logo logo

How free is free trade

Bernama, Malaysia

How Free Is Free Trade

By Adam Kadir

9 August 2005

KUALA LUMPUR, Aug 9 (Bernama) — A huge interest was aroused when Singapore signed a Free Trade Agreement (FTA) with the United States (US). The impression was that Singapore, though a vital member of Asean, was independent-minded in forging its economic interest beyond the regional grouping.

Firming this up was the statement made by the island-state’s Premier Lee Hsien Loong that Asean should take urgent steps so that by 2020 Asean would witness the completion of its own common market. Talking about a common market before free trade practices reach its fulsome is like expecting a baby to run before it can even walk properly. Certainly Premier Lee realized that. His concern is about the speed the market is taking shape.

It is rather difficult to define what a free market (read ’trade’) is. Needless to say, the term ’free’ is itself an adjective. It tends to mean a market that is characterized by the attributes of freedom. Upon scrutiny, clearly the mother of all free market laws, the ones that bind the European Economic Community (EEC) as the outcome of the Treaty of Rome in 1957, allow goods originating from a member country to enter other member countries without being subject to customs duties.

Apart from this, the law also provides that no new taxation was to be introduced, while the rate of the existing ones was not to be raised. The EEC, now the EU (the European Union), found numerous problems in meeting the provisions.

Little wonder, then, the AFTA (Asean Free Trade Agreement), has its shares of problems. Worse still is the fact that AFTA is not anywhere near what is regarded as usual and normal FTA among the EU countries.

However, in order to appreciate aspects of free trade practices, nothing is better than picking some crucial cases of interest that have shaped the EU free market over time. Five years after the 1957 Rome Treaty that was inked by the founding signatories — Germany, France, Italy, Belgium, Holland and Luxembourg — a case was tested in a Dutch court.

Van Gend En Loos, an importing company, won its case. It was held that the glue that was imported by the company from Germany was not subject to additional duties. The relevant provision in the Treaty stipulates for a tax-free import, or, otherwise, the existing tax quantum be retained. This case now stands as a defining pillar in the EU free market law.

In delivering its judgment, the court pronounced a dictum for the EEC member countries for the purpose of safeguarding the reality of a free market. It said that the EEC is a new legal order in international law, for the benefit of which member countries have limited their rights in certain fields.

The subjects of the legal order were both the countries and the individual citizens. Their rights must be protected by the national courts. Among these rights is the enjoyment of free movements of goods across internal borders.

In other words, one can import and export one’s goods across borders freely, the terms being equal, immaterial whether the goods are made domestically or abroad. This principle envisages that when two parties, say Malaysia and China, enter into an FTA, such equal terms would come into force. That is an ideal FTA, perhaps practised only by the EU member countries. The reality of the FTA among other countries may be different. It may mean that the free movements are confined to selected goods.

In 1986, another crucial case, Humblot, stood tall. The efficiency of the burgeoning free market was further honed in the Humblot case.

It drew a parallel with the present-day intricacies on import and export of cars and other mechanized vehicles. The questions of discrimination and artificial barriers to free trade were advanced. The French court, backed by the European Court of Justice (the ECJ), found that the extra tax paid by Humblot to the French authorities infringed the relevant provision of the Rome Treaty.

The road tax system adopted by the French government was discriminatory against imported cars. High road taxes discouraged potential buyers of German cars. Humblot not only obtained the refunds on the extra tax that he had paid, the German car manufacturers in turn were jolted.

Since all French cars had engine capacities below 16 c-v, the steep rise of road tax rate for cars exceeding 16 c-v was regarded as a measure to discourage buyers from buying German cars. It is not difficult to imagine that the protected French cars were none other than the Renault, Peugeot or Citroen while the German ones were the Mercedez, BMW, Porsche or Audi.

Faced with the challenges from the German cars on a level playing field, the French cars have improved tremendously. At certain engine capacities, Mercedez and BMW are not without alternatives offered by Peugeot and Citroen.

On the home turf, one imagines the Protons and all those competing cars coming from Japan, Korea and other Western countries. The protection of domestically-manufactured vehicles in the form of quantitative and the like restrictions, be they fiscal, quota or content, may work over a certain length of time.

Beyond that, regression would set in. Quality would be the first victim. Confidence, or the loss of it, would probably lead to a river of no return. A lesson can be learnt from the French experience that took place about 20 years ago. Better still, the lesson from the extensive free trade experience of the EEC countries, now the EU, since 1957.

The original member countries are first world countries with which we like to be one soon.

(Tan Sri Adam Kadir is Chairman of Pos Malaysia Holdings Bhd. He holds LLM, a Masters degree in Corporate and Commercial Law from the University of London)