Commentary: Free Trade Agreements and the Doha Development Agenda

Abstract

The proliferation of preferential trade agreements in recent years has reenergized a long-standing debate over their benefits and costs. This paper argues that a balanced view is in order. The trade creating effects of free trade agreements (FTAs) are likely to fall off sharply with increasing distance between partners and diminishing size of trade flows subject to liberalization. This will naturally tend to arrest the proliferation dynamic once the major regional agreements have been completed. Given the sheer number of bilateral relationships in the global trading system, global free trade is thus unlikely to be achieved through a network of FTAs. Since multilateral rules have lower compliance costs than webs of inconsistent bilateral/plurilateral rules and the major frictions in the trading system can only be addressed through global negotiations under the auspices of the World Trade Organization, the advantages of the multilateral system will re-assert themselves. While preferential agreements are poorly regulated within the multilateral rules-based system, this is unlikely to be redressed through either negotiations or litigation under the Dispute Settlement Understanding. The more practical way to minimize the negative effects of FTAs is to lower the margin of preference through a negotiated reduction of Most Favored Nation (MFN) tariffs in the Doha Round while enhancing the trade-creating effects of existing FTAs by broadening their membership.

Keywords: WTO, Doha Round, Free Trade Agreements, Preferential Trade Agreements

JEL Classification: F13