1. Negotiations
2. :: Across the board ::

Bilateral/regional free trade agreements: An outline of elements, nature and development implications

TWN
Third World Network
twnet@po.jaring.my

September 2005

BILATERAL/REGIONAL FREE TRADE AGREEMENTS:
AN OUTLINE OF ELEMENTS, NATURE AND DEVELOPMENT IMPLICATIONS

By Martin Khor, Third World Network

1. Bilateral Free Trade And Economic Agreements

Several Asian countries and Asean as a bloc are now pursuing trade and economic frameworks and agreements with non-Asean countries. Among the initiatives involving Asean are (a) the Asean-Japan framework for comprehensive economic partnership (CEP) signed on 8 Oct 2003, expected to bring in an FTA by 2012; negotiations on liberalization concessions are on a bilateral basis; (b) Asean-China framework agreement on comprehensive economic cooperation signed on 4 Nov 2002, which is expected to conclude an FTA by 2010 for older Asean states and 2015 for newer Asean states; (c) Asean-India agreement signed on 8 Oct 2003 (to be concluded on 2011); (d) US enterprise for Asean initiative (announced by the US in Oct 2002) to create a network of bilateral FTAs linking Asean with US; (e) Trans-regional EU-Asean trade initiative in which Asean and EU trade ministers agreed on 4 April 2003 to enhance Asean-EU economic partnership. There are also looser and less substantial Asean partnerships with Australia, New Zealand and South Korea. Most of the above frameworks include trade in goods, services and investment liberalization, intellectual property and a dispute settlement mechanism. They thus cover not only trade but other areas like investment, intellectual property and services.

There is also an increasing number of bilateral agreements between individual Asean countries and non-Asean countries. For example, Singapore has signed FTAs with New Zealand, Japan, Australia, US, European Free Trade Association and Jordan. Thailand has signed or is pursuing agreements with US, New Zealand, Australia, China, Japan, etc. Malaysia and 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 IPRs, tariff reduction for industrial and agricultural goods, environment and labour standards, etc.) Malaysia and Japan are negotiating a Closer Economic Partnership, and Malaysia and Australia are contemplating a bilateral FTA.

2. Disadvantages of FTAs compared to multilateral trade agreements

It is generally recognized that bilateral agreements, especially between a developing and a developed country, are not the best option and that multilateral negotiations and agreements are preferable. The reasons for this include:

1. Bilateral agreements usually lead to “trade diversion”, in that the partners divert away products that may be more cheaply priced in favour of products from the FTA partner, even if they are not cheaply priced, thus resulting in inefficiency.
2. In an FTA between a developed country and a developing country or countries, the latter are usually in a weaker bargaining position due to the lack of capacity of their economies, their weaker political situation, and their weaker negotiating resources.
3. In the WTO, the principles of special and differential treatment, and less than full reciprocity, are recognized. Thus, developing countries are better able to negotiate on the basis of non-reciprocity and for non-reciprocal outcomes, in which they are not obliged to open up their markets (or undertake other obligations) to the same degree as developed countries. However, these “development principles” are usually absent in FTAs, or they are only reflected in longer implementation periods for the developing country. The FTAs are basically on the basis of reciprocity. This “equal treatment” of parties that are unequal in capacity is likely to result in unequal outcomes.
4. The FTAs contain many items that are not part of the rules of the WTO. Many North-South FTAs include rules on investment, government procurement and competition law, which have so far been rejected by developing countries as subjects for WTO negotiations or rules. Developing countries also refused that labour standards and environment standards be subjects of discussion in the WTO. All these topics are now entering “by the side-door” through the FTAs, even though the same reasons for developing countries to reject rules on these issues should apply in FTAs as they do in the WTO.
5. Even where issues are already the subject of rules in the WTO (e.g. intellectual property and services), there were many “flexibilities” and options open to developing countries in interpreting and in implementing obligations in these areas. However, there are attempts by developed countries to remove these flexibilities for developing countries in the FTAs. If these attempts succeed, the “policy space” for developing countries to pursue development and socio-economic goals would be significantly reduced.
6. The proliferation of so many agreements also puts pressure on personnel and financial resources in developing countries and requires a lot of technical expertise which may be not adequately available, given the large number of agreements and the limited resources.

