The Rise of Regional Trade Agreements

Introduction

Recognising the complexity and dynamism of the global trade regime and the immensely diverse issues that are continuously shaping it, the present work will effort to demonstrate that the rise of bilateralism and regionalism since the 1990s was primarily caused by three essential reasons, namely: the disintegration of the USSR, the entrenchment of neoliberalism, and the deadlock in the Uruguay and Doha Rounds of the World Trade Organization (WTO) due to North-South tensions.

Regarding its structure, this essay will answer the topic question in three main parts. First, it will analyse some theoretical considerations regarding the context of preferential trade agreements (PTAs). Second, this work will develop the central arguments that explain the rise in bilateral and regional trade accords. Lastly, the present essay will analyse the reasons why Mexico decided to take part in one of the first and most relevant regional accords of the time, the North American Free Trade Agreement (NAFTA).

Note: for the purpose of this work, the term preferential trade agreements (PTAs) will be used interchangeably for bilateral and regional trade agreements, as it is advised by a large number of scholars (Ravenhill, 2020, p. 141).

Theoretical Approaches of Trade Politics

Grounded in the domestic politics arena, the society-centred approach asserts that trade policy decisions are shaped by interest groups due to its distributional characteristics. In trade there are always victors and vanquished parties (Oatley, 2016, p. 69). Therefore, whether is from a factor (labour versus capital) or from a sector (industries versus industries) perspective, protectionist and pro-free trade groups will exert pressure to different branches of their governments to obtain a beneficious trade policy (Oatley, 2016, pp. 70-73).

An appropriate example of the factor model dispute would be the tensions between the American trade union federation AFL-CIO and the Business Roundtable (association of CEOs), regarding the negotiation and congressional approval of NAFTA in the early 1990s. As to the sector model, the debate take place between import-competing and export-oriented sectors (each of which includes capital and labour cooperating for the same interest), e.g., the American Textile Manufacturers Institute (ATMI) and UNITE (union of textile employees) have been generally opposed to PTAs, while the high-tech corporations and their unions in the US have historically supported free trade (Oatley, 2016, pp. 73-77).

Furthermore, other approach within the domestic level suggests that sometimes policymakers intervene in trade policy aiming to produce a benefit to its constituencies, regardless of interest groups pressures. This state-centred approach is (broadly) characterized by the implementation of industrial policy, i.e., the strategic use of protectionism -tariffs, subsidies etc- to promote the advancement of certain local industries (Oatley, 2016, p. 90-91).

Analysing this approach along with some creativity, it would not be unsound to claim that it was in the best interest of developed economies to try to put an end to the industrial policy efforts of their future competitors (emerging economies), by negotiating PTAs with them in order to support the exports of their own strategic industries, as was the case of the US with Japan in the early 1990s (Oatley, 2016, p. 106).

Additionally, rooted in IR theory there is an interesting argument regarding realism as a solid explanation to the shift from multilateralism to regionalism and bilateralism, specifically, that in their quest for power states tend to disregard big picture dividends to more relative benefits (Kirshner, 2009, cited in Hopewell 2020, p. 5). The deterioration of the hegemonic status of the US, exemplified by its undermined influence in the Doha Round and explained by the rise of other hegemons (thriving in the WTO regime), relocated their interests toward regions and individual partners as a strategy to regain power -or at least diminish the power of others- (Hopewell, 2020, p. 5). Moreover, it is simpler for hegemons to negotiate (read impose) favourable provisions in PTAs with a small number of nations from the Global South (Hopewell, 2020, p. 9).

Bilateralism and Regionalism: raisons d’être

There are many factors (internal and external) that could explain the reasons why a group of countries decide to sign a PTA. However, it is interesting to notice that in many cases the logic is driven by politics rather than economics (Cattaneo, 2009, p. 29-30). Furthermore, it should be noted that the international trade regime has been characterized by fluctuations between bilateral, regional, and multilateral accords depending on the political context of the time (Lester and Mercurio, 2009, p. 3).

Nevertheless, this essay identifies three major (but not at all limited) reasons why the signing of bilateral and regional trade agreements raised sharply since the 1990s: first, the dissolution of the Soviet Union. Second, the raise of neoliberalism, and third, the North-South impasse within the WTO Uruguay and Doha Rounds (Ravenhill, 2020, pp. 154-155, 159).

In regard to the USSR related case, it would be appropriate to analyse it through various correlated perspectives. To begin with, the urgency to guarantee peace and security by the end of the Cold War proved to be a good incentive for the Western powers to launch trade negotiations with their former rivals (Ravenhill, 2020, p. 154). Historically, PTAs had been used as a foreign policy tool to remunerate countries that support the geopolitical agenda of the West (Hopewell, 2020, p. 8). Trade liberalisation became to be a measure to keep countries from adopting communism (Zeiler, 2012, p. 102; Ravenhill, 2020, p. 156).

Furthermore, with the termination of the Council of Mutual Economic Assistance (USSR version of the Marshall Plan) its former members needed an alternative to maintain an official channel of economic cooperation with development purposes among themselves, as with new partners (Ravenhill, 2020, p. 154). By the same token, as established by Oatley, the former parties of the USSR relied on regionalism and bilateralism to manage their trade as efficient as possible (2016, p. 39).

