Press reports that Japan is interested in a free trade agreement (FTA) with the United States in response to the U.S.-Korea FTA have again raised concerns about the effectiveness of bilateral agreements in moving toward freer world trade. As the Doha Round of WTO trade policy negotiations continues to drag on, discussions about FTAs have become even more important. The issue is not whether bilateral or multilateral agreements are better, but how they can work together in a world that needs continued efforts to remove trade barriers.
Japan has short-term, practical interests in a FTA with the U.S. and longer-term, strategic economic issues. Electronics and automobiles from Korea will enter the U.S. duty free while Japanese products will continue to face tariffs of 5 percent and 2.5 percent, respectively. Both countries have modern industries and tariffs could make the difference in head-to-head competition. Japan’s longer-term issues are an aging population and high food costs under its existing import restrictions. The fact that Japan would even consider an FTA with a major agricultural exporter like the U.S. is an indication it is serious about rethinking its economic and trade policies in light of limited opportunities in multilateral negotiations. Japan has started FTA negotiations with Australia, and farm lobbies have intensified their opposition to all FTAs.
One of the advantages of bilateral agreements is that countries can choose when to enter into agreements. The U.S. and Canada were ready to start the FTA process in the mid-1980s. Mexico followed a few years later and the U.S.-Canada FTA was folded into NAFTA. CAFTA-DR was negotiated in 2004-05 when the U.S. and the other countries decided there were economic and foreign policy benefits. A U.S.-Korea FTA would not have been doable 10 years ago. The EU and the MERCUSOR countries of South America are negotiating again after a several year break. Countries can use natural synergies like geographic proximity or complementary industries to gain economic efficiencies that are country specific.
The ability to choose to not pursue FTAs is also one of the major short comings of bilateral FTAs. Industries protected by tariffs and other import restrictions can exert great political pressure to prevent even planning to negotiate an FTA. The breadth and depth of the WTO agreements are powerful enough to get most countries and industries involved in the negotiations to avoid not having their voices heard. An agreement applies equally to all members of the WTO and lets market forces determine trading patterns. Countries with little in common are part of the same rules-based trading system. Issues like trade distorting domestic subsidies are also best handled when all countries are bound to the outcomes.
If the current WTO negotiating process remains bogged down, countries will increasingly explore bilateral or regional agreements to move their trade agendas forward. Relying solely on bilateral and regional agreements would be a mistake because they do not move all countries along at some minimal pace toward freer trade under a common set of rules. The multilateral process needs to seek other ways to negotiate towards more open markets.
Some groups are already thinking about what happens next with or without a Doha agreement. The consulting group Oxford Analytica in a June 19 analysis identified six factors most often connected with the problems of the Doha Round: too many subjects, too many participants, consensus rule, most-favored nation principle, north-south differences and lack of political leadership at the national level. A new negotiating process would need to address at least some of these concerns.
An April 2007 policy paper on the new global economy from the Atlantic Council of the U.S. stated that “the WTO must be preserved and strengthened as a major institution in the management of the global economy.” The paper followed up with a blunt assessment, “No matter its final outcome, the Doha Round has demonstrated that the era of the traditional trade round is over…In a significant paradigm shift, it is unlikely that the Doha Round will be followed by a similar Round anytime in the near future.” After the Doha Round is concluded, the authors suggest that the U.S. and the EU lead a set of negotiating efforts for further trade opening within the WTO context. This would be a form of “variable geometry”, a new buzz phrase that refers to different groups of countries involved in various trade opening efforts based on their interests and capabilities. The paper also calls for bilateral and regional trade agreements to not erode the authority and rules of the WTO.
A logical approach is to move away from comprehensive negotiations that involve all industries, all types of trade distortions and all countries. The comprehensive approach worked well when a few dozen countries were involved in talks centered mainly on industrial goods. An industry-by-industry approach may force countries to decide to protect their companies in an industry at the expense of being left behind as capital and technology seek out the best market opportunities. The single industry approach also would avoid countries having to accept a bad agreement in one industry to get a good agreement in another industry. This may work better in fast growing new industries like semiconductors than in older industries like steel.
The post Doha era of WTO trade agreements appears to have already arrived. Bilateral and regional FTAs have the upper hand unless the WTO trade policy negotiations process can reinvent itself to be more relevant to twenty first century trade issues. Those trade policy participants most critical of bilateral and regional FTAs need to lead the reforms in the WTO to ensure that the multilateral trade policy process fulfills its vital role.