The report “The Future of the WTO” commissioned by the WTO Director-General and which was published in January 2005 has criticized the proliferation of bilateral and regional trade agreements, which it says has made the “MFN” (most favoured nation) principle the exception rather than the rule, and which has led to increased discrimination in world trade.

The revival of negotiations in the WTO under its Doha work programme after its General Council meeting of 31 July 2004 has been heralded by many as a revival of multilateral trade negotiations, which is supposed to reduce the pressures for bilateral agreements. In Thailand, the WTO revival has resulted in calls by academics and NGOs to the government to abandon its plans for bilateral trade agreements in favour of the multilateral trade agenda and WTO. According to Sompop Manarang (Professor of International Economics at Chulalongklorn 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.” (IPS agency, 3 Aug 2004). However, it appears that FTA negotiations are moving ahead and negotiations on even more FTAs and RTAs are being announced.

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 dangers and 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.

3. Changing views on the effects of liberalisation

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

Up to a few years ago, there was a widespread belief in the orthodoxy (promoted especially by the IMF and World Bank, and by policy makers in developed countries) that liberalization is necessarily good for development, and the faster the liberalization the better it is for development. This was the intellectual basis for developed countries to pressurize developing countries to quickly and deeply cut their tariffs and remove non-tariff barriers, as well as open up their services sector, financial sector and investment regime.

However, there has been growing skepticism not only from civil society but also policy makers regarding this orthodoxy, mainly because such rapid liberalization has led to import surges in many developing countries, with adverse effects on the local industrial and agricultural sectors, and on the balance of payments and the debt position. The emerging paradigm is that developing countries require certain degrees of protection to enable the local firms and farms to compete in their own domestic markets, and that this was the way the now-developed countries arranged their own trade and industrial policies when they were at the development stage.

Such protection is especially required by developing countries when many agricultural products are heavily protected by tariffs and subsidies in the developed countries, and where export and domestic subsidies enable these countries to sell artificially-cheapened products on the world market. Tariff protection is the means by which developing countries can defend their farmers from unfair competition, especially since quantitative restrictions were prohibited under the Uruguay Round.

Arguments have been put forward by developing countries along the above lines in the WTO. The developing countries are also pursuing three tracks to strengthen the development dimension in the WTO: (1) proposals to clarify, review or amend existing WTO rules, due to problems of implementation of these rules; (2) proposals to strengthen existing SDT (special and differential treatment) provisions, and to introduce new ones where they do not exist but are required; (3) proposals to have adequate SDT provisions in new rules or revision of rules in current negotiations (especially in agriculture and industrial products).

Some developed countries are beginning to change their previously strict insistence on liberalisation in developing countries. For instance the UK government has declared that it will not seek to “impose” liberalization on African countries and on least developed countries. The recent G8 summit also has a statement along similar lines. Notably, this change in attitude is stated only for “least developed countries” and thus presumably does not apply to non-LDC developing counties. But it can be noted that a change in attitude towards liberalization has started even in developed countries’ policy circles.

4. “Reciprocity” as a principle in FTAs

There is a significant lack of a similar “development track” within FTAs between developed and developing countries. Instead, the FTAs are being negotiated mainly on the basis of “reciprocity”, i.e. that both sides take on similar levels of obligations.

This is mainly due to the demand for such a basis by trade policy makers of developed countries. They also point to the need for FTAs and RTAs to be consistent with WTO rules, in particular Article XXIV of GATT 1994 (covering customs unions and free trade areas). (WTO 1994: p522-525). This Article enables FTAs to be established under certain conditions. One provision is that “the purpose of a customs union or a free trade area should be to facilitate trade between the constituent territories and not to raise barriers to the trade of other contracting parties with such territories.” It also defines a free-trade area as a group of two or more customs territories in which the duties and other restrictive regulations of commerce are “eliminated on substantially all the trade between the constituent territories in products originating in such territories.” [GATT, Article XXIV.8(b)].

