This article was published in the Singapore Straits Times on 04 December 2004 and extracted from here.

Why E. Asia is rushing to seal FTAs
By Barry Desker
Dec 4, 2004

THE recently concluded Asean Summit in Vientiane witnessed a decision to abolish tariffs in 11 sectors by 2007, three years earlier than the 2010 plan for the Asean Free Trade Area. The Asean-China free trade agreement (FTA) was signed, removing tariffs on goods traded with China by 2010. Asean FTA negotiations with Australia, New Zealand and South Korea will begin early next year.

Within South-east Asia, once-sceptical states such as Malaysia now plan to conclude bilateral FTAs with trading partners such as South Korea, Japan and the United States. Thailand and the Philippines have also demonstrated keen interest in such negotiations. And Singapore, of course, has been the most aggressive in pursuing FTAs.

Even its most earnest proponents agree such FTAs are a second-best option compared to World Trade Organisation (WTO) agreements which promote universal trade liberalisation. But while economists may seek the ideal solution, governments will focus on the politically attainable, even if it is a second-best choice. This rationale explains the rush to conclude FTAs in the region.

Significantly, the recent Asean decisions have come after the successful WTO General Council meeting concluded on July 31 in Geneva, which put the Doha round of negotiations back on track after they were derailed by the failure of the WTO Ministerial Conference in Cancun in September last year.

However, the Geneva agreement is at best a framework agreement, and the hard bargaining will take place over the next year. The European Union is committed to the elimination of agricultural export subsidies, a major source of distortions in global farm trade, while the US has, in principle, accepted restrictions on its food aid and export credit schemes.

Although agricultural liberalisation would provide the largest percentage gains in real income, this issue is politically most difficult for WTO members and likely to delay negotiations.

The Geneva meeting also adopted a vague outline for cutting industrial tariffs while the provisions for the liberalisation of trade in services represent declarations of good intentions rather than clear negotiating guidelines.

Finally, the jury is still out on whether the Doha Round will result in an outcome where the developing countries will emerge as net beneficiaries.

Nevertheless, this outline Geneva agreement was widely welcomed given the difficulties in reaching a consensus among the 148 WTO members, and the fear that another failure after the Seattle and Cancun debacles would lead to a retreat to bilateralism and regionalism.

The WTO negotiations are likely to be protracted and arduous. Because of the practice of brinkmanship, and the high stakes involved, breakdowns are part of the WTO-General Agreement on Tariffs and Trade negotiating process. It is unlikely that a negotiating package will be ready before the Hong Kong WTO Ministerial Conference scheduled for December next year.

However, because US fast-track authority expires in 2007, there will be pressure for negotiations to conclude before President George W. Bush’s new term ends in 2008. In the absence of ‘fast track’, which allows members of the US Congress to vote only in favour of or against Bills without the right to amend such legislation, the tendency will be for congressmen to revise negotiated texts which have already been agreed at international meetings and include ‘pork barrel’ items. No international trade agreements can be concluded in such circumstances.

WTO negotiating rounds now last for almost a decade, although they are usually launched with a three- or four-year time frame for completion. As governments in East Asia work within four- to five-year electoral cycles, there is a growing tendency to seek bilateral and regional FTAs as these can be negotiated successfully during their current term of office. Such agreements are justified on the grounds that they are ‘WTO plus’ agreements. Governments in East Asia have therefore opted for a parallel-track process, combining multilateral trade negotiations with bilateral and regional FTAs.

In doing so, East Asia is following a trend begun by the US through the North American Free Trade Area and the EU. Both the US and the EU have asserted that the preferential trading arrangements that they were parties to expanded international trade and did not violate international trade rules agreed at the WTO and its predecessor, the General Agreement on Tariffs and Trade.

I would argue that as long as trade liberalisation occurs, it matters less whether it is at a bilateral, regional or multilateral level. FTA negotiations have the significant benefit of promoting technology and knowledge transfers, domestic reforms, productivity gains and improved developmental prospects.

By contrast, critics of FTAs emphasise the negative effects, including the distortion in trade patterns between ‘insiders’ and ‘outsiders’, which undermines welfare gains arising from expanded trade. They also stress that the trade distortions create incentives for inefficient resource allocation.

In addition, where there are multiple FTAs, the multiple sets of rules of origin impose tremendous operational costs on small and medium enterprises. This is why it is argued that FTAs are a second-best option compared to a multilateral agreement at the WTO with uniform rules applicable to all WTO members.

Given the spate of FTAs that are being negotiated in the region, especially with partners outside East Asia, the test of their usefulness is whether they provide benefits that can be utilised. The utility of FTAs is a relative function of the tariffs lowered through such agreements as well as the market-opening measures in the services sector arising from such agreements.

If compliance costs are high and benefits are minimal because of the low volume of trade in goods and services, then FTAs that are concluded are likely to have the same impact as agreements on the establishment of joint commissions which are often the outcome of ministerial visits.

An important consideration for East Asian states is whether the WTO will continue to focus on trade liberalisation and the promotion of domestic deregulation, or whether it will adopt the EU preference for increasing the regulation of global trade, including the establishment of rules governing domestic regulation of trade and investment.

Mr Pascal Lamy, then EU trade commissioner, stated in an address in Jakarta on Sept 6: ‘The EU, for its part, remains convinced that the real 21st-century trade issues are not tariffs and quotas, but standards and rules.’

As most Asian states have emerged only recently from colonialism, the desire to maintain a separate national identity and have domestic regulatory frameworks, which differentiate rather than integrate, will continue to be a key driving force in the region.

The writer is director of the Institute of Defence and Strategic Studies.

  

Posted on December 6th, 2004 by jl
Filed under: Regionalisation