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TWN: Call to review bilateral trade deals

Third World Network Features
August 2004

Call to review bilateral trade deals

Martin Khor

With a deal being struck at the World Trade Organisation on 31 July to revive negotiations, will the move towards bilateral trade agreements slow down?

Many adherents to the multilateral trade system hope so. ‘Multilateralism has made a minor triumph,’ said the WTO’s Director-General Supachai Panitchpakdi, hinting that the ‘strengthened belief in the multilateral trading system’ would reduce the motivation for bilateral free trade agreements (FTAs), which have been proliferating.

It is generally recognised that bilateral agreements, especially between a developing and a developed country, are not the best option and that multilateral negotiations and agreements are preferable as they are less discriminatory and allow a better bargaining position for the developing countries.

Having to negotiate so many agreements at the same time also puts tremendous strain on the developing countries’ personnel and financial resources.

Bilateral FTAs are not popular in many developing countries, as public-interest groups fear that their governments will come under intense pressure to give in to the demands of their more powerful negotiating partner.

In Thailand, the WTO revival has resulted in calls by academics and civil society groups to the government to abandon its plans for bilateral trade agreements in favour of the multilateral trade agenda.

According to Sompop Manarang, economics professor at Chulalongkorn University: ‘The Thai government will have to reconsider its stress on bilateral trade negotiations. It will be difficult for the government to praise the FTA over the WTO deal because it is important for Thailand to pay attention to the bigger global trade platform.’

ASEAN as a bloc and also many ASEAN individual countries are now pursuing trade and economic frameworks and agreements with non-ASEAN countries. At the regional level, ASEAN has signed framework agreements towards establishing FTAs with Japan and India, and the US is pursuing an ‘ASEAN initiative’ with bilateral agreements with ASEAN countries.

At the bilateral level, Singapore has signed FTAs with New Zealand, Japan, Australia, the US, the European Free Trade Association and Jordan. Thailand has signed or is pursuing agreements with the US, New Zealand, Australia, China, and Japan.

Malaysia and the US agreed to a framework for a bilateral agreement in May 2004. The list of subjects includes services liberalisation, facilitation of trade and investment, promotion and protection of investment and intellectual property, tariff reduction for industrial and agricultural goods, environment and labour standards. Malaysia and Japan are negotiating a Closer Economic Partnership, and Malaysia and Australia are contemplating a bilateral FTA.

Several researchers have pointed out that whilst bilateral agreements may be tempting for a developing country to get some specific advantages from its developed-country partner, such as better market access for some of its products, there are also several potential disadvantages.

Developed countries such as the US and Japan are known to want to use the instrument of bilateral agreements to obtain from their partners what they failed to achieve at the WTO, in which the developing countries have been able to oppose or resist certain negative elements in various agreements.

Whilst an advanced developing country which is already highly liberalised may be able to bear the pressures of faster liberalisation, other developing countries may not be able to compete with the faster opening of their markets or with other demands of the developed country.

The following are some areas which developing countries should be cautious about.

In services, the WTO allows a developing country to commit to services liberalisation according to the extent and rate that it chooses and which suits its conditions. A country may want to try out liberalisation in some sectors to see the extent to which it is beneficial, but they can decide whether to commit the liberalisation measures in the WTO (as this makes it irreversible, or difficult to reverse).

The WTO has a positive list approach, where a country commits only what it puts on the schedule, as against the more drastic negative list approach (in which everything is committed to be opened unless specified in the schedule).

The US, it seems, would prefer the negative list approach. For example, the US-Singapore FTA has a negative list approach, in which only sectors placed on a schedule are not subjected to full liberalisation.

On the investment issue, many developing countries, including Malaysia, opposed the introduction of an investment agreement in the WTO, as they were concerned this would prevent or reduce their policy space to determine their own investment policies, such as choice of and conditions for foreign investment, including entry, equity requirements, performance requirements, and limitations to funds transfer.

Most bilateral FTA agreements with developed countries now include investment agreements, which can incorporate the elements and ‘standards’ preferred by the developed countries.

The US-Singapore FTA allows for high standards of right of establishment, national treatment, prohibition of performance standards, freedom for funds transfer, expropriation clause, as well as investor-to-state dispute settlement (i.e. the foreign investor and not only his government can take the host government to an international court).

ASEAN countries should be very cautious as to whether they would like to include an investment component to their bilateral FTAs, and if so, that this does not commit them to elements that may be detrimental to their investment and development policies.

It should be noted that the kind of policies undertaken by Malaysia during the financial crisis of 1997-2000 may not be allowed under provisions that could be proposed under an FTA.

There are also other issues such as competition and government procurement that are now off the WTO negotiating agenda. Many developing countries, including Malaysia, Indonesia, and the Philippines, worked hard to keep them off the rubric of the multilateral trade agenda.

However these topics are likely to be proposed in bilateral FTAs. They are in the Free Trade Area of the Americas and in the US-Singapore FTA. Some countries in Latin America have argued that these issues should not be in the FTAs.

Intellectual property rights are also a major item in bilateral FTAs, and countries like the US and Japan are keen to have their interests furthered, beyond what is in the WTO TRIPS agreement.

Developing countries had their rights under the WTO TRIPS agreement reconfirmed that they are able to offset patents through compulsory licence, government use and parallel importing, including for medicines.

However, studies show that US bilateral FTAs with several countries or groupings are limiting the flexibilities or measures that are permitted in the WTO. The result is that the developing country in the FTA would now find it more difficult or impossible to undertake measures such as compulsory licensing or ‘government use’ to provide cheaper generic drugs to patients.

Given these issues, perhaps ASEAN could set up an expert group to examine what are the rights and flexibilities allowed by members under the WTO, and to point out in which areas these rights and flexibilities may be compromised or reduced in the proposals on various items or elements in the bilateral FTAs.

Suggestions and options (with implications for each option) can then be provided, so that ASEAN countries’ negotiators can have guidelines with which to better negotiate.

— Third World Network Features

About the writer: Martin Khor is Director of the Third World Network.

 source: Call to review bilateral trade deals