Pragmatism may have turned the world towards preferential trade pacts but these have distortive effects that are avoidable
As the old adage in French goes, plus ça change, plus c’est la même chose (the more it changes, the more it’s the same). Recent arguments and debates over India’s decision to give a miss to the Regional Comprehensive Economic Partnership (RCEP) agreement are oddly reminiscent of the debates we were having as long ago as the early 1990s—including in my Columbia graduate international trade class with economist Jagdish Bhagwati.
At that time, the new breed of “preferential trade agreements" (PTAs) was just coming into vogue, exemplified by the 1992 North American Free Trade Agreement (Nafta). What made these different from old-school customs union agreements was that they included provisions on more than just tariffs, encompassing, in the case of Nafta, “side" agreements on labour and the environment which were imposed by the US only on the pact’s poorer partner, Mexico—while the US itself, and Canada, were exempted.
Nafta and similar PTAs spawned a lively academic and policy debate, starting in the early 1990s, on “fairness" claims in trade. They also set off a debate around the “harmonization" of regulatory and other standards between members of a trade agreement. These debates involved not just economists but political scientists, sociologists, lawyers and others.
I well recall the 1996 publication of a mammoth two-volume set by MIT Press, Fair Trade And Harmonization, edited by Bhagwati and legal scholar Robert Hudec, which was among the earliest scholarly analyses of the relevant issues. At the same time, there was a separate, although related, debate on the merits of PTAs, compared to multilateral trade liberalization, in the work of Bhagwati and other trade economists, including Arvind Panagariya and Pravin Krishna.
At the risk of oversimplifying, the consensus view among economists allied to the Bhagwati school was that multilateral trade liberalization was preferable to preferential trade liberalization; and that non-directly-trade-related issues, such as those related to regulatory standards, did not belong in trade agreements.
The argument was that the inherently two-faced nature of PTAs—both liberalizing and discriminatory—would distort global patterns of trade, creating, in Bhagwati’s famous turn of phrase, a “spaghetti bowl" of crisscrossing tariff preferences, which would take the world away from an efficient pattern of global production.
Likewise, “fairness" claims, such as around labour and environmental standards, ought to be decoupled from trade agreements, and were better handled in other fora, such as the International Labour Organization and other multilateral institutions geared toward each of the other issues deemed in need of attention.
The counterview, prevalent in the think tanks of Washington, D.C., among other places, was that multilateralism was dead or dying, and that PTAs were the only game in town; and, likewise, that “deeper" integration required the melding of conventional trade liberalization with harmonization of regulatory and other standards to a global norm (which might, not coincidentally, be the preferred policy of the US).
While economics was on the side of Bhagwati, the political economy of international trade favoured both preferential trade deals and the baking in of regulatory and other non-trade issues into trade agreements. Again, as long ago as the early 1990s, Bhagwati had asked whether PTAs were “building blocks" or “stumbling blocks" on the road to multilateral trade liberalization, and had concluded that they were the latter. The last quarter-century has proven him right.
Fast forward to the present day, and our debates from the 1990s are being played out, albeit in a slightly different guise. Thus, it is now argued that, in the context of a world shaped by US President Donald Trump, there is no hope of pursuing multilateral liberalization under the aegis of the World Trade Organization (WTO), and that “mega" regional deals such as the RCEP or Trans-Pacific Partnership (TPP) are the only realistic options. Likewise, it is suggested that, in a world of complex and criss-crossing global value chains, “deep" integration through mega deals is the only way to reap the full gains from trade, and that tariff-oriented trade deals are “shallow" at best.
The interesting twist is that some of the erstwhile defenders of multilateralism have thrown their weight behind regional deals such as TPP and RCEP. Thus, Panagariya, as staunch a multilateralist as there was, has argued forcefully in favour of India joining RCEP, presumably because he believes that the WTO-led multilateral process is moribund and that this is India’s best shot at improving its integration with the global economy.
Likewise, those who once warned of “trade diversion" and of the spaghetti bowl phenomenon now appear sanguine about the distortive effects on the global pattern of production of a proliferation of PTAs—or at any rate, they believe that this is the best available among perhaps even worse alternatives, such as a descent into unilateralism and rampant protectionism.
The irony is that those of us batting for multilateralism in the 1990s were considered quixotic, old-fashioned and naïve by the “in" crowd, and the same charge is being levelled against the dwindling band of multilateralists left today, including by some of our erstwhile allies in the debate who have since joined the “in" crowd.
I would like to believe that future generations will view our present descent into parochialism and preferentialism as but a detour on the long road toward a genuinely fair, multilateral and rules-based global order.