[A-List] US trade policy: a defence

["Michael Keaney" <michael.keaney@xxxxxx>]

LETTERS TO THE EDITOR:
Trade pacts with big powers are essential for developing countries
By Jeffrey Schott
Financial Times; Nov 06, 2002

>From Mr Jeffrey J. Schott.

Sir, Your alarm bells about the perils of regionalism ring true to economic
theory (Editorial, November 4). I question, however, whether they accurately
reflect developments in the marketplace or at the negotiating table.

Your basic premise is that a lot of small free trade agreements do little to
liberalise trade , while increasing transaction costs and creating obstacles
to multilateral reform. Why, then, do so many developing countries seek such
pacts with the trading powers of Europe and North America?

The short answer is that FTAs are investment-driven. The pacts reinforce
domestic economic reforms and so encourage foreign direct investment, which
is critical to development strategies. Such investments generally are not
made to hide behind tariff walls; rather, the investors tend to lobby for
most-favoured-nation tariff reforms so they can source most efficiently and
keep pace with global competition.

One can also question whether, on balance, FTAs raise transaction costs. In
Central America, for example, integration pacts have propelled regional
reforms of customs administration, lowering costs. Moreover, regional
arrangements among developing countries tend to integrate fragmented markets
by promoting investments in economic infrastructure, again encouraging
development by linking energy grids and transport networks.

But will they undercut the Doha round? You argue that FTAs divert attention
from the World Trade Organisation round and expend scarce negotiating
resources. Here again, negotiating realities require an admixture of
regional and WTO initiatives.

First, there are almost 175 countries engaged in the WTO talks (including
observers and those negotiating accession). As you note, the Doha round
needs to produce a big deal, if the industrial powers are to accept big cuts
in their farm subsidies and peak tariffs. Without a big farm deal, the WTO
talks fail. The US has proposed radical farm reforms in the Doha round but
cannot follow through itself or get the European Union to do likewise
without large concessions from developing countries on the broad negotiating
agenda.

To make progress, US and EU negotiators must build coalitions with
developing countries. Bilateral pacts can contribute to this process;
indeed, such alliances were crucial to the success of the Doha ministerial
by securing African and Latin American support for a new round in return for
concessions by the industrial powers on agriculture and patents and public
health. Similar north-south co-operation is needed to produce a good WTO
deal on agriculture - a main objective of regional pacts.

Second, although the agendas of the respective trade talks are nearly
identical, the resource constraints are significant. That is why the
"capacity building" component of the Doha agenda is so important. But FTAs
also can contribute by educating new legions of trade officials.

The biggest fault of the Uruguay round was creating opportunities of which
developing countries could not take advantage because of inadequate
development and resources. The Doha round seeks amends with its focus on the
"development agenda". Bilateral and regional trade negotiations, aimed at
the economic development of the participant developing countries, seem to
complement and reinforce the laudable goals of the WTO system.

Jeffrey J. Schott, Senior Fellow, Institute for International Economics,
Washington, DC 20036-1903, US