America's departure from multilateralism: Highway or dirt road to freer trade?

After having guaranteed the functioning of the multilateral system of trade negotiations within the General Agreement on Tariffs and Trade (GATT) for more than 40 years, the United States is obviously changing its trade strategy. There is an ongoing debate within the Clinton administration and among leading US economists on the potential benefits and costs of multilateral trade talks. The formation of the North American Free Trade Area (NAFTA) and more recently the aggressive retaliation measures against the European steel industry and the announcement of further tariffs on European and Japanese exports indicate that the United States has lost confidence in the effectiveness of the GATT process and will likely turn towards a new trade strategy favouring the establishment of additional free trade zones under US leadership and a policy of aggressive bilateralism. This paper investigates whether an American departure from multilateralism leads on a highway or a dirt road to freer trade. In Section II. 1, the analysis starts with a brief discussion of the welfare effects of regional trading blocs. In Section II.2, the political economy effects of the GATT process of multilateral trade negotiations and the formation of free trade areas will be discussed. Section III examines the pros and cons of a policy of aggressive bilateralism. In Section IV, it will be shown that a multilateral system of international trade negotiations being built upon a conditional mostfavoured- nation (MFN) principle might be the first-best solution to the current problems of the GATT.