Sunday, September 14, 2008

Evaluating trading blocks

In a few weeks we will be discussing international economics in a more systematic fashion. Section 4.3 of the syllabus is on Economic Integration and Trading Blocks.

In a recent issue of The Economist there are two articles on regional trading blocks that are both interesting and useful. The first one is a leader titled 'A second-best choice' which discusses India's free-trade agreement with the ten fast-growing countries in the Association of South-East Asian Nations. The newspaper considers bilateral agreements inferior and dangerous compared to any resulting through the WTO led multilateral system. According to the Economist:
India dealt the multilateral trading system a blow by saying “no”. Kamal Nath, India’s trade minister, helped kibosh a breakthrough in the Doha round of global trade talks by refusing to compromise over demands for safeguard tariffs to protect more than 200m Indian farmers.
(obviously, I didn't know the word 'kibosh' so that explains the link above!)
The Economist is great in explaining complex economic theory in simple (but dense) words so I can't resist the temptation to copy the explanation offered for its position:
Multilateral trade rounds are the foundation of the trading system because they are based on the “most favoured nation” principle—that any tariff cuts offered to one country must be offered to them all. Regional and bilateral deals are based on discrimination. They lower tariff barriers between their signatories, but not everyone else. Discrimination means that, although regional deals create new trade among their members, they may also divert it from lower-cost outsiders.
(we will discuss trade creation and trade diversion later in class)

I also can't resist quoting Jagdish Bhagwati of Columbia:
In a new book Mr Bhagwati calls them (regional trading blocks) “termites in the trading system
He has also referred to the complexity resulting from the differing rules of these bilateral / regional deals as the 'spaghetti bowl' of preferential agreements.

The second article in the same issue on regionalism vs multilateralism is titled 'Afta Doha' (if you can explain the title you will gain many kudos). Read it as it contains interesting facts that you could use in your final May (November?) exam.

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