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Multilateral Trade Liberalization versus Regional Agreements: Charting the Way Forward Essay


Introduction

Academics and policy analysts are in agreement that the proliferation of bilateral and regional trade agreements is undeniably one the most notable developments in international trading panorama in the recent past.

In a sharp contrast to the new global economic order contemplated in 1944 by the initiators of the Bretton Woods system, and in a sharp contrast to the principles enshrined in the new post-war economic order and grounded on the non-discriminatory, non-protectionist, and all-embracing standards of multilateralism, we now have a disjointed mass of bilateral and regional agreements in most of the significant arenas of global economic regulation (Zeng, 2010; Suominen, 2009).

Currently, the popular view governing international trade and economic regulation, it seems, is that regional integration is the rule, and multilateralism the exception (Reich, 2010). By evaluating these thematic presuppositions through the prism of global trade and economic regulation, this paper will aim to demonstrate that regional agreements are now more preferable than multilateral treaties.

Multilateralism versus Regional Agreements: The Changing Tides

Today, more than ever, mainstream commentators are increasingly signalling to the notable shift in global economic order, from a predominately multilateral orientation to an arrangement that espouse regionalism and regional trading agreements, and regional integration (Ravenhill, 2008).

One doesn’t need to look far to demonstrate evidence to this shift; the United States, formerly a strong believer in multilateralism, is presently in a ‘signing spree’ of such bilateral and regional treaties and now has put into practice or is in the process of entering into free trade agreements (FTAs) with no less than thirty-seven countries (Reich, 2010).

Since there is a marked difference between bilateralism and regionalism, this paper concerns itself with evaluating the latter, which analysts view as a launching pad for other regional endeavours, such as regional integration and regionalization. Below, some few terms related to the scope of the topic are explained.

Definition of Terms

Regionalism, when used in economic literature, refers to a conscious expression of a common sense of identity, loyalty and purpose, combined with the development and implementation of voluntary political and economic institutions with a view to pool together resources for collective functional and institutional arrangements (Kacowicz, 1999).

Regionalization, on its part, can be envisaged as “…the growth of societal integration within a given region, including the undirected processes of social and economic interaction among the units” (Kacowicz, 1999 p. 530).

In this paper, the term is used to imply a continuing process of establishing regions as geopolitical and economic units. Consequently, while regionalism is used to imply the purposive/directed proneness to establish regional institutions and agreements, regionalization usually denotes the undirected tendency to establish regions.

Protectionism, when used within the context of global political economy, denotes any form of system or arrangement that attempts to foster or develop domestic trade and industries by actively shielding them from international competition through duties, tariffs and quotas enforced on importations (Thompson & Reuveny, 1998).

Extant research demonstrates that multilateral trade agreements were initially encouraged by the Bretton Woods system and other global institutions such as GATT/WTO for the obvious reason that they helped to fight protectionist economic policies, which were thought to strongly intimidate the stable functioning and prosperity of the global economy, leading to noticeably reduced levels of trade and economic growth rates (Gilpin & Gilpin, 2001).

Almost 20 decades down the line, the multilateral trade agreements seems to have lost favour to regional and bilateral agreements.

Why Multilateral Trade Agreements lost Preference to Regional Agreements

The multilateralism versus regionalism debate revolves around the sensitive issue of whether countries should stick to an all-embracing international organization, which has been governing global economy ever since the end of World War II, or to subscribe to bilateral and regional trade treaties emerging by the day (Beng, 2001).

Although the initiators of multilateral trade agreements had good intentions, particularly in stabilizing the global economy, it now seems that all nations, including the United States, are aligning themselves more with regionalism, while partially or wholly marginalizing multilateralism.

There exist varied reasons as to why the above disposition is taking shape. Economic analysts are of the opinion that multilateral agreements, owing to their structure, are largely ineffective in supporting trade and foreign direct investment (FDI), particularly in the developing world.

