Bilateral trade may hinder free trade

Many countries try to expand free trade through regional trade negotiations, as opposed to multilateral trade negotiations. However, a new study from the World Bank notes that while these trade agreements may be more politically palatable, they are economically inferior to more general trade barrier reductions.

The researchers note that regional and bilateral trade deals are quite popular:

Almost 230 such agreements exist today, up from a mere 50 in 1990.

An additional 60 are under negotiation.

The average African country belongs to four different trade agreements, while the average Latin American country belongs to eight different trade agreements.

However, local trade agreements are far from ideal, say the researchers. Most agreements between poor countries often exist more on paper than in practice. Meanwhile, bilateral deals between rich and poor countries tend to be better implemented, but are marred by restrictive rules of origin and by the routine exclusion of important agricultural products.

Consequently, bilateral trade negotiations have not been particularly effective, say the researchers. Between 1983 and 2003, only a tenth of global tariff cutting was due to regional and bilateral deals. In contrast, two-thirds of the tariff reduction was due to unilateral reforms by individual countries.

The researchers argue that shifting to broad, global trade agreements would increase incomes worldwide. They estimate:

If developing countries all had bilateral agreement with rich trading partners, global income would rise by only $112 billion by 2015.

However, broad based agreement would yield $263 billion, with $109 billion going to poor countries.

Source: Not All Trade Agreements Are Good, Economist, November 18, 2004; based upon: Global Economic Prospects 2005, World Bank, November 16, 2004.

For text http://www.economist.com/displaystory.cfm?story_id=3410790

For study text http://publications.worldbank.org/ecommerce/catalog/product?item_id=3426794

For more on Trade Issueshttp://www.ncpa.org/iss/tra/

FMF Policy Bulletin/ 14 December 2004