September 14, 2007 / 11:00 AM / 12 years ago

Regional deals make global trade more complex

GENEVA (Reuters) - Countries seeking a global pact to simplify and open up worldwide trade are also forging side deals that make commerce more complex, distort flows and put small countries at the mercy of bigger, richer nations.

Diplomats and trade experts say bilateral and regional accords are creating a confusing web of trade links — often described as a “spaghetti bowl” — that may undercut World Trade Organization (WTO) efforts to level the playing field for all.

“Regionalism won’t go away. It will continue to spread,” said Eirik Glenne, Norway’s ambassador to the WTO. But such regional free trade agreements (FTAs) are not the best way to organize world trade told a WTO conference.

The main objection to such small-scale free trade agreements is that they encourage ties between certain pairs and groups of countries at the expense of others, causing producers to use suppliers that may not be the most competitive.

“The spaghetti bowl falls hardest on the heads of the smallest countries,” said Richard Baldwin, a trade expert at Geneva’s Graduate Institute of International Studies.

Nearly 400 regional and bilateral FTAs are due to be implemented by 2010 and more than 200 are already in force. Only one of the WTO’s 151 member states, Mongolia, is not party to such a deal.

Many export-reliant countries have sought out regional deals out of frustration at the slow pace of the WTO’s six-year-old Doha round of talks, where 151 member states are struggling to agree on ways to lower worldwide tariffs and subsidies.

“The WTO is going in the right direction, but not at the right speed,” Mario Matus, Chile’s WTO ambassador, told a WTO conference this week.

Matus said Chile, which has signed 20 FTAs with about 60 countries, cannot produce efficiently for its home market and needs secure access for its exports abroad to power its economy.

“We’re a young country, we have to go quicker,” he said. “We have to get people out of poverty quicker.”

GLOBAL SUPPLY CHAINS

But regional inter-governmental deals often ignore the reality of modern business, which relies on global supply chains involving dozens of nations.

“Trade is not done between countries, trade is done between companies,” said Michael Treschow, chairman of Swedish telecoms infrastructure maker Ericsson.

Treschow argues trade is so complex it cannot be regulated through bilateral deals but needs worldwide, or multilateral, arrangements, and the WTO is the only body that can handle this.

For Treschow like many diplomats, the answer is a successful conclusion to the stumbling global trade talks known as the Doha round, launched nearly six years ago to revive confidence in the world economy and help developing countries grow out of poverty.

“We have to complete the Doha round first and that’s the most important step,” said Sun Zhenyu, China’s WTO ambassador.

Leaders of 21 Asia-Pacific economies issued a statement last weekend of strong support for the Doha round, but in what many see as a “Plan B” said they would continue to study proposals for a regional free trade area too.

Gary Hufbauer of the Peterson Institute for International Economics in Washington estimates the proposed Asia-Pacific free trade agreement could increase the region’s trade by $4.8 trillion a year, from the average $7.9 trillion in 2000-2005.

Regardless of the outcome of the WTO’s Doha talks, Baldwin of the Graduate Institute of International Studies said bilateral and regional accords would continue to have appeal.

“Even if the Doha round concludes successfully tomorrow, regional trade agreements will continue to be signed,” he said. “The Doha round will do almost nothing to tame the tangle.”

For WTO Director General Pascal Lamy, the question is no longer whether the regional deals are good or bad, but how they can be integrated into the global system.

“We need to look at the manner in which regional trade agreements operate, and what effects they have on trade opening and on the creation of new economic opportunities,” he said.

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