A Competitive Approach to Free Trade

The debate over the relative merits of multilateral trade liberalization and bilateral or regional agreements is raging again. Advocates of preferential deals view them as a way of substantially reducing barriers, deepening political ties among participants and promoting a successful conclusion of the Doha round in the World Trade Organization. Proponents of pure multilateralism fear such agreements will generate much trade diversion, risk new political clashes between the "ins" and the "outs" and undermine both Doha and the WTO itself.

There is no definitive answer to the debate. History teaches us that regional discrimination, as in the 1930s, can have devastating political as well as economic consequences. More recently, preferential and multilateral liberalization have proved to be necessary complements. The postwar process of trade negotiations shows a steady ratcheting-up of liberalization between regional and global initiatives.

In the future as in the past, the outcome will be determined not by theory but by the policies of the main players. Developing countries are now more important than ever but it is the actions of the US and the European Union that will be decisive.

The EU is the source of the world's greatest trade discrimination-which will increase sharply as its membership expands-and the hub of the most extensive set of preferential deals with non-members. But Europe badly needs the outside pressure of global commitments to implement essential internal reforms, especially in agriculture. That outside pressure comes primarily from the Americans.

The US, as usual, remains the pivotal operator. There are two concerns about its will to lead Doha to a successful conclusion. One is that protectionist pressures will preclude any meaningful US liberalization at all. Another is that its new zeal for preferential negotiations will sidetrack its traditional multilateral predilections. The first concern is misplaced. Recent actions on steel and farm subsidies, though noxious and politically motivated, were essential in winning congressional approval of trade promotion authority, without which the US could not negotiate any liberalization. A successful Doha package will in fact require and enable Washington to roll back its agricultural supports and to tighten its safeguards to prevent future abuses.

America's new penchant for preferential deals is also readily understood. Robert Zoellick, US trade representative, is pressing for "competitive liberalization"-bilateral, regional and global-to place pressure on non-members of individual free trade agreements either to join the group itself or to conclude broader agreement. For example, the North American Free Trade Agreement preferences in the US market induce other Latin American countries to create a Free Trade Area of the Americas, as an FTAA would in turn spur the Doha round.

Critics fear the defensive reactions to other countries' preferential pacts but the objective is precisely to induce non-members to accelerate their own liberalization in ever-widening circles until global free trade is achieved. More than half of world (and US) trade is already free, or en route to freedom, via preferential agreements. In any event, the overarching US priority must remain Doha for three reasons.

First, significant agricultural liberalization is essential for the US, because the farm bloc is crucial to its domestic coalition for freer trade and is possible only at the global level. Second, festering problems in the WTO's dispute settlement mechanism obviously require action in the WTO. Third, a stronger WTO is necessary to make the world safe for regionalism itself by functioning as a more effective arbiter of the preferential pacts.

Even the strongest critics of US trade policy should thus be reassured by the sweeping proposals Washington has now made for Doha: elimination of all tariffs on agricultural and industrial trade, massive cuts in farm subsidies and liberalization of services. The US is willing to eliminate all tariffs, including on some clothing and other "sensitive" items, and sharply trim its own farm subsidies. It is willing to give a lot if it can obtain a lot in return.

The other main countries must co-operate but many of them would lose heavily if the global talks failed and the EU and the US were forced to follow only the preferential path.

Skeptics are correct to doubt that all this can be done by the target date of end-2004. The real deadline for Doha (and the Free Trade Area of the Americas) is mid-2007, when US negotiating authority expires, a discipline that has helped complete all previous postwar rounds. Moreover, the next US farm bill, the vehicle for rolling back the new subsidies, must be tackled in 2006. The recent Franco-German agreement appears to preclude significant reform of the EU's common agricultural policy until then.

Hence the outlook is for a series of preferential pacts over the next few years that will generate "competitive liberalization" and produce a sweeping Doha agreement by the middle of 2007. That would bring the world considerably closer to the state of global free trade that would obliterate the distinction between the competing approaches and the endless debate about them.