Remarks on Regional and Bilateral Trade Agreements

Written By Milos Barutciski

On May 6, 2008, Milos Barutciski made a presentation to the 150th Meeting of the CD Trade Committee in Paris. He participated in the event as a member of the Business and Industry Advisory Committee of the CD.

Thank you, Mr. Chairman, for the opportunity to provide a Canadian business perspective on the issue of bilateral and regional trade agreements. I make these remarks as a member of the BIAC delegation and also in my capacity as Co-Chair of the Canadian Chamber of Commerce's International Affairs Committee.

Like the constituencies represented by my colleagues from DuPont and Daimler, Canadian business supports the expansion of bilateral and regional trade agreements as a complement to the multilateral trading system anchored by the World Trade Organization.

Regional and bilateral free trade agreements (RTAs and FTAs) can bring about a useful reduction in trade barriers in their respective geographic areas. However, they are not, and must not be viewed as, a potential substitute for the WTO regime.

FTAs and RTAs make a great deal of sense when they facilitate or accelerate trade that would have taken place on its own merits as a result of the comparative advantages of the trading partners concerned. In that context, they further economic integration and trade-based economic growth that are core objectives of trade liberalization.

At the same time, we must recognize that bilateral FTAs can often be driven by geo-political and or strategic objectives (particularly when they involve agreements between developed and developing countries) more so than they are by economic or trade objectives.

Even where trade and economic objectives are more prominent, many bilateral FTAs are relatively narrow in scope, with the market opening initiatives tending to be limited to a handful of sectors that are particularly significant to the trading partners in question. Other sectors, especially those with strong defensive interests, are generally not subject to significant market openings beyond what is already enshrined in multilateral agreements out of a fear of putting too much “in play” in future negotiations.

The hardest issues – those that frequently prove most intractable in multilateral trade negotiations – can be just as hard to deal with in a bilateral or regional setting.

That said, bilateral FTAs can play an important role in facilitating and expanding trade that is beneficial on its own merits. They can also offer a useful forum for experimentation in different approaches and instruments for promoting trade liberalization

Regional trade agreements, particularly among developing countries, hold out even greater promise for promoting economic growth and liberalization. By promoting economic integration among regional trading partners, they provide both firms and consumers with greater choice, increased competition and lower prices.

In brief, RTAs can make an important contribution to economic growth, employment and development more generally, while at the same time moderating political rivalries and tensions within a given region. Economic integration breeds familiarity and interdependence, indirectly contributing to peaceful relations among nations.

At the same time, we must not be blind to the costs imposed by a growing network of disparate and potentially trade distorting FTAs and RTAs. Differences in the operational aspects of trade agreements – such as rules of origin and technical standards – give rise to the “spaghetti bowl” that is increasingly characterizing international trade rules.

These differences can and do impose real transaction costs on multinational companies seeking to establish global supply chains, as well as on small- and medium-sized enterprises looking to become links in these chains. Compliance costs and other transaction costs can dwarf the often incremental reductions in tariff s brought by RTAs and FTAs in many sectors, thus limiting and even negating the potential benefits of trade liberalization.

In addition, RTAs and FTAs can also distort trade by creating preferences that are not based on true comparative advantage, at the expense of trade that is more economically efficient in the longer term.

Such preferences can themselves become impediments to further trade liberalization in their own right as countries, and the favoured industrial sectors within them, become vulnerable to the preference erosion that inevitably results from multilateral liberalization.

In addition to these more traditional trade-related “costs”, we must not forget some of the “softer” costs of the increasing attention devoted to RTAs and FTAs. Th e pool of government and business resources that can be applied to trade negotiations is finite and the more those resources are devoted to negotiations of narrower geographic scope, the fewer there are to pursue the broader benefits held out by multilateral trade liberalization.

Bilateral and regional trade negotiations also consume political and bureaucratic capital that is often in limited supply. One need only look at the political resources that were devoted in the United States to the Central American and Colombian FTA initiatives to realize that there is only so much time on the political agenda that can be devoted to trade issues.

Bilateral and regional trade initiatives can also serve as lightning rods to attract and galvanize opposition to trade liberalization more generally, and thereby help to make such opposition all the more effective against more important multilateral initiatives.

In conclusion, regional and bilateral trade agreements can be important tools for promoting broader trade liberalization. Businesses and consumers will usually benefit from the trade openings and greater competition engendered by RTAs and FTAs. However, they must be pursued carefully and deliberately in a manner that does not undermine multilateral trade initiatives or divert limited resources from multilateral fora. FTAs and RTAs are not a substitute for a properly functioning multilateral trading system and systemic efforts to deepen multilateral trade agreements like the current Doha Round of WTO negotiations.

Regardless of the outcome of the Doha negotiations, the WTO will continue as the cornerstone of the international trading system, and its rules will continue to govern trade relations and disputes that arise along the way will continue to be effectively resolved by the WTO's dispute settlement mechanism as they have during the 14 years since the WTO came into existence. We must be careful not to erode the effectiveness of that system through disproportionate attention to narrower bilateral and regional initiatives merely because they may be easier to achieve in the short term.