Global Trends by Martin Khor

Monday 29 August 2005

Serious effects of free trade treaties

Blurb:  More countries are now engaging in bilateral free trade agreements with developed countries.  Often, these FTAs contain issues that the developing countries have rejected in the WTO, and oblige developing countries to cut their tariffs more steeply and and open up their service sectors.  The effects can be devastating, as the case of Mexican agriculture shows.


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 Organisation.

In fact, the norm is for FTAs to aim for zero tariffs for both sides as a general rule.  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.

This is so even in agriculture, where developing countries are supposed to have comparative advantage.

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% to the US after the North American FTA was signed.

But its imports from the US tripled for corn and over 500% 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 US 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, displacing the farmers.

The hopes that countries have to realize more market access to the major developed countries can thus be illusory.  Even a country as strong as Australia could not get what it wanted in agriculture in its FTA with the US. 

Australia did not get any increase in the US sugar quota, even though its leaders had said, “No sugar gain, no FTA.”   On beef, it only won a minor benefit, equivalent to an extra market access of half a cow per farm per year according to some economists.

One problem is that according to the WTO rules, the FTA partners have to eliminate tariffs and other barriers covering “substantially all trade.”    This is unlike the WTO, where developing countries can ask for special and differential treatment, to reduce tariffs by less than the developed countries.

The drastic effect of tariff cuts under a FTA can be seen in the example of serious problems facing Malaysia’s national cars as the country fulfils 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.   

While even an FTA among neighbours may cause problems (at least for certain sectors), an FTA with developed countries poses more difficulties.

In particular, FTAs that the US is 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 US.

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

The US strongly asks that its FTA partner allow American banks, insurance companies and other financial institutions to enter and operate in its country, with full ownership, and to be given “national treatment”, or be treated equally as local institutions.

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. 

Finally, “biopiracy” is being practiced, where transnational companies are patenting biological resources or traditional knowledge originating from developing countries.

In the FTAs with the US, 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.

In the FTAs with the US, countries are restricted to issuing compulsory licenses on only a few grounds, such as during an emergency.

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.

To reserve preferences and subsidies for local companies would not be permitted as this is seen as discriminating against foreign firms.   

The FTA partners are also obliged to discipline the behaviour of  governments and government-linked companies, so that the GLCs do not enjoy privileges, and each does not influence the policies of the other.

Agreeing to an FTA with the US 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 (though sometimes in dilute forms) as the US, in their FTAs.   It is a serious affair.

Why do countries negotiate a FTA with the US if there are such drastic consequences?  Some feel they are left behind if they don’t, because the neighbouring countries are signing. 

Some believe they can sell more exports to the US, 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 a FTA when the consequences can be so grave.

The country must thus 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 the Third World Network.

Hopefully the public and policy makers alike will wake up to the realities of what the FTAs entail, and the issues are examined in detail before decisions are taken to begin an FTA or to sign on to them if the negotiations are already under way.