Termites in the Trading System: How Preferential Agreements Undermine Free Trade.

• Author: Griswold, Daniel
• Position: Book review

Termites in the Trading System: How Preferential Agreements Undermine Free Trade

Jagdish Bhagwati

New York: Oxford University Press, 2008, 139 pp.

This may sound like a "man bites dog" story--"Leading free trade economist denounces free trade agreements!"--but it is not such a strange tale in the world of international economics. Since the pioneering work of Jacob Viner in the 1950s, economists have known that bilateral and regional trade agreements can actually reduce a nation's welfare by merely diverting trade rather than creating new trade. In his latest book, Jagdish Bhagwati of Columbia University makes a tough, passionate, and concise, if not airtight, argument that the proliferation of such agreements is fatally undermining the global effort to advance free trade.

Bhagwati is a longtime critic of what he rightly calls "'preferential trade agreements," or PTAs. He has authored or coauthored numerous books and papers that analyze the economic shortcomings of PTAs. This short volume sponsored by the Council on Foreign Relations attempts to, in the author's words, "provide every scholar and policymaker with a comprehensive and analytically coherent, if brief, overview of the arguments that must be confronted if we are to cut through the fog that surrounds this important and, in my view, pernicious development" of proliferating PTAs.

Like all his writings, this book is a pleasure to read even if trade is not your specialty. Bhagwati explains economic concepts clearly and enlivens the argument with anecdotes and brief profiles of fellow economists and policymakers. If only more free-trade economists could communicate this well.

The first of the book's four chapters documents the checkered history of regional and bilateral agreements in the 20th century and their rapid spread in the past two decades. One feature of the disastrous "beggar my neighbor" trade policies of the 1930s was the fragmentation of the global economy into competing trading blocs and preferential arrangements. The United States and 22 other major trading nations sought to undo the damage by creating the General Agreement on Tariffs and Trade in 1948. The GATT not only sponsored reciprocal reductions in tariffs but required that they be applied according to the "most favored nation" (MFN) principle. That is, tariff reductions must be applied in a nondiscriminatory manner to all signatories to the agreement.

While the MFN principle was a cornerstone of the GATT...