Globalization and Multilateral Out, Bilateral In: Bottom-Line will be Hit Negatively

The Resistance Reports

March 7, 2017

Trump is threatening global trade, with “America First” policy, convinced that the global trade has hurt America’s workers and industries, because the global trade system is not fair. And thus one of the first thing he did when in the White House, was to kill Obama’s Trans Pacific Partnership, and went on a long verbal assault of many countries such as China, on trade and currency.

But Trump is just the “Tip of the Iceberg” as Trump cries “America First” all across, the planet, especially with the “Extreme Right” in Western Europe, where of course EU sits, is crying their country first. This of course, is a threat to EU and the “Common Market” idea, and if the extreme right does well in elections, “Bilateralism” looks to be the key for future trade.

There is no coincidence, that noting trend, already UK is touting, and promoting itself, as being the first to have a trade deal with America under Trump.

There is a danger that events will take a life on to itself and spin out of control. Already are talks of trade and currency war, driving the global economy into a contraction.

And with the threat of a trade war looming, globally economic and business were fearful and frightened, and even close ally of America, such as Japan, has stepped up its diplomacy contact with Trump, at least to protect their countries trade position with America. Then Trump again also touted a free trade talk for an agreement with the UK, an indicating Trump believes, at some level, in liberal trade policies.

Perhaps that Trump belief is on a limited scale, and what the scale Trump is looking at is is difficult to speculate, giving that a great deal of about Trump, involves a high degree of personal likes and dislikes.

In recent months, Trump has also made a low key contact with China, with a much softer-tone, indicating he welcomes China and is willing to work with China. Subsequently, many analysts, from seeing Trump as an isolationist, modified their position to say Trump is in favor of “Bilateralism.”

However, so from all of the above, a new question arise. And this is, between “Multilateral” and “Bilateral” which agreement is best? And what is the likely impact on the bottom-line? The following provide one answer that concludes the bottom-line will be impacted negatively, from current level, from the adoption of “Bilateral Trade” globally.

Bilateral versus Multilateral Free Trade Agreements: A Welfare Analysis

One sentence summary: International development policies conducted for the removal of obstacles such as transportation costs and differences in comparative advantages should be the main goal toward achieving a multilateral FTA, which is shown to be the first-best solution to the maximization problem of global welfare.

The corresponding paper by Demet Yilmazkuday and HakanYilmazkuday has been published at Review of International Economics.

The working paper version is available here.

Abstract

Why do we observe proliferation of bilateral free trade agreements (FTAs) between certain types of countries instead of having progress in attaining global free trade through a multilateral FTA? We answer this question by exploring the enforceability of different types of FTAs through comparing minimum discount factors that are necessary to sustain them in an infinitely repeated game framework. We also search for the globally welfare maximizing trade agreements that are sustainable under different conditions. The results depict that transportation costs, differences in country sizes and comparative advantages are all obstacles for having a multilateral FTA. Accordingly, international development policies conducted for the removal of such obstacles should be the main goal toward achieving a multilateral FTA, which we show to be the first-best solution to the maximization problem of global welfare.

The following is a view from Australia:

There are multiple ways for governments to advance free trade; trade liberalization can be negotiated via multilateral, bilateral or regional mechanisms. Each strategy carries a mix of benefits and costs, reports The Conversation (source)

Tony Abott, Australia Prime Minister has come and gone, but when he first entered office one of the first acts of Tony Abbott’s government was to declare it intended to “embrace free trade” in its first term in office. Calling the trade minister Australia’s “ambassador for jobs”, the Coalition has staked its economic and foreign policy credibility on the promise to finalize a series of free trade deals that made limited progress under former Labor governments.

But Australia already has a lot of trade on its plate. It’s a participant in the ongoing Doha round of World Trade Organization (WTO) talks, and a party to the Trans-Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership (RCEP) negotiations in Asia. It has also open bilateral trade negotiations with five of its most important economic partners – China, Japan, Korea, Indonesia, and India.

