Regional and bilateral free trade schemes should be pursued with caution

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IMF SURVEY: Are bilateral and regional trade agree- ments-rather than multilateral agreements-driving U.S. trade policy?

HILAIRE: U.S. trade policy is running along three parallel tracks. The first entails lowering tariffs on imports from certain countries without requiring a commensurate reduction in these countries' tariffs, as is the case with sub-Saharan African countries under the African Growth and Opportunity Act. The second, multilateral, track involves proposals under discussion at the World Trade Organization's Doha Round. And the third track, which has gained increasing momentum, focuses on bilateral and regional free trade agreements (FTAs). What is driving U.S. trade policy is a set of three goals: increasing U.S. exports of goods and services, enhancing the investment climate abroad, and cementing geopolitical and security links. This last element is especially relevant with regard to the Middle East, where the United States is rigorously pursuing FTAs.

IMF SURVEY: Does the energy the U.S. expends on bilateral or regional arrangements come at the expense of a more vigorous push on multilateral trade negotiations?

YANG: There is no simple answer to this question. On the one hand, arguments have been made that competition for bilateral and regional trade arrangements creates incentives for countries to liberalize in the context of these agreements, which, in turn, favors deeper liberalization in the context of multilateral negotiations. Proponents of this view argue that "competitive regionalism" can catalyze global trade liberalization. It is often said that the establishment of the North American Free Trade Agreement (NAFTA) helped to move the earlier Uruguay Round forward when it was at a crossroads.

On the other hand, some observers worry that regional approaches to trade liberalization could weaken incentives for multilateral liberalization, and there are few signs yet that the recent push for regional arrangements has helped the Doha Round. Indeed, with the current round at a critical juncture, many countries seem to be following the U.S. lead and are placing increasing emphasis on bilateral or regional FTAs, possibly reducing the urgency to work toward a breakthrough at the multilateral level.

IMF SURVEY: A standard argument against preferential trade arrangements is that trade may be diverted away from lower-cost suppliers that are not members of the arrangement. How great a concern is this?

HILAIRE: This...