PREFERENTIAL TRADE AGREEMENTS AND THE GATT - CAN BILATERALISM AND MULTILATERALISM COEXIST

By distinguishing constraining and nonconstraining nations, we model when bilateral trade agreements jeopardize an existing multilateral one. We define the constraining country as the one whose preferences limit the multilateral trade-liberalization parameter. If a constraining nation enters a preferential trade agreement (PTA), that country will offset its bilateral liberalization by more tightly constraining the multilateral agreement; therefore, PTAs by 'foot draggers' in the liberalization process may jeopardize existing multilateral agreements. PTAs by nonconstraining countries, on the other hand, allow willing countries to liberalize further without jeopardizing existing agreements; such PTAs need not reduce the extent of multilateral liberalization and may increase it. When nonconstraining countries liberalize trade bilaterally, any effect on existing multilateral liberalization comes indirectly through the constraining country, not directly from the parties to the bilateral agreement. The model's results illuminate differential concerns over 'Fortress Europe', a Japan-centered Asian bloc, and the Canada-U.S. Free-Trade Agreement and proposed NAFTA.