This is widely taken to mean that FTAs have to be reciprocal in nature, since SDT provisions are not mentioned in the Article, and that tariffs and other trade restrictions have to be eliminated on “substantially all trade” between the parties. It is not defined what constitutes “substantially all trade.” In the course of discussions between the European Union and ACP countries, which are negotiating economic partnership agreements (EPAs), it is understood that the EU considers this to mean at least 90% of trade, while some ACP countries interpret it to mean at least 60% of trade.

There have been recent proposals to revise or clarify Article XXIV so that it clearly enables non-reciprocal relations to prevail in FTAs between developed and developing countries. The ACP Group has made such a proposal. Recently, China has also made a development-oriented proposal on Article XXIV.

If the Article is not clarified or revised, if reciprocity remains the principle in an FTA between a developed and developing country, and if the FTA covers almost all products, then a typical developing country is likely to be at a serious disadvantage, as it has less production capacity and probably has significantly higher tariffs, especially on industrial products. Elimination of tariffs will thus hurt the business or viability of local industries and even farms of the typical developing country.

5. Main Features of FTA involving developed-developing countries

The main issues in FTAs that involve developed countries such as the US, EU and Japan typically include the following:

1. Market access in goods
2. Services in general
3. Specific services sectors (eg. financial sector, telecommunications)
4. Intellectual property rights
5. Rules on the “Singapore Issues” or “Non-Trade Issues”
— Investment
— Government Procurement
— Competition Policy
6. Labour standards and environment issues

Only the first item has traditionally been the subject of an FTA. The second and fourth issues were introduced into the multilateral trading system through the Uruguay Round that concluded in 1994. They are the new issues in GATT, and are now in WTO. The set of issues in item 5 are known as the Singapore issues as they were first introduced into the WTO through its Ministerial Conference in 1996 in Singapore. However they were only subjects for discussion in working groups and there has been opposition from developing countries to make them subjects of binding rules. In July 2004, the WTO General Council agreed that there would not be any negotiations on them during the Doha work programme period, and work in the working groups on these issues stopped.

However, the FTAs include these items (or some of them) as subjects of rules. On the sixth item, it was also agreed that labour and environment standards not be part of rule-making in WTO. Labour standards are not even a subject of discussion in the WTO. This is due to the fear of developing countries that they would become the basis of protectionist measures against their products. However in the FTAs, “environment” may cover environmental issues broadly and not just standards.

It can be seen that subjects that have been rejected by developing countries as topics of negotiations or even discussion have made a comeback through the FTAs.

6. Market Access in Goods

Given the problems arising from FTAs, some developing countries decide to negotiate an FTA with a developed country is the fear of being left behind, as they see other countries, especially in their region, entering FTA negotiations with developed countries, which constitute their major markets. There is a fear that those developing countries that are entering FTAs will gain a competitive edge and thus leave those that do not join an FTA behind.

The developing country may also believe that entering an FTA will give it benefits in terms of greater access into the markets of the partners, as the FTA will provide preferences in terms of lower tariffs or quotas.

It is thus crucial that the developing country identify the products which are important for it, whose exports it hopes will expand through the FTA, and to assess whether realistically whether there will be an increase in market access and to what extent. This will then have to be measured against the costs to be incurred by the country, in terms of market access to its own markets by the partner, as well as in terms of concessions in other areas (such as services, investment and intellectual property).

Many countries that had hoped to obtain significant expansion of market access to the major developed countries have been disappointed in the results of the negotiations. A major reason for this is that there are structural, legal and political impediments that prevent the developed country from opening its market beyond a certain limit, in respect of its sensitive products (where further opening will cause dislocation to its producers).

