US free trade initiatives & their implications for the multilateral trading system

ASED | Berlin | 16 April 2004

US Free Trade Initiatives and their implications for the multilateral trading system

By Biswajit Dhar & Murali Kallummal

The rationale for regional integration between two or more countries would suggest that such agreements would need to be based on substantial trading interests. However, except for NAFTA signed in 1994, the later regional initiatives of the US are mostly framed to address issues of governance and competitive liberalisation by countries, mostly in the area of non-trade issues. The FTAA and the CAFTA initiatives, which cover countries of North and Latin Americas and the Caribbean islands except Cuba, are to promote growth among the neighbouring states of America. Similar initiatives by the US in the East European transition economies and Africa (AGOA), further confirms the view expressed above. It has been the failure of NAFTA in achieving many of the conceived goals, which led to the US efforts for a large regionalization effort in the form of FTAA, been pushed further at the trade ministerial meeting in Miami recently.

In the concluding session at the Miami summit, the U.S. Trade Representative Robert Zoellick hinted at the need for flexibility. To quote: “....the declaration indicates that the USTR and his hemispheric counterparts also recognize the need for flexibility, to take into account the needs and sensitivities of all FTAA partners." The declaration raised the need for longer adjustment periods in implementing FTAA provisions, wherever necessary. Another important mechanism that addresses the different sizes and levels of development of hemispheric economies was the suggestion on the Hemispheric Cooperation Program (HCP). The HCP as per the US is "a unique effort to try to link trade and aid together effectively." These are proposals which support construction of “differing obligation levels” under the FTAA. What is important, beyond these flexible sounding approaches to bilateral initiatives, is the series of new FTAs which the US has singed in the last couple of years.

Making the situation more complicated, the US has either signed (or is in the process of signing) bilateral FTAs with countries like Singapore, Australia, Israel, Costa Rica, Chile, Honduras, Guatemala, El Salvador, Nicaragua, Morocco, and Jordan. Although these FTA partners and the US together account for not more than 20 percent of global trade, the substantial portion of which (close to 16 %) is accounted by the US. The partner countries together do not account for more than 5 percent of global trade, both in terms export or import. Further, the US seems to have missed the “golden principles” of both the need for harmonisation and the dis-economies of associated with multilayer legal and structural frameworks which are emerging out of multiple agreements with highly selective objectives. Even if this is ignored, it is important to ask as to what are the objectives behind these new FTA initiatives of US, with the tiny economies? The answers the question lies in the overall American policies of unilateralism.

In spite of the small size, the other attractive features of these economies lie in their strategic location and high external dependence. With exports and imports accounting for close to 80 percent of GDP during early 1990s, these economies had an existing liberal trading regime, even before the bilateral US FTA initiatives. The exceptions to this are the partners in the FTAAs like Argentina and Brazil, which have trade share of less than 15 percent. The high proportion of trade in economy in the former group of countries, by contrast, is directly correlated to liberal trading regimes in terms of market access issues. Further the simple average MFN tariff of the bilateral FTAs partners were 4.7 percent, in comparison to the average of 7.2 with that of US non partners also confirm that most of these countries had a liberal trading regimes. When compared to non partner countries, it can be said that these countries had almost double the incidence of duty free tariff lines in the total national tariff lines at the MFN level. The United States was certainly looking beyond liberalisation while entering into FTA agreements with these economies.

The total GDP of all the bilateral FTAs partners account only for one percent of the US GDP. Even after inclusion of the FTAAs member (without Canada and Mexico) this figure does not cross 25 percent of US GDP. Clearly the bilateral FTA agreements of US are between unequal partners. Similar element of inequality can be seen when comparison are drawn on the basis of exports and imports volumes. Further as trading partners the US has reserved either first or second position in most import commodities in each FTA partner country. The only exception to this was seen in the case of Jordan and Morocco, both these countries imported more from the European and Asian countries. Again, Latin American countries and Israel also have substantial market dependence on the US markets, with US holding either first or second position in terms of destination for majority of top 40 commodities exported. Therefore, while the United States markets holds a critical position for the FTA partner countries, both in terms of exports and imports. But for the US economy, the partner countries are of low importance as trading partners. The dominant US trading partners are countries like: China, Canada, Mexico, Japan and a few other European countries. As partners, these FTA countries hold no key position for the US economy. With no clear trading significance, America is certainly looking for much broader objectives, beyond the perceived trade and growth complementarities. Describing some elements of this broad strategy, Robert Zoellick talks of a pact that would ultimately help the Bush administration’s trade policy throughout the world through “competitive liberalisation”, as countries vie for access to the world’s largest market. The small size, high external dependence and high dependence of the American domestic market, provide a suitable set of countries a set of vulnerable economies.

The immediate question then is whether America is selling its markets cheap? The answer to this question lie in the details of preferential tariff reduction schedules, early harvest list, and the extent of market access provided to the FTA partners. Hence, there is a need to look beyond the benign nature of these agreements. Most of the regionalism efforts carried out by America have integrated debatable issues like service sector liberalisation, investment, and intellectual property protection. The investment issues which are being debated under the WTO are being increasing introduced as part of the comprehensive FTA agreements by the US. Besides the broad definition adopted as common phenomenon, the issues of investor to state dispute is also included in all of these agreement at the bilateral level. On intellectual property the FTAs are attempting to create uniformity and maintain high standards on issues like patents, copyrights, trademarks, data exclusivity, and enforcement. The FTAs with Singapore and Chile is especially important as they have created Precedent-setting levels to create greater incentives to protection across other FTAs of the US.

