The Chicago Conference on the Global Economy
The Future of the Global Trading System
15-16 September, 2003
Chairman and CEO
Japan Economic Foundation
To make it simple, this session is supposed to cover pros and cons of FTAs vs the WTO, and assessments of FTAs in each region and implications for Doha.
Regarding pros and cons, however, dichotomy should not be between FTAs and WTO because they are complementary with each other. Therefore the dichotomy, if any, should be between the policy exclusively relying on the WTO and the policy also using FTAs in addition to the WTO. Theoretically speaking the WTO alone policy would be more desirable because of its multilateral nature.
FTAs, being an agreement to eliminate trade barriers among member countries only, have a discriminatory aspect against non-member countries. The General Agreement on Tariffs and Trade (GATT) prohibited discrimination and required each member country to give most favored nation (MFN) treatment to the other member countries.
Therefore, FTAs violate at least the spirit of GATT, although GATT admits FTAs with certain conditions in Article 24 of its rule. In the 1980s, this argument seemed to be prevailing.
However, the international situation started to change from the beginning of the 1990s. First of all, in December 1990, the ministerial negotiations at GATT’s Uruguay Round in Brussels failed to reach a conclusion.
This failure cast a dark shadow over the smooth development of multilateralism.
Also, the so-called "EC 92" was successfully launched in 1992. EC 92 was an initiative by the then European Community (now the European Union [EU]) to try to strengthen their FTAs. Both Japan and the United States expressed concerns in vain over EC 92 creating a "Fortress Europe."
Trying to cope with this development, the Association of South-East Asian Nations (ASEAN) formulated an ASEAN Free Trade Area (AFTA) in 1992 and the United States, Canada and Mexico created the North America Free Trade Agreement (NAFTA) in 1994.
Thus, as of Oct. 1, 2002, among the top 30 economies in the world, there were only five that are not members of FTAs. Those five economies were Japan, China, Korea, Taiwan and Hong Kong. So even if these economies contend legitimate argument that FTAs are against the spirit of GATT which prohibits discrimination, these economies will lose in the regional trade agreement committee of the WTO, being surrounded by other countries, most of which are member countries in some FTAs.
Also actual damage has started being felt by some countries due to the FTAs of other economies. For example, U.S. companies can export goods to Mexico free of tariffs in principle thanks to NAFTA. Also EU companies can do the same thanks to the EU-Mexico FTA that started in July 2000. However, Japanese companies have to pay tariffs when they export goods to Mexico. By the way Mexico has an average tariff rate of 16.2%. If these economies join or formulate FTAs, they can avoid the isolation or the actual damage. This is one of the inevitable reasons to support FTAs. There are more positive reasons to support FTAs.
First, a country can carry out vigorous structural reforms through implementing firm commitment imposed upon it by an FTA. This would be a sound form of peer pressure to promote structural reform. For example, it is said that the Canadian wine industry was weak before NAFTA and the U.S.-Canada FTA. But after being exposed to foreign competition through FTAs, the Canadian wine industry has become a very competitive industry producing high quality ice wine and so on.
Second, FTAs can include ambitious trade reform faster than the WTO. The number of WTO members stands at 146 as of now, including China and Taiwan. It is fairly difficult to get a consensus there quickly. In the case of FTAs between two or several countries, however, there are fewer difficulties in reaching a consensus. Therefore, in the near future, even a clause to introduce rules on competition and trade, which might be too ambitious for the WTO at this moment, can be incorporated into an FTA.
Since FTAs have some benefits I mentioned above, to pursue a policy combining WTO and FTAs would be a reasonable choice.
Let me move to the second point that is assessments of Asian FTAs and implications for Doha. The first FTA in Asia, based on Article 24 of GATT rule, was agreed between Japan and Singapore in January 2002. This FTA is called Japan-Singapore Economic Partnership Agreement (JSEPA). Although JSEPA was agreed just last year, the study for JSEPA started in the beginning of 2000. The studies for Japan ’s FTAs with South Korea and with Mexico started in the beginning of 1999 between JETRO and its counterparts. These studies were started, reflecting METI ’s policy change from the WTO alone policy to the dual track policy combining WTO and FTAs. China did not miss this policy change and agreed with ASEAN to study an FTA between them in November 2000. They have entered negotiations since November 2001 and came up with a framework agreement for their FTA. This development of China-ASEAN FTA negotiations means that China is running a few steps faster than Japan that has made a framework agreement just last week with ASEAN for Japan-ASEAN FTA.
However, it is very good especially for China to try hard to have a rather ambitious FTA with ASEAN, because it means that China will commit its liberalization not only to WTO multilaterally but also to an FTA with ASEAN regionally, thereby strengthening further their "reform and opening" policy which is in the interests of all the other countries.
Japan ’s or China ’s FTA with the entire ASEAN has a more desirable aspect than an FTA with each member country. The reason for this is that an FTA with the entire ASEAN necessitates further integration of ASEAN economies each of which tends to be small in size, whereas an FTA with each ASEAN member country segregates each market. In this respect the US proposal (Enterprise for ASEAN Initiative) to have an FTA with an ASEAN member country may work against the necessity to strengthening ASEAN integration. The same is true with Japan - which is, in addition to an FTA with the entire ASEAN, also studying for an FTA with Philippine, Thailand, Malaysia and Indonesia respectively.
Now, it seems that an ASEAN-China FTA and a Japan-ASEAN EPA, if any, will be coexisting in this area in the near future. Perhaps ASEAN countries might feel more comfortable to have Japan and China compete with each other by having two different FTAs or EPAs, one for Japan and the other for China, rather than having them included in a single FTA or EPA, in which case the voices from Japan and China might predominate over those of the ASEAN countries.
However, I think it would be better for East Asia to have a single FTA by the name of EAFTA (East Asian FTA) consisted of Japan, China, Korea, Taiwan, Hong Kong and Asean 10 countries. It is very important for Japan and China to cooperate with each other for the development of an Asian economy under the same umbrella of an EAFTA. Economic development in this area will lead to sustainable peace in this area. The EU will expand to include 10 other countries next year. The American continent is supposed to be covered by FTAA by 2005. Asia should also have a single FTA. Time is short. We have to hurry to formulate an EAFTA that includes Japan, China and the other important economies such as Taiwan in this area.
The WTO ministerial meeting for the Doha Development Round was being held until the day before yesterday in Cancun Mexico. In this meeting there was an argument for strengthening the disciplines on FTA. As of June 12th, 142 FTAs were notified to the GATT/WTO based on GATT Art 24 and in force. Only 6 of them finished to be examined. Therefore one thing for sure is the necessity to examine retrospectively every FTA including the one for the EU and NAFTA if the disciplines on FTA is strengthened.