Regional Trade Agreements and the Trading System

Summary

The WTO Forum features a discussion on regional trade agreements (RTAs) and their impact on the global trading system. Jagdish Bagwati from Columbia University argues that while RTAs are WTO-compatible, their rapid proliferation complicates global trade with preferential rules. He highlights concerns for developing nations. Gary Huffbauer of the Peterson Institute offers a different view, stating that RTAs help reduce trade barriers more quickly than the WTO can. Both experts agree that the challenge lies in balancing the regional and multilateral trade systems, especially ensuring fairness for smaller developing countries.

Takeaways

• 🌍 Regional trade agreements (RTAs) are allowed under WTO rules but have become a systemic issue due to their proliferation, creating complexity in global trade.
• 🍝 Jagdish Bagwati refers to the current state of RTAs as a 'spaghetti bowl problem,' highlighting the confusion caused by overlapping rules of origin.
• 💼 Large corporations can handle the complexity of RTAs, but small countries and businesses face disadvantages navigating these chaotic systems.
• ⚖️ Gary Hufbauer argues that while RTAs are not ideal, they help reduce trade barriers faster than the WTO, which often gets bogged down by the need for consensus among many countries.
• ⏳ There are now over 400 RTAs, a significant increase in recent years, driven by dissatisfaction with the slow pace of WTO negotiations.
• 📉 RTAs, while preferential and not fully free trade agreements, are seen as politically pragmatic methods for faster liberalization, especially for developed nations.
• 🚧 Developing countries often face greater risks in RTAs, especially when dealing with large economies like the U.S. or EU, which may impose conditions beyond just trade terms.
• 🛑 India, a developing country, is blocking progress in the WTO Doha round but is willing to negotiate bilateral deals with other large economies, such as the EU.
• 🤔 Jagdish Bagwati emphasizes that RTAs could erode long-term gains for developing countries as preferential advantages may diminish over time.
• 🔗 Both experts agree that RTAs are here to stay and the next challenge is to integrate them better into the multilateral trading system, ensuring fairness for smaller developing countries.

Q & A

What is the main topic discussed in the WTO Forum?

The main topic is whether regional trade agreements are stepping stones or obstacles to a more effective global trading system.

What does Jagdish Bhagwati suggest is a systemic problem caused by regional trade agreements?

Jagdish Bhagwati highlights that the proliferation of regional trade agreements has become a systemic problem for the World Trade Organization (WTO), as they complicate trade by bypassing the most-favored-nation (MFN) clause and creating a complex 'spaghetti bowl' of crisscrossing rules of origin.

What is the 'spaghetti bowl' problem referred to by Jagdish Bhagwati?

The 'spaghetti bowl' problem refers to the complexity created by numerous regional trade agreements, where overlapping and crisscrossing rules of origin make it difficult to identify the origin of products, complicating international trade.

How does Gary Hufbauer view the benefits of regional trade agreements?

Gary Hufbauer believes regional trade agreements are a faster and more effective way to reduce trade barriers compared to multilateral agreements. He argues that while they are not perfect, they allow countries to lower barriers quickly, especially in areas like services and investment.

What is one of the concerns Bhagwati raises about developing countries in relation to regional trade agreements?

Bhagwati is concerned that developing countries, particularly smaller ones, struggle to navigate the complex structure of preferential trade agreements. Large corporations may cope with the complexities, but smaller countries and businesses may face significant disadvantages.

According to Hufbauer, why have regional trade agreements proliferated in recent years?

Hufbauer argues that the proliferation of regional trade agreements is due to the stalemated situation in the WTO. Countries that want to liberalize trade are turning to regional agreements because the WTO's progress has been slow.

Why does Hufbauer believe unilateral trade liberalization is ideal?

Hufbauer believes that, following Adam Smith’s principles, unilateral trade liberalization is the best way to reduce barriers. However, he acknowledges that political realities make this difficult, which is why countries rely on the WTO and regional agreements.

What are some advantages of regional trade agreements according to Hufbauer?

Regional trade agreements can reduce tariffs to zero, go beyond the WTO by addressing areas like services and investment, and deliver benefits faster and more comprehensively than multilateral agreements.

What is Bhagwati's critique of the speed of regional trade agreements?

