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A serendipitous exception in FTAs

Korea Herald

26 November 2004

A serendipitous exception in FTAs

The Straits Times (Singapore) Asia News Network

At the Asia-Pacific Economic Cooperation summit in Chile last weekend, leaders discussed economic issues, especially trade. Singapore and Peru, for example, agreed to initiate talks for a free trade agreement (FTA).

Free trade enhances a nation’s welfare: people can import and export goods without barriers such as high tariffs or quotas, so consumers get the best prices. Also, trading partners seldom, if ever, go to war with each other.

But when free trade is limited to two parties in a bilateral FTA, it is welfare-enhancing only for the parties involved: It could discriminate against those outside the pact. So FTAs may distort trade by increasing trade from one country at the expense of another. Yet the World Trade Organization (WTO) permits them.


The central tenet in the 1994 WTO treaty, as articulated in its Article I, clearly stipulates that a country which grants preferential treatment to another must grant it to all other countries. This ensures that no one is excluded from the benefits of free trade.

Yet Article XXIV excuses FTAs from that requirement, permitting preferential terms of trade between countries involved which may, however, continue to maintain their individual tariffs and quotas against third countries.

How then to reconcile the contradiction?

You cannot.

That disconnect found its way into the books as a result of the machinations of some parties during post-World War II trade talks. Traditionally, it was said that the United States repudiated preferential trade arrangements like those Britain still had with the Commonwealth countries at the time. The United States was supposedly single-mindedly trying to advance multilateral trade principles.

In this view, the new superpower only accepted Article XXIV because it was convinced that the Europeans and the developing nations would otherwise abandon global trade talks it felt would preserve the peace.

Drawing from archival records, Professor Kerry Chase of Tufts University in Boston recently demonstrated that the real reason was a secret FTA the U.S. was negotiating with Canada from October 1947. Chase, who specializes in international trade issues, told the Straits Times that because of its public posture against preferential treatments, the United States worked behind the scenes, getting Lebanon and Syria to propose FTA exemptions to the proposed global trade rules.

While the United States "provided critical input to the text," Chase discovered, it "left sponsorship of key amendments to France," itself working on an FTA with Belgium, the Netherlands and Luxembourg at the time.

Thus was Article XXIV created.

In April 1948, Canada’s prime minister for a total of 22 years, William King, who was retiring that November, decided not to ink the deal after all. He did not want to leave a legacy as the man who helped break up the Com-monwealth, something he felt might happen if Canada were to proceed with the FTA.

Nevertheless, Article XXIV - with its lax standards for policing FTAs - was firmly embedded in the text of what eventually became the General Agreement on Trade and Tariffs, the WTO’s predecessor.

From then on, the contradiction would be managed through benign neglect.

For example, more than 100 FTAs have been notified to the WTO since 1995, as is required of members, but none has its official stamp of approval - although FTAs are typically self-described as "WTO-compliant."

Through artful procrastination, Mercosur - the free trade arrangement that groups Argentina, Brazil, Paraguay and Uruguay - is still described on the WTO Web site as being "under factual examination," for instance. Likewise, the status of the North American Free Trade Agreement remains one of "consultations on draft report."

How then to ensure that FTAs don’t harm third countries?

Well, there is no effective WTO policing mechanism.

Yet, no third country has challenged any FTA at the WTO. No one has asked, for example, whether the United States can favor Singapore the way its FTA now does. In theory, the contradiction between Articles XXIV and I is a legal time bomb waiting to explode into a huge trade fight if a country sues.

But no one has rocked the boat, a happy state of affairs probably attributable to the fact that each WTO member is either participating in one or more FTAs, or is seriously considering one.

Rather than resorting to the WTO’s dispute resolution mechanism to discipline FTAs, members self-police by practising self-restraint. In Chile last week, APEC leaders promised to try to standardize FTAs which are proliferating in the Pacific Rim.

The FTA is a more realistic approach than waiting for all-encompassing multilateral agreements. Remember, there have been eight rounds of multilateral negotiations since 1948 and the current round may not even be completed by December next year.

Every nation probably has some sector that can’t take on all comers, so every nation probably wants some protectionism. Thus trade is never going to be completely free or fair - and the WTO will always fall short.

But if the aim is to afford the best opportunities to the most number of countries, FTAs fit the bill. Although FTAs compromise multilateralism as an ideal, they have, in practice since World War II, complemented the process of trade liberalisation and reinforced peaceful political relations among trading partners.

Even the U.S. officials who secretly framed Article XXIV couldn’t have anticipated the welfare-enhancing impact of FTAs on many a trading nation today.

Andy Ho is senior writer of the Straits Times. - Ed.