Global Trends by Martin Khor

Monday 10 Sept 2007

New warnings on FTAs

In the past week, a Nobel laureate and a new report from the United Nations’ foremost development think-tank have sounded warning bells on how developing countries may be disadvantaged by entering bilateral free trade agreements with  developed countries.


Free trade agreements between developed and developing countries continue to stir significant debate, especially on the benefits and costs for the developing countries.

In his recent visit to Kuala Lumpur, the Nobel laureate and former World Bank chief economist Jospeh Stiglitz strongly criticized FTAs involving the United States, saying they have not benefited developing countries that have entered into such deals.

“In fact, these countries lost a great deal, especially access to intellectual property,” Stiglitz said in an interview with The Edge.  “They have more difficulty accessing  knowledge and particularly generic medicine. So, there are thousands of people dying in developing countries because of the trade agreements with the US.”

According to Stiglitz, who was also chief economic advisor to former US President Bill Clinton, US tariffs are so low (3 to 5 per cent) that developing countries don’t need an FTA to export to the US.

“It’s not about trading goods; it’s about losing sovereignty. It’s about America pushing for a particular agenda. It has not benefited any country…. And they managed to advantage the US at the cost of the developing countries.”

Stiglitz’s frank comment that “overall, bilateral agreements have been a disaster, for the
developing countries and for the global trading system” has been reinforced by the UN Conference on Trade and Development (UNCTAD) which last week warned developing countries to think carefully before negotiating bilateral trade agreements with developed countries.

UNCTAD is the United Nations’ main development think-tank.   Its annual Trade and Development Report (TDR) said a developing country may be tempted to conclude an FTA with a developed country as it expects better market access for its products.

But they are often disappointed by the lack of gains due to systemic impediments (for example, reduction of agricultural subsidies is not part of the FTAs), restrictive rules of origin, and non-trade barriers.

On the other hand, the developing country has to remove its trade barriers which often results a surge in imports and a worsening trade balance with the FTA partner, and removes policy instruments needed for development, says the report.

It adds:  “Thus the gains for developing countries from improved market access are far from guaranteed, whereas they have to give up a large part of the policy space they might otherwise have used to promote the creation of new productive capacities, industrial upgrading and structural change in their economies.”

The report also details five non-trade areas in which FTAs with developed countries will particularly hurt developing countries.

First, in government procurement, developing countries use policies that favour local companies and people, and boosts the domestic economy.  However, the FTA removes this policy tool by opening the procurement business to foreigners, which results in loss of market share of local firms and of foreign exchange.

Second, liberalizing services under an FTA can disrupt national plans to strengthen the domestic service sectors such as banking, finance, telecommunications and professional services.

Foreign participation may be useful to complement domestic services, says UNCTAD, “but accelerated and excessive liberalization of key sectors under an FTA has the potential to disrupt or hinder the process of establishing a national strategy for services.”

Third, the investor-protection rules of an FTA gives new rights to potential foreign investors, thus “drastically reducing the scope of the for a host country to decide whether or not to approve a foreign investment or impose conditions for such an approval.”

Moreover, measures favouring local investors have to be curbed as these are seen as discriminating against foreign investors. 

The free transfer of funds, mandated by the FTA, can increase financial instability and prevent measures to reduce instability or crises, says the report.

“Several of the measures adopted successfully by Malaysia, for example, during the financial crisis of 1997-1999, such as temporary restrictions on outward capital transfers outflows by foreigners in Malaysia would have been prohibited,” the report added.

Moreover, an FTA with the United States allows investors to sue the host government in an international court for compensation for expropriation.  This includes “indirect expropriation” or policy measures affecting the present or future revenues of a foreign enterprise.

Fourth, on intellectual property, the report criticizes FTAs for reducing the possibility of developing countries to set their own policies on granting of patents, on the use of compulsory licenses and on copyright.  

Developing countries will incur costs resulting from intellectual property obligations that go far beyond the WTO rules, since most patents and copyright are mostly owned by foreigners, concludes the UNCTAD report.

Fifth, the competition policy part of an FTA can hinder the growth of local firms and reduce their ability to compete or survive against large foreign firms, and this can result in the end in less competition.

“Thus it would be prudent for developing countries to be cautious and not to rush into North-South bilateral or regional FTAs,” concludes UNCTAD.  When assessing benefits and costs, a country should take account not only of the impact on exports, imports and foreign investment but also on the country’s ability to use alternative policy options and instruments for longer-term development strategy.

In contrast to North-South FTAs, the UNCTAD report promotes regional trade and cooperation among developing countries.  These have a greater chance of benefiting the countries as they are at similar levels of development, and help in their trade and industrialization process.