Martin Wolf strongly voiced concerns yesterday regarding the signing of the South Korea – US Free trade agreement announced a few days ago.
“This month marks the 60th anniversary of the General Agreement on Tariffs and Trade, of which Cordell Hull was a founding father. It also sees the announcement of a “free trade agreement” between his country and South Korea. The core of the Gatt was non-discrimination. The core of the new agreement is its opposite. Thus has the US taken the betrayal of its erstwhile principles even closer to its logical conclusion.
Why do I object? Is such trade liberalisation not precisely what most economists interested in trade believe in? The answer to this question is “yes and no”: yes, because liberal trade is desirable, but no, because this form of liberalisation is not necessarily a move towards liberal trade. As Jagdish Bhagwati of Columbia University has argued, “free trade agreements” should, instead, be called “preferential trade agreements”. I would prefer “discriminatory trade agreements”.
A more significant economic cost, however, is systemic. The number of preferential trade agreements has exploded upwards in recent years (see chart). An agreement between the US and South Korea is itself a quantum leap in this progression. The US was the world’s largest importer of merchandise products and South Korea the sixth largest in 2005 (if the European Union’s internal trade and Hong Kong’s re-exports are excluded). The US is also the world’s largest importer of commercial services, while South Korea is the 12th largest (this time with EU internal trade included). Other countries will be desperate to avoid the adverse effects upon them. This makes probable yet another jump in the prevalence of such agreements.
That will have at least two further economic consequences. First, an increasing proportion of the world’s trade is sure to be governed by the diverse rules of origins and special procedures of a host of discriminatory bilateral and plurilateral agreements. That guarantees an explosion in administrative complexity. Second, every further bilateral agreement will alter the degree of preference enjoyed by existing suppliers. That guarantees an explosion of business uncertainty. These are indeed inevitable results of what Prof Bhagwati has called the “spaghetti bowl” of preferences.
The political consequences of this development are, however, at least as important. First, a company’s market access will depend increasingly on the power of its own government to lever open other markets rather than its competitiveness. Second, big powers will compete with one another to wrest more favourable terms for their own producers. The emergence of such power-driven trading blocs is a world away from the hopes of the founding fathers of the Gatt system.”
Much to think about over Easter.