Dec 14, 2008

Why unilateral trade liberalization beats the WTO

“In trade policy debates, the issue of unilateralism versus reciprocity (where reciprocity of access is insisted on instead) is a long standing one. The theoretical arguments used by proponents of either policy stance are well known: Unilateralists rely upon the demonstration that in the absence of ‘‘distortions,’’ free trade is efficient, while a policy stance of reciprocity is theoretically supported by the presence of ‘‘terms-of-trade’’ and political economy motivations in the economy. “England’s famous unilateral repeal of its Corn laws saw free traders and reciprotarians actively pitted against each other [… and it only came] after decades of attempts to negotiate lower tariffs with its trading partners’ (Krishna and Mitra 2005).

A criticism of unilateral liberalisation is that it ‘wastes’ the bargaining chip of access to the domestic market. “Some people would say [UTL is] akin to unilateral disarmament--that […] all of leverage to encourage others to liberalize” is lost (Ikenson 2006). But this logic should apply only to big countries. Developing countries would gain far more from unilateral trade liberalization than from multilateral trade liberalization negotiated over many years (Nogues 1990). Maybe small countries are resistant to proceed with UTL as they would lose the possible enhanced non-trade related cooperation that comes with the signing of an FTA.

In any case UTL makes sense since "although there are benefits from improved access to other countries' markets, countries benefit most from liberalizing their own markets” (IMF 2001). Import competition boosts productivity and living standards by shifting resources towards relatively more productive activities. This is the case for most developing countries as noted in the World Bank report (2005): UTL was “undertaken to increase the productivity of the domestic economy [as it] promotes global competitiveness by lowering costs of inputs, increasing competition from imports to drive productivity growth, and integrating the national economy into the global economy. Autonomous trade reform is, ironically, more important than ever in the presence of RTAs; low border barriers minimize the risks of trade and investment diversion.”

Finally, an argument comes from a blogger in the Philippines who claims that with UTL there would be no money lost to trade negotiations as multilateralism is slow and costly. “One wonders how much money have been paid by taxpayers from the countries concerned, first to pay for the salaries, travels, and perks of their country trade negotiators, including their pool of consultants and secretariat support, in all those years […] Trade negotiations are being done by thousands of country trade representatives and bureaucrats, along with WTO officials and staff” Oplas (2008)

Ikenson, Daniel (2006) “U.S. Trade Policy in the Wake of Doha: Why Unilateral Liberalization Makes Sense”, Presentation by Daniel Ikenson, Cato Institute, Washington, D.C. July 20, 2006

International Monetary Fund (2001), “Global Trade Liberalization and the Developing Countries,” November

Nogues, Julio (1990) The Choice Between Unilateral and Multilateral Trade Liberalization Strategy, The World Economy 13 (1)

Oplas (2008) “Unilateral Trade liberalization” on Government and Taxes blog

Pravin, Krishna, Devashish Mitra (2005) Reciprocated unilateralism in trade policy, Journal of International Economics

World Bank (2005) Global economic prospects 2005 : trade, regionalism and development

WTO (2007) The economics and political economy of International trade cooperation, WORLD TRADE REPORT 2007


Sebastian said...

There is an inherent asymmetry, which makes me disagree. I do not see the WTO's task in bringing down trade barriers further than is done on a bi- or unilateral basis. But I see it as the oranization which ensures that they will not rise again when single countries feel like doing putting up new barriers. The latter is just about to be tested in the current days, and it seems the WTO serves its purpose.

I am not sure the self ineterest of single countries would prevent this.

Dany said...

congrats PL, seems like you are doing some progress in your thesis, maybe the pressure of MPT works...

some comments: a crucial point is missed, unilateralism, bilaterlism, multilaralism or the ism you prefer, is terrible related with thresholds. Is not just a matter of which one to choose, but for which levels of tariff you pick one of them. As I mentioned once to you, and it was told me again here in Chile, for high tariff you go unilateral until certain level, after that you go for the others.

buena suerte!

Pierre-Louis said...

whats MPT?

Dany said...

MPT: Mémoire Préliminaire de Thèse

Daniela said...

Dany, you are right.

But if on top of that you are smart you go unilaterally down to a nominal tariff rate of 6% across-the-board, with an average applied tariff of 1.5% (due to FTAs) and a WTO bound tariff of 25%!

That was the case of Chile (maybe still is, not too sure) for many years.