from Greenberg Center for Geoeconomic Studies

Termites in the Trading System

How Preferential Agreements Undermine Free Trade

Foreign policy analyses written by CFR fellows and published by the trade presses, academic presses, or the Council on Foreign Relations Press.

In his new book, Termites in the Trading System: How Preferential Agreements Undermine Free Trade, CFR Senior Fellow for International Economics Jagdish Bhagwati argues that so-called free trade agreements (FTAs), which he maintains are in fact preferential trade agreements (PTAs) involving two or more countries, actually set back the cause of free trade and undermine the multilateral trading system.

He writes that FTAs make global multilateral agreements more, not less, difficult. "The current tide of preferences has been a result of politicians mistakenly, and in an uncoordinated fashion, pursuing free trade agreements because they think (erroneously) that they are pursuing a free trade agenda."

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Bhagwati makes the case against PTAs for several reasons, including:

  • PTAs undermine multilateral trade negotiations such as the Doha Round and divert diplomats and negotiators away from attention to the World Trade Organization.
  • Because every country negotiates different trading terms in each particular PTA with every other different country, each with their own loopholes, exceptions, and particular regulations, this collectively turns world trade into an indecipherable mess. "Crisscrossing PTAs, where a nation has multiple PTAs with other nations, each of which then had its own PTAs with yet other nations, was inevitable. Indeed, if one only mapped the phenomenon, it would remind one of a child scrawling a number of chaotic lines on a sketch pad…[or a] spaghetti bowl…"

Bhagwati proposes that the Doha Round be completed expeditiously and U.S. trade policy be redirected from proliferating FTAs. "Preferential trade agreements have slowed down our progress on the multilateral freeing of trade, as with the Doha Round. The Doha Round's success is essential to strengthening the multilateral trading system, which is beneficial to all."

A Council on Foreign Relations Book

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Reviews and Endorsements

Mr. Bhagwati is a rare academic who has the great ability to communicate his ideas to a more general audience. ... [His] concise book of just 100 pages of text should be read by all who care about the world trading system today. ... [W]ritten with a light touch, with many amusing stories, examples, and effective argumentation that make it, above and beyond its policy significance, a genuine pleasure to read.

New York Sun

The founding fathers of the postwar trading system wisely chose nondiscrimination as its central principle. But the last fifteen years have witnessed its erosion due to the proliferation of preferential trading agreements. Jagdish Bhagwati, the leading trade economist of our time, rang first the alarm bells about the resulting spaghetti bowl of discriminatory rules and regulations. Now, with his usual blend of brilliance, wit, and bluntness, he describes the rise of PTAs and analyzes why it has occurred and how it threatens the multilateral trading system. This book is essential reading not only for economists and trade diplomats, but for anyone concerned with the design of the institutions that are central to our prosperity.

—Andre Sapir, professor of economics, Universite Libre de Bruxelles; former economic adviser to European Commission president Romano Prodi (2001–2004)

The world's foremost trade policy scholar explains why what he calls 'preferential trade arrangements' are not a path towards global free trade, but a dangerous step away from it. A long-standing and brave opponent of these arrangements and particularly of those between hegemonic powers and developing countries, Jagdish Bhagwati explains how they promote costly trade diversion, interfere with the efficient operation of global business, and allow great powers to extract unjustified concessions from weaker countries. This book underlines the abiding wisdom of nondiscrimination, the now almost completely forgotten founding principle of the world trading system, and concludes that the only way to return to sanity is by movement towards free market access for all.

—Martin Wolf, chief economics commentator, Financial Times

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