The first Mexican carrier to deliver goods in the U.S. interior under a long-delayed free-trade provision is scheduled to enter the country at Laredo, Texas, shortly after midday Friday.

The truck owned by Nuevo Leon, Mexico-based Transportes Olympic will make a delivery to the Dallas suburb of Garland. That’s despite continuing opposition from the Teamsters union and some lawmakers who fear the program will make U.S. highways more dangerous and cost American jobs.

The truck will carry a monitoring device. The move complies with a provision of the 1994 North American Free Trade Agreement.

The company was also the first approved under the 2007 pilot program before President Barack Obama’s administration canceled it [in 2009]. Mexico retaliated by placing tariffs on 99 agricultural products worth more than $2 billion annually.

A little over a year ago, I noted that Washington insiders didn’t expect the dispute to be resolved “any time soon”, but in the broader context, 14 months isn’t bad. So what does the program do? It includes a lot of measures to address the safety concerns raised by its opponents:

Supporters say especially strict safeguards have been implemented: Electronic devices will track the routes drivers take, how long they drive and how long they rest. Participating drivers must undergo national security and criminal background checks, and inspectors will administer oral English-proficiency exams.

Does this end the dispute? Not necessarily. Look up the Federal Motor Carrier Safety Administration’s announcement in the Federal Register and you’ll discover that this is a three-year pilot program, a fact not made clear by some press coverage. From the Federal Register (pdf):

The Federal Motor Carrier Safety Administration (FMCSA) announces its intent to proceed with the initiation of a United States-Mexico cross-border long-haul trucking pilot program to test and demonstrate the ability of Mexico-domiciled motor carriers to operate safely in the United States beyond the municipalities in the United States on the United States-Mexico international border or the commercial zones of such municipalities (border commercial zones)…

In a pilot program, DOT typically collects specific data for evaluating alternatives to the regulations or innovative approaches to safety while ensuring that the goals of the regulations are satisfied. A pilot program may not last more than 3 years, and the number of participants in a pilot program must be large enough to ensure statistically valid findings.

Will the pilot program have large effects on international trade? Both sides claim big numbers:

Todd Spencer, the executive vice president of the Independent Drivers Association, which represents small independent trucking businesses, said 100,000 trucking jobs will be lost. Proponents say it will spur economic growth as companies save millions by sending the goods door-to-door.

But I doubt we’ll see any such impacts soon. Tire Business reports:

So far two small Mexico-based motor carriers have been certified for the program. They are Transportes Olympic of Monterrey, with two vehicles, and Grupo Behr de Baja California S.A. de C.V. of Tijuana, with five vehicles.

However, the FMCSA is withholding Grupo Behr’s permit while reviewing objections raised by the Teamsters and others regarding Grupo Behr’s safety record. The Teamsters also question Transportes Olympic’s record on safety.

You can track the approvals online at the FMCSA’s website. That site says that Transportes Olympic has registered one vehicle and two drivers. It looks like the dispute will continue in some form, for the time being.

A congressional committee on Wednesday strongly backed deals with South Korea, Colombia and Panama, setting them on course for expected final approval and ending years of trade policy paralysis…

The panel’s chairman, Representative Dave Camp, said approval of the deals could not come at a better time for the struggling U.S. economy…

The three pacts must be approved by the full House and the Senate to become law. The panel backed the pacts on the following bipartisan votes: Colombia, 24-12; Panama, 32-3; and South Korea, 31-5.

Camp said he expected the full House to approve the trade deals next week. The Senate also could move quickly enough for the pacts to be approved in time for South Korean President Lee Myung-Bak’s visit to the White House on Oct 13.

One such danger is that FTAs might be a means for the US or EU to try to lock in first-mover advantages in shaping regulatory standards (such as technical barriers to trade). While preferential tariffs can be undone relatively easy by further tariff cuts, plurilateral agreements that promulgate the adoption of a larger economy’s preferred technical standard might serve to determine which standard is later adopted multilaterally. A first mover might gain at the expense of others if its preferred standard is worse for world welfare.

A new WTO report tackles this very issue:

Director-General Pascal Lamy, in launching the World Trade Report 2011 on 20 July 2011, warned that preferential trade agreements (PTAs) “may lock in their members to a particular regulatory regime reducing the potential for trade to prosper with countries outside the arrangement”. “The new challenge posed by deep PTAs to the multilateral trading system is one of market segmentation because regulatory systems, which can become divergent, have now more importance on trade flows than tariffs,” he added…

In fact PTAs of today are less about tariff preferences and more about regulatory measures that were once considered the domain of national rather than international economic policy.  This change is occurring partly because of changes in the way production is being organized internationally with the rise of global production networks.  To prosper, these production networks require an enabling regulatory environment that provides stronger investor protection, better infrastructural services, freedom of movement of corporate personnel, protection to intellectual property rights, and facilitation of trade.   The demand for governance in these policy areas is being met by the supply of deep PTAs…

Another idea would be that we should not ignore the potential difficulties that deep PTAs can give rise to on the regulatory side.  One can observe in the sprawl of agreements what can only be called “families” of PTAs, with each family adopting a particular approach to important policy areas such as technical barriers to trade or competition policy.  The peril here is that PTAs may lock-in their members to a particular regulatory regime reducing the potential for trade to prosper with countries outside the arrangement.

