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The post-World War II international trade policy framework is being challenged by a proliferation of bilateral and regional trading arrangements. Australia faces a choice over whether to join this preferential trade bandwagon and risk collateral damage to the multilateral trading system, or to go no further down the preferential trade road but risk being “left behind” in the event that the rush to PTAs continues, leaving the multilateral system increasingly sidelined.
Is the international trading system fragmenting? The dilemma for Australian trade policy
About the author
Mark Thirlwell
One of Australia’s leading commentators on the international economy, Mark has been tracking global economic trends since he joined the Bank of England’s International Divisions in 1990 where he worked as part of the Whitehall Economists Subgroup, coordinating the forecasting of major emerging markets across the Bank, Treasury, the FCO and other stakeholders.
An important area of research interest for the Lowy Institute is the emerging debate on whether we are living through a fundamental change in Australian foreign policy and whether this change has been driven by a marked shift in how the world works. Part of this debate therefore involves a discussion of how developments in the international economic environment affect Australia’s place in the world. This paper focuses on one part of that external economic environment – the international trading system – with a particular emphasis on the implications of the rise of preferential trading agreements (PTAs). This trend is identified both as a response to the challenges facing the current trading framework and as a source of pressure on that framework. The potential costs and benefits of the recent rise in regional trading agreements are reviewed and some policy implications highlighted.
The paper begins by reviewing the achievements of the current international trading system. It notes that the post-World War II trade policy framework – based around multilateral trade liberalisation under the auspices of the General Agreement on Tariffs and Trade (GATT) and its successor the World Trade Organisation (WTO) – has helped deliver a sustained period of rapid growth in trade flows and international economic integration, an achievement that has been described as “perhaps the most successful exercise of deliberate economic policy making in history”. Despite these successes, however, the trading system faces growing challenges. The paper identifies several strains, including changing relative economic performance among the leading industrial nations and new protectionist pressures that have been thrown up by the deepening penetration of international trade into national economies. In addition, it notes that the ending of the Cold War has also started to alter the political cost-benefit calculations for a US economy which until now has provided substantial economic and political support for the post-war trading framework.
The paper then describes how one response to the challenges facing the international trading system has come in the form of a proliferation of bilateral and regional trading arrangements – the so-called “New Regionalism”. The growth in the number of these PTAs has been dramatic. Between 1948 and 1994 the GATT received notifications for 124 agreements. In contrast, since the creation of the WTO in 1995, more than 130 additional agreements have been notified. As a result, around 43% of world merchandise trade now takes place within preferential agreements and the WTO has estimated that more than half of global trade could be occurring within such agreements by 2005. The paper notes that the spread of this New Regionalism to East Asia is of particular significance for Australian policymakers, as major trading partners such as Japan and Korea have now abandoned a previous disdain for PTAs and have signalled that they intend to join the global trend.
The paper provides a brief review of economic theory and empirical evidence on the merits of PTAs and concludes that neither provides an unequivocal answer as to whether they are good either for member economies or for the world trading system as a whole.
Finally, the paper concludes by identifying the dilemma for Australian trade policy created by the PTA bandwagon. As a medium-sized open economy Australia has a vital national interest in the ongoing health of the multilateral trading system. Any gains from individual PTAs would look insignificant when set against the costs involved in a fragmenting global trading system. The dilemma for policymakers therefore is whether to continue to push ahead with PTAs like the current free trade agreement with the United States, and hence risk collateral damage to the multilateral trading system, or to go no further down the preferential trade road, and take the chance of being “left behind” in the event that the rush to PTAs continues, leaving the multilateral system increasingly sidelined.
