The number of bilateral and regional free trade agreements (FTAs) has grown rapidly in the last ten years.  Some analysts have questioned the wisdom of FTAs because they can distort markets and divert trade from nonmember exporters.  A recent study of older agreements by the Economic Research Service of USDA, Reciprocal Trade Agreements – Impacts on U.S. and Foreign Suppliers in Commodity and Manufactured Food Markets, concludes that these agreements have enabled exporters to increase trade with member country importers, with limited trade diversion.

The study analyzed how 11 reciprocal trade agreements (RTA) with 69 participating countries helped to shape exports of commodity (raw and semi-processed products) and manufactured foods (breakfast cereal, bakery products, pasta, candy, beer, etc.) for the U.S. and other suppliers.  The 11 agreements accounted for 78 to 92 percent of world agricul­tural trade during 1975-2005.

Ten of the 11 RTAs expanded trade in either the commodity and/or the manu­factured food markets of member countries.  Nine of the 11 RTAs also expanded exports to a lesser degree to nonmember countries.  A few agreements that typically granted very limited cross-border trade preference to developing countries failed to have a positive effect on member country trade.

Three agreements involved mostly developed countries.  The EU had a 95 percent growth in intra-EU commodity foods trade and a 93 percent increase in manufactured foods between 1975 and 2005 compared to not having an agreement, a growth rate of 3 percent annually.  The three NAFTA countries, the U.S., Canada and Mexico, had an 8 percent per year increase in manufactured foods trade between 1989 and 2005 and a 3 percent annual growth in commodity foods.  Over that same time, Australia and New Zealand of the Closer Economic Relations agreement had a 6 percent per year increase in trade in the value of manufactured food and 3 percent per year in commodity foods.

Among developing countries, the Andean Free Trade Agreement (ANDE), Central American Common Market (CACM), Common Market for Eastern and Southern Africa (COMESA) and Common Market of South America (MERCOSUR) increased trade in both commodity and manufactured foods compared to having no agreement.  The Greater Arab Free Trade Agreement (GAFTA) had no affect on trade in either category.  The South African Development Community (SADC) only increased intra-bloc trade in commodity foods, while the Association of Southeast Asian Nations Free Trade Agreement (ASEAN) and the South Asian Preferential Trade Arrangement (SAPTA) only had gains in manufactured foods.   The authors believe the small land areas of ASEAN, SAPTA and GAFTA explain their lack of growth in commodity trade.

ASEAN was the only agreement where agricultural trade with countries outside the agreement grew faster than intra-agreement trade.  The countries have similar comparative advantages in agriculture within the bloc and need to trade outside the bloc to meet their food needs.  The GAFTA countries also appear to be uncompetitive internationally in both food categories, while the SADC countries are not competitive in manufactured foods.

ASEAN countries discriminate against U.S. suppliers of manufactured foods with exports declining 3 percent per year since 1993 compared to the estimates with no agreement.  Other suppliers increased exports indicating that ASEAN is a relatively open market except for U.S. products.  COMERSA countries did not discriminate against U.S. manufactured foods, but other supplier exports declined by 3.5 per year.

The authors believe the growth in trade between non-member countries fits the concept that trade liberalization in one area “begets more liberalization.”  It probably also reflects increased competitiveness from efficiencies caused by competition within the RTAs.

Trade diversion

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