Conclusions and the Future Landscape of World Trade

The interest in forming BTAs has been growing at a phenomenal rate. In the Asia-Pacific region alone, the number of BTAs has more than tripled over the past 5 years, from 57 in 2002 to 176 in October 2006. Furthermore, this interest seems to be increasing at an increasing rate! The key distinguishing feature of bilateralism is the amount of flexibility it provides- both in terms of process and in pursuing disparate interests. Any two countries, in any part of the world, can form a BTA simply by wanting to do so. In a one-on-one setting, just about any objective can be pursued, and trade-offs can be designed to accommodate parties concerned in a way that would be difficult to do in a plurilateral or multilateral setting.

In this context, it is not surprising that a wide array of both economic and non-economic factors appear to be driving the proliferation of BTAs. We identified a set of general and specific factors involved. The general factors were: disenchantment with progress of the WTO; snowballing and domino effects as a result of countries not wanting to be left behind; lower visibility and thus lower resistance from opposing forces; and pure politics driven by politicians and political parties. There are three broad categories of specific factors that we identify: economic; strategic and event driven. Each of these broad categories have their sub-categories, and the subcategories for economic and event driven BTAs are each sub-divided into two sub-categories as well. Thus, in total, we identified 11 specific factors to explain the proliferation of BTAs.

In general, it is would appear that the sheer number of BTAs and their continued rapid growth is fragmenting the world trading system. The most obvious effect is the much discussed spaghettibowl effect. It is also distracting, and drawing scarce resources away from the multilateral effort. But the story is not that simple or straight-forward once we consider specific factors. The fallacy of division applies because the motivation in pursuing a BTA can determine if its impact on the world trading system is positive or negative. Whether or not a BTA contributes to the integration or fragmentation of the world trading system can vary depending on this.

Most of the event driven BTAs, except perhaps some PTA facilitation BTAs, appear to either support multilateralism or have a positive effect on the world trading system. All of the strategically motivated BTAs appear to have a negative effect. Of the economically motivated BTAs, sector expanding and market restoring BTAs have the potential of supporting the multilateral process, while market creating and sector excluding BTAs appear to threaten it.

Are BTAs likely to continue proliferating? At the moment, the answer appears to be yes, since they are increasing at an increasing rate. How much longer is this likely to continue, and where is all of this likely to lead? One view is that they will continue to proliferate until the world trading system is so distorted that countries will be forced to seek a remedy. This response may take several forms.

One is the consolidation of BTAs into region-wide PTAs, or blocks, where the various BTAs between members belonging to the same region become largely redundant. For instance, many if not all of the event driven BTAs are likely to fall into this category, but there could be more. There are numerous examples of defunct BTAs following the establishment of the EU. In the Asia-Pacific region, the US-Canada BTA was superseded by the establishment of NAFTA, and the India-Sri Lanka BTA by SAFTA. An Asia-wide FTA would supersede a host of regional BTAs, and consolidate them into one region-wide agreement.

Although this may reduce the number of intra-regional BTAs, it may be somewhat of a hollow victory if it serves to further fragment the world trading system by carving it up into distinct regional blocks. Furthermore, it may provide fresh impetus for a new wave of market restoring BTAs as traditional trade partners outside the region seek to retain trade access with members of the consolidated PTA. In fact, with more countries outside the region that inside, it is possible that the total number of BTAs could increase if the reduction in the number of intra-regional BTAs through a consolidated PTA is more than offset by the number of inter-regional market restoring BTAs that it indirectly induces. This is hardly a remedy to the problems facing the world trading system.

The second response may come in the form of the completion of the Doha round with minimum compromises. This would undoubtedly be the preferred response to the current chaotic environment of criss-crossing BTAs. A bona fide conclusion to the Doha Round should dilute preferences that are currently scattered around the world, and take away much of the incentive to continue pursuing BTAs. If this happens, then the proliferation of BTAs would have contributed to their eventual demise, in terms of their impact on the world trading system. This is much more like a remedy to the problems facing the world trading system.

But what is the Doha round fails, or is concluded in such a watered-down and compromised form that its impact is minimal? Although this may provide an additional incentive to pursue more BTAs and PTAs, there may eventually come a point where countries may voluntarily seek a remedy that lies in their own best interests. One thing that is clear is that the cost of administering and implementing multiple country-specific BTAs is costly. The cost to the supplying countries also rises with the number of country-specific BTAs. The cost of applying for preferences is also apparently high, and may explain why only a very small percentage of nonagricultural world trade is conducted under preferential terms (see Grether and Olarreaga 1998).

Once a country has concluded BTAs with most, if not all, of its major trading partners, it may then make sense to: equalize preferences across these BTAs and then offer them to non-BTA countries on an MFN basis. This would remove the administrative burden, and eliminate distortions to country and global trade patterns. As it is with reversing much of second-best policies, it is the actual realized cost of implementation rather than any potential unrealized benefits that actually drives the process. And there are significant potential unrealized benefits that will accrue to the country concerned as well as the world trading system if this process of multilateralizing preferences is pursued, whatever the reason.

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