Respecting the second reason, the globalized proliferation of neoliberalism -especially after the end of the Cold War- brought a renewed appetite for free trade (Strange, 2020, p. 26), especially between the Global North and South, where developing economies engaged in “market-friendly” internal reforms and trade accords negotiation endeavours to compete in attracting foreign investors, being the case of Mexico and NAFTA the example par excellence (Ravenhill, 2020, pp. 154-155). Moreover, the ever more common dispersion of production (offshoring) through regional supply chains made high standard PTAs indispensable to effectively conduct the 21st century trade (Trommer, 2020, p. 136).

Additionally, it is possible to argue that the retreat of the state and the increased influence of multinational corporations promoted by neoliberalism made possible for the latter to shape, through lobbying and other efforts, the trade policy of countries (Ravenhill, 2020, pp. 152, 154-155), as affirmed by the society-centred approach mentioned elsewhere in this work.

Lastly, the slow and uncertain outcome of the Uruguay Round, along with the rapid growing complexity of international trade issues (e.g. intellectual property and competition policy) since the beginning of the 1990s resulted in a sharp increase of regionalism (Baldwin and The World Trade Organization, 2011, pp. 10-11, 18). PTAs signees anticipated that nations that were being left out of these trade instruments would soften their position and make compromises to achieve multilateral goals (Ravenhill, 2020, p. 159).

Moreover, the failure of the Doha Round caused by North-South tensions, that is, the dramatical increase of WTO membership from the Global South, the protectionism of developed countries in specific sectors (namely agriculture), the democratic nature of the WTO (consensus based decision-making), and the rapid development and deepening of trade standards (environment protection, labour market, investments etc) (O’Brien and Williams, 2016, p. 115-123), weaken multilateralism even further in benefit of the other two relevant alternatives for this essay.

Mexico in NAFTA: A Case of Study

Some of the hypotheses above mentioned are clearly embodied in the memoir of former Mexican President Carlos Salinas, which -in my view- provide a unique insight of the decision-making process of one of the 1990’s leaders that were instrumental in shaping the modern international (regionalised) trade regime for the Global South.

In his publication, President Salinas recognised three main reasons why he decided to accept President George H. W. Bush offer to negotiate a bilateral free trade agreement (that would later become NAFTA), namely: the imminent collapse of the Socialist bloc, the formation/deepening of strong trading regions (US – Canada PTA, Maastricht Treaty, and the emerging Southeast Asia), and the (perceived) stagnation of the Uruguay Round (Salinas-de Gortari, 2002, pp. 38-39).

Regarding the first reason, the Mexican government feared that the shift of attention to the new markets in Eastern Europe would negatively impact the amount of foreign investment Mexico was striving to promote (see Ravenhill, 2020, p. 150). In late January 1990, President Salinas reported sharing his uneasiness in a meeting with then UK Prime Minister Margaret Thatcher, to which she would reply: “You are right to be worried” (Salinas-de Gortari, 2002, p. 44).

As for the second reason, the Salinas Administration was concerned with the fact that, apart from being left aside as a secure and competitive place for foreign investment, Mexico risked also being excluded from international trade itself. This view was reinforced by the German Chancellor Helmut Kohl, who -according to President Salinas- expressed that by the beginning of the 21st century the world would have three strong trading regions: the Asia Pacific, North America, and Europe (as in EU), therefore, “if Mexico does not join in a trade bloc, it will be left outside” (Salinas-de Gortari, 2002, p. 45). Arguably, the “domino effect” put forward by Richard Baldwin, i.e. the prospect of being excluded from production chains (2016, p. 114), seems to explain to a good extent the position of Mexico and the other developing economies at the time.

Lastly, respecting the uncertainty of the outcome of the Uruguay Round, the incentive to reach a regional agreement was more evident. In the absence of a multilateral accord, trade would have to rely on the existing regional/bilateral blocs. Additionally, the Mexican leader gave account of a meeting with Arthur Dunkel, then Director of the GATT, in February 1990 where he expressed that “multilateral negotiations were not opposed to Mexico … deepening its bilateral relations with the United States” (Salinas-de Gortari, 2002, p. 46), as article XXIV of the GATT clearly stated (Oatley, 2016, p. 37).

Furthermore, President Salinas disclosed a new doubt about engaging with major trade talks with the US: diversification. Mexico needed to sign more PTAs with different important markets to avoid its trade to be heavily concentrated in the United States. However, as stated by Jacques Delors (at the time President of the Commission of the European Community) in a meeting with Salinas, for other markets to be interested to negotiate with Mexico, it had first to be part of the North American bloc (Salinas-de Gortari, 2002, p. 46).

Conclusion

The main purpose of this work was to strive to explain the reasons behind the rise of bilateral and regional trade agreements since the 1990s, from theoretic perspectives to historical, political, and economic facts. In this sense, this paper put forward three preeminent explanations that -together with their broadly diverse causes- originated a fertile ground for regional and bilateral trade agreements to thrive, as the Mexico-NAFTA part of this essay efforts to evidence.

However, an important debate remains in force: whether regionalism and bilateralism promote or hinder the global liberalization of trade (Ravenhill, 2020, p. 164). Relevant arguments have been made for and against each position, but events are still unfolding. Until mid-February 2021, there were 341 operational regional trade agreements -552 notifications- (World Trade Organization, 2021a). It will be interesting to observe if the historic election of Dr. Ngozi Okonjo-Iweala from Nigeria as Director-General of the World Trade Organization (World Trade Organization, 2021b) brings revitalization to the multilateral regime, or if, on the contrary, the trend toward PTAs continues to grow.

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