TWN Info Service on Free Trade Agreements

20 March 2007


UN Meeting Warns of Effects of Free Trade Agreements


A UN Conference on Trade and Development (UNCTAD) meeting last week heard experts warning that free trade agreements (FTA)often results in developing countries losing their policy space, disadvantaging local banks, industries, farmers and consumers.

South-South regional trade agreements (RTAs), such as Asean, SADC, Mercosur and Caricom, are among neighbouring countries that are at about the same development level while in North-South FTAs, the rich country is so far ahead economically that their goods and firms can overwhelm the developing country’s economy.

Also there is a tendency by developed countries to ‘cherry pick’ issues which benefit them such as investment and intellectual property rights while measures that can benefit developing countries (such as removing Northern agricultural subsidies) are left out, thus highlighting the lop-sidedness of such agreements.

Some statistics were also quoted to highlight how FTAs with the US and EU could be detrimental to developing countries.

In Mexico, following the North American Free Trade Agreement, foreign ownership of the banking system had increased to 85% by 2000 but lending to Mexican business had dropped dramatically from 10% of GDP in 1994 to 0.3 % in 2000.

Impact assessments show that Colombia, under its FTA with the US, could experience reductions of 57% in income and 35% in employment in nine agricultural sectors.

FTAs involving the US and EU also require the adoption of plant breeder rights legislation that removes the farmers' right to share seeds, thereby making the livelihoods of the world's poorest farmers even more vulnerable, whilst increasing the market power and profit margins of the world's largest agribusiness.

Below is a report of the meeting which is reproduced here with permission from the South-North Development Monitor (SUNS) Issue #6214, 20 march 2007.



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Trade: UNCTAD meeting warns of effects of bilateral, regional FTAs

Geneva, 18 Mar (Sangeeta Shashikant and Riaz K. Tayob) -- Free trade agreements among developing countries can help them strengthen regional cooperation, but trade treaties between a powerful developed country with developing countries can result in problems for their consumers, farmers and industries.

This was one of the major themes that emerged at an expert meeting in Geneva last week on the interface between the multilateral trading system and regional trade arrangements (RTAs), organized by the United Nations Conference on Trade and Development (UNCTAD).

South-South RTAs (such as ASEAN, SADC, Mercosur and Caricom) are among neighbouring countries that are at about the same development level while in North-South FTAs, the rich country is so far ahead economically that their goods and firms can overwhelm the developing country's economy.

Mrs. Lakshmi Puri, Director of UNCTAD's Trade Division, at the opening said that the meeting's focus was the interface between the multilateral trading system and RTAs, and whether RTAs were building blocks or stumbling blocks towards multilateral trade relations.

Approaches to RTAs are not uniform and they differ, whether they are North-South or South-South in nature, especially in relation to delivery of development imperatives. The number of RTAs had grown rapidly, with 366 notified to the WTO, 214 remaining in force and 400 expected by 2010.

Mrs. Puri posed several questions for discussion: How to ensure that participation is beneficial particularly in regard to asymmetries in North-South RTAs? How can special and differential treatment be used in North-South agreements like the Economic Partnership Agreements (EPAs)? How do countries best approach North-South RTAs when developing countries are in the process of deepening South-South processes?

Referring to the recently agreed transparency mechanism at the WTO on regional trade arrangements, she asked what can be done to assess RTAs in the multilateral trading system using this mechanism.

She said that new-generation RTAs have substantially increased their "bite" to encompass new non-trade areas such as investment, competition and intellectual property (IP). But at the same time some elements of trade liberalisation are not addressed in RTAs, the most obvious example being agricultural subsidies.

This theme of "cherry picking"of issues in North-South RTAs was taken up by several experts during the meeting. The selection of issues, done usually by the developed countries, reflects the lop-sidedness of such agreements.

Issues like investment and IP which benefit the developed countries are put in (even if they were rejected at the WTO) while measures that can most benefit developing countries (such as removing Northern agricultural subsidies) are left out, at the insistence of the more powerful countries.

Ransford Smith, Deputy Secretary-General of the Commonwealth Secretariat, said that the expansion of RTAs is evidence of a contradiction in the multilateral trading system whose main tenet is "non-discrimination", while RTAs are based on discrimination. RTAs may also diffuse the negotiating capacity of developing countries.

He added that developing countries must be rightly concerned with North-South RTAs. Smith said that developing countries in their RTA negotiations need to consider enhancing special and differential treatment, facilitate the movement of workers and improve trade remedies. On the investment and competition issues, he said that these need to be first implemented at the national level and between countries at similar levels of development.

