Why are BTAs So Popular?

The first thing to note when discussing the popularity of BTAs relates to possibilities, or the maximum number that are technically possible. In theory, it is possible to have many more BTAs than PTAs simply because only two entities are involved and there are no geographical (regional) restrictions on membership. With 192 countries in the world (excluding the Vatican and Holy See), and two non-country members of the WTO, it is technically possible to have up to 18,721 BTAs (194 times 193 divided by 2) between them! If we include BTAs between a country and a PTA, a BTA and a PTA, or between PTAs, then this number becomes even bigger. Adding the 7 PTAs and 1 BTA that have already engaged in BTAs raises the maximum number to 20,301. Of course there are many more than 7 PTAs and any of them could start negotiating BTAs in the future. Furthermore, the possibility exists for new PTAs to be formed in the future, that could then participate in BTAs as well, and there is nothing stopping BTAs from forming new BTAs between themselves, and so on and so forth! All of this does not explain why BTAs are popular of course, but they do suggest that if they are, then they can proliferate in a dramatic and almost uncontrollable way, unlike other forms of PTAs.

So what are the factors driving the proliferation of BTAs in the world today? In answering this question, we identify a set of general as well as specific factors or motivations for the popularity of BTAs. The general motivations apply to most, if not all BTAs, but there is always at least one additional specific factor that drives the formation of a BTA. Usually there is more than one specific factor involved however. For instance, each party to the BTA may have their own motivation in pursuing the agreement, and this may not coincide with the interest of the other party. It is also possible that each party has more than one motivating factor in pursuing the BTA.

General factors

An important general reason for the popularity of BTAs is the apparent disenchantment with pace of progress with liberalization at the multilateral level. The difficulties associated with concluding the Doha round have simply reinforced this view. Many feel that the WTO has failed to deliver and so have pursued BTAs (and PTAs) as a means of pressing ahead with their trade and liberalization agendas.³

A kind of snowballing or domino effect, as with PTAs in the past (see Baldwin 1996), has also been driving the growth in BTAs. In the Asia-Pacific region, interest in forming BTAs began in the late 1990s with Japan, Singapore, South Korea and New Zealand initially. By 2000, the US, Australia, Thailand and the PRC had joined the trend, with more than 40 new BTAs being proposed or negotiated (see Table 2). The momentum gathered over subsequent years to the point where other Asia-Pacific countries may have felt disadvantaged if they did not join the club. The number of BTAs thus continued to grow, and almost doubled to 109 between 2002 and 2004. It is quite possible that it may double again by the end of 2006. There is clearly a momentum effect driving some of the growth in BTAs with countries not wanting to be left behind in this apparent race. Baldwin (2006, p. 22) argues that it could continue to play a role in the proliferation of BTAs in the region in the coming years: "If history is any guide, the domino effect in East Asia will spread to many, many more countries in the neighborhood. In Europe, for example, the playing out of several waves of domino effects has left the EU with preferential trade deals with every WTO members except nine. It is therefore conceivable that the 13 members of the ASEAN+3 group will end up signing a very large number of bilaterals in the coming years."

BTAs also tend to attract less attention all around, including from the media. So, the pressure from opposition forces at home- such as the anti-free trade lobby or particular "sensitive" industry groups- or from abroad- such as traditional trade partners or members of a regional grouping that the country is a part of, is likely to be low. This would facilitate not only the speed at which a BTA can be negotiated, but also the number of them. Of course there are exceptions, and these generally arise when the partner is a large country (eg. the US) or when sensitive sectors are involved in the negotiations of the BTA.

Finally, it is often claimed that some, if at most, BTAs are essentially politically motivated. There is no doubt that political economy considerations, and indeed political parties or politicians themselves, play a major role in driving the proliferation of BTAs. A recent example of this is how the control of both Houses by the Democrats has put at risk a number of the BTAs that the Bush administration has been pursuing. Although we try and take into account political, strategic and foreign policy related issues, we focus on economic and economic related considerations because they are easier to identify and measure. Thus, the discussion that follows is likely to understate the role that politics and politicians play in the proliferation of BTAs, simply because these influences are often difficult to measure or model, let alone classify.

Specific Factors

There are three broad categories of specific factors that we identify: economic; strategic and event driven. As depicted in Figure 2 [ PDF 92.7KB | 1 pages ], each of these broad categories have their subcategories, and the sub-categories for economic and event driven BTAs are each sub-divided into two sub-categories as well. Thus, in total, we identify 11 specific factors to explain the proliferation of BTAs.

Economically Motivated BTAs

Within the economic motivation, the two sub-categories are sector driven and market access BTAs. Sector driven BTAs are further sub-divided into sector excluding and sector expanding BTAs. Market access BTAs are also divided into two groups: market restoring and market creating.

