Pitfalls aplenty on the fast track to trade
New Straits Times
Opinion: Pitfalls aplenty on the fast track to trade
11 Apr 2006
MOHAMED ARIFF
April 11: The distorting aspects of bilateral free trade agreements can be avoided by adopting a multilateral approach, argues MOHAMED ARIFF.
MANY countries are busy negotiating and signing bilateral free trade agreements (BFTAs) these days. Bilateral trade deals have become increasingly popular and fashionable.
The sudden flurry of bilateral talks may have much to do with the slow progress of multilateral trade negotiations under the World Trade Organisation. The on-going Doha round of multilateral trade talks are moving at a snail’s pace after hitting serious snags in Seattle and Cancun and narrowly escaping disaster in Hong Kong.
Although one should not pre-judge the outcome of the WTO talks, it is not an exaggeration to say that expectations are low. It is not easy for the 149 WTO member countries to arrive at a consensus.
The difficulties are compounded by the North-South divide, which separates developed countries from developing countries on many issues. Some countries, whose patience is running thin, tend to seek alternative avenues for trade deals such as BFTAs.
To be sure, BFTAs were not unheard of before the launching of the Doha round. The problem of slowness in multilateral trade negotiations did exist in the previous rounds as well, notably in the Uruguay round under the auspices of the Gatt (General Agreement on Tariffs and Trade).
There were also other considerations, which had propelled some BFTAs between close neighbours, as was the case with the US-Canada free trade agreement prior to the formation of Nafta (North American Free Trade Agreement).
The fact, however, remains that the proliferation of BFTAs seen today is a new phenomenon. It was Singapore that set off the trend by signing a BFTA with Japan, with others subsequently joining the bandwagon.
It was a coup for Japan, which had previously distanced itself from trade agreements outside the multilateral framework.
For Japan, its bilateral trade agreement with Singapore was an interesting experiment and it was relatively easy, as agriculture, often a thorny item, was a non-issue as far as Singapore was concerned.
For Singapore, it made considerable sense as it could secure tariff concessions in the lucrative Japanese market, while its own tariffs were already close to zero, notwithstanding some trade-offs it had to make in the services sector.
It is noteworthy that Malaysia had objected to Singapore breaking ranks with the rest of Asean. Malaysia’s stance then was that Asean should pursue trade deals as a group instead of individual members going it alone.
Singapore’s response was that a collective Asean agreement with Japan or any other country would be a slow process and that it could not, as a front-runner, settle for the lowest common denominator within Asean. Singapore’s stance was that it would go ahead first and others might follow suit if and when they are ready.
Experience has shown that BFTAs are highly contagious, tending to spread like wildfire. Understandably, the first agreement would always be difficult, as powerful domestic interest groups, which are likely to lose out, would put up strong resistance. But subsequent agreements would be relatively easy, as it is just a matter of extending similar concessions to others as well.
For Malaysia, the opportunity cost of not signing a similar agreement, when Singapore has already entered into one or more bilateral deals, would be very high, as the former runs the risk of losing its export market share to the latter.
Malaysia’s urge to forge BFTAs grew stronger when Thailand joined the fray. Malaysia then decided to craft its own bilateral deals based apparently on the simple logic that it is better to "join them if you can’t beat them". (It is due to conclude free trade initiatives with Pakistan, Australia and New Zealand this year.)
Herein lies the futility of this entire exercise. Trade concessions a country gets from a trade partner through a bilateral agreement are eventually diluted, if not negated, when others get the same concessions through parallel agreements.
The prospects of Asean member countries individually pursuing bilateral trade deals with third parties, and the implications for Asean as a grouping, are frighteningly serious. For starters, it will weaken Asean’s regional solidarity.
It will also allow third countries to take on Asean members one by one and extract deals that would tilt the scale in their favour. Collectively Asean would have a much stronger bargaining power than if its members were to forge bilateral agreements individually.
More often than not, BFTAs go far beyond trade. Some of them are even long on foreign policy objectives and short on substantive trade liberalisation.
They also tend to fragment markets just like the national commercial policies of the past.Consequently, distortions created by BFTAs can impair global economic efficiency.
To the extent that the more efficient non-FTA trade partners are replaced by less efficient FTA partners, there will be trade diversion rather than trade creation.
The most troublesome feature of BFTAs relates to the rules of origin that govern the eligibility of products for preferential treatment.
These rules tend to vary from one agreement to another. In some cases, the rules of origin even vary from one product to another in a given agreement.
Multiplicity of rules of origin is a nightmare not only for manufacturers who would be at a loss over which rules to conform to, but also for Customs officers who need to verify rules compliance.
Monitoring and enforcing BFTA provisions would add significantly to the cost of administering them.
It is often argued that BFTAs are WTO-consistent, although none of these agreements has actually been scrutinised for WTO consistency based on Article 24 of the Gatt.
Some have postulated that BFTAs are "building blocks" of global free trade, while others view them as "stumbling blocks".
In any case, it would be a lot simpler and far more efficient to liberalise trade multilaterally. To be sure, BFTAs are no substitutes for multilateral trade liberalisation, although some of these are touted to be "WTO-plus" in the sense that they cover issues that remain highly contentious in multilateral negotiations.
Admittedly, the multilateral approach takes much time, as it is not easy for all WTO members to arrive at a consensus. BFTAs offer a fast track. The problem, however, is that they are all by design discriminatory, trade-distorting, messy and cumbersome. Even so, they are temptingly attractive.
Arguably, it is unwise to reject the BFTA option simply because it is no more than second-best, especially when one’s competitors are already at it. Besides, BFTAs, unlike the WTO, often go beyond trade matters into other areas which include good governance, capacity building and development co-operation.
A smarter move would be to multilateralise all bilateral trade concessions on MFN (most favoured nation) basis so that we can enjoy the best of both worlds, creating but not diverting trade.
* Emeritus Professor Mohamed Ariff Abdul Kareem is the executive director of the Malaysian Institute of Economic Research