Bhagwati critiques that regional trade agreements, while faster for some countries, often involve asymmetric negotiations, especially between larger economies like the U.S. and smaller developing countries. This can lead to developing countries signing onto unfavorable terms.

How do Bhagwati and Hufbauer view the future of regional and multilateral trade systems?

Both Bhagwati and Hufbauer agree that regional and multilateral trade systems are here to stay. The challenge is to integrate them, addressing the 'rough edges' of regional agreements and ensuring small developing countries get fair treatment.

Outlines

00:00

📊 Overview of Regional Trade Agreements (RTAs)

The forum opens with the topic of regional trade agreements (RTAs) and their potential role as either stepping stones or obstacles to the global trading system. Jagdish Bhagwati from Columbia University introduces the problem, noting that RTAs have proliferated, with over 400 currently in place. This growth is seen as a systemic problem for the WTO, complicating trade with overlapping rules of origin and preferential treatment. The spaghetti bowl of rules causes confusion, particularly for smaller countries, as these agreements bypass the Most Favored Nation (MFN) principle.

05:02

🌐 RTAs as a Practical Solution to Liberalize Trade

Gary Hufbauer offers a contrasting view, supporting RTAs as a pragmatic solution to reduce trade barriers quickly. While unilateral liberalization is ideal, political realities make it difficult, hence the need for bilateral and regional deals. These agreements often go further than the WTO by addressing services and investments and reducing tariffs to zero. Although he acknowledges the rapid growth of RTAs, Hufbauer attributes this to the stagnation within the WTO, suggesting that developing countries use RTAs to achieve faster liberalization.

10:03

⏳ The Increasing Pace of Regional Trade Agreements

The discussion shifts to the growing speed and number of RTAs being formed, with Hufbauer noting that earlier agreements like Chile-U.S. took years, but recent ones have accelerated. Bhagwati explains that the WTO's complexity and slow pace, particularly with large-scale negotiations, are inevitable given the number of countries and issues involved. While he remains optimistic about completing the Doha Round, he warns that RTAs, especially bilateral ones involving large powers like the U.S., are asymmetric and may force developing countries into unfavorable long-term commitments.

🧩 Balancing Regional and Multilateral Systems

The final part of the conversation focuses on the future of both regional and multilateral trade systems. Hufbauer emphasizes that RTAs are here to stay, but the challenge lies in meshing them with the multilateral system. He worries particularly about small developing countries that may struggle in these systems, pointing out the paradox of countries like India blocking WTO progress while simultaneously engaging in deep bilateral agreements. Both experts agree that finding ways to integrate small developing nations into the broader system is crucial for the next decade.

Keywords

💡Regional Trade Agreements (RTAs)

RTAs are trade agreements between two or more countries that agree to reduce or eliminate tariffs and other trade barriers between them. In the video, RTAs are discussed as a way to promote trade liberalization, but they also raise concerns due to their proliferation, creating a complex system of overlapping rules, which some experts believe complicates global trade. The debate centers on whether RTAs are beneficial stepping stones or problematic obstacles for global trade.

💡World Trade Organization (WTO)

The WTO is an international organization that regulates global trade, ensuring that trade flows as smoothly, predictably, and freely as possible. The discussion in the video highlights the WTO's role in multilateral trade agreements and contrasts it with the growing number of regional agreements, raising concerns about how RTAs may undermine the WTO’s objectives, particularly through the violation of the most-favored-nation (MFN) clause.

💡Most-Favored-Nation (MFN) Clause

The MFN clause is a principle in international trade agreements that ensures non-discriminatory trade practices between all WTO members. Each country must offer the same trade terms to all WTO members. In the video, Jagdish Bhagwati points out that RTAs undermine this principle by creating preferential trade conditions that favor certain countries over others, leading to a 'spaghetti bowl' of conflicting rules.

💡Spaghetti Bowl Problem

The 'spaghetti bowl problem' refers to the complex and overlapping rules of origin and trade regulations that result from the proliferation of RTAs. In the video, Jagdish Bhagwati uses this term to describe the confusion caused by the numerous regional agreements, which complicate trade, especially for smaller countries and businesses, by requiring them to navigate a maze of different trade rules.

💡Trade Liberalization

Trade liberalization involves reducing or eliminating trade barriers such as tariffs and quotas to encourage free trade between countries. Both experts in the video agree that liberalization is beneficial for economies, but they differ on how best to achieve it. Gary Hufbauer supports RTAs as a faster way to liberalize trade, while Jagdish Bhagwati expresses concerns about the unintended consequences of RTAs for the global trading system.

