Afta Doha

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: may be due to the ASEAN Free-Trade Area (AFTA), which has cut barriers between members and attracted foreign direct investment. But Factory Asia also demonstrates the flaws of such agreements. If a country wants to grant favours to one trading partner but not all, it has to write complex “rules of origin” to establish the nationality of a product.

But in a dense network of production, every product is a mongrel, with an indecipherable pedigree. In recognition of this, AFTA’s rules of origin are quite relaxed: a good qualifies even if only 40% of its value was added in the region, and that 40% can come from more than one member.

Even so, ASEAN’s success owes more to ambitious cuts in its MFN tariffs, which it applies to everybody. Thailand, for example, slashed its average tariff from 41% in 1989 to 18% in 2000; Indonesia cut from 25% to 8%. If the MFN tariff is low enough, exporters will pay up rather than trouble themselves with documenting the origin of their products. Only 5% of ASEAN trade takes advantage of the preferences its officials so painstakingly negotiated.

If multilateral liberalisation were proceeding apace, firms everywhere could bypass the thicket of preferential agreements, just as South-East Asian companies have bypassed AFTA. But do such accords help or hinder the cause of full liberalisation?

Mr Bhagwati insists that they hinder it. One of the stumbling blocks in the Doha round, for example, was “preference erosion”. Some African and Caribbean countries did not want to see the EU open its banana market to all and sundry, because that would erode the value of their privileges. (This issue was reportedly resolved at the Geneva summit in July.)

Sometimes it is the countries granting the privileges that want to preserve their worth. America, for example, offers trade deals to strategic allies as a reward for fighting the war on drugs or stabilising the Middle East. Nuno Limão, of the University of Maryland, has shown that in the last global trade round America was slower to cut MFN tariffs wherever that would remove a plum from its allies’ mouths.