South Centre Executive Director Yash Tandon distinguished between three types of RTAs: (1) integrative partnerships (where partners have compatible interests and which are based on solidarity and subsidiarity where benefits go to members at the lower levels); (2) enforced partnerships where one side dictates the terms and the other side either has to "take it or leave it"; and (3) structured regionalism where the partnership is enforced and located in structures linked to historical relationships (such as the EU-ACP agreements).

Tandon said that there are two opposing trends. The first is where enforced and structured partnerships are still in place, while the second trend is a struggle by developing countries towards integrative regionalism so as to liberate themselves from the predatory lock of structural relationships. In the economic partnership agreement talks, the ACP countries are trying to reposition themselves to bring onto the agenda their genuine concerns where the structure imposes the interests of the dominant partner, the EU.

Third World Network Director Martin Khor said that a major problem for developing countries was that WTO rules hinder the existence of special and differential treatment (SDT) for developing countries in bilateral and regional agreements, because Article XXIV of GATT establishes "reciprocity" in that RTA parties have to eliminate barriers on "substantially all trade."

He said that this seemed to be absurd, because RTAs by their nature contradict the non-discrimination principle of GATT/WTO and thus the multilateral rules should place limits to this non-discrimination, instead of insisting that if parties want to form an RTA, they have to "go all the way" or almost all the way.

If Article XXIV is not amended to enable SDT (as suggested by the ACP Group) and thus enable developing countries not to have to liberalise in such an extreme manner, developing countries are bound to be at a serious disadvantage in North-South RTAs. They have lower production capacity and their domestic firms would be unable to compete if the countries' goods and services markets are opened up suddenly and comprehensively to giant foreign firms through the RTAs.

Khor said that in North-South RTAs, developing countries' market access gains are limited by the developed countries' avoidance of opening up in areas that would be of most benefit to developing countries.

Most glaring is that elimination of agricultural subsidies are off the table in North-South FTAs involving the US, EU and Japan, and thus the most important Northern trade barrier is not affected, depriving developing countries of what could be their most relevant "WTO plus" benefit.

In FTAs involving the US, the gains from textiles trade are also limited or offset by many tariffs not being eliminated immediately, and by conditions like the "yarn forward" rule (the trade partner has to use yarn that it produces or that is from the US) and stringent rules of origin. There is also very limited WTO-plus gain, if any, in liberalization of labour services.

In return, the developing country partner is asked to open its markets in extreme ways that go far beyond its WTO commitments in goods and services. WTO flexibilities such as less than full reciprocity and maintenance of unbound tariffs in industrial tariffs are removed or drastically eroded.

In services, the US insists on using the "negative list approach" in its FTAs, which has many disadvantages as compared to the "positive list" approach in the WTO. Many other development flexibilities built into the WTO's services agreement are also removed.

Commercial presence in services is also merged into the investment chapter in FTAs involving the US, resulting in these services obligations coming under the investor-state dispute mechanism in which developing countries are liable to pay compensation for "expropriation", including indirect expropriation, the definition of which includes government regulations that result in investors losing their future profits.

Khor added that through the FTAs, developing countries also have to open their markets in government procurement, which in some countries amount to over 20% of the GDP. The procurement chapter in the FTAs go far beyond the proposals at the WTO which only covered transparency aspects but not market access. Even then, the procurement issue was removed from the Doha agenda in 2004 at the WTO, while the more extreme version involving full market access was coming in by the side door of the FTAs.

Oxfam's Trade Campaign Director Celine Chaveriat said that FTAs involving the United States and EU strip developing countries of the policy space that they need to effectively govern their economies. For example, IP provisions in FTAs go much beyond the TRIPS Agreement. The negative effects include limiting access to technological know-how and affordable medicines, while failing to protect traditional knowledge.

She added that every FTA being negotiated with the US delays the introduction of generic medicines. For example, these FTAs include protection for clinical trial data that grants exclusive use to the patent holder, preventing registration of generics during the patent term, thus extending patent monopolies.

Medicine costs are estimated to rise by $919 million by 2020 in Colombia due to its FTA with the US, an amount which instead can be used to provide healthcare for 5.2 million people.

Chaveriat said that FTAs involving the US and EU also require the adoption of plant breeder rights legislation that removes the farmers' right to share seeds, thereby making the livelihoods of the world's poorest farmers even more vulnerable, whilst increasing the market power and profit margins of the world's largest agribusiness. The US-Dominican FTA is expected to raise agrochemical prices in the Dominican Republic by several fold.

On services, the financial sector is especially targeted. Under FTAs with the US, EU and Japan, developing countries liberalise in the hope that greater competition and efficiency would improve poor people's access to finance.