💡Doha Round

The Doha Round refers to the latest round of trade negotiations under the WTO, aimed at lowering trade barriers globally. The video discusses the slow progress of the Doha Round, which has frustrated many countries and led them to pursue regional agreements instead. Both experts acknowledge the challenges of concluding the Doha Round, with Hufbauer highlighting the stalled negotiations as a reason for the rise in RTAs.

💡Unilateral Liberalization

Unilateral liberalization is when a country independently reduces its trade barriers without requiring reciprocal actions from other nations. Gary Hufbauer mentions this as the ideal approach for trade liberalization but acknowledges that political realities often push countries to seek reciprocal agreements through mechanisms like the WTO or RTAs.

💡Developing Countries

Developing countries are nations with lower industrial bases and human development indices compared to developed nations. In the video, both experts express concerns about how smaller developing countries may struggle to benefit from RTAs, as they are often disadvantaged by the complex rules and lack of negotiating power in these agreements. Gary Hufbauer specifically points out that countries like India, while considered developing, can navigate these agreements better than smaller nations like Bangladesh.

💡Preferential Trade Agreements (PTAs)

PTAs are agreements between countries that provide preferential access to certain products by reducing tariffs or other barriers. In the video, Jagdish Bhagwati emphasizes that RTAs are not true free trade agreements but are PTAs because they create exclusive trading advantages for specific countries, thereby distorting the multilateral trading system.

💡Rules of Origin

Rules of origin are the criteria used to determine the national source of a product. These rules are essential in RTAs to establish whether a product qualifies for preferential treatment. The video highlights the complexity of these rules, particularly in the context of the 'spaghetti bowl problem,' where the proliferation of RTAs has led to a web of conflicting and overlapping rules, making trade more difficult for small countries and businesses.

Highlights

Regional trade agreements, while legal under WTO, have proliferated to the point where they may be causing systemic issues in global trade.

Jagdish Bhagwati raises concerns over the 'spaghetti bowl' effect of crisscrossing trade rules, leading to complications for both small countries and businesses.

Bhagwati points out that large corporations can manage complex trade agreements despite the costs, but smaller developing countries struggle to keep up.

Gary Hufbauer emphasizes the political economy behind regional trade agreements, suggesting they are a pragmatic response to the slow progress of WTO negotiations.

Hufbauer argues that regional trade agreements achieve faster tariff reductions, which benefit global trade more quickly than multilateral negotiations.

Bhagwati counters that the proliferation of preferential trade agreements is creating inefficiencies and undermining the most-favored-nation (MFN) principle of non-discriminatory trade.

Hufbauer highlights that while multilateral agreements are ideal, regional agreements often achieve more in areas like services and investment.

Both experts acknowledge that the number of regional trade agreements has exploded in recent decades, with over 400 currently in place.

Hufbauer notes that countries turn to regional agreements as a faster way to liberalize trade, particularly due to the WTO's gridlock.

Bhagwati remains optimistic about the future of multilateral trade agreements like the Doha Round, emphasizing their potential to create a more unified global trading system.

Bhagwati warns that developing countries, when engaging in trade deals with powerful economies like the US or EU, often sign onto unfavorable terms.

Hufbauer argues that some larger developing countries, like India, benefit from bilateral agreements but hinder progress in multilateral negotiations.

Both speakers agree that the challenge ahead lies in reconciling the growth of regional agreements with the need for a cohesive global trading system.

Bhagwati expresses concern that smaller developing countries are disadvantaged by the complex web of preferential trade agreements.

Hufbauer highlights that small developing countries need better integration into both regional and multilateral trade systems to avoid being marginalized.