Sector Driven BTAs

These BTAs are motivated mainly by one or a few key sectors. There is both a positive and negative element to this sector based motivation, with some BTAs designed to expand liberalization into sectors or areas that have previously been ignored at the multilateral level while others exclude sensitive sectors or issues. We discuss them separately because their impact on the world trading system is likely to be quite different depending on whether they are sector expanding or excluding

Sector Expanding BTAs

It is easy to see why BTAs are easier to negotiate and conclude than PTAs or a multilateral deal: with only two parties involved, the potential for disagreement is reduced. As the focus of liberalization shifts away from the relatively easier task of reducing trade taxes on industrial products, achieving agreement on a multilateral level has become more difficult as the agenda broadens to address less transparent forms of protection, more complex issues, and new sectors. By requiring only two parties to agree, a BTA could face fewer obstacles than a regional or multilateral pact. BTAs may then have the potential to achieve a deeper level of integration than that possible through the multilateral approach alone. Even if it is not any deeper, it is often argued that we might be able to get there more quickly using the bilateral approach compared to the multilateral one.

In other words, both the degree and scope of liberalization policy may be enhanced in the context of only two negotiating partners, and so bilateral efforts may be able to surpass the extent of integration possible at the multilateral level. In this sense, sector expanding BTAs are often described as 'WTO Plus' or 'New Age' BTAs. The US-Singapore BTA is one of the first such BTAs and is often described as a model worthy of emulation by other negotiating partners. In fact, the BTAs being pursued by the US with the other ASEAN countries as part of its Enterprise for ASEAN Initiative" is using it as a model. ⁴

Of the various so-called "Singapore issues" that were raised at the WTO Ministerial Conference in Singapore in 1996, only the rather fuzzy concept of trade facilitation measures appears to have survived on the WTO agenda. Other Singapore issues such as establishing rules for investment, competition policy, and government procurement are being pursued in some sector expanding BTAs. Progress with liberalization of services in general has been slow at the multilateral level and fraught with difficulties given country-specific sensitivities. A wide-ranging multilateral deal looks unlikely in the near future. Some sector specific BTAs have emerged in response to such an environment. In this environment, BTAs have also been driven by the fact that preferential access may enable a supplier to steal an irreversible march on the competition, and cement a long-term advantage in the market. Many of the US BTAs with developing countries are pursuing more favorable rules relating to investment and intellectual property rights

Sector Excluding BTAs

The most sensitive sector as far as liberalization is concerned is agriculture. Most sector excluding BTAs relate, in one way or the other, to this sector. An example of the negative element would be the BTA between Japan and Singapore, known as the Japan-Singapore Economic Partnership Agreement (JSEPA). Japan has long resisted joining PTAs because of its reluctance to liberalize its agriculture sector, but the absence of any significant agricultural sector in the city state of Singapore has facilitated the signing of this BTA. Even the few agricultural products that Singapore does export were easily excluded from the JSEPA, such as cut flowers and ornamental fish. Less than 10 percent of the volume of exports of agricultural products from Singapore to Japan is provided with duty-free access, and the JSEPA did not create any new preferences in the agricultural sector (Ravenhill 2006).

A similar set of exclusions of sensitive sectors can be found in Japan's BTA with Mexico. Unlike Singapore, Mexico does have a large agricultural sector and is a major exporter of meat (pork in particular) to Japan, so the exclusions have been so widespread that about 13 percent of Mexico's exports to Japan are excluded from the BTA. So, even when agriculture is important to one partner but sensitive in the other, it appears that BTAs can still be concluded by excluding this sector. Clearly the flexibility provided by BTAs through one-on-one negotiations allow such compromises to be made and trade agreements to be concluded when they might otherwise stall or fail.

Market Access BTAs

As mentioned earlier, we divide market access BTAs into two groups: market restoring and market creating.

Market Restoring BTAs

In the discussion earlier on general factors behind the popularity of BTAs, we noted that one of the reasons was the apparent disenchantment with pace of progress with liberalization at the multilateral level. The same disenchantment with the WTO was one of many factors driving the original interest in PTAs of course. It also set off a kind of snowballing or domino effect (see Baldwin 1996). As the world trading system started being carved up into blocks, countries that did not belong to a PTA felt compelled to form or join one in order to secure regional markets, or compensate for markets in other regions that were becoming more isolated and less accessible as a result of preferential arrangements.

