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FTA Attraction

Hindustan Times, India

FTA attraction

4 August 2004

By Jorge Heine

Free Trade Agreements (FTAs) are getting a bit of a bum rap these days. There’s always the danger they might be used to dump artificially cheaper goods from elsewhere and swamp the local market. Then there’s the vexed issue of the Rules of Origin (ROO) and the possibility that they might be circumvented, thus allowing third-country imports to be channelled into one of the countries party to it, with little or no value added. Given the apparently easy way in which FTA rules can be bent and misinterpreted, wouldn’t it be better to dispense with them altogether? Moreover, now that the Doha Round of the WTO has been given another lease of life, why not simply wait for global, multilateral tariff reduction?

Free trade is not an objective in itself. Historically, it has been used to justify all sorts of shenanigans. The ultimate purpose of all these exercises is a better standard of living and a higher quality of life for all. To achieve that, a number of things are needed. But one sine qua non requirement is growth. Without economic growth, there’s no better future, period. If a country grows at 7 per cent a year, it will double its per capita income in ten years. This will take many more years if the rate is half of that. And the evidence that open economies grow faster than closed ones is by now quite established.

In Latin America, we know this only too well. One factor determining the very different growth rates between East Asia and Latin America over the past 40 years has been the much higher degree of openness of the former. While we were stuck in import-substitution-industrialisation (ISI), South Korea and Taiwan were quietly but firmly penetrating the US and European markets with their export-led industrialisation strategy, and laying the foundations for their current prosperity and extraordinary resilience. (The region has already fully recovered from the 1997 ‘Asian crisis’, and is cruising full-speed ahead at pre-crisis growth rates.) If that is the case, the question is: how do you go about opening the economy?

And what is the best international trade policy to that effect? Each country, of course, is very different and has its own imperatives and dilemmas. But the policy debate and the experience of countries that have gone through this do offer a certain perspective on this issue.

In the early Nineties, with an average tariff of 15 per cent, Chile went through this. Interestingly, nobody suggested going back to the ‘good, bad old days’ of blatant protectionism and 120 per cent tariffs. Rather, the question was how to move forward towards a more open economy. Some argued for unilateral tariff reduction. You simply go on reducing your own tariffs as quickly (and painfully?) as possible, until you reach zero. The ideal of a fully open economy will thus be realised, no barriers to trade of any sort will remain, and everything will work out just fine.

The only problem with this approach, which we might call ‘naïve unilateralism’, is that it bears little relation to the way Nation-States actually behave. Lowering your own tariffs, while helpful for a variety of reasons, does not guarantee that other countries will do the same for you, and you might end up ‘giving something for nothing’ - in other words, opening your markets to others, who will not respond in kind.

Another position, of ‘idealist multilateralism’, was that, rather than acting on our own, the optimal solution was to wait for what was then the Uruguay Round of the GATT to gain full speed, so that, at some point, all countries in the world would lower (and, eventually eliminate) their tariffs. GATT, of course, is no longer there and the Uruguay Round has been replaced by the Doha Round, some progress in trade liberalisation has been made. But we are still very far from that rosy scenario. To put it mildly, it will take a while before all WTO members agree to lower all their tariffs to zero. Can we afford to wait for that? No. Should we continue to press for it? Of course. But we should, meanwhile, do other things as well, ‘to keep the ball rolling’.

And this is where FTAs come in. While admittedly sub-optimal (which is why so many economists dislike them), they provide a nice ‘middle-way’ solution to one of the thorniest international trade policy dilemmas of our time. Through bilateral or plurilateral agreements, countries can continue to reduce their tariffs and keep going at opening their economies, while at the same time gaining access to new markets.

That is precisely what Chile ended up doing, in a strategy of ‘lateral’ or ‘globalised’ regional integration, which has led it to sign FTAs with 38 countries (only Mexico has signed more), including the US, the EU, Canada and South Korea (the first between an Asian and a Latin American country). Even China has recently proposed an FTA with Chile (a first for China), whose feasibility is currently being studied. One result of all this is that Chile’s exports have more than tripled - from $ 9 billion in 1990 to a projected $ 30 billion this year, and FDI has reached a total of $ 55 billion in this period.

FTAs are messy, they have to be negotiated and monitored, and they create a ‘spaghetti-like’ kind of worldwide trade grid that is aesthetically unpleasing. In an ideal world, tariffs would be dispensed with wholesale and FTAs would not be necessary. But that is not the world we live in. Whether we like it or not, FTAs have become a significant ‘retail tool’ to promote international trade and its correlates, growth and development.

(The writer is the Ambassador of Chile)

 source: FTA attraction