This is a very crowded trade policy agenda, characterized by complex, overlapping – and sometimes competitive – initiatives. Given limited bureaucratic and diplomatic resources, it would be both difficult and inadvisable to spread efforts evenly across the range of proposals.

So, where should Australia’s priorities lie?

There are multiple ways for governments to advance free trade; trade liberalization can be negotiated via multilateral, bilateral or regional mechanisms. Each strategy carries a mix of benefits and costs.

Multilateralism and the WTO

Historically, multilateralism has been the dominant approach, embodied in the World Trade Organisation. The WTO currently has 159 members, who exchange tariff preferences in line with the non-discriminatory “most-favoured-nation” principle.

The product scope of the WTO has gradually expanded since 1948 through a series of negotiating rounds; the current one is known as the Doha “development round”, which commenced in 2001.

Multilateralism is the “policy purist” approach to trade liberalisation. Since Russia’s accession to the WTO in 2012, practically all significant economies have become members, creating a single integrated system of global trade rules.

But size has also proven to be one of the WTO’s major weaknesses. Having many members makes consensus difficult to forge, and recent years have seen the formation of a complex array of “coalitions” with competing, and often-incompatible, agendas.

Disagreement among these coalitions – particularly over the sensitive issue of agriculture – is one of the main reasons the Doha round is currently deadlocked after 12 years of talks.

Bilateral free trade agreements

With the WTO in deadlock, attention has turned to bilateral free trade agreements (FTAs). Practically unheard of before the mid-1990s, these agreements have expanded exponentially during the last decade as governments sought to deepen trade ties with key economic partners.

Bilateral FTAs typically involve states swapping trade concessions with each other, but some also address so-called trade-related measures such as investment, intellectual property, and biosecurity.

The primary appeal of bilateral FTAs is their ease; with only two parties, deals can be negotiated efficiently. But as the quick-and-easy option, they often fall short of promoting genuine free trade.

Important but sensitive trade issues (agriculture, for instance, and services) are often excluded from bilateral FTAs, and very few deal with trade-related measures substantially.

They also pose the vexing “spaghetti bowl problem” of creating a complex set of overlapping and inconsistent rules that erode the integrity of the global trade system.

Keeping it on the ‘hood

Regional free trade agreements are the third option. Midway between multilateralism and bilateralism, they involve a group of countries within a geographic region negotiating a free trade area.

Trade regionalism picked up during the 1990s, through the formation of the Mercosur bloc (1991), the ASEAN free trade area (1992) and the NAFTA agreement (1994).

Australia is party in two regional trade agreements currently under negotiation in Asia: the US-led TPP and the ASEAN-centred RCEP.

Regional free trade agreements are sometimes considered a trade sweet spot – easier than multilateralism, but more substantial than bilateral deals. Indeed, regionalism advocates have also described them as a building block where multilateral deals can later be built.

Still, they face their own challenges. Power asymmetries within regions are often highly pronounced, leading to deals that favour the largest member at the expense of smaller partners. They also pose the risk of “balkanising” the global trading system by dividing the world economy into competing trade blocs.

Bilateral trade or clearing trade

Bilateral trade or clearing trade is trade exclusively between two states, particularly, barter trade based on bilateral deals between governments, and without using hard currency for payment. Bilateral trade agreements often aim to keep trade deficits at minimum by keeping a clearing account where deficit would accumulate.

The Soviet Union conducted bilateral trade with two nations, India and Finland. On the Soviet side, the trade was nationalized, but on the other side, also private capitalists negotiated deals. Relationships with politicians in charge of foreign policy were especially important for such businessmen. The framework limited the traded goods to those manufactured domestically and as such, constituted a subsidy to domestic industry.

