Free trade agreements
BusinessWorld
MANILA, PHILIPPINES | Monday, February 28, 2005
Free Trade Agreements
By LARISSA C. VILA, Researcher
The formation of free-trade agreements (FTA) has become a worldwide trend in recent decades. The Philippines, in particular, is showing interest in a slew of trade agreements.
An FTA is an agreement between two countries or among groups of countries aimed at a policy of non-intervention by the state in trade between their nations. Tariffs and non-tariff barriers are usually removed or lowered while each country maintains its own commercial policy towards countries that are not part of the FTA.
In a research paper, Erlinda Medalla and Dorothea Lazaro of the Philippine Institute for Development Studies (PIDS) said FTAs increase a country’s competitiveness in the global economy. "And even if FTAs are very much about market access and investment liberalization in general, they may serve as instruments that can allow the country to look further in terms of investment attraction, trade facilitation, institution-building, technology upgrading and industry competitiveness."
The recent trade agreements that the Philippines entered into and has been looking at are all significant: the ASEAN-China Free Trade Agreement, ASEAN-India, ASEAN-Korea, Japan-Philippines Economic Partnership Agreement and quite possibly, the RP-US FTA.
With the ASEAN-China FTA, members of the Association of Southeast Asian Nations (ASEAN) expect to establish a free-trade area by 2010 for original ASEAN members Thailand, Malaysia, Singapore, Indonesia and Brunei and by 2012 for the Philippines and newer members Cambodia, Myanmar, Laos and Vietnam.
A trial phase, called the "Early Harvest Program" took effect early last year and aims to eliminate tariffs on mostly agricultural products by 2006. The normal track begins this year, continuing until the establishment of the ASEAN-China free-trade zone in 2010.
On the other hand, "fundamental policy differences" are hampering a proposed FTA between ASEAN and India. A trade negotiating committee failed to conclude talks held in Jakarta, Indonesia last year. The Department of Trade said earlier that the ASEAN was proposing a set of rules that encourages ASEAN regional outsourcing while India was attempting to dilute that capacity.
The ASEAN and South Korea, meanwhile, expect to set up an FTA one year ahead of the ASEAN-China FTA. By 2009, 80% of products will have zero tariff while the remaining 20% will be "subject to negotiations."
Korea is ASEAN’s fifth largest trading partner. Last year, ASEAN exports to Korea amounted to $17.1 billion, while imports reached $15.1 billion.
For the Philippines, the tariff liberalization will increase gross domestic product (GDP) by 0.04% to 0.32%. For the rest of ASEAN, GDP is expected to grow 0.03% to 2.07%.
The Bureau of International Trade Relations previously said that with ASEAN-Korea exports expected to increase under free trade, the Philippines and Malaysia will experience an export growth of between $500 million to $1 billion annually.
The Japan-Philippines Economic Partnership Agreement (JPEPA) is expected to be signed in July. After this takes place, it will be the country’s first bilateral free-trade pact expected to boost the country’s GDP as well as expand Japan’s export market.
Among the partnership targets, as stated in an earlier working draft, are as follows:
– facilitate, promote, liberalize and provide an environment for economic activities between the two parties by reducing or eliminating customs duties and other barriers to trade in goods;
– facilitate mutual recognition of the results of conformity assessment procedures for products or processes;
– remove barriers to trade in services; and
– mutually enhance investment opportunities and strengthen protection for investors and investments.
This pact between Japan and the Philippines is highly significant as Japan has been the Philippines’ second largest trading partner, while the Philippines ranks the 14th largest partner of Japan.
In the PIDS study, the authors pointed out two principles apparent in the national policy of the government in engaging in FTAs. One is internal or domestic in character, which requires an FTA to be beneficial to the country; and two, global in perspective, which "provides that these FTAs should be in accord with [the country’s] multilateral commitments and toward the achievement of the multilateral goals."
However, analysts said that the Philippines lacks concrete strategies or deliberate policies toward FTAs. According to Medalla and Lazaro, what the Philippines should have is, first of all, a clear objective with respect to the elements of an FTA. "The FTA strategy should be seen as a complementary tool in the country’s development and competitiveness strategies, with impact on the three pillars of the FTA, namely, goods, services and investments."
Accordingly, identifying the provisions that can be negotiated along these pillars, the commitments and limits of involvement, and the conditions and special issues that need to be addressed, ought to be done within the country’s overall development framework.
The government must determine clearly the scope of the agreement in terms of eliminating trade barriers. An important task is to identify specifically the sensitive products. Prior to negotiating, there must already be a classification which products are negotiable and nonnegotiable.
"This is especially relevant if FTA partners are to adopt a negative listing approach. Otherwise, there might be a scenario where a prospective partner will make reservations on all products covered, thereby reaching a point where all the products seem to be excluded and protected from the country’s perspective," said the PIDS study.
Aside from the traditional FTA issues, it is also important to address the "so-called enhancing features of new-age FTAs." These include rules on investments, competition policy, government procurement, transparency and trade facilitation measures. Ms. Medalla and Lazaro said that apart from facilitating trade, the said provisions would also serve as institutional safety nets for each FTA partner or member state.
Finally, of great relevance is establishing a set of criteria in choosing an FTA partner.
"For the Philippines, engaging in bilateral agreements with its largest trading partners could maximize the potentials of its trading relationship," said the research analysts. "However, an important but sometimes neglected query is whether it will also be advantageous to enter into potential bilateral FTAs with countries where the Philippines has negligible trade.
"Exploring the Philippine FTA Policy Options" by Erlinda M. Medalla and Dorothea C. Lazaro, Philippine Institute for Development Studies, 2004.
