Economics, Politics, Social Commentary and occasionally Superstring Theory.

Monday, December 06, 2004

Zoellick's Strategy

Sebastion Mallaby has an excellent op-ed in The Washington Post (registration required) about United States Trade Representative's Robert Zoellick's pursuit of not only multilateral, but also bilateral trade liberalization initiatives. The piece praises Zoellick's energy in promoting the Doha round of WTO trade negotiations, but strikes a cautionary note regarding bilateral agreements.

Mallory does a good job of listing the dangers inherent in bilateral trade treaties, but I'd like to add a couple more. Trade fortresses and rent-seeking.

Trade fortresses: There is a possibility that pursuing bilateral treaties will lead to the formation of regional trade blocs. The EU is already a customs union, and there is talk of reviving the Free Trade Area of the Americas along the same lines (although MERCOSUR seems to make this a long-shot.) The fear is that these regional customs unions will turn into regional trade fortresses, with trade free amongst their members but prohibitively high outside them. This is the flavor that international trade had taken in the run-up to World War I, and we saw how that worked out for everyone. Economic stability feeds into military stability. An open and level multilateral trading system is preferable to spheres of influence anchored by economic superpowers. No one needs an economic Cold War.

Rent-seeking: Creating different tariff levels for goods originating in different countries distorts commercial flows by making it more profitable to commit resources to an area where they would not normally generate the highest return. For instance, let's say our tariff rate on shoes originating in China is 5% ad valorem, consistent with our WTO obligations (I'm pulling these numbers out of the air, by the way.) So, a shipment of shoes from China valued at $100 will be assessed a $5 duty at import. This cost will be passed on to the consumer at the checkout line. Now, let's say we sign a regional free trade agreement with Haiti, the Dominican Republic and Grenada which commits us to a bound tariff rate on shoes at 2% ad valorem. A comparable shipment of shoes at $100 will only be assessed a $2 duty, and that cost will also be passed on to the consumer at the checkout line. China only remains competitive if its product costs are 3% or less than in the Carribean countries. This means that even if China could produce and sell the shoes for 1% or 2% less than the Carribean countries, it will still be less expensive for consumers to buy Carribean-made shoes. Therefore, capital will flow to Carribean shoe manufacturers, even though they are not the most efficient producer of shoes. This is a trade distortion, and works against the theory of comparative advantage that the multilateral trading system is based on.

Mallaby mentions it in his article, but I think it's worth mentioning again: there is a limited amount of enthusiasm for trade liberalization. Negotiations are an exhausting process of nailing down a deal that doesn't rob you blind and then selling it to a protectionist electorate. By using this limited enthusiasm for bilateral, rather than multilateral negotations, we may be taking the wind out of the sails for a successful conclusion to the Doha round. And the Doha round is critical to restoring developing coutries' faith in the WTO.


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