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Global trade: Creating a new mindset with FTAs

The Straits Times Interactive | Singapore

SEPT 20, 2004

Global trade: Creating a new mindset with FTAs

By See Chak Mun

TO UNDERSTAND current developments in the global trading system, it is useful to look back at the previous multilateral trade rounds. In the heat of rhetoric and the media focus on the failures at the World Trade Organisation (WTO) negotiations, it is easy to forget that the Tokyo Round took almost seven arduous years to complete.

The Uruguay Round (UR), launched in September 1986, was concluded only in April 1994. However, in terms of its scope, depth, and impact on the multilateral trading regime, the UR made great strides. It eliminated voluntary export restraints; agreed on the removal of textile quota restrictions by 2005; and adopted modalities to liberalise trade in agriculture.

Significantly, the UR brought a radically new set of rules and disciplines for trade in services and trade-related intellectual property rights (Trips) into being. Although we take these rules for granted today, they were novel concepts back then.

Negotiators took almost two years to reach agreement on the four modes of delivery for trade in services, namely, cross-border (for example, mail order), consumption abroad (for example, tourism), commercial presence (for example, multinational companies), and movement of natural persons (for example, foreign talent).

Few realised then that the trading framework for a new knowledge-based world economy was being created, and that these rules would be adapted to regulate the rapid changes and innovations in information technology (IT) and telecommunications.

As technology advanced, especially with the advent of the Internet era, the first mode’s access to markets became increasingly significant. Firms in the United States and Europe began to outsource business activities like call centres and software development to developing countries with lower wage costs. Developing countries also benefited from the growing demand for services under the fourth mode, which span the spectrum from domestic maids and construction workers to management consultants and IT professionals.

Ironically, some developing countries felt that the ’new’ rules would perpetuate the developed countries’ dominant trading position and technological advantage.

For instance, Trips had evolved substantially and unrecognisably from an earlier innocuous attempt to curb trade in counterfeit goods into a means of protecting the knowledge patents of developed countries. To redress this imbalance, developing countries seeking cheap medicine for public health sought special dispensation from such restraints.


INCREASINGLY, the UR’s limitations were exposed. In spite of the UR anti-dumping agreement, there remained many grey areas, and WTO members, including developing countries, exploited the loopholes by using its rules to counter the effect of trade liberalisation. However, negotiations for market access have also proved to be difficult and frustrating. In fact, the collapse of the Uruguay Round in Brussels in 1990 was due not so much to a breakdown in the agriculture negotiations but to the absence of an adequate overall market-access package for all.

The WTO ministerial meeting in Doha in 2001 avoided a similar fate because an interim solution on agriculture was found and the postponement of a decision on the so-called ’Singapore issues’ - investment, competition policy, government procurement, and trade facilitation.

However, it was a near escape, for the Doha talks would have collapsed if developing countries from the African-Pacific-Caribbean (APC) grouping had not been assured of their continued preferential access into the European Union market.

Unfortunately, the fragile consensus did not last. The developing countries demanded a more equitable share of rights; and a group of African countries strongly pressed their demand for immediate market access as well as compensation for loss of earnings on their cotton exports. This was the straw that broke the camel’s back at the WTO ministerial meeting in Cancun last September.

Notwithstanding the slow progress at the WTO, countries continued to liberalise trade. Countries like Singapore could not afford to put trade liberalisation on hold until a global consensus was reached. Instead, it had to consider strategic bilateral and regional trade agreements, as incremental building blocks towards a global multilateral trading regime.

Trade among developing countries accounts for 40 per cent of global trade. However, there has been no serious effort to negotiate a global multilateral trade liberalisation regime among developing countries, because of a belief that they should not demand and negotiate market access among themselves in order to preserve the semblance of G-77 solidarity.

Instead, the alternative is to negotiate a free-trade agreement (FTA) with a special trading partner, or a regional trading arrangement (RTA) among a group of developing countries. It is no coincidence that there has been a dramatic rise in the number of RTAs since the Uruguay Round.

Although FTAs have both trade-creating and -diverting effects, overall they serve the objective of multilateral trade liberalisation. The underlying premise is that FTAs are only a temporary deviation from the most-favoured nation (MFN) principle.

In the context of WTO rules, FTAs must cover substantively all trade, and zero duties should apply across the board to all sectors, that is, there should be no a priori exclusion of any sector or sensitive product.

Members of an FTA may demand proof of local content to prevent a circumvention of the rules. In goods, the preferential rules of origin are based on what is locally produced (value-added) in the territory of an exporting party member, but there is no requirement that production has to be undertaken by the nationals of the party member concerned.

In services, the WTO requires proof of substantive business operations, but any foreign-owned company that satisfies this requirement is entitled to enjoy trade benefits granted under the WTO (or under an FTA for that matter).

By removing import barriers, FTAs would increase both trade and investment flows among the FTA partners. Obviously, monopolies, cartels and inefficient industries that depend on protection or import substitution policies may feel threatened.

Nevertheless, FTAs act as a catalyst for competitiveness, cost-cutting, greater economic efficiency and better consumer welfare. Hence FTAs are accepted under WTO rules insofar as they allow for the full operation of the principle of comparative advantage and division of labour among the FTA partners - in short, a return to Adam Smith.


TO DATE, 284 RTAs and FTAs have been notified to the WTO, and these have been driven by economic, as well as strategic and political calculations.

For example, the Mercosur trading zone was motivated by the desire among South American member countries to integrate themselves into an economic union so that individually they would not be overwhelmed by the US dominance in the Free Trade Area of the Americas (FTAA) negotiations.

Nearer to home, since India concluded its first bilateral FTA with Sri Lanka in 1998, it has launched similar initiatives with Thailand, Singapore, Asean and Bangladesh. Economic imperatives aside, these initiatives were also driven by strategic considerations within the ambit of India’s ’Look East’ policy, including its need to secure new energy resources and to ensure maritime security in the Strait of Malacca.

To seriously engage East Asia, India needed to plug itself into the existing matrix of regional FTAs that may potentially form the nucleus of a nascent pan-Asian community. It was in this context that former Indian prime minister Atal Behari Vajpayee proposed the establishment of an Asian Economic Community.

In spite of criticisms that FTAs and RTAs create exclusive trading blocs and dilute the commitment towards a global multilateral trading regime, the evidence suggests otherwise. In particular, South-east Asia’s experience demonstrates that FTAs and RTAs have a bandwagon effect, and Singapore’s FTAs have inspired other countries to follow suit.

The FTAs soon grow into RTAs, which in turn have the potential to grow into inter-regional free-trade areas. Thus FTAs and RTAs would not only generate momentum, they also create a pro-liberalisation mindset more likely to support a global multilateral trading regime.

The writer was Singapore’s chief negotiator during the Uruguay Round and is currently High Commissioner of Singapore to India. The views expressed here are his own.

 source: STI