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Free trade agreements Vs. multilateral trade negotiations

Author: Peter Drysdale, ANU The last decade has seen rapid proliferation of bilateral ‘free trade’ agreements (FTAs) while the Doha Round of multilateral trade negotiations remains stalled.

East Asia Forum

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The last decade has seen rapid proliferation of bilateral ‘free trade’ agreements (FTAs) while the Doha Round of multilateral trade negotiations remains stalled.

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In East Asia and across the Pacific there has been a growing number of these bilateral agreements and there are as yet unfulfilled ambitions to negotiate various regional ‘free trade’ arrangements, within ASEAN + 3 or within ASEAN + 6 and APEC — where the Free Trade Agreement of Asia and the Pacific and, recently, the Trans Pacific Partnership, extending from a group of small Asia Pacific economies, have gained some favour.

 man rides his bicycle past stacked shipping containers carrying his wife and child in Shanghai, China on 09 January, 2009.

man rides his bicycle past stacked shipping containers carrying his wife and child in Shanghai, China on 09 January, 2009.

The agreements already negotiated, those that are in the works, and those that are on the drawing boards are not strictly free trade agreements.They are preferential trade agreements which involve an element of discrimination and protection against trade from non-member countries. They undermine the core principle of the WTO that trade be undertaken on a most-favoured-nation basis. That principle helps prevent the world from breaking up into protectionist trading blocks.

Yet, despite the continuing importance of global markets to Asia’s exported-oriented economies, bilateral FTAs in Asia have been regarded benignly. It’s suggested that they are building blocks to freer trade globally, while global negotiations languish, although very few of them encourage easy sign-in or extension to other trading partners. It’s suggested that they introduce elements, like services and economic cooperation which global agreements have difficulty dealing-in, although it makes little sense to tie these issues to preferential trading arrangements. More tellingly, it’s argued that they don’t do very much harm — their provisions are under-used because they are costly to business — and avoid the really hard and therefore sensitive issues of trade reform (such as agriculture in Japan and the United States or services in China), their impact on regional and global trade have been trivial. All the hype about them is diplomatic song and dance; they don’t deliver economically.

Suddenly, bilateral and regional FTAs seem less benign. There is the beginning of a re-think about the trade policy strategy that favours FTAs over domestic reform and multilateral initiatives.

There are two important reasons why the re-think on FTAs is gathering strength. First, the global financial crisis has shaken confidence in the resilience of global openness. Protectionist sentiment is on the rise and it has some particular targets, in Asia and the emerging market economies. While trade barriers are coming down generally, as was the case when the European Economic Community  (an earlier incarnation of the EU) was formed, regional arrangements were less of a worry as tariffs and other barriers (except on agricultural products) were coming down against everyone.

In a time of global crisis, there’s a threat that preferential bilateral and regional arrangements could reinforce, not stem, a retreat towards protectionism. Second, there’s the issue of dealing with the rise of China. Accession to the WTO embedded China in the global trading system and encouraged behaviour according to global rules and norms. Despite fears that Chinese participation in the WTO might weaken and corrode the global trading system, China has successfully emerged as a responsible stakeholder if not yet an active leader in the system. Yet China too has played the FTA game, with diplomatic success in Southeast Asia. The bigger China grows — it is already the second largest single trader in the world  — the less comfortable the rest of the world becomes about the leverage China exercises in making its own bilateral trade deals and regional arrangements. At the Pacific Trade and Development Conference in Beijing last week on the ‘Role of China in the World Economy’, Hugh Patrick, of Columbia University, observed that the conclusion that stands out is that, because of China, ‘global strategies and frameworks must dominate regional frameworks and strategies’.

Experienced Singapore trade policymaker, Barry Desker, this week concluded that now ‘the question can be asked whether we would not do better to focus once again on WTO negotiations’.

In Australia, Trade Minister, Dr Craig Emerson, in a watershed policy speech on 10 December, also endorsed re-focus on core WTO principles in developing trade policy strategy for Australia:

The principle of non-discrimination is the foundation stone of the World Trade Organization’s global trading rules…. Discriminatory trade agreements can divert trade away from more efficient, excluded producers to less efficient parties to the agreements. Like currency wars, trade diversion amounts to no more than a redistribution of jobs and prosperity instead of the creation of more jobs and prosperity. Worse, trade diversion is inherently job-destroying and income-destroying from a global perspective.

In this week’s lead essay, Andrew Elek underlines Emerson’s commitment that Australia would not be embarking in future on new (bilateral) ‘negotiations based on overly optimistic modeling of the best-possible outcome. The real outcome of negotiations would be assessed before signing up to any new deal. Looking ahead, the government will not be interested in

… collecting trophies for the national mantelpiece, empty vessels engraved with the words ‘free trade agreement’ if they are nothing of the sort and of token value to our country’.
A week earlier, Indonesia’s Trade Minister, Dr Mari Pangestu, argued that emerging economies are transforming the structure of world trade, with the fastest trade growth and with much larger trade shares because their incomes are growing faster than those in the developed world. This trend has been accelerated through the financial crisis. The flip side of this is that Asian and other economies which are leading trade growth are in a peculiar position of responsibility to lead on the completion of Doha and on getting the momentum together for changing the modus operandi of the WTO beyond Doha.

In a substantial review of their nature and impact, the Australian Productivity Commission concludes that bilateral and regional trade agreements have been oversold. Focus on domestic reform and non-preferential trade policy strategies delivers measurably superior economic outcomes.

Three swallows do not a summer make, but there are signs of trade policy change in the air.

The two big questions are: what are the best ways forward on entrenching domestic reform and strengthening the multilateral WTO framework as the critical elements in maintaining an open regional economy; and what kind of diplomatic and political effort might best contribute to this objective? The answers to both questions will require a lot of careful thought and strategic engagement among key global and regional partners. It is promising that Trade Ministers Emerson and Pangestu have begun the process.

There is a window of political opportunity next year to bring the Doha Round to conclusion. It won’t be easy but there is no more important single act of trade policy that needs resolution. But what comes after Doha and how can the WTO be reshaped to deliver the range of trade and commercial reforms that might constitute the new agenda for the international trade regime today?

These issues extend well beyond the traditional border barriers to trade that were the early focus of the GATT and the WTO. The complication of regional and bilateral trade agreements and getting discipline over them is another issue that needs attention. It is time to look beyond Doha, work to change the global trade policy game with serious collective effort at WTO reform. Developing a clear agenda for system-reform beyond Doha will take time, but commitment to that now would have a positive impact and the G20 and APEC are among the platforms from which to get this idea moving.

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