Why are Regional Trade Agreements growing?

Mighty pow­ers in inter­na­tion­al eco­nom­ics have resumed their fat­was against region­al trade agree­ments (RTAs) as threats to the mul­ti­lat­er­al sys­tem. “Jagdish Bhag­wati and Ross Garnaut(link to TheAus­tralian newspaper)”:http://www.theaustralian.news.com.au/common/story_page/0,5744,6732019%255E7583,00.html in the Aus­tralian of 11 July and “Bhag­wati with Arvind Panagariya(link to Finan­cial Times — subscription)”:http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1057562355896&p=1012571727092 in the Finan­cial Times.

I think these dire warn­ings are a mis­read­ing of what’s going on as I explained in my let­ter to The Aus­tralian news­pa­per yes­ter­day. The pro­fes­sors, like every­one else in busi­ness, are ped­dling their prod­uct. But the buy­er should exer­cise cau­tion: their record is not unas­sail­able as “Stephen Kirchner(Link to Steven Kirchner’s prizewin­ning site)”:http://www.institutional-economics.com/ points out. If, as they say, Free Trade Agree­ments are harm­ful to the mul­ti­lat­er­al sys­tem, then we’ve yet to see any real evi­dence. In fact, there’s a lot more to the sto­ry than appears on the sur­face …
The growth of region­al agree­ments must stand as one of the most remark­able trade pol­i­cy trends of past half cen­tu­ry: from a hand­ful in the 1960s to the WTO’s cur­rent esti­mate of 240 today and pos­si­bly 300 by 2005. But the real accel­er­a­tion in the num­ber of agree­ments took place in two spurts—one of which con­tin­ues: # between about 1970 and the end of the Tokyo Round of WTO trade nego­ti­a­tions in 1979, and
# most dra­mat­i­cal­ly, from the last days of the Uruguay Round in 1991 What explains this pat­tern? With only two events, its dif­fi­cult to be sure. But there is no obvi­ous cor­re­la­tion to events in the mul­ti­lat­er­al sys­tem that would explain the two spurts as a reflec­tion on the GATT/WTO or coun­tries’ adher­ence to the prin­ci­ples of non-dis­crim­i­na­tion that under­lie the sys­tem.

Per­haps the mean­ing becomes clear­er, how­ev­er, if we con­sid­er the growth curve as com­pris­ing not ‘two spurts’ but one trend line, inter­rupt­ed dur­ing the decade of the 1980s. Now con­sid­er the shape of the curve of world exports over the same peri­od.  There’s an intrigu­ing sim­i­lar­i­ty: the slowdown—indeed the first rever­sal of world trade val­ue growth—in the peri­od of the GATT/WTO occurred in the first half of the 1980s (1981 — 1986) when world-wide reces­sion slowed the pace of glob­al­iza­tion. This peri­od coin­cides with the peri­od of low­er rate of RTA for­ma­tion we saw in the first chart. A coin­ci­dence? Per­haps not. These two charts show us that glob­al­iz­ing growth in trade coin­cides with the upsurge in RTA activ­i­ty. This is not an argu­ment that dis­crim­i­na­to­ry trade agree­ments are good: there’s no causal rela­tion­ship evi­dent in these pic­tures. But it is almost the con­verse of the sto­ry that the Bhag­wati et al want us to believe.  Fur­ther­more, it is plau­si­ble that some­where in the trade growth pic­ture we are see­ing the trade cre­ation effect of RTAs. The pic­tures should also remind us of anoth­er aspect of trade that many ana­lysts (not “Wolf­gang Kasper(link to Pro­fes­sor Kasper’s paper ‘Break­ing the Trade Stalemate&#8217)”:http://www.cis.org.au/IssueAnalysis/ia18/ia18.pdf ) for­get much of the time: that trade is pre­em­i­nent­ly a pri­vate activ­i­ty involv­ing firms. Glob­al­iza­tion is a ‘bot­toms-up’ phe­nom­e­non not cre­at­ed by—although poten­tial­ly hin­dered by—government trade agree­ments. It wasn’t RTAs that slowed the growth of glob­al­iza­tion in the mid-1980s and, to be hon­est, there’s no rea­son to think that RTAs are respon­si­ble for the growth since.

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