Are Bilaterals Good or Bad?

There has been a lot of talk recently about the proliferation of bilateral trade agreements. Are they worth pursuing? Will they enhance or decrease the likelyhood of a multilateral trade deal in the future? The most recent round of multilateral trade talks (Doha Round) has stalled so countries have turned to negotating bilitaral deals which are much easier to negotiate and where the U.S. can take off the table its subsidies to politically sensitive areas.

The real question in this debate boils down to whether or not bilaterals are "building blocks" or "stumbling blocks" to multilateral trade. Underpinning pro-trade liberalization arguments is the number produced by the Peterson Institute for International Economics that complete trade liberalization would bring $500 billion in benefits to the U.S. per year.


The proponents of bilateral trade deals offer the following arguments:

1) More trade is good, so if we can't get a multilateral deal, bilaterals are the next best.
2) Bilateral deals can offer political benefits; Following 9/11 the U.S. negotiated trade deals with predominantly Muslim countries (Bahrain, Jordan, Morocco).
3) If we don't do bilateral deals, other countries will continue to negotiate them amongst themselves, at the expense of the United States.


For the opposing arguments, I refer to Martin Wolf in today's FT who comments on the recent deal awaiting approval by the U.S. congress between the U.S. and South Korea:

"The number of preferential trade agreements has exploded upwards in recent years. 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. The US is also the world's largest importer of commercial services, while South Korea is the 12th largest. 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.

Political and diplomatic capacity is also limited. While the US is focusing on preferential agreements, the Doha round of negotiations is incomplete. The EU is at least as culpable as the US for the failure to complete a round that would bring far greater benefits to world trade than any conceivable bilateral agreements. But if the attention of the US is diverted from multilateral to bilateral trade agreements, the Doha round is even less likely to be completed.
I am not totally opposed to the idea of preferential trade agreements. Regional agreements at least have a natural political and economic logic. More imaginatively, a free trade agreement open to the world could be the best route to global liberalisation, after the Doha round. Liberally minded countries could agree to a single free trade agreement open to any country prepared to sign up. Such an agreement could then ultimately be a template for global free trade.
As it is, however, it is far more likely that the move to discriminatory trade will end up fragmenting the world economy rather than integrating it in this imaginative way. If they were so minded, the members of the World Trade Organisation could sign some 10,000 different bilateral agreements among themselves. Does anybody think that this would be sensible? If not, at what point would the Gadarene rush cease? If the US, as the dominant economic player, makes discrimination a central principle of its own policy, how can it fail to become a global model, with predictable and disturbing results?"