TCS Daily

Free Trade Two-Step

By Axel André Weber - May 17, 2006 12:00 AM

Editor's Note: This essay won a runner-up prize in the TCS Asia Essay Contest. For the contest we asked: "Are free trade agreements in Asia helping Asia to be globally competitive?"

"The party is on. Grab yer partner and dance into a free trade area." This could be the motto when looking at regional trade developments in Asia. The number of free trade areas (FTAs) has soared in recent years, much to the chagrin of those political units left outside most or all of them, such as Taiwan, and much to the disappointment of larger units and their benefactors, such as APEC and WTO, which threaten to be undermined by these developments. This is especially true for the achievement of the Bogor Goals.

The danger here is most poignant and challenging, as the larger number of FTAs includes conditions with which global or multilateral agreements could never compete. That is due to the reason that most FTAs are forged on a bilateral basis and therefore render match-making easier. In addition, multiparty organisations such as APEC can only issue recommendations, whereas FTAs are legally binding agreements, and in many cases, such as the multilateral ASEAN Free Area, offer dispute settlement mechanisms which provide FTA-members with a certain psychological comfort. What is more, APEC depends to a huge degree on the good-will and intentions of its largest member state, the USA. Global units such as the WTO on the other side are often stuck in multilateral problems. Many countries therefore find it much easier to forge bilateral free trade areas that bypass all of the above mentioned troubles, even if this entails a violation of the WTO-principle of non-discrimination. The last round of WTO negotiations in Hong Kong has not contributed to diminishing the scepticism of the world trade body.

What are the benefits and the potentials of an FTA? Besides being the eventual first step that could lead -- as in the case of the EU -- to a deeper level of integration it effectively helps foster trade between the partners of an FTA. Though shallow as it might be, the ASEAN-China FTA and the import duty reductions that came along with it helped to raise ASEAN-China trade by 25 percent in the first half of 2005 to 60 billion $US. Not taking part in such beneficial arrangements means losing out in the competitive new arrangements in world trade. Hence it has been calculated that Taiwan, by not being able to take part in this agreement, might eventually lose one percent of its annual GDP, which equals seven billion $US a year.

On the scale of international relations, FTAs can be the eventual first step for fostering solidarity among the parties to such an agreement. Beneficial spill-over effects can be expected for domestic reforms which could also help to achieve WTO goals. The arrival of the first East Asia Summit last year in Kuala Lumpur mirrors the interest of several Asian leaders to bring about, however slowly, a pan-Asian political awareness. Suggestions of an East-Asian currency and market have been uttered. All this, it has to be emphasized, is envisioned to take place under the exclusion of powers such as the USA. Asian free trade areas among Asian nations therefore clearly aim to promote East Asia's economic strength, and are thought to eventually bring about a stronger political cohesiveness of its members. Obstacles can be found especially among the possible leaders of such a grouping, Japan and the People's Republic of China.

More and more trade between Asia's largest economies is being exchanged in Asia and the relative importance of overseas markets is losing ground. Right now 45 percent of all Japanese exports are bound for neighbouring Asian countries. Free trade agreements between, for example, Japan and other countries would help making export easier and trouble free.

Yet there are downsides to these FTAs as well. FTAs between countries on different levels of development are bound to find themselves in difficult two-table negotiations, opting for a free market on the one hand while trying to protect certain non-competitive sectors at home on the other. This is the case for example in the ASEAN FTA. Such FTAs might become watered down as a result and lose their overall bite.

What is more, by favouring certain suppliers of goods and services over others FTAs might exclude the most sufficient performers on the market from outside the FTA and thereby instigate the shrinking of the excluded economies. Several studies have shown that however effective bilateral FTAs or FTAs among a certain group of countries might be these do not yield the same positive results global market liberalisation would bring about. This is especially true when such dominating markets as the USA and the EU are excluded from the FTA.

In the end, local FTAs in Asia are a step in the right direction to strengthen certain sectors for global competition. Yet parties to an FTA should not regard these agreements as the last step. They should be considered as necessary means to implement WTO liberalizations and to induce domestic reforms that make it easier to compete not only regionally, but also on a global scale. There is more to gain globally than regionally.

Axel André Weber, MA is a political scientist and journalist for AKTUELL ASIA, the leading German-language magazine in Asia.


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