Weighing up the benefits and costs of FTAs

Martin Khor, The Star, Asia News Network/Selangor

Negotiations on bilateral free trade agreements (FTAs) are going on at a blazing speed worldwide. Not much is known on how these talks are going. But they have a lot of effects on local industries and farms, on medicine prices and on what can be included in future development strategies.

FTAs are flooding into Asia. For example, Malaysia is negotiating FTAs with Japan, New Zealand, India and China, among others. It is in an initial phase with the United States, having signed a trade and investment framework.

Under FTAs, the partners agree to give trade concessions, such as reducing tariffs for each other, to levels lower than what they offer other countries through the World Trade Organization (WTO).

In fact, the norm is for FTAs to aim for zero tariffs for both sides. Some exceptions are then allowed for certain products or sectors.

Between equal partners, there may be mutual benefits. But between a strong and a weaker country, the stronger partner tends to get more benefits as they have the capacity to sell, whereas the poorer country is unable to make use of the increased market access.

At a workshop on FTAs last week in Kuala Lumpur, Lauren Carlsen of the Americas Programme revealed that Mexico increased exports of fruits and vegetables by 50 percent to the United States after the North American FTA (Nafta) was signed.

But its imports from the United States tripled for corn and over 500 percent for soybean, wheat, poultry and beef. Mexico's agricultural imports rose much more than its exports, and 1.7 million rural jobs have been lost.

One reason is that Mexico reduced its tariffs to zero within a few years of Nafta's signing. On the other hand, the United States did not reduce its farm subsidies, and many of its food products could sell at lower prices than the production costs. Thus they swamped the Mexican market.

Even a country as strong as Australia could not get what it wanted in agriculture in its FTA with the United States.

The drastic effect of tariff cuts under an FTA can be seen in the example of serious problems facing Malaysia's national cars as the country fulfills its obligation under the Asean Free Trade Agreement to bring the tariffs down by stages to almost zero.

Under the same treaty, rice farmers may also face problems in Indonesia and Malaysia when import duties are reduced to low levels within a few years, as rice from Thailand and Vietnam is cheaper.

FTAs that the United States are signing with developing countries contain much more than just trade issues. They also contain chapters on services, intellectual property, investment, government procurement and competition.

The developing country will have to give up many of its existing policies if it wants to conclude an FTA deal with the United States.

Under services, the treaty asks for opening up of all sectors (including financial services, which have their own chapters), with reservations to full liberalization allowed for some sub- sectors.

In intellectual property, there is a growing trend to view the standards at the WTO as already too high for developing countries. The effects include higher prices of medicines, software and other products as a result of the monopoly granted to the companies owning patents and copyright.

Also, as most patents are owned by foreign companies, the local companies will have difficulties in accessing technology or in producing the patented products, thus curbing domestic development.

In the FTAs with the United States, many of the policies still permitted by the WTO are closed off. For example, when patents are granted on medicines, the WTO allows countries to grant "compulsory licenses" to local companies to produce generic versions of these medicines on a wide range of grounds.

The inclusion in FTAs of investment, government procurement and competition has even more serious implications. These issues have already been dropped at the WTO after a hard-fought battle by the developing countries.

They have quietly re-entered the scene through the side door of the FTAs. The three issues have the same theme, to give new rights to foreign companies to be established in the partner country, to be treated at least as well as local companies, and to have equal rights as locals to bid for the supply of goods and services to government and to government projects.

Agreeing to an FTA with the United States would thus require a developing country to alter its laws, policies and perhaps its entire development strategy.

Other developed countries, such as Japan and the European Union, are also making similar requests.

Why do countries negotiate an FTA with the United States if there are such drastic consequences? Some feel they are left behind if they do not because the neighboring countries are signing.

Some believe they can sell more exports, and sometimes do not take into account that the increase in imports may be even more.

"Joining the bandwagon" is not a good enough reason to sign an FTA when the consequences can be so grave.

The country must undertake a detailed study of the benefits and costs to it of each aspect of the FTA, and overall, and of the effects on the country's development goals and strategies. This was one of the conclusions of last week's Asian workshop on bilateral FTAs organized by Third World Network.