by Maria Robson
Research Analyst, The Public Policy Research Initiative
Fr
eeing up trade by lowering or removing barriers such as tariffs and quantitative restrictions usually gets support from economists and observers of international relations who see economic cooperation as conducive to broader harmony among countries. Aside from countering the political appeal of protectionism, advocates for free trade face a choice that has become especially acute in recent years: whether multilateral or bilateral arrangements are the best approach. Since the 1980s, Canada has made bilateral and regional arrangements its principal focus. Despite the practical appeal of this approach, however, evidence that bilateral arrangements can undermine multilateralism suggests that Canada should switch its focus, making completion and development of the World Trade Organization’s Doha Round its first priority.
Good trade policy is crucial for any country, due to its potential to boost the country’s economic and social development. The protectionist approach of mercantilism, founded on the premise that a country must run a trade surplus, with burgeoning exports but restricted imports, has historically held little appeal for consumers. As cross-border flows of intermediate goods and services have grown, however, its drawbacks are becoming more obvious to producers as well. The best method of boosting a country’s economy through trade is to facilitate the free flow of goods and services to the greatest possible extent, recognizing that cross-border trade today involves vast quantities of intermediate goods (Dymond & Hart, 2008). Reducing restrictions is preferable to adding concessions, and the most effective way to hasten the flow of intermediate goods is to abolish cross-border tariffs.
Since World War Two, Canada, the United States, and many other countries have actively embraced the concept of freer international trade. Their principal focus, however, has shifted over time. In the early post-war years, the multilateral negotiations under the General Agreement on Tariffs and Trade were the main event. More recently, bilateral and regional arrangements have dominated. The World Trade Organization estimates that nearly 400 regional trade agreements will be active in 2010, the vast majority of which are Free Trade Agreements (FTA) (World Trade Organisation, 2009). The question that arises is which method of free trade states should pursue. The argument for bilateral trade agreements is one of practicality. Multilateral trade is an appealing ideal, but nearly 200 countries will never be able to successfully negotiate a deal that will please everyone; the situation has parallels with the December 2009 Copenhagen conference on climate change. The Doha Round has therefore entered a state of paralysis, with participants unable to successfully work around special interests, while bilateral trade treaties continue to be negotiated across the globe.
With the Doha Round stymied, and potentially doomed to fail, Canada has rushed to establish FTAs on a smaller scale. Canada’s FTA with the European Free Trade Association came into force in July 2009 and was followed a month later by an FTA with Peru. The impetus for this can be clearly seen in the number of FTAs the United States has signed in recent years, which pose a potential threat to Canada’s importance as a trading partner. Canada has historically feared a hub-and-spoke system of bilateral agreements with the United States at the centre and Canada as one of many spokes; this was a driving factor in the Canadian push for a trilateral free trade agreement with Mexico after the U.S. and Canada had already ratified a bilateral deal, instead of the bilateral negotiations underway between Canada’s continental neighbours. Canada’s trading position is not diverse and strong enough to avoid some degree of isolation if the U.S. establishes many bilateral arrangements with other countries (Robson, 2007).
In the past two decades Canada and the U.S. have each pursued numerous bilateral deals. Some of the American ones have jeopardized Canada’s importance to the U.S. economy – such as the 2004 FTA with Australia. Thus, it is important for Canada to encourage multilateral negotiations, particularly including the United States, rather than standing by while its most important trading partner negotiates bilateral agreements with other countries.
In addition to the potentially isolating effects of bilateral agreements for any country that is not privy to them, such agreements can impede broader, multilateral negotiations. In his 2006 study for the American Economic Review, Nuno Limão found American preferential trade agreements in the 1980s and 1990s to have been detrimental to the United States’ efforts at multilateral trade. The study provides empirical evidence that the United States, when reducing tariffs in accordance with multilateral agreements, tends to make smaller reductions for goods that are already included in its bilateral preferential agreements (Limão, 2006).Thus, some countries are already paying lower tariffs for these goods when they export them to the U.S., but the other countries involved in the multilateral negotiations will not receive the same level of reduction. This finding also holds true for Canada. In a 2007 study, Matthew Adler found similar results for Canadian tariff reductions, concluding Canada’s reductions in the Uruguay Round on goods encompassed by NAFTA would have been greater without the trilateral arrangement (Adler, 2008).
Advocates of freer trade would justifiably argue that Canada is better off engaging in bilateral negotiations than no negotiations at all. As long as there is potential for substantial multilateral negotiations, bilateral and regional talks pose important risks. Canada has only so many trade negotiators and only so much attention its leaders can give trade negotiations, so focusing on bilateral and regional arrangements inevitably means neglecting the multilateral alternative. As emphasized by Adler, moreover, for Canada as for the United States, FTAs may impede the viability of prospective future multilateral agreements (2008).The practicality argument is compelling; with globalization and increasingly integrated cross-border production, facilitating trade, even on a bilateral basis, has clear economic benefits. However, successful multilateral trade deals are the best means of ensuring substantial trading benefits for all countries involved.
References
1. Dymond, Bill and Michael Hart. (2008, March). Navigating New Trade Routes: The Rise of Value Chains, and the Challenges for Canadian Trade Policy. C.D. Howe Institute Border Papers Series, No. 259. Retrieved December 15, 2009 from http://www.cdhowe.org/pdf/commentary_259.pdf.
2. World Trade Organization. (2009). Regional Trade Agreements. Retrieved December 20, 2009 from http://www.wto.org/english/tratop_e/region_e/region_e.htm.
3. Robson, William. (2007, August 16). Stuck on a Spoke: Proliferating Bilateral Trade Deals are a Dangerous Game for Canada. C.D. Howe Institute e-brief. Retrieved December 15, 2009 from http://www.cdhowe.org/pdf/ebrief_47.pdf.
4. Limão, Nuno. (2006, June). Preferential Trade Agreements as Stumbling Blocks for Multilateral Trade Liberalization: Evidence for the United States. The American Economic Review, 96 (3). 897.
5. Adler, Matthew. (2008, October 15). Stumbling Forward on Trade: The Doha Round, Free Trade Agreements, and Canada. C.D. Howe Institute e-brief. Retrieved December 15, 2009 from http://www.cdhowe.org/pdf/ebrief_65.pdf.