Transcripts

hello and welcome to WTO Forum today's

topic regional trade agreements are they

stepping stones or obstacles to a more

effective global trading system today

we're fortunate to have with us two

noted experts on this topic Jag dish

bagatti professor at Columbia University

and at the Council on Foreign Relations

and Gary Huff Bower of the Peterson

Institute of international economics in

Washington DC gentlemen welcome thank

you very much ja d i could start with

you are regional trade agreements

compatible with a global trading system

well in principle they are because

there's article 24 in the Gat and now in

the WTO in which we allow for uh free

trade agreements and Customs unions to

to go through uh the problem at the

moment is that they proliferated on such

an enormous scale that they have become

very much uh uh a systemic problem right

now for the World Trade Organization uh

I think most people do realize that the

scale to which they've grown there're

about 400 right now that large amounts

of World Trade is now going through uh

through these agreements which actually

deny the most favored nation clause

which is about non-discriminatory

handling of trade so that is one thing

which worries a lot of people it's been

you know I've called it the spaghetti

bow problem in the sense of lot of

crisscrossing tar rules of origin

because you have to identify which

product is whose and that gets very

complicated and I think lot of people

are yearning for Simplicity which is

really what you would get uh with the

mfn treatment in the WTO so while it's

legal WTO compatible historically uh it

is not it's something that's gotten out

of hand and I think a lot of people are

worried about it now and you know the

whole question is now what do we do

about them how do we make them more

compatible uh if at all it's possible

with the World Trade Organization uh and

many people are also worried about the

effects of these very complicated

arrangements with the

literally hundreds of um rules which are

all you know preferential how do the

small countries and the you know the

small corporations deal with this

chaotic structure so many developing

country people uh trade

ministers are worried about the downside

for the developing countries because the

big corporations can get around they are

mbas and you know I mean they're worried

about it but they can surmount it uh it

just adds to the cost of production why

I have to worry about all this but it's

not something which stops them in their

tracks Gary do the developing countries

face disadvantages in a system like this

I want to go back to First principles

because I have a little bit different

take than Jagdish as you might expect

and there Jagdish I know

knows the whole purpose of all this uh

trade system is to lower barriers to get

tariffs down to get other barriers down

now we've known since Adam Smith that

the best way to do that is unilaterally

but we also know from political economy

that countries have a hard time doing it

just on their own um and so that's why

we have the Gat in the WTO so each

country can trade its barriers for the

other country's

barriers that's already a step away from

the best that's good but it's not the

best which is unilateral now the all

these regional trade agreements are just

one further

step towards recognizing the political

reality and uh preferential trade

agreements free trade agreements

whatever you want to call them um they

enable a couple of countries two three

four however many to really get those

barriers way down to zero in many cases

as has happened in Europe as has

happened in

NAFTA and some other

agreements and

um you know you have to ask what's wrong

with that we the big goal is to get the

barriers down and these get the barriers

down they do it a lot faster than the

WTO or the Gat has been able to do it

they go a lot further they go into areas

like services and investment which the

WTO has not been able to do uh and they

go to zero as I as I emphasized now

what's wrong with it is exactly what Jag

dis has emphasized by I have to put the

shoe on the other foot the the wrong is

this explosion this proliferation as

he's correctly said there about 350 or

400 now in existence and there have been

more in the last 10 years than in the

previous 10 years and so

on what's the cause of that the cause of

that is the very stalemated situation in

the WTO and that's where countries are

turning who want to liberalize and get

the benefits of trade including many

developing countries so I finally come

back to your question this is the way

they get there quickest this is the

turnpike method and um it's not the best

but it's sure better than keeping those

barriers up at the

sky further and faster through Regional

agreements it didn't used to be faster

uh like the Chile one with United States

took long long almost twice as long as

the Uruguay round which was dealing with

a great range of issues now it's

quickened that's for sure because once

people learn how to do these things uh

some templates get established and so on

so I think they've they've grown though

there's an enormous growth of all kinds

of templates also I think one of the

reasons why the some of the developing

countries have gone in for these is not

because they're unhappy with the the

pace at which WTO proceeds because in

the end we're dealing with large numbers

of countries large number numbers of

issues so it's inevitable that you know

that the amount of time taken is going

to increase uh Tokyo round was about

five years that was the then we had the

Uruguay round which was about eight a

little short of eight we've now on Doha

gone as far as about 5 and a half to six

so we have another two years to go

before we begin to worry but that I'm

not saying we should go another two

years we are pretty close in my opinion

to an agreement but I think in a sense

this kind of feeling which I think uh I

