The collapse of the Doha Round, the first post World War II multilateral trade round has brought to the fore the issues that need to be moved forward for trade liberalisation. This has coincided with the publication of an important book -- Termites in the Trading System -- by one of the world's leading economists, Columbia University's Jagdish Bhagwati. The book makes a strong case against bilateral Free Trade Agreements (FTAs).
Over the past decade and a half or so, countries impatient with the slow pace of multilateral trade negotiations decided to "take the bull by the horns'' and move on their own, going for bilateral free trade agreements, to eliminate or almost eliminate tariffs and other barriers to trade between them. Many post David Ricardo economists have been leery of them. They describe it as inefficient and suboptimal solutions leading to "spaghetti bowl" of treaties, difficult to monitor and enact, a form of protectionism in disguise that distracts the real task of unilateral tariff lowering or a massive multilateral trade agreement that could effect it. Bhagwati's work is in that tradition.
Yet, the issue is not as clear-cut. As the WTO reassembles to reconsiders its options which may include the start of a new round in the not too distant future, should countries in the developing world stay put and give up on efforts to otherwise move forward or should they try to make the most of a difficult situation and go the bilateral and plurilateral route route? At least in theory, everybody is in favour of a more open and liberalised trade regime, one with lower subsidies and lower tariffs. The real question is how to get there. There are, as they say, many ways to skin a cat. Are FTAs such a bad idea that we would be better off without them even after the death of Doha?
The one country in the world at the forefront of FTA-signing has been Chile. It already signed with 54 countries. And is negotiating with four more, Australia, Malaysia, Turkey and Ecuador. Many attribute the enormous success of the Chilean economy -- the best performing in the world outside Asia since 1990 -- to these FTAs that gave market to Chilean products. Chile is now invited to join the OECD, and it is expected to do in 2009. In 2007 Chile exported US$ 67 billion and projections indicate this year it would be US$ 75 billion, half of what Indian exports earn. There are a number of reasons for that, but at least one of them is its international trade policy, and particularly the role of FTAs.
To rely on export-driven growth is like riding a bike. The moment your exports stop growing, you fall. This entails a constant search for new markets. Expand the current ones and get new markets. It also means export promotion policies at home, raising productivity to stay competitive, aggressive photosanitary policies to protect the domestic agricultural environment, and an export-oriented culture and mentality even among medium and small-size enterprises. But the foundation stone of it all is access to foreign markets. Without it, all the rest would come to nothing.
In 1990, with the return of democracy to Chile, the country faced a number of challenges in its international trade policy. There were three quite distinct positions: one of them was that the way forward was to unilaterally lower tariffs, all the way to zero. This is very much following what David Ricardo said: liberalisation is good per se, and the very idea of mutual trade concessions is meaningless. The theoretical beauty and simplicity of this view made it especially attractive to the neoliberal economists of the Chicago school, and it started from the premise that the reduction of tariffs and other barriers to trade was a matter of domestic policy, not of diplomacy. Yet, elegant as this notion may be, it failed to take account of the harsh realities of international relations. What would happen if other countries, blissfully ignorant of the principles of neoclassical economics, did not follow suit in applying this optimal solution, did not lower their own tariffs to zero and simply took advantage of Chile's newly opened market? Such an initiative for "economic opening" could turn out to be an expensive proposition.
A second approach, very popular on the Left, was to say that Chile had to rejoin the various Latin American integration schemes from which Pinochet's military regime had withdrawn, and throw its lot in with the region. Yet, this was by no means easy, or even viable. To join MERCOSUR as a full member (Chile did become an associate member in 1996), Chile would have had to raise its external tariff from 6.0 per cent to 14 per cent, cancel all the ongoing FTA negotiations, and eventually repudiate all bilateral trade agreements it already had in place. This was just not feasible.
Finally, a third approach was to say "multilateral is best". This advocated putting all the eggs in the nest of multilateral negotiations, in the hope that these would lower tariffs to trade more or less universally.
Faced with these alternatives, Chile said, in effect, ''none of the above'', and came up with its own, quite distinct response: a "lateral" approach to international trade policy. Although acknowledging that some components of these three alternatives needed some unilateral trade reduction, formal relations with the various Latin American regional integration schemes and a constructive role in the multilateral trade talks (all of which was done). Chile also needed something else for which Chile could not wait: preferential access to Chile's main markets as quickly as possible. This meant two things: FTAs and targeting Asia.
For Chile (as for much of Latin America), its traditional export markets had been in the United States and in Europe, and until the late eighties most trade and investment promotion efforts were targeted there. In the early nineties, Chile realised that the world's economic axis was shifting towards Asia. Chile thus joined APEC in 1994 (the second Latin American country to do so) and over the past decade and a half Asia has become the region in the world with which it trades the most.
The rest, as they say, is history. Chile today has signed the largest number of FTAs (54 of them), has increased its exports seven and a half times since 1990, has had the best economic performance in this period of any non-Asian country, with an average of 5.6 per cent and an FDI-fo-GDP ratio of 65 per cent, one of the highest, and has made the most of the opportunities the world economy offers to a developing country.
This might have led Chile into a "spaghetti bowl" of unwieldy bilateral deals, difficult to negotiate and then to monitor, but, it has certainly been a price worth paying. It has been a lot of work, no doubt, and Chile prides itself of its international trade negotiators. The net result has turned out to be a key driving force for growth. It has also been extremely helpful in keeping up the diversification of Chile's export markets, which a decade ago were more or less evenly divided in fourths between North America, Latin America, Europe and Asia, and which today are leaning much more towards Asia. This July, 43 per cent of Chilean exports went to Asia, 30 per cent to the Americas as a whole and 22 per cent to Europe. A total of 7000 Chilean exporting firms participated in this new pattern of export markets. The latter mirrors the main growth areas of the world economy and the trade agreements that Chile has signed in Asia with South Korea, China, Japan and India.
For economists, who look at the world through the lenses of abstract models, based on assumptions that have often very little to do with the reality. FTAs are messy, confusing, suboptimal solutions, far inferior to a situation in which all 220 countries, or at least the 140 WTO members, would lower their tariffs in one fell swoop to zero. Not surprisingly, many of them don't like FTAs. My argument as a political scientist is that, for better or for worse, the world itself is messy and imperfect, and we might as well deal with it as it is rather than the way we would like it to be. An incrementalist, interactive approach like the one followed by Chile in terms of FTAs, with the results mentioned above, has shown to be a fruitful way of gaining market access and fostering domestic growth, whatever its theoretical shortcomings.
As Bangladesh looks for ways to continue to increase its foreign trade, something in which it has made so much progress over the past decade and a half, it could look at the Chilean experience with FTAs.