Copyright © The Author 2007. Published by Oxford University Press.
Regional free-trade areas: sorting out the tangled spaghetti
* Australian National University, e-mail: ross.garnaut{at}anu.edu.au
** University of Oxford, Australian National University, and CEPR, e-mail: david.vines{at}economics.oxford.ac.uk
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As a result of the difficulties in negotiating the liberalization of trade globally, countries seek liberalization among smaller groups. We describe open regionalism as one such attempt to do this, and show why after a decade of success it ran into the ground as a strategy. The formation of discriminatory regional free-trade areas (FTAs) is sometimes seen as another response to this problem. This paper point outs what is wrong with this response—that it distorts trade patterns and thereby sets up an unpleasant prisoner's dilemma—and suggests some ways forward. We propose the formation of open trading arrangements (OTAs) and the establishment of a Trade Transparency Commission in each country that is participating in an OTA. We also suggest global regulation of trade diversions caused by all FTAs, whether OTAs or not. Ultimately, the return to health of the global trading system will require expanded understanding of the basic insight of economics, that liberalization enhances the welfare of citizens of the liberalizing country.
Key Words: free trade area • open regionalism • competitive liberalization • open trading arrangements
This is a revised version of a paper presented at the Peterson Institute for International Economics in Washington on 6 April 2007. An earlier version of the paper was given at the Lowy Institute in Sydney on 31 March 2006, and at a seminar on ‘An Assessment of the Doha Round After Hong Kong’ held at Manchester University on 2–3 February 2006, a meeting organized by the Initiative for Policy Dialogue and the Brooks World Poverty Institute. We are grateful for helpful comments from Philip Levy.
1 Arguments used include the following: (i) adjustment costs in responding to trade liberalization, even if the eventual outcome is a potential Pareto improvement; (ii) distributional objections to liberalization (Stolper–Samuelson, specific factors, etc); (iii) the infant-industry arguments for protection; and (iv) risk-management issues—the need to accompany a move to openness with better social safety nets (see Kanbur and Vines, 2000).
2 We are grateful to Anne Krueger for insisting to us, in discussion, that this view contributed to the thinking in the USA at the time, and that it was a view held by William Brock, the US Trade Representative from 1981 to 1985. She was already sceptical about the benefit of FTAs, setting out some of the arguments presented in the current paper in a paper on rules of origin (Krishna and Krueger, 1995). See also Krueger (1997, 1999). At the meeting in Manchester at which the current paper was first presented, in February 2006, Krueger described how the caution about FTAs, expressed in that paper of hers, was opposed in the US academic and policy community at the time.
3 See Sinclair and Vines (2006).
4 NAFTA was also, importantly, a response to the problem of how to stem the flow of Mexican immigrants into the USA—it enabled people to stay in Mexico, while enabling Mexican exports produced by them to enter the US market more easily.
5 Anne Krueger has said to us that she believes that this position has been part of the views of those in the USA in favour of FTAs since long before the election in 2000.
6 It is possible to read Kissinger (2001) this way.
7 Some people have argued that this assumption makes Krugman's model inappropriate, since most countries are so small that they do not have enough market power for their Nash optimal tariff to be much different from zero. But Krugman's argument can be recast so that the initial positive Nash optional tariffs arise not from such market power. They might arise, instead, for political-economy reasons; because those determining trade policy set tariffs above zero because they wish to reward those producers who compete with imports. With this kind of recasting, the same argument can be made.
8 Krugman only presents simulation results and does not explain this argument. We owe our understanding of it to Peter Sinclair of Birmingham University.
9 Mrazova et al. (2007) also show that, in the presence of the WTO constraint, the big bloc will be slightly smaller than it would have been without this constraint, essentially because if countries in the big bloc cannot exploit those outside as fiercely, by raising tariffs so much, then it may be worth letting more of them into the bloc so as to benefit from increased trade creation.
10 See Gibbs and Wagle (2006) for a thorough presentation of the relevant facts.
11 This is a guiding principle of Article 24 of the old GATT, and of the relevant article of the WTO.
12 This is the subject of a major piece of work by one of us, Garnaut, at the Australian National University. The following is a brief description of our proposals. See also Garnaut (2005).
13 It is likely that a country which has already made a liberal FTA arrangement already has low external tariffs against trade from all other countries. This would ease the requirement that such a country offer equally liberal access to its markets to all members of any OTA that it was proposing to join. Nevertheless this whole question needs much further investigation.
14 This possibility is discussed in Spriggs (1991). For further discussion of transparency, see Hoekman (2005) and Bown and Hoekman (2007).
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