The Case Against EURAFTA

by Reihan Salam

The Washington Post editorial board calls for a trans-Atlantic free trade agreement. The idea is intuitively appealing, but it is important to remember that free trade agreements (FTAs) of this kind are actually preferential trade agreements (PTAs), insofar as the tariff reductions don’t apply to all comers. Ideally, the U.S. and EU wouldn’t just reduce tariff barriers for each other, but rather to all economies that are not explicitly excluded from “normal trade relations,” e.g., Iran. Consider the following from Douglas Irwin’s review of Jagdish Bhagwati’s Termites in the Trading System:

The right way to reduce trade barriers, [Bhagwati] explains, is on a multilateral basis and in a nondiscriminatory way. After World War II, America led the world in creating the General Agreement on Tariffs and Trade (GATT), which did just that, by encouraging the reduction of tariffs and liberalization of other import restrictions. In recent years, however, countries have increasingly bypassed this system. Now, it is common for two or more countries to agree to eliminate tariffs and reduce other trade barriers for each other, but not for others, as is the case with NAFTA.

So what is the problem with PTAs of this kind? Many free traders argue that PTAs can coexist with the WTO process. But Bhagwati disagrees:

By introducing discriminatory treatment into the trading system, the movement toward preferential trade agreements sacrifices economic efficiency and, perhaps more troublingly, throws the carefully constructed postwar system into disorder. Instead of having one common multilateral system, we now have a bewildering array of complex and overlapping bilateral and regional agreements, each with conflicting and contradictory provisions regarding trade in goods and services. Mr. Bhagwati, always quick with an illuminating metaphor, has referred to this as the “spaghetti bowl” system, in which these agreements create a tangled mess of restrictions and regulations, ultimately disrupting rather than promoting free trade.

Thus, Mr. Bhagwati is by no means anti-trade or anti-trade agreements; instead, he makes a strong case for opening trade much more aggressively at the multilateral level — with all-inclusive and nondiscriminatory agreements.

This strikes me as the best reason to oppose something like EURAFTA, particularly if the EU demands some degree of regulatory harmonization as a condition for entering into a trade agreement. 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.