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Argument: NAFTA and other FTAs make multilateral free trade agreements more difficult to construct

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Supporting evidence

  • "The Pros and Cons of Pursuing Free-Trade Agreements". The Congressional Budget Office. July 31, 2003 - "Critics worry, however, that the pursuit of free-trade agreements could divert the world from multilateral negotiations and lead to the development of rival trading blocs centered on the United States, the European Union (EU), and Japan. Indeed, the EU has negotiated a number of FTAs in recent years. Critics also argue that because of differences in negotiating dynamics, FTAs between small developing countries and such large entities as the United States or the EU are likely to leave in place some trade barriers that multilateral negotiations in the absence of FTAs would eliminate. Foreign-policy and tactical considerations must be weighed alongside the economic arguments in determining whether the pursuit of FTAs is an advisable path to the goal of multilateral free trade."

Regional trade agreements become a major dispute-settlement problem when multinational trade agreements come about

  • Martin Wolf, Why Globalization Works?. Yale University Press. 2004. ISBN 0-300-10777-3. pp 91. - "Once a large number of bilateral agreements has been agreed, the move to a single multilateral agreement makes sense: it reduces complexity for countries and, still more, for private agents. This is one of the arguments against the current explosion of regional trade agreements [like NAFTA]. Once there is a multilateral agreement among countries, there must be a dispute-settlement mechanism. That cannot be left in the hands of one party, since the agreement would then not be worth the paper it is written on. Equally, it cannot be left to the parties to the dispute, since they are, by definition, in disagreement. For a multilateral agreement to amount to anything, its dispute-settlement system must be out of the direct control of any party or parties to a dispute. By definition, therefore, an international agreement represents an infringement on the sovereignty, narrowly defined, of a member."

A multilateral trade agreement would be better because...

  • It does not result in "trade diversion", but only "trade creation", with net benefits to all economies:
    • "The Pros and Cons of Pursuing Free-Trade Agreements". The Congressional Budget Office. July 31, 2003 - "The Benefits of Free-Trade Agreements: The analysis of FTAs is a little more complicated than that of multilateral trade liberalization. The rules of the WTO (and before that of the GATT) stipulate that, except in relation to free-trade areas, countries may not impose a higher tariff against one member country than against another, and any reduction in a country's trade barriers must apply equally to imports from all other member countries.(4) Accordingly, any reduction in a country's trade barriers will benefit the competitiveness of all imports equally, and any resulting growth in imports from a given foreign country will displace domestic production and not displace imports from other countries.
In the case of an FTA, however, the reductions in trade barriers increase the competitiveness of imports from the other parties to the agreement not only relative to domestic production but also relative to imports from other countries. Consequently, any resulting rise in imports from parties to the agreement may displace either domestic production or imports from other countries. Economists refer to the displacement of domestic production as trade creation because it results in a net increase in trade. They call the displacement of imports from other countries trade diversion since it does not increase trade overall but rather amounts to a diversion of existing trade.
The distinction between trade creation and trade diversion is important because the former is more likely than the latter to produce a net economic benefit. Although trade creation may hurt some sectors, it is almost always economically beneficial overall because it occurs only when the price of the import in question is lower than the domestic cost of producing the same good. Trade creation therefore allows the domestic economy to obtain the good at a lower cost than would be possible without trade.
Trade diversion is less likely to be beneficial to the importing country (in this case, the United States) in the aggregate, although some sectors are still likely to gain from it, because it results in the import's being obtained at a higher cost to the economy. The reason is that an import's cost to the economy is different from its cost to a domestic purchaser: the cost to the domestic purchaser equals the foreign country's selling price plus any tariff imposed on the import, whereas the cost to the economy equals the foreign country's selling price only. The tariff paid by the purchaser constitutes U.S. government revenue and therefore remains with the U.S. economy rather than going to the foreign economy.
As an illustration, suppose that before NAFTA went into effect, a particular product was imported from Chile and not Mexico, but that after NAFTA, because of the elimination of tariffs on Mexican goods, the same product was imported from Mexico and not Chile. The fact that the good was imported from Chile before NAFTA means that the price to U.S. purchasers was lower for the Chilean good than for the Mexican good. Since U.S. tariffs on the product were the same for both countries, the foreign country's selling price--the cost to the U.S. economy--must have been lower for the Chilean good than for the Mexican good. The implementation of NAFTA did not change that fact; the cost of the Chilean good to the U.S. economy remained lower than the cost of the Mexican good. However, the elimination of the tariff on the Mexican good meant that U.S. purchasers faced a lower price for that product than for the Chilean one, which was still subject to the tariff, so they bought the Mexican good even though its cost to the economy was higher.
In general, one would expect an FTA to result in some amount of both trade creation and trade diversion. If the trade diversion was sufficiently large relative to the trade creation, the agreement could conceivably end up being slightly harmful to the United States rather than beneficial (although, interestingly enough, the harm would come from imports that did not cause the pain of dislocating production by domestic industries). However, as more and more FTAs are negotiated, the later agreements become less and less likely to divert trade and more and more likely to reverse the trade diversion that resulted from earlier agreements. Returning to the example above, if NAFTA caused a rise in imports from Mexico at the expense of imports from Chile, the subsequent free-trade agreement with Chile would reverse that diversion of trade and eliminate the resulting harm. Ultimately, negotiating individual FTAs with all countries would eliminate all trade diversion and leave only trade creation--just as would happen if free trade with all countries was negotiated multilaterally in the WTO--and the United States and all other countries would benefit."

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