International Economic Law and Policy Blog

Strong Words from Bhagwati about Preferential Trade

From his new book:

The Pandemic of PTAs

There is yet another irony. The interwar proliferation of preferences was a result of an uncoordinated pursuit of protectionism, itself aided by the breakdown of financial stability and macroeconomic equilibrium in the world economy. But the current tide of preferences has been a result of politicians mistakenly, and in an uncoordinated fashion, pursuing free trade agreements because they think (erroneously) that they are pursuing a free trade agenda.

So today we have a cumulative total of over 350 PTAs reported to the WTO. Even if only active PTAs are counted, the estimated total is still large. By either count, the PTAs are evidently increasing continually.

Among economists, I was the earliest to warn against PTAs, starting in 1990 when I sensed that we were facing a systemic threat to the principle of nondiscrimination in world trade. I was then in a minority of one, even among economists, many of whom thought I was a "multilateralist freak." Arrayed on the other side were truly eminent economists, among them Larry Summers, who became the U.S. Treasury Secretary, and the remarkable Paul Krugman, my former MIT student and now New York Times columnist.

But now that the proliferation and its many downsides have become evident, and ever more threatening, I daresay that the profession has moved like a herd into my corner. Pascal Lamy, currently the Director General of the WTO, once remarked that half the economists in the world were now opposed to FTAs. I retorted mischievously that this was an English understatement by a distinguished Frenchman; in fact, nearly all were.

I discovered that the European Union which started the pandemic while the United States had grossly aggravated it, applied its MFN tariff to only six countries--Australia, New Zealand, Canada, Japan, Taiwan, and the United States--with all other nations enjoying more favorable tariffs. I asked Pascal Lamy, who was then the E.U. Trade Commissioner, Why not call it the LFN (least favored nation) tariff?

In short, we now have once again a world marred by discriminatory trade, much as we had in the 1930s. And we know how that turned out.

McCain on NAFTA

From a McCain speech in Ottawa last week:

We must also work to ensure reliable energy supplies and increase sources of renewable energy. As you all know, Canada is America's largest energy supplier. Not only does Canada have the second largest proven oil reserves in the world, 60 percent of the energy produced in Canada is hydroelectric, clean energy. We stand much to gain by harmonizing our energy policies, just as have gained by cooperating in trade through NAFTA. Since NAFTA was concluded, it has contributed to strong job growth and flourishing trade. Since the agreement was signed, the United States has added 25 million jobs and Canada more than 4 million. Cross-border trade has more than doubled since NAFTA came into force. We have established North America as the world's largest economic market and the integration of our economies has led to greater competitiveness of American and Canadian businesses. Because of our common market, our workers are better able to compete, and to find opportunities of their own in the global economy.

There is still more work to do. Complying with NAFTA's rules of origin can be cumbersome and costly. Border delays can pose a serious impediment to trade, the equivalent of a tariff. And even now, for all the successes of NAFTA, we have to defend it without equivocation in political debate, because it is critical to the future of so many Canadian and American workers and businesses. Demanding unilateral changes and threatening to abrogate an agreement that has increased trade and prosperity is nothing more than retreating behind protectionist walls. If I am elected president, have no doubt that America will honor its international commitments -- and we will expect the same of others. We will strengthen and extend the open and rules-based international trading system. I aspire to lead a proud, outward-looking America that deepens its partnerships throughout the hemisphere and the world.

The part about "Complying with NAFTA's rules of origin can be cumbersome and costly" amused me a bit.  I suppose rules of origin can be better or worse, depending on how they are crafted.  But isn't the problem of "cumbersome and costly" rules of origin something inherent in bilateral/regional FTAs?  If he was really concerned about problems with rules of origin, he might want to emphasize multilateral trade agreements over regional or bilateral FTAs.

Speaking of the downside of FTAs, Jagdish Bhagwati will have some things to say at an upcoming AEI event enitled Termites in the Trading System: How Preferential Agreements Undermine Free Trade.

