What is in this article?:
- Reciprocal trade agreements gaining importance
- Trade diversion
- Until a method can be designed to achieve consensus on a new WTO agreement, reciprocal trade agreements will continue to grow in importance.
The data indicate that trade diversion (bloc countries reorient trade from low-cost, nonmember countries toward higher cost, bloc countries) has occurred in the countries of the EU, GAFTA and SAPTA. Because of the EU agreement, U.S. commodity exports to the EU countries declined from 1975 to 2005 by 66 percent and non-U.S. suppliers had a 29 percent decline compared to not having an agreement. The EU countries do not appear to discriminate against U.S. or other country suppliers of manufactured foods. GAFTA countries lowered imports of commodity and manufactured foods from the U.S. by 8-9 percent annually since it began in 1998 and from other suppliers by 3-4 percent. U.S. commodity exports to the SAPTA countries declined by 12 percent per year on average since 1996, but non-U.S. suppliers had no declines. Both the U.S. and other countries suffered diversion in manufactured foods with the U.S. down by 10 percent per year and others down 3 percent.
The authors concluded, “The majority of the 11 trade agreements examined in this study created trade in the commodity and manufactured markets while diverting comparatively little trade away from outside suppliers, with the exception of commodity food imports by the EU. This finding suggests that the benefits of RTAs generally outweigh costs in the international food marketplace.
Some agreements not in the analysis like the U.S.-Central America FTA have come into force in recent years and will impact trading relationships. Plus, there are dozens of new agreement concluded in the last few years that include some of the advanced developing countries, such as the U.S.-Korea FTA and the EU-Korea FTA. Studies on these in coming years will tell us more about how RTAs impact trade. Much has also changed in older agreements since 2005, the last year of data for this analysis.
Interest in these agreements should not diminish the importance of the current WTO agreements or the value of a new one like the hoped for Doha Round agreement. All of these RTAs operate under the umbrella of WTO article XXIV as long as they apply to “substantially all trade”, which is open to interpretation. Despite valid concerns about RTA being ‘stumbling blocs’ to freer trade, the ERS analysis reinforces the concept of RTAs as ‘building blocks’ on the road to freer trade. Until a method can be designed to achieve consensus on a new WTO agreement, reciprocal trade agreements will continue to grow in importance.
Ross Korves is an Economic Policy Analyst for Truth About Trade and Technology