As Smith (2005) points out, there are a number of structural problems that make it difficult for developing countries to obtain market access in sectors of interest to them in FTAs with developed countries. Firstly, there is usually unequal bargaining power in developing-developed country bilateral negotiations, with the developing countries in a weaker position. Secondly, it is difficult for the developed countries to reduce or withdraw agricultural export and domestic subsidies on the products that the developing county partner are exporting, as the subsidies would have to be removed for all the products, which would then also benefit non-FTA partners. Thirdly, there may exist laws that frame the terms of reference for what the developed country can offer

The United States negotiators are also constrained in the terms they can offer in FTAs by their Bipartisan Trade Promotion Authority Act of 2002 (Smith 2005). This Act prevents US negotiators from concluding FTAs which:

– ‘reduce any rate of duty (other than a rate of duty that does not exceed 5 percent ad valorem on the date of the enactment of this Act) to a rate of duty which is less than 50 percent of the rate of such duty that applies on such date of enactment’
– ‘reduce the rate of duty below that applicable under the Uruguay Round Agreements, on any import sensitive agricultural product;’
– ‘The term “import sensitive agricultural product” means an agricultural product-
(A) with respect to which, as a result of the Uruguay Round Agreements the rate of duty was the subject of tariff reductions by the United States and, pursuant to such Agreements, was reduced on January 1, 1995, to a rate that was not less than 97.5 percent of the rate of duty that applied to such article on December 31, 1994; or
(B) which was subject to a tariff-rate quota on the date of the enactment of this Act’

Besides the above, the Act does not enable special and differential treatment as its negotiating objectives include ‘reciprocal market access’, ‘to obtain reciprocal tariff and non-tariff barrier elimination agreements’ and to obtain rules which are comparable to US ones .

Besides the legal constraint posed above, it must be expected that the US negotiators will find it very difficult to make offers in agriculture or in sensitive industrial products (especially textiles and clothing), where increased market opening for imports will be met with a political backlash from lobby groups such as big farmers, food companies, labour unions, domestic firms and from Congress. The recent episode in the US Congress, in which the bill authorizing the US-CAFTA agreement faced massive opposition and was passed by only two votes, shows how difficult it will be for market access demands of developing country FTA partners to be met, even though the exports from CAFTA countries were too small to have an appreciable impact on the US economy.

On textiles and apparel (politically extremely sensitive products for the US), even a strong negotiating party like Singapore, was unable to overcome the US demand to apply the “yarn forward rule” to qualify for immediate duty-free entry into the U.S’. The ‘yarn forward’ rule means that ‘textiles and apparel from Singapore must be made from yarn sourced from Singapore or the U.S. This means that US yarn has to be used, instead of cheaper yarn and fabric sourced from the Asian region. (Smith 2005; Koh and Chang, 2004). Singapore also had to agree to additional and cumbersome customs procedures to verify that textiles/apparel are made in Singapore (including allowing on-site inspections of enterprises by US officials) and additional safeguard measures.

On agricultural products, the negotiations on certain sensitive products can also be expected to be very difficult. Even a developed country like Australia found that it could not gain any ground with the US on expanding its market access on sugar, which is an important Australian export and is highly protected in the US.

Before its FTA with the USA, Australia had a sugar quota of 87,402 tonnes per annum. During the FTA negotiations, the Australian Government repeatedly promised ‘no sugar, no deal’. The Australian government fought very hard to increase the quota but failed to do so. The US-Australia FTA did not provide any extra quota for Australia. (Smith 2005).

On beef, which is Australia’s main export to the US, Australia obtained an 18.5 per cent increase in beef quotas, but this was confined to manufacturing-grade beef (mainly hamburger mince and pet food) and spread over 18 years. It meant that Australia’s share of the American beef market could actually decline, according to Australian projections. Australian academics calculated the benefits for beef farmers from the extra market access under the FTA to be about half a cow, per farm, per year. Furthermore, the US has reserved the right to employ safeguards to raise tariffs again if the quantity of Australian imports or the price of beef changes suddenly. (Smith 2005).

The developing country partner in an FTA may have limited products where it can effectively make use of increased market access opportunities, due to limited supply capacity or inability to market. For instance, most of the ACP countries and the LDCs have been unable to make use of the preferential access they have to the EU market. And for products that the developing countries have an advantage in, these are usually “sensitive” to the developed country and thus some or all of them may be excluded from the FTA market opening. The market access hopes may become illusory. On the other hand, the developing country is expected to reciprocate by opening up its own market to the developed country, by eliminating its tariffs on a wide range of products. This can result in significant dislocation of local producers.

