Bilateral Free Trade Agreements: A Critical Assessment and WTO Regulatory Reform Proposal

29 Pages Posted: 6 Sep 2008

See all articles by Ralph Folsom

Ralph Folsom

University of San Diego School of Law

Date Written: September 2, 2008

Abstract

At this writing, most-favored-nation (MFN) principles notwithstanding, every nation save Mongolia has entered into at least one bilateral or regional free trade agreement. The European Union, for example, is so heavily engaged in bilateral deals that it has MFN trade relations with only seven countries. Hundreds of bilaterals have been negotiated since the early 1990s. The apparent failure of the Doha Round virtually guarantees their dominance of international trade law and policy. This article reviews the history of bilateral and regional free trade agreements ("bilaterals"), failed attempts at their regulation under the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO), and critically assesses the significance of their proliferation for international trade law and policy. Reform of WTO jurisdiction over bilaterals concentrated in the Dispute Settlement Understanding (DSU) is proposed. Specifically, abandonment of all WTO regulation except for a Revised Transparency Mechanism (text attached) operating in conjunction with expanded DSU opportunities is suggested. A word on nomenclature: This article utilizes the term "bilateral(s)" because it best characterizes the free trade agreements that are presently sweeping the seas. Generally in GATT/WTO parlance, "regional trade agreements" (RTA) has been and continues to be employed. Those words, in my opinion, are not the best descriptors of what is happening when, for example, China and Chile, Japan and Mexico, the United States and Oman, and the European Union and South Africa agree on free trade. A variety of factors help explain why bilaterals have become the leading edge of international trade law and policy. Difficulties encountered in the Uruguay, "Seattle" and Doha Rounds of multilateral trade negotiations are certainly crucial. GATT/WTO regulatory failures regarding bilaterals have also fueled this reality. Yet these "negatives" do not fully explain the feeding frenzy of bilaterals. A range of attractions to bilaterals are also at work. For example, bilaterals often extend to subject matters beyond WTO competence. Foreign investment law is a prime example, and many bilaterals serve as investment magnets. Government procurement, optional at the WTO level, is often included in bilaterals. Competition policy and labor and environmental matters absent from the WTO are sometimes covered in bilaterals. In addition, bilaterals can reach beyond the scope of existing WTO agreements. Services is one "WTO-plus" area where this is clearly true. Intellectual property rights are also being "WTO-plussed" in bilateral free trade agreements. Whether this amounts to competitive trade liberalization or competitive trade imperialism has been provocatively explored by Prof. Bhala. Further, bilaterals are politically and economically selective. In other words they avoid not only global most-favored-nation principles, but also domestically "sensitive" areas of national politics and economics. For example, Singapore's absence of farm exports helped make it an ideal U.S. and Japanese free trade partner. The micro-sized economy of Chile contributed to its attraction as a free trade partner with Mexico, China, the European Union, the United States and others. U.S. free trade deals with Jordan, Bahrain and Oman fit economically in a similar fashion, not to mention national security objectives. Like it or not, the "spaghetti-bowl" maze of bilaterals is driven by powerful negative and positive forces. It is not only the preferred trade medium of today, but very likely the future. Already more than half of world trade is conducted under bilaterals. While international trade lawyers may celebrate full employment, it bears remembering that bilaterals are discriminatory. They could render MFN the least favored status in world trade. Such an outcome would be especially harmful to the world's poorest nations, those with whom few WTO partners seek a bilateral agreement.

Keywords: Free Trade, World Trade Organization

JEL Classification: K33

Suggested Citation

Folsom, Ralph, Bilateral Free Trade Agreements: A Critical Assessment and WTO Regulatory Reform Proposal (September 2, 2008). San Diego Legal Studies Paper No. 08-070. Available at SSRN: https://ssrn.com/abstract=1262872 or http://dx.doi.org/10.2139/ssrn.1262872

Ralph Folsom (Contact Author)

University of San Diego School of Law ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States

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