This is in sharp contrast to regional agreements, which are founded on the tenets of regionalism, and therefore are rigorous in their pursuit for preferential trade arrangements due to the common sense of identity, loyalty, and purpose (Yarbrough & Yarbrough, 2001).

In effect, the regional agreements are increasingly being credited for creating astute trading blocks, such as the EU, NAFTA, and ASEAN, which are committed to protecting the interests of member countries without adapting a protectionist approach (Zeng, 2010).

The breakdown of WTO Doha round of talks in 2006 coupled with the interrelated complexities of imbalances in external trade barriers predominant under multilateral settings have worked to the disadvantage of multilateral treaties (Reich, 2010). In contrast, it is becoming increasingly easy for nations to agree on intraregional tariff reduction on products and services, making regional agreements a viable option.

Additionally, the non-reciprocal trade preference between developed and developing countries, entrenched under the tenets of multilateralism, has failed to either increase the per capita income of the least developed countries (LDCs), or diversify their export bundles appreciably in the past four decades (Mansfield & Milner, 1999). This orientation has allowed adequate reasons for LDCs to align themselves with regional trading blocks.

What’s more, multilateral treaties have been accused, albeit rightly, for lacking the competition effects as well as the scale effects. It beats logic how a country with a huge GDP, such as the U.S., can possibly compete for trade opportunities with a country in Sub-Saharan Africa under similar multilateral treaties.

In sharp contrast, the “…dynamic effects of regional integration have been a major rationale for the formation of recent RTAs, including those arising from FDI flows, strengthened intellectual property rights protection, or the predictability of the trade regime and institution building and governance” (Mashayekhi et al, 2005 p. 5).

It is imperative to note that such vibrant effects of regional agreements have been noted most profoundly in the EU and NAFTA, which have not only enhanced their accrued intraregional exports, but also their trade with the rest of the globe.

Lastly, evidence has been adduced to the fact that multilateral agreements limit participating member countries to move more rapidly to freer trade with resilient and functional disciplines over a broad range of products and services than could be accomplished at the regional level (Mashayekhi et al., 2005. The above discussion, therefore, demonstrates why multilateral agreements are currently less preferable than regional treaties.

Theoretical Underpinnings Supporting the Loss of Preference

Scholars have advanced a number of theoretical frameworks in their attempt to explain why regional integration and regional agreements are more preferred than multilateral agreements.

One particular theory that to a large extent influenced the formation of regional trading outfits such as NAFTA is the theory of the Second Best, which posits that “…if the persistence of one distortion is taken as given, thus precluding the first-best solution, then eliminating another distortion does not necessarily yield the second-best solution; it may be only third best, or worse” (Frankel et al, 1997 p. 208).

This presupposition implies that so long as tariffs and other trade barricades against ‘outsider nations’ remain firmly in place, as is the case with multilateral trade agreements that put the developed world at a distinct advantage over developing nations, the eradication of trade barricades between two FTA member countries can as easily exaggerate trade distortions as eradicate them.

Consequently, many countries are gravitating towards regionalism and free trade agreements to avoid such a scenario.

Another theory that can be used to explain the loss of preference is known as the Partial Equilibrium model, which presupposes that under perfect competition, and when all the other factors are held constant, an RTA may indeed enhance the level of trade between member countries at the expense of less competent domestic producers or of more efficient developing countries (Mashayekhi et al., 2005).

This theoretical dispensation has been extensively used by EU in increasing its trading volumes with developing but efficient countries such as South Africa, while putting trade barriers to Western nations perceived as largely inefficient, as is often the case with some countries in Eastern Europe (Zeng, 2010).

Outlining the Rise of Regional Agreements

Available literature demonstrates that regional agreements have increased extensively around the world, particularly in the past two decades. Barely nine years after the turn of the century, an estimated two-hundred regional agreements had already been notified to the WTO, with the number expected to rise to an estimated four-hundred RTAs by 2010 (Suominen, 2009).