Under NAFTA, Mexico agreed to total trade liberalization of all agricultural products by 2008 (even though it had a 15-year adjustment period for corn and beans). According to Carlsen (2003), imports of corn (the most widely grown crop in Mexico) nearly tripled after NAFTA, and the price has dropped. Other crops fared worse, as imports of soybean, wheat, poultry and beef have risen over 500%, displacing domestic production. Exports especially of fruits and vegetables have risen but this failed to compensate for the import rise. 1.7 million rural jobs were lost since NAFTA.

7. Services

The WTO allows each member to commit in the WTO to services liberalization according to the extent and rate that it chooses and which suits its conditions. This is especially true for developing countries. These countries may want to try out liberalization in some sectors to see the extent to which it is beneficial, but they do not have to commit the liberalization measures in the WTO (as this makes it irreversible, or difficult to reverse).

The WTO has a positive list approach (i.e. 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 positive list approach was insisted on by the developing countries to enable them to have more flexibility and policy space as to what and when to commit. It is also less risky than the negative list approach as a country may not be aware of the full range of sectors, nor on what it should select to exclude.

The developed countries prefer the negative list approach, as this would make it easier for developing countries to commit to liberalization measures in more sectors. The US has chosen this negative list approach in its FTAs with developing countries. For example, the US-Singapore FTA has a negative list approach, in which only sectors placed on a schedule can have limitations to the principles of national treatment, market access, local presence, etc. Such an approach reduces policy space for developing countries, and goes against the more development-friendly positive list approach of the WTO. It also goes against the principles and services structure that the developing countries fought so hard to attain in the WTO.

8. Investment

Many developing countries 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 requirements, equity requirements, performance requirements, regulation on funds transfer, etc.

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 a broad definition of investors and investments, “high” standards for the 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 for claimed violation of the agreement). In FTAs involving the US, the expropriation clause typically has a broad definition of expropriation, that includes “regulatory takings”, or loss of profit and revenue due to an application or change of government regulation or policy. Investors claiming to have suffered losses due to expropriation within this broad definition can take up cases against the host government for compensation. Many such investor-to-state cases have been taken up under NAFTA.

Developing countries should be very cautious, as to whether (a) they would like to include an investment component to their FTA; (b) if yes, that such a component does not commit them to standards and elements that may be detrimental to their investment and development policies. Present national policy and legal space to determine the definition and scope of investment, right to establishment, type of foreign investment to welcome and not welcome, national treatment, transfer of funds, and on performance requirements, dispute settlement system, etc. should not be narrowed or removed by the FTAs. It should be noted that some of the 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 is a strong case that binding rules relating to investment should not be part of a developed-developing country FTA. This is especially since the WTO members have decided not to start any negotiations on an investment agreement in the WTO, as developing countries are concerned about the adverse implications for development.

9. Other “Singapore Issues”: Competition, Government Procurement.

These issues, like investment, are now off the WTO negotiating agenda, at least for the duration of the Doha work programme. Many developing countries, including India, Malaysia, Indonesia and the Philippines, worked hard to keep them off the rubric of the multilateral trade agenda. However these topics are proposed by the US and other developed countries in bilateral FTAs.

The African Union’s Trade Ministers’ conference in Cairo in June 2005 adopted a Declaration on Economic Partnership Agreements (that they are negotiating with the EU) that the three Singapore issues (investment, competition and government procurement) should remain outside the scope of the EPA agenda and negotiations. This is despite the fact that these issues had been listed as agenda topics. The reason put forward is that these issues were recently rejected as negotiation topics by the members of the WTO.

In Latin America, Brazil and other countries have made the case that investment, competition and government procurement should now not be included in the FTAA negotiations (even though they were originally items on the agenda) and that any further discussion can be in a multilateral forum.

In the FTAs involving the US, the chapter on government procurement goes far beyond what was being discussed in the WTO for many years (with the discussions eventually suspended). The WTO working group had been given the mandate only to discuss “transparency in government procurement”, with possible rules to be limited to only the transparency aspects, and excluding market access aspects. However, the FTA chapter on government procurement covers the market access aspects, i.e. enabling foreign companies to bid on equal terms with local companies for government contracts. This would drastically limit or eliminate policy space for the developing-country government to give preferential treatment to local companies and persons, and remove a crucial instrument for boosting the domestic economy.

