Trends by Martin Khor
Monday 28 November 2011
Need to assess
costs, benefits of FTAs
Free trade agreements designed in a different era can prevent or hinder
the policy measures developing countries need to address the growing
global economic crisis, and deserve to be reviewed.
financial crisis does not seem to have abated, despite technocrats
having taken over top political posts in Greece and Italy, the two
countries recently at the epi-centre of the crisis. If anything,
the crisis seems to have worsened, with signs last week of weakened
bond-investor interest in France and Germany.
This gives credence to growing expectations of a global economic slowdown
or recession. In recent days, there are reports of the fears of a
credit crunch that may spread to developing countries, and initial
signs of reverse flows of capital out of emerging countries in search
Some prominent developing countries are seeing their currencies weakening
rapidly. The South African rand has depreciated around 20% from 6.7
to the dollar four months ago to the present 8.5.
The global situation is prompting developing countries to re-think
a range of their economic policies. These include the need for regulating
capital flows to prevent excess volatility that can wreak havoc to
their capital market and the currency, and the need to boost domestic
demand and domestic firms to offset the slowdown in exports.
Measures that traditionally have been used to support local enterprises
and the domestic economy are being introduced or revived in Brazil,
South Africa, China and other countries.
They include subsidies, access to long-term credit, preference to
local suppliers in government procurement and development projects,
taxes on exports (to ensure supply of raw materials for local processing
and manufacturing) and even tariff increases to slow down the surge
in imports (as in the case of Brazil).
There is also the revival or strengthening of the development plan,
which covers the whole economy, an expanded version of old-style industrial
policy. South Africa launched a national development plan on 11 November,
Brazil has introduced three versions of a development productive plan,
and China recently adopted its latest five-year plan. Malaysia has
its own five-year plan and the economic transformation programme.
However, there is also a counter-trend of some developing countries
engaging in negotiations on free-trade agreements with developed countries,
especially the United States and European Union.
These FTAs not
only deal with trade in goods but are in fact mainly about services,
capital flows, investment, government procurement, economic structures
(competition policy) and regulations, labour and environment policies.
Examples are the Trans Pacific Partnership Agreement involving the
US and 8 other countries (whose rules are mainly based on the US-FTAs),
and the EU’s FTAs with African countries, India and Asean countries.
Perhaps the incentive prompting the countries into the negotiations
is increased market access to the US and Europe, and the expectation
that their investors will be more willing to come in.
Ranged against these benefits is the reduction of “policy space” or
the ability to adopt a wide range of policy measures that are traditionally
used to promote local enterprises and the domestic economy or to defend
against speculative flows of capital.
This raises significant concerns. The goals of boosting the local
economy and managing volatile capital flows should be given higher
priority because of the global crisis, but policy measures to do so
are prohibited or hindered by the FTAs.
The gains in exports of goods are quite limited because both the US
and Europe do not want to place the reduction of their agricultural
subsidies (their main trade distortions) on the FTA agenda.
In textiles, exporters have difficulty with the “yarn forward rule”
in the US FTAs, according to which trade preference is given only
if the yarn is sourced from the partner countries.
The developing country partners meanwhile have to lower almost all
their tariffs to zero or near-zero, thereby exposing their local firms
and farmers to competition from cheaper imports. Those affected would
have reduced revenues, market shares or close down.
The services chapter of the FTAs oblige the developing countries to
open up a whole range of services to competition from the FTA partners.
In the WTO, countries are asked to list the sectors that they commit
In contrast, in the US FTAs, there is a “negative list” approach,
where all sectors are deemed to be liberalised, unless explicitly
listed as exceptions. Thus, future services that do not yet exist
(for example, the internet or certain types of financial services
did not even exist a few decades ago) are also committed.
The investment chapter has major implications. There is a commitment
to allow free flows of various types of capital. This is a barrier
to controls on capital inflows and outflows, and hinders the ability
of the financial authorities to prevent or manage financial volatility
It also obliges the countries to significantly loosen national laws
and rules that screen the entry of foreign companies, or set conditions
for their establishment, such as the type of company (subsidiary,
locally-incorporated, joint-venture, etc) and the degree of equity
requirements are prohibited, this affects the ability to set terms
for foreign companies such as management (for example, the hiring
of locals) or technology transfer.
The US FTAs also
include a draconian investor-to-state dispute system, in which the
foreign companies can sue the host governments for “expropriation”,
whose definition typically includes “indirect expropriation” or the
loss of future profits or benefits should there be policy changes
Many developing countries have been obliged to pay huge compensation,
after being sued in international tribunals designated by the FTAs.
The procurement chapter obliges the governments to open up their purchases
of goods and services and their development projects to the companies
of the FTA partner countries. The normal preferences given to local
companies over foreign companies to supply goods or to obtain contracts
for construction jobs and development projects would be severely curtailed.
The “competition” chapter would also place major constraints on the
preferences and supports given to local enterprises, and curtail the
rules under which government owned and linked enterprises operate.
Indeed, a large aim of the FTAs are to curb the scope and operations
of state-linked companies, so as to open up opportunities for the
The intellectual property chapter obliges the developing countries
to take on obligations that go far beyond the already policy-limiting
rules of the World Trade Organisation’s TRIPS agreement.
The FTA rules are so constraining that producers and importers of
generic medicines would find it even harder to operate or survive,
with the result that the prices of medicines would go up, and in some
cases out of the reach of patients.
Liberalisation and competition may have certain benefits, which is
why many developing countries have embarked on de-regulation and privatisation.
However, this is usually done in ways that benefit local enterprises
and the domestic economy, while improving efficiency and gains to
The extreme forms of liberalisation, de-regulation and opening up
to the global financial and goods markets, that become obligatory
under the FTA model of the US and EU, are however likely to create
In the context of the current economic crisis, when countries have
to be nimble and look at many options in formulating future strategies,
it is important for them to retain the freedom to use various policy
On the other hand, a country joining an FTA or the TPPA expects to
enjoy benefits beyond exports of goods, as its companies can also
invest abroad with higher degrees of investor protection.
It is thus important that a cost-benefit analysis is done, not only
on the trade and economic aspects, but also on the social and political
aspects, as the FTAs will have impacts on the socio-economic structures
and underlying political understandings in the countries. The ramifications
are far beyond trade and investment.