However, the opposite has happened, said Chaveriat. Recent IMF and UN studies show that opening up the banking sector leads foreign banks to "cherry pick" only the most lucrative customers in the economy, leaving the poorer and higher risk customers for local banks, as a result reducing the profitability of local banks.

In Mexico, following NAFTA, foreign ownership of the banking system had increased to 85% by 2000 but lending to Mexican business had dropped dramatically from 10% of GDP in 1994 to 0.3 % in 2000.

On investment, the FTA provisions ensure that the access and activities of foreign investors in developing countries are unfettered and many provide a powerful system of international arbitration to ensure that the expanded rights of foreign investors are vigorously enforced.

She stressed that the new rules in many FTAs undermine the ability of investment to contribute to development. In Argentina, during the 2001-2002 financial crisis, 39 groups of foreign investors lodged compensation claims, some successfully. Amid increases in unemployment, government emergency measures forced foreign investors to stop charging dollar equivalent rates for basic utilities such as water and gas. Current outstanding claims against Argentina are estimated at $18.55 billion.

On trade in goods, Chaveriat said that developing countries are being pushed to eliminate (in some cases totally) agricultural and manufacturing tariffs. However, the developed countries do not want to negotiate agricultural subsidies (which have damaging impacts on farmers in developing countries). In many cases, the developing countries are asked to undertake such obligations to only secure current levels of access to developed country markets.

She said that impact assessments show that Colombia, under its FTA with the US, could experience reductions of 57% in income and 35% in employment in nine agricultural sectors. She stressed the need for SDT for developing countries in FTAs and called for a serious overhaul of rules governing WTO and RTAs as well as a change of mind-set by big players about their trade policies toward developing countries.

David Vivas of the International Centre for Trade and Sustainable Development said that developed countries had placed strong IP provisions in their FTAs due to strong lobbying from their pharmaceutical, biotechnology, movie and information technology industries. Several FTAs not only require developing countries to undertake IP obligations beyond the TRIPS Agreement but also to ratify several WIPO agreements.

He highlighted several public policy concerns on the incorporation of TRIPS-plus provisions in FTAs. These include: (1) difficulties in keeping or utilizing public policy flexibilities available in TRIPS; (2) reduction of the public domain due to ever expanding IP rights; (3) burdensome licensing procedures; (4) lack of synergy between the FTAs on the one hand, and the Convention on Biological Diversity and the International Treaty on Plant Genetic Resources, on the other; and (5) lack of SDT for developing countries.

There are also direct costs such as increased payments for licensing, and costs establishing a legal framework of action, institutional reform, infrastructure and administration costs.

Rohini Acharya of the WTO Secretariat said that the WTO's Doha negotiations on the RTA issue revolve around two categories: procedural issues (to improve RTA transparency and improve procedures for the consideration and surveillance of RTAs by the WTO) and systemic issues (to clarify and improve existing WTO rules of RTAs).

On procedural issues, Acharya listed the following existing problems: (1) there is no effective WTO surveillance of RTAs; (2) there is no consistency assessment of the RTAs in force; (3) many RTAs are not even notified; and (4) there is a lack of RTA transparency.

On systemic issues, she listed the following problems: (1) There are divergent interpretations of disciplines in GATT Article XXIV and GATS Article V (that deal with RTAs); (2) There are problems of coherence between RTA rules and between these rules and other WTO provisions (for example, there is no clarity on the meaning of "substantially all trade" in GATT XXIV); and (3) There are institutional tensions and discrepancy between RTAs and the multilateral trading system.

The WTO official said that on 14 December 2006, the WTO General Council adopted a transparency mechanism for RTAs that clarifies existing RTA transparency provisions, that establishes guidelines and that asks the Secretariat to prepare presentations on all notified RTAs.

However, she said, the substantial issues are harder to resolve. There has been discussion at the WTO only on GATT Article XXIV but none on GATS Article V.

She added that the WTO discussion had been mainly on defining "substantially all trade", with the focus on thresholds and SDT provisions, but there has been no agreement. In particular, there are mixed views on the desirability of SDT in Article XXIV. The ACP countries have led the move to introduce SDT in Article XXIV in terms of non-reciprocal commitments and length of transition periods, but there is quite a lot of resistance by some other WTO members.

Officials from many regional groupings, including ASEAN, the Andean Pact, SADC, Caricom, COMESA, and Mercosur, presented their experiences on RTAs. Other speakers at the UNCTAD meeting included representatives from the World Bank, the OECD, the WTO and research institutions.