Some BTAs have developed in response to such a global trading environment. The motivation behind them is to try and restore trading links that existed prior to a trading partner joining a PTA. They generally apply to non-regional but traditional trade partners where one or both have become members of a relatively integrated PTA, which has weakened trade links between them as a result. These BTAs are designed to bypass, or at least reduce, the discriminatory treatment imposed upon them as a result of the PTA. Lloyd (2002, p. 6) describes this as the one factor that is common to all new PTAs and sees it as becoming more important relative to the other factors. As he puts it (pg. 6), "This is the fear of exclusion from major markets. In this context, exclusion does not mean that a country is denied access to a market, that is, total exclusion. It means that it has access on terms less favorable than some other country or countries".

With the EU and NAFTA as centers of regional preferential trading, and with little or no prospect of other countries becoming members of these regional trading blocs, many of the BTAs being pursued with them (either with the EU or NAFTA or with individual member countries) would serve as examples of restoring market access BTAs.

The US is a major trading partner for most of the ASEAN countries. As noted earlier, with the exception of Myanmar, all other ASEAN countries have either concluded or are pursuing BTAs with the US. For the ASEAN countries, the BTAs are viewed as a means of restoring market access in the post-NAFTA era.

Market Creating BTAs

Market Creating BTAs usually involve countries seeking to strengthen trade and investment relations when there has been little or weak economic relations in the past. To the extent that limited trade in the past has been due to trade barriers or other regulatory or commercial restrictions, market creating BTAs may be successful in achieving its objective of promoting bilateral trade. For instance, it could be that both countries had relatively high trade barriers with the rest of the world, but then each removed them preferentially amongst regional partners in a PTA. In this case, there may be potential for boosting trade between the two countries through a BTA that opens-up a conduit between the PTAs that each country is a member of.

If, however, historically weak trade relations is due to economic reasons based on comparative advantage, such as competitive rather than complementary resource endowments, then such BTAs will have little, if any, effect on boosting bilateral trade, unless the preference margins are very large.

Strategically Motivated BTAs

BTAs that are motivated by strategic factors are classified into two groups: lobby driven and terror driven. Each is discussed in turn below.

Lobby Driven BTAs

The Seattle Ministerial Meeting of the WTO collapsed in the face of developing countries opposing the push by a number of developed countries, spearheaded by the US and the EU, to introduce labor standards and environmental regulations on to the WTO agenda. Having failed at the WTO, critics claim that the US is now trying to press ahead with this agenda by intimidating small, weak countries into accepting them in one-on-one negotiations, while simultaneously trying to seduce them with preferential access to a large domestic market. The so-called "fair trade" push by the US and the EU is seen as nothing less than covert protectionism that penalizes exports from low wage emerging and developing economies. ⁵ Bhagwati (2005) also laments the introduction of what he describes as trade-unrelated "fair trade" demands, referring not only to labor and environmental standards but also intellectual property rights protection, on to the agenda of a trade organization.

The first precedent relating to labor standards was set in NAFTA, or more specifically by the North American Agreement on Labor Cooperation (NAALC), which was negotiated as a side agreement to NAFTA, which came into effect on 1 January, 1994. But critics such as Bhagwati (2005) complain of a ratcheting up effect, as these issues progress from being annexes to trade agreements and into their text. With the US-Jordan BTA, labor standards and environmental regulations found their way into the body of the agreement for the first time. With the BTAs with Chile and Singapore, the agenda broadened to include capital controls, and these agreements forbid these countries from using them. The precedent setting formula is described as a blueprint pattern, whereby the "strongest" BTA to date serves as a model for negotiating the next one.

Terror Driven BTAs

It would appear that US trade policy has not escaped the Bush Administration's apparent preoccupation with fighting the ‘war on terror'. Some of the US's BTAs are viewed as another instrument in pursuing this objective. As Tonelson (2002) notes, "trade policy as an anti-terror weapon is an understandably appealing idea. It doesn't put American soldiers in harm's way. It is non-violent, market-friendly and holds the promise of ‘draining the swamp' where terrorists are assumed to thrive. And it doesn't require a line in the federal budget." The use of trade incentives has long been a part of US foreign policy. During the Cold War in particular, trade and access to the US market was used to strengthen ties with allies such as Taipei,China, South Korea, and Israel (with whom the US signed its first BTA in 1985).

There is an element of rewarding friends and forging new geopolitical links by engaging potential foes in this current pursuit. The TIFA with Pakistan and subsequent strong push to conclude a BTA is an example of rewarding an ally for continuing support in this endeavor. The Middle East Free Trade Initiative, proposed by President Bush in May 2003, has already seen BTAs concluded with Jordan, Morocco, and Bahrain, and negotiations are on-going with Oman and the United Arab Emirates. According to FTA Watch (2006), the BTA with Morocco is designed "to 'reward' a moderate Muslim government for its support to the White House's 'war on terror' and to pull a friendly North African kingdom deeper into its sphere of influence, creating a wedge vis-à-vis the Arab world". The US strategy in the Middle East is a graduated one, negotiating bilateral trade agreements country by country before moving toward a regional agreement to be completed in 2013. Strong supporters of the war on Iraq, such as Australia, are also in negotiations with the US on a BTA which would reward Australian firms with the opportunity to directly tender, for the first time, for US government contracts.

