Need to assess costs and benefits of FTAs
By Martin Khor
28 November 2011
Free trade agreements designed in a different era can prevent or hinder the policy measures developing countries need to address the growing global economic crisis, and deserve to be reviewed.
The European financial crisis does not seem to have abated, despite technocrats having taken over top political posts in Greece and Italy - the two countries recently at the epi-centre of the crisis.
If anything, the crisis seems to have worsened, with signs last week of weakened bond-investor interest in France and Germany.
In recent days, there have been reports that the credit crunch fear may spread to developing countries.
The global situation is prompting developing countries to rethink a range of their economic policies.
These include the need to regulate capital flows to prevent excess volatility that can wreak havoc to their capital market and the currency as well as the need to boost domestic demand and domestic firms to offset the dip in exports.
Measures that have been traditionally used to support local enterprises and the domestic economy are being introduced or revived.
They include subsidies, access to long-term credit, preference to local suppliers in government procurement and development projects, taxes on exports (to ensure supply of raw materials for local processing and manufacturing) and even tariff increases to slow down the surge in imports.
There is also the revival or strengthening of the development plans.
On Nov 11, South Africa launched a national development plan, Brazil introduced three versions of a development productive plan and China recently adopted its latest five-year plan.
Malaysia has its own five-year plan and the economic transformation programme.
However, there is also a counter-trend of some developing countries engaging in negotiations on free-trade agreements (FTAs) with developed countries, especially the United States and the European Union.
These FTAs do not only deal with trade in goods but are in fact mainly about services, capital flows, investment, government procurement, economic structures (competition policy) and regulations, labour and environment policies.
Examples are the Trans Pacific Partnership Agreement (TTPA) involving the United States and eight countries (whose rules are mainly based on the US-FTAs), and EU-FTAs with African countries, India and Asean countries.
Perhaps the incentive prompting the countries into the negotiations is increased market access to the United States and Europe, and the expectation that their investors will be more willing to come in. Ranged against these benefits is the reduction of "policy space" or the ability to adopt a wide range of policy measures that are traditionally used to promote local enterprises and the domestic economy or to defend against speculative flows of capital.
These issues raise significant concerns.
The goals of boosting the local economy and managing volatile capital flows should be given higher priority because of the global crisis, but it is prohibited or hindered by FTAs for policy measures to do this.
The gains in exports of goods are quite limited because both the United States and Europe do not want to place the reduction of their agricultural subsidies (their main trade distortions) on the FTA agenda.
The developing country partners, meanwhile, have to lower almost all their tariffs to zero or near-zero, thereby exposing their local firms and farmers to competition from cheaper imports.
Those affected would have reduced revenues, market share or be forced to close down.
The services chapter of FTAs oblige the developing countries to open up a whole range of services to competition from the FTA partners.
In the World Trade Organisation, countries are asked to list the sectors that they commit to liberalise.
In contrast, in the US-FTAs, there is a "negative list" approach, where all sectors are deemed to be liberalised, unless explicitly listed as exceptions.
Thus, future services that do not yet exist (for example, the Internet or certain types of financial services did not even exist a few decades ago) are also committed.
The investment chapter has major implications. There is a commitment to allow free flow of various types of capital.
This is a barrier to controls on capital inflows and outflows, and hinders the ability of the financial authorities to prevent or manage financial volatility and instability.
It also obliges the countries to significantly loosen national laws and rules that screen the entry of foreign companies, or set conditions for their establishment. such as the type of company (subsidiary, locally-incorporated, joint-venture, etc) and the degree of equity allowed.
Since performance requirements are prohibited, this affects the ability to set terms for foreign companies such as management (for example, the hiring of locals) or technology transfer. The extreme forms of liberalisation, deregulation and opening up to the global financial and goods markets, that become obligatory under the FTA model of the United States and European Union, are likely to create many problems.
In the context of the current economic crisis, when countries have to be nimble and look at many options in formulating future strategies, it is important for them to retain the freedom to use various policy measures. On the other hand, a country joining an FTA or TPPA expects to enjoy benefits beyond exports of goods, as its companies can also invest abroad with higher degrees of investor protection.
It is thus important that a cost-benefit analysis be done, not only on the trade and economic aspects, but also on the social and political aspects, as FTAs would have impact on the socio-economic structures and underlying political understanding in the countries.
The ramifications are far beyond trade and investment.