mean Gary's

absolutely uh telling us the sort of

feeling which you have in some you know

some among some negotiators that this is

such a uh hornest Nest uh the WTO that

therefore we have to go the other route

but that is I think over overd

dramatizing the slowness in my opinion

uh even now I'm an optimist on Doha and

I think there are ways in which you

could get it done uh and simply saying

that we Retreat

into in a second best um you know

bilaterals and so on seems to me to be a

little short sight in terms of the

impact it leaves on the system I don't

agree with um Gary uh that any kind of

trade liberalization is good I mean just

like any kind of tax increase is not

good if you want to raise revenue you

worry about what kind and I think I

would say that the downsides of many of

these ptas or preferential trade

agreements I call them preferential

because we have to remember these are

not free trade they B they're they're

they're not multilateral free trade

they're less than that and they're

preferential so they they have different

kind of animal from the rest Gary Jack

uh Jack D is absolutely right that the

time from the end of the last round to

the end of the next round it's getting

longer and longer and we would be lucky

if this round has concluded you know 50

years after the uh the Uruguay

run this is not an accident this is not

an accident imagine a

parliament which worked on two rules one

it had to get everything through

unanimously and two every issue whether

it be taxes Health roads defense had to

be in a

single undertaking had to be in a single

Bill well that Parliament would never

get place that's exactly the WTO system

right now 150 members they basically all

have to agree or essentially all of them

have to agree and we've got this single

undertaking which goes across a vast

range of issues now when you have that

kind of um of system you have built in

stalemate and countries want to get the

benefit of liberalization it's beyond

doubt that liberalization you know pays

enormous dividends it's one of the best

things a country can do for

itself and they don't want to wait wait

for uh you know for 133 years to do it

and uh Jag is absolutely right Chile

took 13 years but Chile did a lot of

unilateral liberalization they're

they're a virtuous country they did a

lot first but if you take uh us

Australia that took all of two years

chag dish final thoughts well uh I think

uh when you deal with a number of issues

like like take my

University the 3,000 professors all of

whom have a senate we get things done we

have lots of issues there so the within

the WTO we worked out ways in which the

150 don't matter as much because they

work through groups and so on and they

natural coalitions which which gets

established so I think when you think in

abstracted by the number of countries

and so you're going to go the the Gary

half Bar Route and start woring like M

two I think uh the developing countries

among themselves can do things uh and

are doing some of them they're uh a fair

number now by now but when it comes to

Big countries like us or or group like

EU when they get into agreements you

know one onone I'm not surprised it goes

through fast right because it's very

uneven it's not it's not negotiation

it's actually a very asymmetric thing so

and the part that really worries me and

the last thought uh is that when you're

doing that and when you take a country

like United States which which is you

know very responsive democracy with a

whole lot of Ling groups and so on we

managed to put in all kinds of

extraneous issues uh which then muddy up

the trade picture and My worry is that a

lot of developing countries are in when

that with EU or us and particularly us

which is much more responsive uh that

you are actually signing on to a variety

of things uh which are going to remain

with you and the preferential advantage

you have in the American Market is one

which is going to erode over time the

more because do is bound to succeed

there'll be another round so I think the

developing countries are the ones I'm

really worry about uh much more uh first

because of the spaghetti Bowl problem

and to the signing onto things and in

Aid we've learned that you know if you

get a somebody calls it an aid program

and when you actually your P you know

you're being ripped off we've learned

that so now with trade we have to to

again make sense you know be careful

what are you buying into it looks like

you're getting entry into the US market

but you know it will go through fast

right but I think cavat empor bar beware

is is something that you know many

developing countries are beginning to

worry about now Gary Huffer you have the

last

word I just would like to make two

points uh I do worry about the

developing countries but I worry about

the small developing countries I think

it's an outrage right now that India is

one of The Blocking powers in this Doha

round but India is willing to reduce its

tariffs to zero in a deal with the

European

Union India doesn't have a problem I

think it's it's not benefiting the uh

the multilateral system but India is a

is a developing country which can take

care of itself could I say that at

Bangladesh probably not the second point

and here I think ja D and I are

absolutely in agreement is that

the regional and the multilateral system

are are both here to stay the Regionals

are here to stay nobody thinks they're

going away and the challenge ahead which

was the challenge of this um two two and

a half day conference we just had is how

you can mesh The Regionals how you can

get over these rough edges how you can

bring in these you know these small

developing countries and give them a

fair shap that's really the challenge of

the next decade two different points of

view on regional trade agreements I'd

like to thank Our Guest Gary Huff and

Jagdish bagatti and thanks to you for

watching WTO forum