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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