On competition policy, there was a move especially by the EU to introduce a competition policy in the WTO that would enable foreign firms and their goods and services to compete “equally” with local firms, through the removal of preference and subsidization of local firms. Later, the proposal was narrowed down to initial topics such as principles of non-discrimination, transparency and procedural fairness, as well as hard core cartels and modalities for voluntary cooperation. This did not preclude the later full-scale introduction of the initial broad proposal.

The FTAs that involve the US typically require the developing country to establish competition legislation. Development economists have questioned whether the framework of competition policy and framework now in place in the US and other developed countries are appropriate for developing countries which are now in their developmental stage. Their concern is that this framework, which the FTA promotes, may hinder the growth of local firms and make them even less able to compete or survive against the large foreign companies especially in the face of globalization. The competition issue in FTAs is thus extremely complex.

10. Intellectual property rights.

The introduction of IPRs as an issue with binding rules within a trade agreement was very controversial, and remains so, after the TRIPS Agreement was incorporated within the WTO. Since then, many economists ranging from Joseph Stiglitz to Jagdish Bhagwati have decried the inclusion of IPRs and TRIPS in the WTO. There is a growing realisation that high IPR standards, promoted by TRIPS to developing countries, are inappropriate to the development needs of developing countries. In particular, the former head of the World Bank’s trade research department, Michael Finger, estimated that the cost to developing countries of implementing their TRIPS obligations amounts to US$60 billion annually, and that this more than offsets the gains they may expect to benefit from expanded market access in agriculture and textiles in the Uruguay Round. (Khor 2005).

There is now a movement by developing countries to clarify some aspects of TRIPS or to amend them, to reduce the more developmentally-negative aspects. For instance the Doha Declaration on TRIPS and Public Health has clarified that developing countries can make use of “flexibilities” such as compulsory licenses to offset the monopoly privileges of patent holders.

Developing countries are also trying to have TRIPS amended to deal with the problem of “biopiracy”, by requiring that patent applications involving biological resources be accompanied by disclosure of the countries of origin and evidence of benefit-sharing arrangements with these countries. Moreover, TRIPS requires some life forms to be patented (microorganisms and micro-biological processes) but allows the prohibition of patenting of other lifeforms (plants and animals), and gives countries the leeway to define what is an invention and thus what is patentable.

The TRIPS agreement requires that IP protection be granted to plant breeders for plant varieties, while previously this was an issue for each country to decide on. However, TRIPS allows countries flexibility to define their own “sui generis” system of protection for plant varieties. Countries can provide for farmers’ rights to save and use seeds.

As WTO negotiators have become more aware of the development dimensions of IPRs, the developed countries have tried to introduce even higher standards of IP globally through the WIPO. However, many developing countries have now started a movement to establish a “development agenda” within WIPO. They have also resisted attempts at harmonizing patent and copyright laws at even higher standards.

Thus, there is now an attempt by the developed countries to seek the forum of the FTA to: (a) remove or reduce the flexibilities in the TRIPS agreement and (b) establish even higher standards of IPRs in developing countries. IP is thus 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. The FTAs threaten the use of TRIPS flexibilities in relation to (a) patents and access to medicines; (b) IP protection of plant varieties with respect to the sui generis system, and the rights of farmers; biodiversity; (c) the ability to ban patenting of some lifeforms.

There may also be a potential for FTAs to make it more difficult for countries to have disclosure requirements with respect to patent applications involving biological resources. Some FTAs also oblige developing countries to have tighter copyright legislation, with adverse effects on technology transfer or access to information and information technology.

