Unilateral trade agreements are best

By Alex Singleton | 26 April 2005

Agreements to lower trade restrictions have several common forms. The least good form is the customs union. Such a union has a 'common external tariff', preventing the member countries from negotiating individually to lower their tariffs with non-members, and can make it more difficult to pursue external tariff lowering. The most prominent example of a customs union is the European Union.

Then there is the bilateral trade agreement (sometimes known as a preferential trade agreement or regional trade agreement). These involve two or more countries which agree to lower tariffs between the members. By enabling more specialization to take place, they increase wealth for the member countries. Their downside is that they do not take specialization to its logical conclusion: letting the whole world in. They are sometimes called 'discriminatory' for this reason. A notable example of such an agreement is NAFTA. They are better than customs unions because individual members of a bilateral trade agreement can go and make trade agreements elsewhere.

The multilateral trade agreement - made at the World Trade Organization - is much better than the bilateral because it applies universally, though they are much more difficult to obtain. However, the inclusion of TRIPS into the WTO shows how vested interests can capture the process. This has given ideas to other vested interests - such as other industries, US labour unions and rich-country environmentalists. The more the WTO is captured by special interests, the less effective it will be. The WTO Ministerial in Hong Kong in December is the last chance for the WTO's Doha round of talks to break from deadlock.

The best form of 'agreement' is a unilateral one. It is impossible for vested interests to capture such an 'agreement' and demand concessions from other countries in return. After all, no other countries are party to the agreement. No concessions can be 'won' from other countries (perversely this can be beneficial). Since imports raise a country's living standards, regardless of what other countries do, it makes little sense to wait for other countries to also liberalize. Britain notably pursued unilateral free trade in the 19th Century, thanks to the work of Richard Cobden and others.