Speaking of Professor Bhagwati jogged my memory about a recent entry made by former WTO Director-General Supachai Panichpakdi about why, contrary to Bhagwati's opinion that they promote unhealthy trade diversion, South-South regional FTAs can have beneficial effects for the world trading system. Supachai is currently the Secretary-General of the UN Commission on Trade and Development (UNCTAD), which was formed in the seventies to press trade-related concerns of developing countries and remains sympathetic to them: In an in-depth study of regional trade agreements and their implications for developing countries, UNCTAD has found that there tends to be an important difference between North-South Regional Agreements, i.e. bilateral Free Trade Agreements (FTAs) between developed and developing countries, and regional agreements between developing countries, so-called South-South agreements. In particular, our research found that developing countries should strengthen regional cooperation with other developing countries, and proceed carefully with regard to North-South bilateral agreements.
The main reason for this is easy to understand: Many of these North-South agreements are missing the developmental perspective, for at least three reasons:
1. Bilateral FTAs often transform formerly non-reciprocal trade preferences between developed and developing countries into symmetric market access regulations; thus, the cornerstone of the post-war international trade system, the special and different treatment of developing countries, is continuously being eliminated.
2. WTO-plus standards and Singapore issues, e.g. labour and environmental standards, government procurement, investment and competition policy, are increasingly being incorporated into North-South FTAs, while the sector in which developing countries are highly competitive - agriculture - is left out. Moreover, these FTAs usually make no provisions at all for monetary cooperation, even though the overall competitiveness of developing countries is highly vulnerable to external shocks. Thus, developing countries often have to accept far-reaching commitments regarding formerly classical domestic policy without being adequately compensated in terms of warranted market access and market success.
3. Simultaneous participation in many FTAs with different rules and implementation horizons makes policy coordination in developing countries increasingly difficult, in particular with regard to the reconciliation between national development objectives, regional commitments and multilateral rules and regulations.
By contrast, UNCTAD’s research has also found that South-South agreements offer developing countries many advantages, which for the time being are not provided on the multilateral level, nor incorporated in North-South agreements.
One of the key motives for developing countries to enter into agreements with partners at a similar level of development in the same area is that of market access. Of course, the benefits of market access, such as scale economies and the diversification of production, are arguments that apply to trade integration generally, be it with developed or developing countries. Nevertheless, for many developing countries that are at an early stage of industrial development, a regional orientation involving countries with similar economic structures and technological capabilities may be considered a more viable option. The initial foreign competition within the region may be less difficult to handle, the technological gap vis-à-vis competitors from more advanced countries outside the region may be easier to close, and the probability of finding a level playing field is greater. In other words, the regional market often sets less exclusive benchmarks than competition with mature suppliers, so that even production at the infant industry stage can be successfully broadened. South-South cooperation can also be advantageous when it comes to competition to attract FDI and to avoid races to the bottom.