The following are more details on one aspect of the effects of FTAs, relating to IPRs and access to medicines. In the WTO Doha Ministerial, developing countries had their rights under the WTO’s TRIPS agreement reconfirmed that they are able to offset patents through compulsory licences, government use and parallel importing, including for medicines. The flexibilities available for policy measures to promote access to cheap medicines were spelt out. However, US bilateral FTAs with several countries or groupings are limiting the flexibilities or measures that are permitted in 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. Examples (in the Médecins Sans Frontières paper, “Access to Medicines at Risk Across the Globe”) include:

(a) Data exclusivity. The WTO does not require “data exclusivity”, i.e. that data submitted by a patent holder to drug regulatory authorities (to obtain marketing approval for safety) cannot be made use of as part of the drug regulatory approval process undertaken by other applicants. Thus, a generic producer (which is given permission, for example under a compulsory license, to sell or produce a generic version of a patented drug) can make use of that data when it seeks safety approval from the drug regulatory authority. However, in bilateral FTAs the US seeks to establish or expand “exclusive rights” over test data provided by the originator companies to prevent generic companies from registering an equivalent generic version of the drug, thus preventing or making it difficult for a compulsory licence to take effect, and effectively curbing the supply of generic drugs. This limitation is in the US-Singapore agreement.

(b) Extending patent life span. Patents on drugs last 20 years from date of filing in most countries; this is also the WTO requirement. The US is seeking to “compensate” drug companies for any “unreasonable” time a national drug authority or patent office takes to examine or approve an application. The life of the patent would be extended by the “unreasonable time” taken. This extension measure is in the US agreement with Central America (CAFTA).

(c) Evergreening the patent. Drug companies try to renew patents after they expire by applying for new patents for “new uses” of the same product. Under WTO, members are not obliged to grant patents on new uses of existing substances. The US wants provisions in FTAs to allow companies to apply for new patents for each “new use” of a product, thus allowing the patent protection to continue beyond the expiry date of the patent. This provision is in the US-Morocco trade agreement.

(d) Limitation to conditions for compulsory license. TRIPS allows countries to issue compulsory licenses and does not restrict conditions for their use. The Doha Declaration on TRIPs and Public Health confirms that countries have “the freedom to determine the ground upon which such licenses are granted.” However, the US seeks limitations on the circumstances under which compulsory licenses on drugs are issued. For example, the US-Singapore FTA allows compulsory licenses only for remedying anti-competitive practice by the patent holder; for public non-commercial use; and in the case of national emergency or circumstances of extreme urgency.

11. Need for Policy Framework and Assessment of Costs and Benefits

Negotiating an FTA is a serious exercise as the outcome can have major implications for development policy and for social, economic and development outcomes. While it can result in some export gains, it can also: (a) result in increases in imports, with implications for the trade balance and the debt position; (b) facilitate import surges as tariffs decline or are eliminated, and this can adversely affect the local industries and farms; (c) reduce tariff revenue, with consequences for the government budget; (d) restrict and in some cases remove “policy space,” or the options and instruments available to a country to institute certain social, economic and development policies.

Thus, before negotiating an FTA, the country needs to have three things in place.

Firstly, a national development policy framework comprising an overall development strategy, with sectoral national plans (for agriculture, industry and services) and issue-based plans (policy towards foreign investment, local participation in the economy, intellectual property, etc).

The proposals put forward by the FTA partner or potential partner can then be assessed within the context of such a framework. Similarly, the positions of the country in the FTA negotiations can be formulated in light of the framework. In the absence of such a framework, it would be difficult to determine the objectives of entering an FTA negotiation, or of the advantages or otherwise of the proposed FTA.

Secondly, there should be a framework to assess the benefits and costs of the FTA, in terms of its various components and of the various proposals and provisions, and the overall balance.

The benefits and costs can be assessed in terms of: (a) gains and losses in trade terms: eg. increase in exports, imports; (b) gains and losses in terms of jobs; (c) effects on the degree of policy space and flexibilities available to the country as a result of the FTA; (d) social effects: on access to health, to knowledge, food security etc; (e) effects on technology transfer. Other items can be added.

The costs and benefits can be applied to the various aspects of the FTA, including market access (to the other country, and the partner country’s access to one’s own market) in goods; services; intellectual property; investment, competition and government procurement; and labour and environment standards. The cross-cutting social and environmental costs can also be assessed.

In general, a developing country can expect (or hope) to benefit from some market access in goods from an FTA with a developed country. This has to be weighed against the market access to be gained by the partner to its own home market. If the country lacks production and export capacity, or if the partner does not offer significant concessions, then it is possible that there may be a net cost rather than benefit, especially if the FTA is on a reciprocal basis (with no SDT for the developing country).

