The Rise of Bilateralism in Trade and its Implications for Pakistan

This paper examines and critiques the worldwide mushrooming of preferential trading arrangements and traces its implications for Pakistan. It points out that this development is fundamentally contrary to the principle of most-favored-nation (MFN) treatment, which was the cornerstone of the post-war multilateral trading system as embodied in the General Agreement on Tariffs and Trade (GATT) and by the World Trade Organization (WTO). The causes ofthe rise in bilateral and regional trading arrangements are discussed and it is shown that they pose a real threat to many relatively small economies, including Pakistan. The paper discusses the various preferential trade agreements Pakistan has already signed. It notes that, with the exception of its trade agreement with China, Pakistan has not succeeded in concluding preferential trading arrangements with any of the strategically and systemically more important countries, viz., the US, European Union, and Gulf Cooperation Council (GCC). The South Asia Free Trade Area (SAFTA) could potentially be of considerable importance for Pakistan’s long-term economic growth, but this potential might not be realized if India and Pakistan fail to overcome their mutual differences. Finally, the paper explores steps that might be taken to promote Pakistan’seconomic interests in its bilateral relations. It points out that, apart from achieving a measure of macroeconomic stability, Pakistan needs to improve its international competitiveness through productivity improvements and be more strategic in its trading relations. Its market access to leading industrial countries that are entering free trade agreements (FTAs) with Pakistan’s competitors is a real threat and remedial actions are required.