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UNCTAD´s Trade and Development Report 2007 warns that North-South bilateral and regional trade agreements could weaken the multilateral trading system, and reduce the scope for national policies that support development and structural change in developing countries
As multilateral trade negotiations in the framework of the World Trade Organization (WTO) are slow to advance, there has been a proliferation of regional and bilateral free trade agreements (FTAs) or preferential trade agreements (PTAs), many of them between developed and developing countries. These deals often present tough choices for the governments of developing countries and countries with economies in transition, and may be more costly than expected, UNCTAD´s Trade and Development Report 2007 (1) (TDR) warns.
Such agreements may offer transitory gains in terms of market access and higher foreign direct investment (FDI), but may also limit government action that can play an important role for the medium- and long-term growth of competitive industries. Officials of developing countries should therefore think carefully before entering into such agreements, the report says.
The report notes that today´s industrialized countries and developing nations that have recorded spectacular economic growth in recent years began by protecting nascent industries, allowing them to develop their abilities to face international competition. By contrast, the report says, FTAs or PTAs between developed and developing countries often require sharply reduced tariffs on industrial goods, exposing domestic manufacturers to overwhelming foreign competition. That can keep poorer nations from developing their industrial sectors. Such agreements also tend to reduce developing countries´ control over foreign direct investment (FDI).
The number of bilateral and regional trade agreements officially reported to the General Agreement on Tariffs and Trade (GATT)/WTO increased from 20 in 1990 to 86 in 2000 to 159 in 2007. A large percentage of these agreements concerns trade between developing and developed countries. UNCTAD believes that the trend towards such agreements, sometimes labelled "new regionalism," is a risky departure from multilateralism. Such agreements often include provisions that extend beyond current WTO rules and regulations in areas such as investment, intellectual property rights, competition policy and government procurement. Or they cover areas that have been excluded from the agenda of multilateral trade negotiations. As a result, many of these provisions reduce the options for developing country policy-makers to carry out proactive policies in support of industrialization and structural change.
The TDR analyzes the implications of these agreements and concludes that developing countries should carefully weigh their costs and benefits.
The trend towards North-South bilateral or regional trade agreements partly results from a sense of frustration of some governments with the slow progress in multilateral trade negotiations, the TDR says. But bilateral and regional deals threaten the coherence of the multilateral trading system, the report warns, and may limit the benefits of existing regional cooperation arrangements among developing countries.
"In assessing the potential economic and social benefits and costs of entering into North-South bilateral or regional FTAs, developing countries should not only take into account the potential changes in exports and imports arising from market opening, and possible increases in FDI," says the report. They should also consider the impact of such agreements on their policy options and instruments in the pursuit of longer-term development strategies. Rather than subscribing to the "new regionalism", developing countries may examine other areas of cooperation with partners in the same geographical region and at a similar level of economic development, in a spirit of a true regionalism, the report counsels. This could help strengthen their own strategies for national development and integration into the global economy, building on the advantages of proximity, similarity of interests and economic complementarity (UNCTAD/PRESS/PR/2007/026).
The motivation of a developing country for concluding a bilateral agreement with a developed-country partner is to obtain concessions that are not granted to other countries, particularly better market access for its products. Although North-South FTAs may bring new trading opportunities and additional FDI to the developing-country partner, this should not be equated with progress in development, the TDR says. Increased trade and FDI are desirable only when they enhance development and structural change. In exchange for better market access, a developing country may be required to give up not only control over FDI but control over government procurement, and may be required to observe stricter rules on intellectual property rights. It may also come under pressure to undertake broader and deeper liberalization of trade in goods and services than has been agreed to under WTO arrangements.
UNCTAD economists also deplore that -- unlike negotiations in a multilateral context -- individual bilateral negotiations create an environment of "competitive liberalization." That is, countries may feel forced to conclude FTAs for fear of losing competitiveness with other developing countries that enter into FTAs with the same major trading partner.
On the other hand, the gains that developing countries can obtain in North-South bilateral negotiations are circumscribed by their usually weaker bargaining power, the report says. And they are often unable to derive the full benefits of the improved market access opportunities of FTAs because of limited supply and marketing capacities and competitiveness, protracted subsidies to "sensitive" sectors in developed countries, and because local firms are frequently unable to comply with restrictive rules of origin on goods destined for export to the developed-country partner. And preferences negotiated by one developing country with a developed partner may quickly be eroded if the same developed country also concludes FTAs with other developing countries.
UNCTAD economists conclude that "the gains for developing countries from improved market access are far from guaranteed, whereas the loss of policy space is certain." They add that it is "in the interest of developing countries that the multilateral trade negotiations advance, but with a stronger development dimension built into international trade rules."