The Rise of Bilateralism in Trade and its Implications for Pakistan

This paper examines and critiques the worldwide mushrooming of preferential trading arrangements and traces its implications for Pakistan. It points out that this development is fundamentally contrary to the principle of most-favored-nation (MFN) treatment, which was the cornerstone of the post-war multilateral trading system as embodied in the General Agreement on Tariffs and Trade (GATT) and by the World Trade Organization (WTO). The causes of the rise in bilateral and regional trading arrangements are discussed and it is shown that they pose a real threat to many relatively small economies, including Pakistan. The paper discusses the various preferential trade agreements Pakistan has already signed. It notes that, with the exception of its trade agreement with China, Pakistan has not succeeded in concluding preferential trading arrangements with any of the strategically and systemically more important countries, viz., the US, European Union, and Gulf Cooperation Council (GCC). The South Asia Free Trade Area (SAFTA) could potentially be of considerable importance for Pakistan's long-term economic growth, but this potential might not be realized if India and Pakistan fail to overcome their mutual differences. Finally, the paper explores steps that might be taken to promote Pakistan's economic interests in its bilateral relations. It points out that, apart from achieving a measure of macroeconomic stability, Pakistan needs to improve its international competitiveness through productivity improvements and be more strategic in its trading relations. Its market access to leading industrial countries that are entering free trade agreements (FTAs) with Pakistan's competitors is a real threat and remedial actions are required. JEL Classification: F13, P45. Keywords: Trade, Pakistan, growth. Pakistan has entered into a series of bilateral and regional trade agreements in recent years. This is in line with the observed rise in such agreements internationally. The number of special trading arrangements between and among countries is difficult to estimate, but probably now exceeds 1,000. However, barely 400 of the agreements (proposed or signed) have been notified to the World Trade Organization (WTO) (Herrmann 2008). Mongolia is the sole country that has not yet entered into any bilateral or regional agreement. In short, regional or bilateral trading agreements (BTAs) have now become the dominant mode of international commerce, and their importance continues to grow. For example, the European Union at present has trade relations with only six countries that are based on the most-favored-nation (MFN) treatment principle1 (Bhagwati 2008). The rise of bilateralism and regionalism in trade gives rise to a number of questions: - Are such arrangements in conformity with the established multilateral trading system as enshrined in the General Agreement on Tariffs and Trade (GATT)/WTO articles? - What do these arrangements do to the core principle that drove the post-war multilateral trading system, viz., MFN treatment? - Why have such arrangements mushroomed? Specifically for Pakistan: - What do these developments mean for the country's long-term development and its geopolitical position? This in turn involves answering two supplementary questions: (i) how has Pakistan responded to the general trend of increasing bilateralism? and (ii) are Pakistan's bilateral trading relations driven by some strategic long-term vision of the Pakistan economy? This paper attempts to address these questions in rather broad terms. It consists of four sections. The first section examines the actual GATT/WTO position on regional free trade areas, including whether such measures are steps toward a liberal trading regime or antithetical to it. The issue here is how such arrangements conflict with or undermine established multilateral trade disciplines. This is followed by a discussion of the factors that have resulted in the rise of bilateralism. …