TCS Daily


Free-for-All

By Alan Oxley - March 30, 2004 12:00 AM

In the last two years the United States has negotiated free trade agreements (FTAs) with Australia, Chile and Singapore. Along with the US, they are members of APEC, the organization of economic cooperation among Asian Pacific economies. These agreements have set new standards for legal protection of economic freedom. This is a major contribution to efforts to promote global prosperity. Unfortunately, the importance of this will be lost in domestic politics in the US.

Everybody says Bob Zoellick is ambitious. His strike rate as US Trade Representative is mixed and that will probably bug him. He secured Trade Promotion Authority from Congress, giving the Bush Administration the mandate to negotiate trade agreements with Chile, Singapore, Australia, Morocco and the Central American countries. He initiated negotiations for an FTA with southern African countries.

This seems a good record, but there is a downside. The Doha negotiations are hopelessly bogged down. The agreements with Chile and Singapore were Clinton Administration initiatives. The Free Trade Area in the Americas initiative (admittedly another legacy from earlier administrations) is stalled. Except for Australia, the bilateral agreements are with small economies. Finally, the US Administration is getting caned over the inevitable flood of imports from China. The imports support economic growth in the US and benefit American consumers, but that message is not coming across.

Nevertheless, Zoellick's achievements are strategically important, not in the sense of military or political security, but for having a strategic impact: they strengthen the foundations of growth in emerging markets. He argues the benefit of this is "competitive liberalization." He believes negotiation of an FTA with one country will encourage others to do more. He has a point.

Mexico had been trying to negotiate an FTA with Japan. Mexico also wanted increased access for its pork in US markets. But Japan's Agriculture Ministry vetoed any concessions on agriculture. Mexico's response was "No deal!" When the US included beef and dairy products in its agreement with Australia, a fierce competitor in farm products in world markets, Tokyo relented and concluded an agreement with Mexico covering trade in pork.

But there is a greater gain than "competitive liberalization." US trade policy is setting new standards for legal protection of economic freedom. This is the foundation of strong market economies.

Consider the impact among emerging economies in the group of APEC economies. In 1994, the group committed to create a vast free market across the Pacific within 20 years. This was very ambitious, but like most politicians, leaders were casual: each one expected to be out of office by the day of final reckoning. Not surprisingly, there has been a marked reluctance to back these commitments with enforceable rules.

Why does this matter? Enforceable rules give trade agreements bite. They restrict how much governments can control trade. This is why the rules of the WTO are effective. Countries are challenged in international legal processes if they don't honor commitments to open markets. The Doha Round of negotiations is stalled in large part because a large number of developing countries, including members of APEC, are unwilling to make such commitments to cut trade barriers.

APEC economies have a better record of economic growth than most developing economies and a reasonable record of economic reform, but there is still reluctance to put the law above politics. The ten ASEAN countries, most of whom are members of APEC, have negotiated complex agreements to remove barriers to intra-ASEAN trade. However, the commitments are not legally enforceable like the WTO and governments regularly backslide. Privately, officials in ASEAN economies concede the agreement is weak.

The ASEAN model is more the rule than the exception in East Asia. While rule of law is stronger there than in other developing regions, the idea that the government has a final right to intervene in any matter of concern to the state is still common. It reflects hundreds of years of tradition of autocratic, even if benevolent, government in East Asia. Rule of law is also weak in Latin America. As Hernando de Soto reminds us, legally protected property rights are fundamental to sustained growth.

The Free Trade Agreements being negotiated by the US with APEC developing countries create legally binding commitments and thereby set new standards. The US FTA with Singapore creates for the first time independent legal rights for foreign investors. Australia, New Zealand and Singapore have followed suit and negotiated FTAs with legally binding commitments. Australia has just completed an FTA with Thailand. Do Asian countries object? It seems not. Thailand will now negotiate an agreement with the US. Indonesia and the Philippines also want FTAs with the US and there are signs in Kuala Lumpur that Malaysia does not want to miss out.

Sometimes external pressure is helpful. One of Indonesia's leading free traders thinks an FTA with the US is the only way that the Indonesian Government can be persuaded to eliminate some the policies which restrain free markets in Indonesia. Nobody thinks FTAs between Asian economies and China or Japan can have that effect.

Bob Zoellick may feel bruised, but history will treat him kindly. His problem is that voters in the US may not see it this way.


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