Termites in the Trading System by Jagdish Bhagwati

Preferential trade agreements (PTAs) undermine the global trading system. They divert trade away from efficient nonmember countries; impose costs on private enterprise; and take advantage of smaller nations.

Firstly, PTAs “divert trade from the cost-efficient nonmember countries to the relatively inefficient member countries” (49). The logic is simple: there are probably countries outside of the PTA that can produce at least some of the traded goods more efficiently than the PTA members can. In addition, PTAs lock countries into being trading partners. “In today’s world of volatile, kaleidoscopic comparative advantage” (60), a PTA member may lose their comparative advantage or a PTA nonmember may develop a significant comparative advantage over the PTA members. PTAs divert trade away from the most efficient allocation.

Secondly, the PTA “spaghetti bowl” is a drain on private enterprise (60). Businesses must expend significant resources “to discover the optimal sourcing” of components (69). The work is “particularly onerous for small enterprises” and “appallingly difficult for the poorer countries” (70). A 2005 Financial Times editorial elaborated:

Bilateralism distorts the flow of goods, throws up barriers, creates friction, reduces flexibility and raises prices. . . . While larger companies have a hard time keeping track, for small groups it is impossible. Bilateral agreements cause the business community to work below its potential. . . . If left unchecked, their continued growth has the potential to hinder the development of the global production system. (70)

Thirdly, the hegemonic powers use PTAs to take advantage of smaller nations. The US and EU frequently use their negotiating power to insert “‘values-related’ demands” into PTAs (74). These stipulations usually have to do with environmental or labor standards. Why is this bad? “Generally speaking, countries will have different sequences by which they approach different dimensions of labor standards” and environmental regulations (76). The values-related demands would be unlikely to be agreed to in multilateral negotiations; PTAs are “a strategy of ‘divide and conquer’” (81). Moreover, these demands are usually the product of domestic lobbying efforts (such as from the AFL-CIO) rather than altruistic intentions.

PTAs divert trade away from efficient nonmember countries; impose costs on the business community; and take advantage of smaller nations. PTAs undermine the global trading system.