In a nutshell, the new challenge posed by deep PTAs to the multilateral trading system is one of market segmentation because regulatory systems, which can become divergent, have now more importance on trade flows than tariffs. This is not a statement about the legitimacy of these regulatory systems. It is a factual assessment of their impact on economies of scale, which is what the WTO should care about.

The report, titled “The WTO and preferential trade agreements: From co-existence to coherence”, is available online.

The discussion of WTO legitimacy at the end of the piece is very interesting, though I won’t focus on it in this post. (More on that subject can be found in this Oxford book on trade ethics.)

In the middle of the article, Meltzer hints at an argument that has perhaps not received sufficient attention:

For the United States, the European Union, China, and Japan, bilateral and even regional FTAs maximize their ability to get their own way. Were these outcomes to become templates for future multilateral trade rounds, then a two-level game that leverages FTA outcomes into the WTO might undermine the WTO’s legitimacy.

One such danger is that FTAs might be a means for the US or EU to try to lock in first-mover advantages in shaping regulatory standards (such as technical barriers to trade). While preferential tariffs can be undone relatively easy by further tariff cuts, plurilateral agreements that promulgate the adoption of a larger economy’s preferred technical standard might serve to determine which standard is later adopted multilaterally. A first mover might gain at the expense of others if its preferred standard is worse for world welfare. (This scenario would be most damaging if technical standards are to be harmonized, but it also highlights the difficulties of harmonization. If mutual recognition is the future of reconciling technical barriers to trade, then the scope for first-mover advantages may be reduced.)

On the other hand, “on aggregate, preferences reduce the global trade-weighted average tariff from 3.2% to 2.1%.” (Their calculations don’t account for the endogeneity of trade volumes, so these 1.1 percentage points probably overstate the preferential margin. But remember that trade-weighted average tariff measures underestimate protection, so we’re taking the difference of two fuzzy numbers.) Policies equivalent to 1/2 of remaining global tariff barriers strike me as big. (Though tariff barriers are never big when compared to non-tariff barriers like labor mobility restrictions!)

Already, we’ve seen rich and poor countries shifting their attention to regional trade deals. Diverse groups of countries can do a lot by trading amongst themselves, exploiting differences in costs, resources, and technologies. Pretty soon, we should see a few large regional blocs dominating global trade. The ones that lower trade barriers faster will grow faster, too. In these cases, the poorer countries would be expected to catch up to the richer ones. When that happens, the wealthier blocs will start to look at the blocs that lagged behind for new trading relationships, and the barriers will start to fall between the blocs. In the end, we’ll have something very close to a global trade deal – and we will have arrived at that deal in a much more organic, economically efficient way. [emphasis added]

Yes, preferential trade is an importance force shaping the WTO talks. Yes, preferential trade is more politically palatable than multilateralism. But more economically efficient?

Most who are relatively optimistic about the dynamics of preferential trade don’t claim it’s the best path (Baldwin: “(1) Regionalism is here to stay; world trade is regulated by a motley assortment of unilateral, bilateral and multilateral trade agreements; (2) this motley assortment is not the best way to organise world trade”). How would large trade blocs be more economically efficient than a global trade deal?

Instead, the idea gaining currency in Washington is a version of trade preference reform in which Agoa-like benefits are extended to all “least developed countries”, leaving Africa with no exclusive trade benefits and SA [South Africa], with its middle-income status, completely out of the loop.

Though a relaxed rule of origin for fabric inputs will expire at the end of 2012, AGOA won’t expire until 2015, so I think it’s a bit early to be sounding alarm bells. The US is supposed to strike a Doha deal in the meantime, for example.

Previous posts on AGOA include thinking about identification, dynamic vs static gains, and binding constraints.

[HT: LWS]

We finalized a trade agreement with South Korea that will support at least 70,000 American jobs. And by the way, it’s a deal that has unprecedented support from business and labor, Democrats and Republicans. That’s the kind of deal that I will be looking for as we pursue trade agreements with Panama and Colombia, as we work to bring Russia into the international trading system.

Keith Hennessey, Director of the NEC under President Bush, says:

The problem is that the U.S. already has trade agreements with Panama and Colombia. The President is in reality saying that he is undoing those deals… When President Obama arrived, he said the South Korea FTA negotiated during the Bush Administration was a bad deal for the United States. Rather than submitting it to Congress for approval, he directed his USTR Ron Kirk to renegotiate certain parts of it with the Koreans… We see from yesterday’s remarks that the President wants this to be the model for future trade agreements. This gives labor unions and their Congressional allies tremendous leverage to water down or even block FTAs they don’t like.

That’s one interpretation of the remarks. It’ll be interesting to see what the administration actually does on trade going forward. Given the relative economic unimportance of these PTAs, I think the efforts to wrap up the WTO’s Doha negotiations this year may be more interesting.

ADB conducted firm-level surveys in six countries, the results of which are published in the book Asia’s Free Trade Agreements: How is Business Responding? Experts in the region looked at the issues using firm surveys in Japan, China, Korea, Singapore, Thailand and the Philippines.

This book asks four important questions concerning the spread of FTAs and the Asian noodle bowl: Are FTA preferences being used by firms? What are their costs and benefits? Are multiple ROOs a burden to business? Is there enough business support for firms to use FTAs?

[HT: LWS]