Going FTA

(written in 2004)

In the aftermath of Cancun’s outcome last year, this column, responding to energetic calls from the both the government and the private sector to enter into bilateral and regional free trade agreements, had this to say:

“Re-engineering trade policy to actively seek bilateral deals with richer countries could also perhaps be a mistake. x x x [If] the developing countries have decried the complexity of the subjects involved in multilateral negotiations, these subjects (such as the Singapore issues, agriculture, non-agricultural market access, etc.) will be no less complex in bilateral and regional discussions. If the developing countries lamented the muscular negotiating tactics of developed countries at Cancun, these tactics will be no less demanding and aggressive in bilateral or regional talks. It must be emphasized that the safety mechanisms that multilateralism brings (i.e., the comfort of numbers, transparency, and an established dispute settlement system) are not present to the same degree in bilateral or regional negotiations.”

The past several months then saw the Philippines negotiate or enter into talks with a slew of such agreements, from the Philippines-Japan Economic Prosperity Agreement and the ASEAN-China Free Trade Agreement, to probabilities of agreements with South Korea, India, Australia, and New Zealand (via ASEAN) or exploring a one-on-one FTA with the United States. All of this while the Doha Development Round of multilateral talks at the WTO are still ongoing.

Now The Economist, a staunch advocate of liberalized trade, (in its 18 November 2004 issue; Trade Policy: Not All Trade Agreements Are Good) has the following interesting things to say:
“Alas, the passion for such agreements may be misguided. Economists have long pointed out that the gains from multilateral trade liberalisation are far greater than those from bilateral or regional deals. At best, regional deals offer smaller benefits. At worst, they do damage, artificially diverting trade away from excluded countries or clogging up commerce with fiendishly complicated ‘rules of origin’. These are needed to define whether imported goods, which may consist of inputs from many different countries, qualify for favoured treatment.
x x x
Most bilateral agreements are far from ideal. Those between poor countries often exist more on paper than in practice. Bilateral deals between rich and poor tend to be better implemented, but are marred by restrictive rules of origin and by the routine exclusion of important agricultural products.
In fact, the [World] Bank's boffins point out that most poor countries would be worse off in a world of rampant bilateral deals than they are today. x x x If developing countries all had bilateral agreements with big rich trading partners (the European Union, the United States, Canada and Japan), global income would rise by much less: $112 billion. The rich would scoop all this, and more: $133 billion. Although a handful of developing countries, such as Brazil and China, would gain a bit, poor nations as a group would be worse off than they are today.
While the Bank's exact numbers should be taken with a pinch of salt, the broad lesson is clear. Bilateralism may be a route to freer global trade, but it is, at best, a risky one.”

FTA’s, for all their supposed benefits, are simply tricky propositions. As The Economist would say, “foreign policy, more than economics, drives some of these deals.” Getting concrete interpretations alone of Article XXIV of GATT 1994 (which provides for the creation of FTAs and customs unions) is quite difficult. Furthermore, their very number provides an increasingly complex international trading system. Considering that there have been concerns raised regarding the capacity of the Philippines to keep up with its multilateral trading commitments, this obviously would be multiplied in view of the proliferation of FTAs because not only would the country have to keep track of its own membership commitments but also, for purposes of keeping Philippine competitiveness, keep track of the arrangements of which the Philippines is not a part of but has been entered into by other countries.

Also, by relying on the benefits of FTAs, certain rules would be needed to protect the existence of such benefits. Most significant among these rules would be that pertaining to the rules of origin. Rules of origin, to put it summarily, are those rules that distinguish the product of a non-FTA member from an FTA member. These rules are not only quite complex but also has an immediate and substantial effect on the bottomline of companies that deal in international trade. Consequently, the greater the number of FTAs that a country is a part of, the greater the number of rules of origin that has to be monitored.

Other complex issues that need to be addressed would be the overlapping jurisdictions by the different dispute settlement systems in place between the multilateral trading system and the different FTAs. Another would be the non-tariff subjects of an FTA (considering that tariffs are low enough already) such as market access, the possibility of problems turning up due to inadequate or faulty trade facilitation (such as complicated or ambiguous customs procedures), sanitary and phytosanitary measures, technical barriers to trade, and – perhaps - the issue of smuggling.

This is not to say that FTAs are bad or destructive, as some benefits had been stated (even by this column) to being perhaps achievable if such are entered into. The point simply is that with regard to formulating a policy or view with regard to FTA’s, there is always the need for greater information regarding the environment that surrounds it. For the moment, a certain degree of caution would perhaps be justifiable under the circumstances when even exploring the idea of possible bilateral or regional trading arrangements precisely because there are no categorical indications regarding the direction, benefits, and risks that are concomitant with FTAs. Consequentially, in confronting the reservations raised with regard to FTA’s, we find ourselves again reiterating the very same issue that pervades overall Philippine trade policy and that is the seeming need for a re-evaluation of the way we engage the international trading system.