Does Multilateralism Crowd Out Intra-Group Trade? Evidence from Some Developing Regions

• Author: Chukwuma Agu, Anthonia I. Achike & Uchenna Amaeze
• Position: African Institute for Applied Economics 128 Park Avenue, GRA, Enugu
• Pages: 203-212

This article was originally published in Kierkegaard,S. (2008) Dynamics of Trade: Law and Economics. IAITL. pp.285-298.

Page 203

1. Introduction - The Problem

Increases in trade volumes and values in recent years across the globe have been both intensive and extensive. According to the United Nations Conference on Trade and Development, world annual average export growth rate has risen from a meager 6.5% between 1950 and 1960 to over 20% between 1970 and 1980 and still growing! The average OECD country trade to GDP ratio of about 12.5% in 1960 rose to 20% in 2005. Indeed, some developing countries like China post averages in excess of developed countries' performances. Explanations for this trend are varied and interesting. One school of thought points to the vast technological changes that have taken place within the last half century as being pivotal to the phenomenal growth in trade. Others believe it has to do with the changing global political climate which presently is in favour of greater integration and reduction in geographical and social barriers (Krugman 1995).

Whatever the cause of this trade boom, however, it has also been acknowledged that the participation of least developed countries (LDCs) is limited. Africa's share in world trade had plunged particularly over the last two decades from 5% in 1981 to about 2.8% in 2005 (figure 1). But the retardation is not noticeable in the area of trade alone; many aspects of macroeconomic wellbeing in Africa either nose-dived or remain erratic. Many economies within Africa suffered impressive growth implosions in the 1990s, with the income per capita of some economies like Nigeria being only half their 1980 values in 2003. These countries have hardly benefited from the global trade boom as can be seen from figure 1.

Africa's Share in World Trade

(Figure in Pdf File)

Figure 1: Trends in Africa's Share in Global Trade, 1981 - 2005 Page 204

The dwindling fortunes of Africa (and indeed, most developing countries) in world trade is partly attributed to size and geography which hinder them from optimally exploiting the opportunities presented by multilateral trade but make them vulnerable to gyrations arising therefrom. World trade growth also came with a myriad of trade promoting, facilitating, monitoring and regulating institutions and a complicated (almost confusing) wave of negotiations and protocols, which have potentials to add to the challenges facing the policymaker. Thus, it is believed that not only had unilateral trade liberalization and multilateral trade not helped promote growth and poverty reduction in poor countries, but that they lack the capacity to do so without the complementation of regional trade arrangements (RIA) and south south trade (SST). Consequently, regional integration arrangements and south south trade (trade among developing countries) are vigorously promoted as complements (if not substitutes) to multilateral trade arrangements among developing countries. It is believed that increased interaction, partnership and integration among developing countries will increase complementarities and potentials for African countries to reap greater benefits from the world market (Cernat 2002; Agatiello 2005)

But it is not clear that much of the clamour for south south trade (SST) and regional integration arrangements (RIAs) has been based on critical and in-depth analyses of the trends in such arrangements over time and thus their potentials to lift developing countries out of poverty. But more importantly, it is often assumed that all the multilateral trade arrangements support such regional trade arrangements and that unilateral trade liberalization does not mean less regionalism and involvement in south south trade. Equally, it is taken as given that developing countries have the capacity to replicate the European Union model of regional integration and that such regional and south south trade arrangements 'are good' for the countries involved.

But some of these assumptions do not reflect the realities on ground. For one, it is on record that several attempts to replicate the European integration model in other parts of the developing world have not proved very successful. The literature on what makes for successful regional integration among developing countries is still weak and it is not exactly clear that even if they work, they will provide superior results to either multilateral trade negotiations or unilateral trade liberalization. But again, it is easily assumed that all these trade arrangements are complementary and can co-exist with one another. Multilateral trade arrangements have spread like wild fire, catching nearly every nation in its wake since the formation of the World Trade Organization. Most developing countries are signatory to the protocol and actively participate in the negotiations. But they are also supposed to be actively engaged in their respective regional and south south trade arrangements.

In this paper, we try to show that this has not been working together and that regional trade cooperation has been dwindling since the formation of the WTO in nearly all regions of the developing world. We have tried to show, using data from on intra-group trade in developing regions that the idea that multilateral trade arrangements is not complementary, but rather substitutive to intra-group trade. In particular, while the WTO purports to promote regional trade arrangements and indeed, have been registering RTAs, its existence has been the reasons for the poor performance of those RTAs. To make the point, this paper draws on the history and trends in south south trade and regional integration in almost every region of the developing world. The methodology is primarily analytical. The aim of the paper is to excite debate on the contributions of multilateral trade arrangements and trade negotiations on intra-group trade. This is part of the ever-relevant debate on whether developing countries on the overall actually benefit from multilateral trade arrangements, and whether the 'increased trade shares' of some of these regions are at the expense of trade relations with their neighbours.

2. The Theoretical Context

Arguably the most prominent theoretical underpinning for regional trade agreements was provided by Viner (1950). Viner's arguments centers on potentials for what he termed trade creation and trade diversion. Viner viewed trade creation as a positive force, good for growth and trade diversion as distortionary. But it is important to note that Viner's conclusions on the outcome of regional integration efforts and negotiated trade arrangements were ambiguous¹. Summarily, it showed that the net effect of RTA would depend on which of either trade creation or trade diversion holds. Conceptually, the ambiguity owes to the fact that preferential trade policies reduce one price distortion - between domestic and partner country products; but introduce another - between partner and third country products (Pomfret, 1997). Consequently, majority of the ensuing literature in this field laid emphasis on the contrast between discrimination through preferential tariffs and unilateral tariff reduction. Discrimination is assumed to misallocate global resources by distorting relative prices and increasing transaction costs while multilateralism (especially as in the Most Favoured Nation Principle) reduces suspicion and distortions.

Viner's argument analyzes world trade as a zero sum game. But if economic growth is sustained (and/or sustainable), it might be better to see trade as having the potential to grow on all sides. Trade diversion is not the Page 205 only source of distortions; domestic policies can also introduce distortions in regional and multilateral trade. Indeed, trade creation and trade diversion are some of the issues that are hardly brought up in the arguments for or against regional integration in developing countries in modern discourse. The reasons are not farfetched. In Africa, for example, the problem of supply response to production is a central challenge - and rightly so. Many policy programmes recommended for Africa assume that getting the policies right is all that is needed to get the continent on sustainable growth path. But hindsight testifies otherwise. Discussions about trade creation and diversion take supply response as given.

But this does not mean that regionalism within a multilateral and globalizing world is entirely misplaced. This is not just because members of a customs union can gain at the expense of the rest of the world, but also because in the real world of multilateralism, regionalism can reduce the bargaining costs of reaching international trade agreements. Given that RTAs are easier to negotiate, they could be a prelude to global trade liberalization measures and could provide more solid foundation for better world trading system. This position has been taken by several post-Viner authors who go beyond analysis of trade creation and trade diversion.

Political motives underlie all regionalism and considerations for trade gains often come as secondary. Some of such political issues are taken up in the Johnson-Cooper-Massell theory. The theory posits that since non-discriminatory tariff reductions are always superior, discriminatory arrangements can be explained only by non-economic motives. Such motives often fall within the realm of politics. For example, regionalism politicizes international trade first by promoting hard bargaining in the course of negotiating preference margins on a case-by-case...