Event Driven BTAs

Event driven BTAs are divided into three sub-categories: PTA, WTO and Political. The PTA sub-category is further divided into PTA facilitation and PTA integration BTAs, while political BTAs are divided into political integration and political disintegration BTAs.

PTA Facilitation BTAs

These are BTAs that are designed to hasten the pace of integration between a country seeking to join a PTA of which the other country is a member. In other words, it is a BTA between a non-member and a member of a BTA. Although both parties are usually countries, they need not be so; they could also be BTAs or PTAs. An example of this would be the India-Thailand BTA, with India looking to strengthen ties with AFTA. The same is true of the "Plus 3" countries of ASEAN, with the PRC, Japan and Korea pursuing individual BTAs with ASEAN members. Such BTAs can also be pursued with the PTA as a whole, and all the "Plus 3" countries are doing so with ASEAN.

PTA Integration BTAs

These are BTAs between members of a PTA. These types of BTAs stand out because unlike all other BTAs, the parties involved already have some form of a preferential trade agreement designed to promote closer economic relations between them. Examples of such BTAs include the Lao PDR-Viet Nam BTA and the Singapore-Thailand BTA, where all countries are also members of AFTA.

WTO Accession BTAs

These BTAs are essentially a means to an end, and that end is WTO accession. Countries wanting to join the WTO have to negotiate bilateral agreements with major economic powers (such as the US and EU) as part of their entry procedure. These bilateral negotiations lead to specific commitments, concessions and schedules to liberalize trade in goods and services. The results of these bilateral negotiations are merged with the results of more general negotiations carried out between the candidate country and a working party of the WTO membership to form an overall "accession package".

For non-members, the WTO would appear as the largest and most restrictive PTA in the world. With 149 member countries, it is the most restrictive because the cumulative domestic content requirement to access WTO accords is effectively 100 percent. In this way. WTO accession BTAs have much in common with PTA facilitation BTAs from the perspective of non-members. Almost all (28 out of 33) observers to the WTO are currently negotiating facilitating bilateral WTO accession agreements, mostly with the US. ⁶ For instance, the largest non-member of the WTO, Russia, will sign a BTA with the US during the 2006 APEC Summit in Hanoi, and this is expected to finally clear the way for its accession. Prior to 2002, almost half of the country-tocountry BTAs notified to the WTO involved at least one non-member of the WTO.

Political Integration BTAs

Political Integration BTAs are designed to hasten the economic integration of recent political unions. Examples of these include the BTAs between PRC and its two Special Administrative Regions (SARs), Hong Kong, China (the first BTA for both parties), and Macao, China. As noted earlier, these entities are members of the WTO in their own right but have since become SARs of the PRC. It is also interesting that Hong Kong, China's Chief Executive, Tung Chee

Hwa, approached Beijing with the BTA proposal only days after the PRC announced that the SARs would not be included in the proposed PRC-ASEAN FTA (see Dent 2006).

Taipei,China is also a member of the WTO but has so far rejected PRC's offer of becoming a SAR. It does not have a BTA with the PRC nor is it pursuing one. Instead, it is actively pursuing a BTA with the US, which appears unlikely to be concluded as a result of political pressure from the PRC, and apparent concern by the US over its poor record in protecting Intellectual property rights. In the absence of such a BTA, and in order to gain access to the US market, Taipei,China is pursuing BTAs with as many of the Central American countries as it can. This is seen as a way of pursuing access to the US market through the backdoor.

Political Disintegration BTAs

The break up of the Soviet Union in 1991 resulted in 15 newly independent or post-Soviet States. ⁷ Following this political disintegration, these newly independent states have been rapidly forging BTAs between each other. In fact, it appears as if BTAs will be signed between most, if not all, of these countries. These BTAs appear to work to restore some degree of political affiliation while ensuring continued economic integration despite political dissolution. They can work as an interim measure to secure market access for goods when market institutions, payments arrangements, and exchange rate convertibility are not yet fully functioning (Tumbarello1 2005). The strengthening of ties amongst each other may also be designed to counter the influence of Russia in the region, and in this way further strengthen their independence. Being newly independent states, many are also not yet members of the WTO. Forging alliances through BTAs or a PTA could strengthen their collective bargaining power and consolidate common positions in negotiating the most favourable deal in WTO accession.

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