Bilateral trade was highly popular within Finnish business circles, as it allowed the commission of very large orders, additionally with less stringent requirements for sophistication or quality, if compared to Western markets. The Soviet side was motivated to participate in clearing trade because the arrangement essentially provided cheap credit. The option was to sell obligations to the international market, and pay interest in hard currency. Capital, such as icebreakers, train carriages or consumer goods, could be obtained from Finland, and the cost would simply become clearing account deficit, eventually to be paid back as e.g. crude oil, or as orders such as nuclear power plants (Loviisa I and II).

Clearing trade was at its busiest up to the 1970s, but began to lose its momentum in the 1980s. In the last of its years, the Soviet Union’s debt began accumulating on an alarming rate into clearing accounts. As a result, the Soviet Union started to pay the deficits with oil, a good with little value added and easily exchangeable to hard currency, which militated against the principle of bilateral trade. With the dissolution of the Soviet Union, this form of trade has mostly disappeared. Bilateral trade is a manifestation of bilateralism; in contrast, multilateralism and in particular multilateral trade agreements became more important.

Strategic goods, such as nuclear technology, are still traded bilaterally rather than in a multilateral open market.

Multilateralism

In international relations, multilateralism is multiple countries working in concert on a given issue. Multilateralism is a form of alliance, although it may be somewhat different structure than traditional alliances. Multilateralism was defined by Miles Kahler as “international governance” or global governance of the “many,” and its central principle was “opposition [of] bilateral discriminatory arrangements that were believed to enhance the leverage of the powerful over the weak and to increase international conflict”.[1] In 1990, Robert Keohane simply defined multilateralism as “the practice of coordinating national policies in groups of three or more states.[2] John Ruggie further elaborated the concept of multilateralism based on the principles of “indivisibility” and “diffuse reciprocity (international relations)” as “an institutional form which coordinates relations among three or more states on the basis of ‘generalized’ principles of conduct … which specify appropriate conduct for a class of actions, without regard to particularistic interests of the parties or the strategic exigencies that may exist in any occurrence.”[3][4]

Multilateralism, whether in the form of membership in an in international institutions,to bind the great power, discourage unilateralism, and give the small powers a voice and voting opportunities that they would not otherwise have. Especially, if control is sought by a small power over a great power, then the Lilliputian strategy of small countries achieving control by collectively binding the great power is likely to be most effective. Similarly, if control is sought by a great power over another great power, then multilateral controls may be most useful. The great power could seek control through bilateral ties, but this would be costly; it also would require bargaining and compromise with the other great power. Embedding the target state in a multilateral alliance reduces the costs borne by the power seeking control, but it also offers the same binding benefits of the Lilliputian strategy. Furthermore, if a small power seeks control over another small power, multilateralism may be the only choice, because small powers rarely have the resources to exert control on their own. As such, power disparities are accommodated to the weaker states by having more predictable bigger states and means to achieve control through collective action. Powerful states also buy into multilateral agreements by writing the rules and having privileges such as veto power and special status.

International organizations, such as the United Nations (UN) and the World Trade Organization are multilateral in nature. The main proponents of multilateralism have traditionally been the middle powers such as Canada, Australia, Switzerland, the Benelux countries and the Nordic countries. Larger states often act unilaterally, while smaller ones may have little direct power in international affairs aside from participation in the United Nations (by consolidating their UN vote in a voting bloc with other nations, for example). Multilateralism may involve several nations acting together as in the UN or may involve regional or military alliances, pacts, or groupings such as NATO. As these multilateral institutions were not imposed on states but were created and accepted by them in order to increase their ability to seek their own interests through the coordination of their policies, while instead work as frameworks that constrain opportunistic behavior and points for coordination by facilitating the exchange of information about the actual behavior of states with reference to the standards to which they have consented.

The term “regional multilateralism” has been proposed suggesting that “contemporary problems can be better solved at the regional rather than the bilateral or global levels” and that bringing together the concept of regional integration with that of multilateralism is necessary in today’s world.[5] Regionalism dates from the time of the earliest development of political communities where economic and political relations naturally had a strong regionalist focus due to restrictions on technology, trade, and communications.[6]

The converse of multilateralism is unilateralism in terms of political philosophy.