On services, US is seeking a comprehensive commitments that guarantee existing levels of market access and results in further liberalization throughout the services sector based on a negative list approach. Contradicting the little understanding achieved under the WTO, the US FTAs are adopting agreements which encourage the use of exemptions like the negative list in service sector liberalisation. What the US has been achieving through the FTAs are in largely in those areas where in it had failed to achieve any convincing success at the multilateral level. Losing the moral ground of being the perfect system and a model of liberal market driven economy, owing to series of financial and economic crisis, it is increasingly depending on the standards setting using a “top-down-approach”.

The little trade gains for the US FTA partner countries are covenanted for inclusion of many controversial non-trade issues. An outstanding example in this direction is the near universal approach in the application of “investor-to-state dispute” clause in all the FTAs. Further, these new FTAs also reveal the existence of varying standards. For example, some of the crucial transparency clauses, with regard to information disclosure of disputes (transparency obligation) under the NAFTA, are missing in the new TIFA and FTAs.

Thus, while on the one hand America is using regionalism to increase the numbers to win the ultimate test of ‘democracy’ in the WTO, on the other hand, it is using these bilateral deals to create more “non-transparent” structures. The application of standards applied in the RTAs depends on the relative economic and political strength of partner state. Evidence of this can be seen in the tariff schedules of the various bilateral FTAs, wherein different stages of tariff liberalisation have been applied with respect to similar commodities at 6 digit HS classification. Further, in many cases, the zero duty applied for commodities are made ineffective through stringent conditions on the quantities allowed for import under these schemes. For example, in some cases, the zero duty import for commodities has a progressive element of 1 kilo in the fist year to 2 kilos by the tenth year. The US FTAs also have strong instruments like Rules of Origin, Sanitary and Phytosanitary measures, quantitative restrictions and longer periods of transitions for creating effective market barriers.

The role played by the US domestic industrial associations in the formation of the US trade and commercial policies have substantially erode the flexibilities available with US trade negotiators to balance the real development concerns of partners with that of American domestic interests. The convoluted tariff concession schedules in each new FTA clearly points to the paramount importance which American trade representatives provide for their domestic companies vis-à-vis the partners. With each new FTA there is a new list of concession schedule which in some manner is different from the previous one. These differences arise from the specific economic interests of the domestic players’ vis-à-vis the partner country.

There is an increase in the pressure from the domestic business community on the US FTA negotiators to eliminate attempts by some U.S. trading partners in the region to forge a more limited agreement by leaving several difficult, but highly important, issues off the negotiating table entirely or addressing them in a less than “commercially” meaningful way. Some of the evidence of this growing pressure of domestic players have been provided above on issues which are of less important in terms of debates under the WTO. However, some of the less promising and debated issues under the WTO, which these FTAs address are Investment and intellectual property protection and other issues like agriculture, non agriculture market access, transparency, e- commerce, technical barriers to trade and customs and trade facilitation.

The United States seems to be attempting to find an easy way around by adopting an overall strategy of having the right number and combination of bilateral and regional partnerships with limited domestic losses. The US strategy in the increased efforts towards regionalism is to use the dynamics of “coalition”, in a manner similar to that seen in the case of Iraq war and post-war reconstruction efforts. Trade and economic issues are no different. Often these agreements missed the simple principles of “freer Trade” in the forms of market access and were outweighed by American interest in areas like intellectual property and services. In nearly all cases the pursuit of trade liberalization carried out was so “selective” that it has achieved extreme results.

Once again, the age old policy of “Convenient Multilateralism” with a difference is evident in the rising number of American bilateral and plurilateral FTAs. Increasingly, the US trade representatives are moving away for unilateral approaches to selective plurilateral approaches to protect its national interests at multilateral forums.

The use of FTAs is to create sufficient numbers to push through its own agendas at the future Ministerial Meeting of the WTO. In addition to the bilateral FTAs analyzed above, a few new FTAs are under consideration with countries like Bahrain, Dominican Republic, Panama, Colombia, Bolivia, Ecuador, Peru, Botswana, Lesotho, Namibia, South Africa and Swaziland. These new FTAs will bring the total number of US bilateral FTAs to 23. However, with the FTAA coming into existence, the total number of countries with which the US would have Free Trade Agreement would further go up by another 28 countries. With all these negotiations complete, the US will have close to 51 countries with similar or near similar opinions. In the WTO negotiations, such alliances would translate into the formation of a club of 40 countries with 38 developing countries. It is the US’s wishful thinking that such alliances can provide substantial gains in the negotiations ahead at the multilateral level. With nearly 300 FTAs and more being conceived, the preferential and the strategic elements, would soon fade away and give way to realism. Therefore, it will have to be seen how such bilateral alliances between unequal partners will survive the final test, when purely “domestic issues” would guide the multilateral negotiations.