Judging RTAs in WTO Dispute Settlement

Among the many difficulties with reconciling bilateral/regional trade agreements and the WTO Agreement is which "branch" of the WTO, the Dispute Settlement Body or the Committee on Regional Trade Agreements, should judge the overall consistency of these agreements with WTO rules.  A recent article by Youri Devust and Asja Serdarevic argues that it should be the CRTA, and that the Appellate Body erred when it stated otherwise:

Following the logic of the Panel Report in the Turkey-Textiles case, this article proposes that, during the enforcement exercise, a distinction should be made between, on the one hand, the legality of the regional arrangement as such and, on the other hand, the legality of concrete trade policy measures adopted by the RTA. The latter should be subject of strict surveillance and sanctioning, notably via WTO dispute settlement. In contrast to the line taken by the WTO’s Appellate Body, it would, however, not be advisable for the WTO dispute settlement system to get into questions of the overall legality of specific regional arrangements. The overall compatibility of regional arrangements with WTO rules is better suited for diplomatic transparency and peer review exercises in the CRTA on the basis of the clarified benchmarks, ...

See http://www.worldtradelaw.net/articles/devuystwtorta.pdf

For reference, in the Turkey - Textiles case mentioned, the Appellate Body had said the following:

58. Accordingly, on the basis of this analysis of the text and the context of the chapeau of paragraph 5 of Article XXIV, we are of the view that Article XXIV may justify a measure which is inconsistent with certain other GATT provisions. However, in a case involving the formation of a customs union, this "defence" is available only when two conditions are fulfilled. First, the party claiming the benefit of this defence must demonstrate that the measure at issue is introduced upon the formation of a customs union that fully meets the requirements of sub-paragraphs 8(a) and 5(a) of Article XXIV. And, second, that party must demonstrate that the formation of that customs union would be prevented if it were not allowed to introduce the measure at issue. Again, both these conditions must be met to have the benefit of the defence under Article XXIV.

(emphasis added)

RTAs Conference in St. Louis

In early April, Saint Louis University School of Law will be holding the following conference on Regional Trade Agreements:

Saint Louis University Public Law Review

and

The Center for International and Comparative Law
presents:

THE CHANGING TIDE OF TRADE:
The Social, Political and Environmental Implications of Regional Trade Agreements
Friday, April 4, 2008
8 a.m. to 5 p.m.

Regional Trade Agreements (RTAs) have become a very important part of the world trade system in recent years.  As World Trade Organization (WTO) membership has grown to over 150 countries, the interests of the WTO Members have diverged on numerous issues and negotiations have become more cumbersome.  Many nations have turned to negotiating RTAs, which focus on the interests of countries in a particular region or group of regions, and not on global interests.  RTAs allow for more efficient trade negotiations and permit countries greater freedom to choose their trading partners, trade deals and conditions of trade.  By 2010, the WTO estimates that nearly 400 RTAs will be in effect.

This symposium will bring together a group of leading legal scholars to examine the social, political, and environmental issues that arise as a result of the proliferation of RTAs.  Some of the key questions to be addressed are:  What are the impacts of RTAs on developed versus developing countries?  What do governments gain or lose from pursuing such agreements?  Will RTAs play a role in shaping the rights of women, children, minorities and the poor?  And finally, how will they affect labor and environmental laws, regulations and standards?

Coming Soon: The Brazil - Tyres AB Report

On December 3, the Appellate Body is scheduled to issue the Brazil - Tyres report.  There will be a lot of things said about GATT Article XX, all of which should be interesting and informative.  In addition, though, there is a slight posssiblity that the AB will clarify GATT Article XXIV a bit as it applies to free trade areas and customs unions.  Before the Panel, the EC had claimed that an exemption for Mercosur imports violated GATT Articles XIII:1 and I:1.  As a defense, Brazil argued that the exemption was justified under GATT Article XXIV.  The Panel exercised judicial economy, though, and did not address the issue.

In its appeal, the EC argues that the Panel's decision in this regard was in error, arguing that "[g]iven the
very limited basis of the Panel's finding of violation regarding the ban, a finding concerning the EC's claims under Article XIII:1 and I:1 GATT would have been necessary to ensure a complete resolution of the dispute."  However, this appeal is a "conditional" one, as the EC only asks the AB to address it if the AB does not find, as requested by the EC, that the Mercosur exemption leads to a finding that the ban is inconsistent with the chapeau of GATT Article XX.  (See paras. 370-371 of the EC appellant submission)