 

List of multilateral free-trade agreements

From Wikipedia, the free encyclopedia

“Economic community” redirects here. For the type of trade bloc which is composed of a common market with a customs union, see Economic union.

This is a list of multilateral free-trade agreements, between several countries all treated equally. For agreements between two countries, between a bloc and a country, or between two blocs, see list of bilateral free-trade agreements; these are not listed below.

Every customs union, common market, economic union, customs and monetary union and economic and monetary union is also a free-trade area; these are listed on these separate articles and are not included below.

For a general explanation, see free-trade area.

Contents

World Trade Organization agreements

WTO accession progress:

Members (including dual-representation with the European Union)

Draft Working Party Report or Factual Summary adopted

Goods and/or Services offers submitted

Memorandum on Foreign Trade Regime (FTR) submitted

Observer, negotiations to start later or no Memorandum on FTR submitted

Frozen procedures or no negotiations in the last 3 years

No official interaction with the WTO

This list is incomplete; you can help by expanding it.

Operating agreements

This list is incomplete; you can help by expanding it.

Stages of economic integration around the World (each country colored according to the most integrated form that it participates with):

Economic and monetary union (CSME/EC$, EU/, Switzerland–Liechtenstein/CHF)

Economic union (CSME, EU, EAEU, MERCOSUR, GCC, SICA)

Customs and monetary union (CEMAC/XAF, UEMOA/XOF)

Common market (EEA–Switzerland, ASEAN)

Customs union (CAN, EAC, EUCU, SACU)

Multilateral Free Trade Area (CEFTA, CISFTA, COMESA, EFTA, GAFTA, NAFTA, SAFTA, AANZFTA, PAFTA, SADCFTA)

Proposed agreements

See also

 

The following are some links to research and news

Difference between Multilateral Trade Agreements and Bilateral …

Difference Between Bilateral and Multilateral Trade Agreements …

What is the difference between multilateral and bilateral treaties …

Bilateral and Multilateral Trade – Ministry of Foreign Affairs – Islamic …

Multilateral, regional, bilateral: which agreement is best?

Bilateral vs Multilateral Aid – DebateWise

 [PDF]Bilateral versus multilateral aid channels – Overseas Development …

Bilateral versus Multilateral Free Trade Agreements: A Welfare Analysis

International Economic Law and Policy Blog: Bilateral vs. Multilateral …

Development in Action | Bilateral versus Multilateral Aid

Module 5: Multilateral & Bilateral Organizations – Unite For Sight

Hakan Yilmazkuday’s Blog: Bilateral versus Multilateral Free Trade …

Bilateral vs. Multilateral Cooperation – OneEurope

Bilateral and multilateral trade agreements – European Commission

Bilateralism – Wikipedia

Multilateral Trade Agreements: Definition and Examples – The Balance

Bilateral vs. Multilateral? On the economics and politics of a global …

Bilateral vs. Multilateral? On the economics and politics of a global …

Multilateral vs bilateral aid: addressing some puzzles.

Bilateral vs. multilateral aid: Does bilateral aid better uphold …

Research – Corruption Q&As – Bilateral versus multilateral aid and …

 [PDF]Bilateral versus Multilateral Free Trade Agreements – FIU Digital …

Frequently Asked Questions – OECD

Bilateral Aid versus Multilateral Aid – Ideas for development

 [PDF]The Effects of Multilateral vs. Bilateral Aid on … – Princeton University

Bilateral versus Multilateral Free Trade Agreements: A Welfare …

 [PDF]Relative Effectiveness of Bilateral and Multilateral Aid on Development …

Multilateral v. Bilateral Aid – jstor

Bilateral versus Multilateral Trade and Investment Liberalisation …

Bilateral vs Multilateral Trade Agreements – RN Breakfast – ABC Radio …

 

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