Global Trends by Martin Khor

Monday 19 March 2007

UN meeting warns of FTA effects

A United Nations meeting last week heard experts warning that Free Trade Agreements often result in developing countries losing their policy space, disadvantaging local banks, industries, farmers and consumers.  


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 many problems for their consumers, farmers and industries.

This emerged at a meeting in Geneva last week on the interface between the multilateral trading system and regional trade agreements (RTAs), organized by the United Nations Conference on Trade and Development.

South-South RTAs (like Asean and Mercosur in South America) are between neighbouring countries that are at 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.

UCTAD Trade Director Lakshmi Puri said new North-South RTAs go far beyond trade to include services, investment, competition and intellectual property (IP). However  agricultural subsidies (which are a main protection tool in developed countries) are left out.

This theme of “cherry picking”of issues was taken up by experts during the meeting. It  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 World Trade Organisation) 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 developing countries must be rightly concerned with North-South RTAs such as the treaty being negotiated by the European Union and the African, Caribbean and Pacific states.

In such RTAs, developing countries should advocate enhancing special treatment for them and facilitating the movement of their workers to developed countries.

South Centre Director Yash Tandon, said there were positive RTAs where solidarity and aid to weaker partners is the main principle.  But many RTAs involving developed and developing countries have an “enforced structure” where one side dictates the terms and the other side either has to “take it or leave it.”

What Tandon referred to is often called a “template”, or a fixed set of issues and demands that the developed country wants.  There is only limited space to vary.  If the developing country partner disagrees, the deal is off.   If the treaty is signed, the developing country accepts a lop-sided bargain and has to implement often harmful policies. 

The influential development group Oxfam said that FTAs involving the United States and EU strip developing countries of the policy space that they need to effectively govern their economies.

Its Trade Director Celine Chaveriat said that FTAs with the US delay the introduction of generic medicines.  Medicine costs will shoot up by US$919 million by 2020 in Colombia due to its FTA with the US.   These lost funds could be used to treat 5.2 million people.

She added that the FTAs involving the US or EU require the developing country to adopt a law that removes the right of farmers to save or share seeds, thereby making its farmers more vulnerable.  For example, the US-Dominican FTA is expected to raise the prices of agrochemicals by several fold in Dominica.

Oxfam said the US and EU also want to open up financial services in the South through their FTAs.  Developing countries liberalise hoping to have more efficiency but the opposite has happened.

Recent IMF and UN studies show that opening up the banking sector leads foreign banks to “cherry pick” only the most lucrative customers, leaving the poorer and higher risk customers for local banks, as a result reducing the profitability of local banks.

In Mexico, following its FTA with the US and Canada, 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.

Chaveriat added that developing countries are also being pushed to eliminate their agricultural and manufacturing tariffs while the developed countries refuse to negotiate agricultural subsidies (which have damaging impacts on farmers in developing countries).

She cited a study showing that Colombia could have falls of 57% in income and 35% in employment in 9 agricultural sectors resulting from its FTA with the US.

Oxfam called for an overhaul of rules governing WTO and RTAs and a change of mindset by big players about their trade policies toward developing countries.

David Vivas of the International Centre for Trade and Sustainable Development also highlighted how the US made use of its FTAs to protect the interests of its companies by insisting on IP provisions that go beyond the current global rules.

Developing countries will find it harder to protect public interests as the expanding IP rights will reduce the public domain. They should be cautious in accepting such IP measures.

Officials from many regional groupings, including Asean, were present at the meeting, as well as representatives from many governments.