Termites in the Trading System: How Preferential Agreements Undermine Free Trade

Termites in the Trading System is a seriously weighty little tome. In 110 pithy pages, economist Jagdish Bhagwati marshals a compelling case against Free Trade Areas - the termites eating away at the efficiency and effectiveness of international trade. But he ducks one crucial, thorny question - which is a pity.

Worldwide there are now over 350 Free Trade Areas, of which more than 200 are fully active. And they are proliferating apace. Increasingly, economists deplore them - and politicians adore them. Politicians adore them because they appear to offer their countries (and their voters) significant economic benefits. Joining a Free Trade Area seemingly offers a country a wider market for its exports and the possibility of cheaper imports. And the words "Free Trade" imply the set-up is a positive step towards extending free trade throughout the world. That all sounds good to voters.

But as Bhagwati demonstrates, the designation "Free Trade Areas" is a misleading misnomer. Bhagwati renames them "Preferential Trade Agreements", and convincingly reveals how - far from encouraging worldwide free trade - they inhibit it. Free Trade Areas benefit their members by disadvantaging non-members. That is their purpose. So they distort free trade, by protecting and bolstering inefficient producers within their borders, at the expense of more efficient producers outside, whose products have to leap their tariff walls. Worse, in an era when most manufactured goods are amalgams of components from many countries, applying Free Trade Area tariffs is often so complex and convoluted that there is no possibility of straightforward competitive free trade operating at all.

Bhagwati argues forcefully that the pandemic of Free Trade Areas must be halted, and that those already in existence must be unravelled. But this is where he ducks the thorny question. He identifies the European Union (EU), in its various manifestations, as the first modern termite - which wormed its way into existence shortly after the Second World War. Like all other preferential trade agreements it was, and is, designed to enrich those within it at the expense of those without. From its start, therefore, the EU undermined and screwed up international trade.

Bhagwati makes this point cogently, although never quite so bluntly. And he implies that the EU has been one of the hungriest of the termites gnawing away at the body of efficient global trading. But again, he never makes the point so bluntly. Such is the power - what might be called the brand image - of the EU, that even a dazzling iconoclast such as Bhagwati hesitates before giving it a mauling.

This is because the EU's founders enrobed their self-serving agreement in the garb of peacefulness and culture. They claimed that if all the European countries worked together as trading partners they would never go to war again; they argued that the EU would rebuild European civilisation, putting it back in its rightful position as world cultural leader. These seemingly virtuous claims burnished the image of the EU, so nobody felt able to attack its discriminatory trading. And such is its reputation that today there is hardly a nation in the world that would not like to be a member - even if only indirectly.

Bhagwati's brilliant book roams the globe, showing how preferential trade agreements are deleterious everywhere - and showing how other countries, particularly the US, have learnt from the EU how to use such agreements to further their own national interests. But he stops short of saying that unless the EU is dismantled, the proliferation will never be stopped. If the Europeans do it, why shouldn't we?, you can hear the rest of the world asking. It is a crucial question. A pity, then, that Bhagwati ducks answering it.