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The danger of trade agreements

The Phnom Penh Post | Wednesday, 05 November 2008

The danger of trade agreements


Jagdish Bhagwati is one of the world’s foremost trade experts. The author and professor at Columbia University is a free-trade proponent and former advisor to the World Trade Organisation

What are the dangers of a country not having a systematic framework for free trade agreement negotiations?

The lack of a systematic framework in negotiating an FTA - or what everyone now calls a PTA, or preferential trade agreement since FTAs reduce trade barriers preferentially for their own members only - is particularly dangerous when the FTA is being negotiated by a developing country like Cambodia with a "hegemonic", powerful country like the US.

The reason is, not so much in regard to the trade provisions as the "trade-unrelated" provisions, extraneous to trade, which are inserted by the lobbies that dominate the US scene.

Thus, FTAs with the US extend into WTO+ requirements on intellectual property protection that go beyond what the WTO agreement on TRIPS [the Agreement on Trade Related Aspects of Intellectual Property Rights] requires, labour standards that go beyond what even the US conforms to - the US has not even signed all the core ILO [International Labour Organisation] conventions, breaks strikes more easily than European law requires, has less than 10 percent of its labour force unionised, etc - environmental standards when in fact the US had not even signed the Kyoto protocol, has violated human rights standards more drastically in its war on terror and in Iraq than Colombia has in its fight against narco cartels.

There are appropriate agencies such as the UNHRC [United Nations Human Rights Council], UNEP [United Nations Environment Programme] and ILO, which deal with these issues with the necessary symmetry of obligations between rich and poor countries, and with necessary nuances that take into account the needs and priorities of the poor countries, rather than in a bilateral FTA framework which winds up with the hegemonic partners imposing self-serving demands on the weaker partners.

So, my recommendation is that, when Cambodia negotiates an FTA with a hegemonic power, it must use a template which confines the negotiations to trade matters only.

On the trade-unrelated issues, Cambodia should merely say that they will reaffirm whatever is negotiated at the WTO on matters like labour standards, intellectual property rights, dispute settlement, etc, and no more.

I would also urge Cambodia to enter into an FTA with Japan - a major power that does not insist on trade-unrelated issues being mixed up with the trade issues that alone belong in a trade treaty. That way, Cambodia can also develop a template with a major rich country that is free from the extraneous, trade-unrelated issues.

As for trade issues in the FTAs such as with Korea, the most relevant question is whether the FTA will lead to diversion of imports into Cambodia from cheaper non-member countries to more costly producers in South Korea who are within the FTA.

Such diversion implies that imports become costlier and this raises the prospect that Cambodia would lose from the FTA.

I usually recommend that, if your external tariff - which is called the MFN tariff - is not low, beware of signing on to FTAs.

Can countries pursue bilateral FTAs without undermining global multilateral agreements? If so, what would this strategy be?

For small countries like Cambodia, the question of their FTAs undermining the multilateral trading system is not relevant.

FTAs are as WTO consistent as Article 24 permits them. If an FTA or a partial FTA is signed by developing countries only, then even Article 24 does not apply and we have the Enabling Clause which imposes no discipline and the developing countries can indulge in any preferences in trade among themselves.

What Cambodia does, however, is not important for the world trading system. What the big powers do, on the other hand, is.

These big powers, by proliferating FTAs, have undermined the world trading system, drowning it in what I call a "spaghetti bowl" of preferences so that what trade barrier an imported good faces depends on where arbitrary rules decide a product is produced.

What effect has the economic crisis had on FTA negotiations?

When macroeconomic conditions worsen, politicians find it difficult to move with trade liberalisation.

The important question is: Will countries move backwards into protectionism? I doubt it.

Policymakers today remember that the 1930 Smoot-Hawley tariff accentuated the Great Crash of 1929; they will not repeat that mistake. Besides, the East Asian financial crisis of 1997 illustrates that policymakers understand that the trade baby does not need to the thrown out with the financial bathwater. The East Asian economic miracle was based on outward orientation in trade; the crisis was due to premature financial liberalisation. East Asia was smart enough to make that distinction.

So, the prospect for trade liberalisation for the next year will be: neither movement forward nor sliding backward. The proper analogy may be the Cambodian bullock cart during heavy rains: The cart is stuck in the mud and moves neither forward not backward.


 source: Phnom Penh Post