1996 Reports

Preferential Trading Areas and Multilateralism: Strangers, Friends or Foes?

Bhagwati, Jagdish N.; Panagariya, Arvind

In this paper we undertake the following tasks: first, having reviewed key concepts and phrases, we extend the "static" analysis of Preferential Trading Areas (PTAs). This enables us to and reject the much-cited claim that it is wrong to worry about trade diversion and that PTAs are generally as good as nonpreferential trade liberalization. Our analysis also gives added insight into why the usual argument made these days that, when countries joining a PTA have large shares of their trade with one another and are thus "natural trading partners," they need not fear losses, is mistaken. Furthermore, it shows why the nonhegemonic countries which are liberalizing with a hegemon which is generally open and offering few new reductions of trade barriers, as is the case with Mexico and with other potential NAFTA members outside of the US and Canada, could face the prospect of significant "static" welfare losses. Next, we turn to the dynamic time-path question. In the policy context, this necessitates our considering arguments as to why a proliferation of PTAs, despite their creating a harmful spaghetti-bowl phenomenon in the world economy, may nonetheless be considered to be beneficial because of their helpful consequences for the progressive freeing of trade and moving the world economy to worldwide free trade. We will systematize the current analytical contributions on this problem and evaluate the current policy developments. We will offer the policy judgment that PTAs which are hegemon-created, as NAFTA is, are not the desirable way to advance the cause of worldwide freeing of trade barriers and that it is better to focus on WTO-centered MFN trade liberalization. By contrast, we will consider intra-developing country, non-hegemon-centered PTAs, such as Mercosur, in a more favorable light.