Free Trade Pacts Are Bad For Business
Oxford Analytica 03.24.06
The WTO on March 22 issued a report criticizing the U.S. pursuit of free trade agreements. The report claims that U.S. free trade agreements create political interests in other countries, which complicate the multilateral process.
A large number of free trade agreements (FTAs) have been negotiated over the past few years. One argument in favor of FTAs is that echoed by U.S. Trade Representative Rob Portman in his reply to WTO criticism: They provide continued momentum to the trade liberalization process in the absence of progress at the multilateral level.
However, many FTAs include broader foreign policy aims, with little substantive trade liberalization content. Indeed, they can have a damaging effect on global economic efficiency in that they fragment markets as much as national commercial policies did in the past. The result is trade diversion rather than trade creation.
Despite this, many countries have only a few critical trading partners, and expect agreements with these partners to provide a framework for further trade growth. Political and strategic considerations further narrow the selection of negotiating partners. This approach essentially seeks to entrench existing trade patterns and thus helps service existing relationships.
Important strategic trading relationships, whether in energy supplies or defense and aerospace related advanced technology, remain outside the multilateral system and can thus be used as side-payments while negotiating regional agreements. FTAs, particularly with the United States, can also carry parallel agreements on investment, labor and environmental issues that would not be possible at the multilateral level.
While several measures could be used to assess the impact of FTAs, one not widely discussed is their impact on business and commercial activity. An important indicator is the emergence of a new trade geography:
— An example arises from the emergence of China as a major consumer of raw materials. This has led to a rise in global commodity prices for the first time since the Second World War, and is of great commercial and political significance to many developing countries.
— Investment strategies are redirected to align with these new trading patterns. Investments are now flowing in to support the new economic opportunities, often with China and India taking the lead.
— The growth in South-South trade has been particularly significant in linking markets and producers in Asia, southern Africa and Latin America into new market structures.
— The emergence of a significant but growing market for export-dependent services in developing countries has been unsupported by an FTA process.
These developments have taken place largely against the grain of FTAs, and would suggest that commercial priorities are being addressed through a variety of non-state related agreements that have a dynamic of their own. There are a number of explanations for this:
1. Limited coverage: The coverage and scope of FTAs does not reflect emerging trade patterns:
— Trade patterns are determined increasingly by investor priorities and look past strategic and political considerations in their quest for high returns.
— FTAs also fail to match the growth potential of the services sector, and hence fail to address one of the priority sectors of developed countries.
— Agriculture is equally weak in most FTAs.
— In opening new markets and deepening the application of rules, the results are equally inconsistent.
2. Rules of the system: Many elements essential to the functioning of an integrated global economy can only be effectively negotiated at the multilateral level:
— FTAs often make specific reference to multilateral rules in a given area, pointing out that special provisions for the FTA are superfluous, as the rules apply to members because of their WTO membership.
— This applies in the areas of trade remedies, technical, health and safety standards, as well as trade facilitation and customs procedures.
— Overall, this picture suggests that the contribution of FTAs to the deepening of rules is overstated and of marginal importance.
3. Costs of regional arrangements: Against a background of generally declining tariffs and increasingly complex rules governing non-tariff barriers, the cost of policing FTAs falls increasingly to national governments. This is seen as justifiable in protecting existing producer interests. In reality, monitoring and enforcing provisions for FTAs adds significantly to the cost of managing the system.
The commercial implications of FTAs appear to be broadly harmful, perhaps even irrelevant, if the new trade geography is anything to go by. The exception is traditional economic activities seeking only marginal expansion, or consolidation within limited markets. FTAs are not creating models for dynamic future economic growth, nor are they delivering on economic efficiencies of scale economists emphasize as being the underlying rationale for global economic integration. Politically, this suggests that producer interests still dominate domestic policy processes in most countries of the world. Limited thought is being given to the architecture of a forward-looking multilateral trading system.
FTAs satisfy largely political objectives, together with limited and mainly defensive commercial objectives. Long-term investor and business interests would be better served through a multilateral process. This in turn suggests that the disengagement of commercial actors from the multilateral process will in fact harm their own interests in the long term.