As observed by this particular author, “…virtually all countries are members to at lease one RTA, and most countries belong to two or more RTAs at once” (p. 29).

In North America, the U.S. has departed from its traditional reticence for regional integration and regionalism to enter into fourteen regional treaties with partners in North America, Asia, India, and the Middle East in a record time of thirteen years. Its NAFTA partner, Mexico, has signed seven regional agreements, while Chile has ratified seven treaties, including with the U.S., the EU, China, India, and Mexico (Suominen, 2009).

The EU, on its part, has adopted a distinct rationale of regional integration, not only entering into FTAs with competent and efficient countries in the Balkans, but also expanding its mandate to incorporate these countries in the EU. Interestingly, the EU now numbers twenty-seven countries, up from fifteen in 2002 (Zeng, 2010).

In contrast, nothing much has been going on in the multilateral trade domain, particularly after the collapse in 2006 of WTO-led Doha round of talks.

Conclusion

From the discussion, it is indeed true that not only has the number of regional integration treaties plummeted in the recent past, but their content and scope are increasingly becoming more complex and all-embracing.

According to Suominen (2009), these regional pacts are fastidiously turning into engines of economic growth, particularly by encouraging market access for products and services, including investment, intellectual property rights, movement of labour, competition policy, and macroeconomic and political cooperation.

Undeniably, it is now evident that the economic growth and stability of countries will most probably be contingent upon how regional and bilateral negotiations are conducted and concluded

List of References

Beng, L.C (2001). Regionalism: A Singaporean Perspective. Asia-Pacific Review, Vol. 8, Issue 2, pp 10-17

Frankel, J.A., Stein, E., & Wei, S.J (1997). Regional Trading Blocks in the World Economic System. Washington, DC: Peterson Institute

Gilpin, R., & Gilpin, J.M (2001). Global Political Economy: Understanding the International Economic Order. Princeton, NJ: Princeton University Press

Kacowicz, A.M (1999). Regionalization, Globalization, and Nationalism: Convergent, Divergent, or Overlapping? Alternatives: Global, Local, Political, Vol. 24, Issue 4, pp 527-540

Mansfield, E.D., & Milner, H.V (1999). The new wave of Regionalism. International Organization, Vol. 53, Issue 3, pp 589-627

Mashayekhi, M., Puri, L., & Ho, T (2005). Multilateralism and Regionalism: The new Interface. United Nations. Viewed <>

Ravenhill, J (2008). Global Political Economy, 2nd Ed. Oxford: Oxford University Press

Reich, A (2010). Bilateralism versus Multilateralism in International Economic Law: Applying the Principle of Subsidiarity. University of Toronto Law Journal, Vol. 60, Issue 2, pp 263-287

Suominen, K (2009). The Changing Anatomy of Regional Trade Agreements in East Asia. Journal of East Asian Studies, Vol. 9, Issue 1, pp 29-56

Thompson, W.R., & Reuveny, R (1998). Tariffs and Trade Fluctuations: Does Protectionism Matter as much as we think? International Organization, Vol. 52, Issue 2, pp 421-440

Yarbrough, B.V., & Yarbrough, R.M (2001). Regionalism and Layered Governance: The Choice of Trade Institutions. Journal of International Affairs, Vol. 48, Issue 1, pp 95-102

Zeng, K (2010). Multilateral versus Bilateral and Regional Trade Liberalization: Explaining China’s Pursuit of Free Trade Agreements (FTAs). Journal of Contemporary China, Vol. 19, Issue 66, pp 635-652

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IvyPanda. 2019. "Multilateral Trade Liberalization versus Regional Agreements: Charting the Way Forward." May 10, 2019. https://ivypanda.com/essays/multilateral-trade-liberalization-versus-regional-agreements-charting-the-way-forward-essay/.

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IvyPanda. (2019) 'Multilateral Trade Liberalization versus Regional Agreements: Charting the Way Forward'. 10 May.

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