Catalog

Opinion
What Route to Free Trade?

Asia’s regional trade pacts can complement the WTO—if properly focused and structured

	EFFECTIVE? Asian economies have taken advantage of regional agreements while avoiding many of the drawbacks

The resurgence of regional trade agreements once again raises the question — how beneficial or harmful are these arrangements in the context of the broader multilateral World Trade Organization (WTO) system?

Japan and Singapore signed an Economic Partnership Agreement in February 2002, and there are proposals for expanding membership in the Association of Southeast Asian Nations.

While much of the debate over regional trade agreements depicts them as black or white, it is the gray areas that matter. Whether they are stumbling blocks or constructive steps to achieving global free trade depends on their institutional arrangements and other details.

Economists have criticized regional agreements but, in fact, they have served the region well. The evidence suggests they increase trade flows. We believe that, together with trade liberalization accomplished through the WTO, they can be economically and politically beneficial if properly focused and structured.

On the plus side, regional trade agreements can foster cooperation on a range of cross-border issues. It is usually easier to tackle complex issues of trade and regional cooperation in a small group of countries that are often neighbors.

For example, the Closer Economic Relations agreement between Australia and New Zealand broke new ground in liberalizing trade in services.

They also encourage domestic competition, leading to productivity gains and improved quality and diversity of goods and services. Producers can reap benefits of the larger markets (created by the pact) and can expand export opportunities and create more jobs. Importantly, they can provide an institutional vehicle for fostering regional cooperation in building infrastructure and addressing cross-border issues.

They enable countries to gain experience in negotiating and carrying out trade liberalization on a limited scale, and build capacity in trade discussions and policy formulation. Such arrangements can provide policymakers an opportunity to commit to future policy reforms or cement past policy reforms. They can also serve as a forum to further diplomatic relations and nontrade economic integration, thus fostering peace and stability.

On the other hand, critics say regional trade agreements provide policymakers who are not serious about liberalization with an easy way out. Such policymakers can use membership of such a pact to appease advocates of liberalization without effectively lowering trade barriers.

Another criticism is that such agreements may increase intrabloc trade at the price of diverting trade from nonmember economies. Furthermore, it is alleged that so many overlapping international and regional trading arrangements can create a spaghetti bowl of regulations and commitments that is difficult to untangle and impedes broader trade liberalization.

While economists differ on the practical effects of regional pacts, they agree that a global free trade arrangement offers greater potential benefits to economies worldwide.

In the past, Asia has given more attention to trade liberalization through the global trading arrangements. Though the region has several regional trade agreements—notably the Asian Free Trade Area (AFTA) of the Association of Southeast Asian Nations, and the South Asian Preferential Trading Arrangement (SAPTA)—most are political in origin and emphasize broader issues of regional cooperation rather than concrete actions in trade liberalization.

Until only recently, Japan emphasized the expansion of the global multilateral arrangements to developing regional agreements. In general, Asia’s regional agreements have been less institutionalized and formalized than elsewhere, and their efforts to lower trade barriers have been relatively muted.

But they have been active in other areas of regional economic cooperation. Efforts in trade liberalization in the region have generally followed advances made through the WTO-led multilateral trading system.

This approach has served the region well and its export-based economies have been able to achieve robust growth and reduce poverty substantially. Asian economies have been able to take advantage of the positive aspects of regional agreements—especially fostering cooperation and addressing shared concerns—while avoiding many of the drawbacks.

Asian policymakers should remember this and focus their efforts in limited regional trading arrangements in areas where they can complement, rather than compete, with the WTO.

In particular, countries should concentrate on areas where broader multilateral arrangements have proven ineffective or in nontrade areas to further international or regional cooperation.

________________________________

An extended discussion of trade agreements in the Asia and Pacific region is included in ADB’s Asian Development Outlook 2002.

Email this to a friend