FTAs are filling in for failing WTO

The current trade war between the US and China has put multilateralism in a bind. The erratic and inconsistent stand of the US has sent out confused signals to the world and threatens the very existence of the World Trade Organisation (WTO) and multilateralism. Many developing countries are left with the limited option of signing Regional Trade Agreements (RTA) with partners they are comfortable with. Thus, Free Trade Agreements (FTA) are gaining ground. Policymakers and economists believe FTAs could play a crucial role in pursuing the trade reform agenda.

First, the complementarities between FTAs and the WTO-governed multilateral trading system can benefit the member countries in various ways, like slowly boosting global free trade by allowing member countries to intensify their level of competition; providing time to domestic industry to adjust; and, creating an arena to tackle difficult issues like agriculture subsidies and trade in services.

Besides, the circles of trade that are created through this exercise can help converge to form expansive multilateral agreements. The argument is that if a country is not yet ready for global competition, it can pick and choose trading partners with which it feels relatively more comfortable. This may help raise its confidence and competitiveness and pave the way for eventual free trade at the global level.

Second, a critical aspect of forming FTAs is that they allow countries to phase and sequence their liberalisation episodes to optimise the benefits. This has been one of the factors propelling countries to engage in FTA negotiations.

Third, the long-term political and ethnic hostility among various countries can be minimised to an extent through FTAs, and this, too, can contribute towards an eventual global multilateral trade regime.

In other words, an FTA can be seen as a strategic move to consolidate peace and increase regional security among member countries. Ideally, this arrangement should help benefit the countries forming the trade bloc. But the realpolitik played by developed countries tends to deliver different things to different developing countries in the grouping.

For instance, RTAs involving developed countries provide increased discriminatory access to a larger market. In return, developed countries look to garner maximum support on the political front to pacify the overall hostility arising out of this arrangement. It is also apparent that most political RTAs are not driven by pure economics. However, in the political arrangements, particularly where a large developed country is involved, there is always the possibility that the interests of the smaller countries get marginalised. It cuts both ways.

Fourth, FTAs can promote the spirit of open regionalism, which would be complementary to a non-discriminatory multilateral system, as espoused by WTO. Open regionalism — that is, agreements with low external trade barriers, non-restrictive rules of origin, liberalised service markets and a dominant focus on reducing transaction costs at borders — can reduce many complexities such as the restrictive rules of origin of the global trading system.

Foreign direct investment

Fifth, among other economic factors that are propagating regionalism or formation of FTAs are foreign direct investment (FDI) and the advantages associated with the economies of scale. FDI has become an important source of foreign capital inflow and a key promoter of economic growth for developing countries. It is increasingly felt that countries join RTA or FTA to attract FDI. On somewhat similar grounds, it is also suggested that smaller countries join FTAs because they can offer domestic firms the advantage of economies of scale.

Sixth, another angle to this debate on FTAs — whether they are productive or beneficial to developing countries -- is propagated by a few experts who express that there has been a consistent dominance by developed countries or blocs, particularly the US and EU with their huge presence in developing regions. With this capital, they may be luring various developing countries to make more and deeper trade and investment commitments through regional agreements with them.

On the other hand, there has been a marked difference among developing countries in their approach to entering RTAs with developed countries. That is to believe and argue that developing countries are forging trade linkages among themselves through regional arrangements to resist the hegemony of large powers in world trade. This may be seen as a strategic move among like-minded developing countries to forge FTAs and that’s the reason why there is a surge towards establishing so many RTAs or FTAs in different regions, especially in the developing part of the world.

Until and unless a fair, transparent and trustworthy multilateral regime governed through the WTO is in place, the world is going to witness more of these regional and free trade arrangements.

(The writer is Professor, Lal Bahadur Shastri Institute of Management, Delhi)