The developing country can be expected to suffer costs in additional IPR obligations beyond the already onerous obligations in TRIPS. These costs are losses to the nation since most patents, copyright and other forms of IP are owned by foreigners. The costs can be in terms of increased royalty and IP licence payments (with resulting loss in foreign exchange) or higher prices of the protected products, and in terms of the social costs of decreased access to medicines, decreased access to knowledge, decrease in farmers’ rights to seeds and other resources, and decrease in food security possibilities.

Regarding investment, there can be expected to be major costs to the developing country in terms of loss of policy space and the use of policy instruments such as regulation of entry of foreign investment, performance requirements, regulation of the flow of funds, etc. The threat of expropriation cases being taken by investors can also have a real or chilling effect on national policies. The ability to use investment policy as a means to increase local participation in the economy, or to nurture local firms and farms, will also be severely restricted.

Regarding government procurement, the loss of policy space will be immense as procurement policy is a major social and economic instrument for boosting the domestic economy and to redress social imbalances. The requirement to give national treatment for foreign goods, services and firms, can also result in loss of market share of local firms, and loss of foreign exchange. There can be loss of effect of fiscal policy, eg an increase in government spending to boost economic growth will have reduced effect if there is higher “leakage” through increased imports of goods and services procured by government.

There can also be considerable loss of policy space and options with regard to the other non-trade issues such as competition policy, labour and environmental standards, as well as in terms of effects on the competitive position of local enterprises.

An example of a simple cost-benefit chart is given below. It can be made more complex, reflecting the realities of the particular country concerned.

Example of FTA Cost-benefit Framework

Possible benefits

1. Market access in goods:
a. Agriculture
b. Industrial

2. Market access in services:
a. commercial services
b. labour

3. Possible concessions on SPS and TBT?

4. Possible aid mechanisms?

5. Possible investment and technology flows

Possible costs

1. Market access into country:
a. industrial goods
b. agriculture

2. Market access into country
Services

3. Intellectual property
(a) Access to medicines
(b) Lifeforms
(c) Plant varieties
(d) Biodiversity and disclosure requirements
(e) Copyright and access to information
(f) Broadcasting

4. Singapore Issues
(a) Investment
(b) Government procurement
(c) Competition policy

5. Labour, environment standards

6. Environmental costs

Thirdly, the country should establish or organize the resources and institutional base for assessing whether or not to enter negotiations for the FTA; and if so, to organize the negotiating teams, objectives, and conduct of the negotiations. As part of the process, different agencies of the government should be consulted and should be part of the process of the formulation of policy and positions. It is equally important to involve stakeholders, such as local firms, trade unions, farmers, consumers, groups representing patients and involved in health provision and environmental protection. This is especially because the FTA can have such wide-ranging effect on society.

Eventually, national decisions have to be taken as to: (1) whether in principle to enter negotiations in the FTA; (2) how to conduct the negotiations; (3) what issues to include and exclude from the FTA; (4) putting positions forward; (5) assessing the other party’s position. (6) continuously assessing the costs and benefits of proposals and provisions; (7) whether or not to conclude the negotiations, if there are many sticking points and outstanding issues.

References

Carlsen, Laura (2003). The Mexican experience and Lessons for WTO negotiations on the agreement on agriculture. (Speech to European Parliament). Americas Program, Interhemispheric Resource Centre.

Khor, Martin (2003). The WTO Singapore Issues: What’s at stake and why it matters. (TWN briefing paper 16).

Khor, Martin (2005). Intellectual Property, Competition and Development. Paper presented at the WTO symposium on intellectual property and development, May 2005.

Koh, Tommy and Chang Li Lin (editors) (2004). The United States Singapore Free Trade Agreement: Highlights and Insights. Singapore

Médecins Sans Frontières (2004). “Access to Medicines at Risk Across the Globe”

Smith, Sanya (2005). Market access: where’s the beef? (Draft paper).

United States (2002). Trade Promotion Authority Act of 2002

World Trade Organisation (1994). The results of the Uruguay Round of Multilateral Trade Negotiations: The Legal Texts.