Free Trade Agreements: Not As Free As You Think

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On July 31, 2014, the World Trade Organisation (WTO) failed to ratify the Trade Facilitation Agreement (TFA), which had emerged from the December 2013 conference in Bali, Indonesia. Despite consensus throughout the WTO’s membership on the urgency of a TFA, the WTO’s efforts to reduce red tape and expedite the movement of goods on a global scale have failed.

Governments lamented the deadlock of global trade liberalization negotiations at the latest WTO Doha Development Round, and the ideological crisis of multilateralism, by retreating to regional and bilateral free trade agreements (FTAs), signaling the return of a more conditional, interventionist and nationalist socioeconomic model, which prevailed in the aftermath of the Great Depression.

Although national barriers are not being re-erected and states resist the temptation to resort to traditional trade barriers – economies do increasingly pick trade partners, assert how commercial activities should be performed, and specify where trade disputes ought to be arbitrated. In 2000 when the WTO Uruguay Round was officially concluded, there were a mere 30 bilateral and plurilateral FTAs in effect in the Asia Pacific, while the number has soared to 119 in 2014. The past few years also witnessed the parallel rise of several mega-FTAs, such as the Transatlantic Trade and Investment Partnership (TTIP), the Regional Comprehensive Economic Partnership (RCEP) and the Tran-Pacific Partnership (TPP).

No Free Trade with Key Partners

An explosive proliferation of FTAs inevitably urges national governments to engage in trade forum shopping. In practice, governments will prioritize some trade forums while moving away from others. Since FTAs serve the purpose of increasing national trade and the choices of individual citizens, one may logically assume that rational governments would strike bilateral deals with their major, if not top, trading partners. In a similar vein, economies could be expected to participate in plurilateral FTAs that their major trading partners are also signatories.

However, facts are unequivocal and disproving. Economies far too often engage in signing preferential trade agreements with their minor trade partners. As of 2014, China has FTAs with countries such as Peru, Chile and Costa Rica, while hardly any meaningful agreement exists between China and its top ten trading partners, excluding Hong Kong and Taiwan. The combined GDP of the EU’s FTA partners in 2013 was $3.2 trillion, approximately equal to one fifth of U.S. GDP. Not unlike China and the EU, the average trade share of the U.S.’s preferential partners, excluding the North American Free Trade Agreement (NAFTA) members, lingered at 0.6 per cent from 1995 to 2004. With respect to plurilateral agreements, governments are not necessarily willing to join trading blocs led by their close trading partners, despite the prospect of maximizing economic gains by locking in liberalization commitments with their principle trading partners. A case in point is South Korea, which to date has been reluctant to join the TPP, a U.S. led mega-FTA. Many have argued TPP membership is in the best interest of South Korea as many of its top trading partners are already negotiating membership, and its absence in the negotiation process will incur high entrance fees in the future and force it to accept an already agreed upon set of rules. Yet South Korea has adopted a “wait-and-see” approach, and is not likely to join the TPP negotiations until its FTA with China is completed.

Ideological and Practical Reasons

This “no free trade with key partners” phenomenon is rather puzzling, yet it is largely explicable. First, most economies are still officially committed to multilateralism, despite their tactical efforts to advance trade liberalization through regional and bilateral measures. For example, the EU upholds a long-standing principle that the WTO is the only legitimate avenue to discuss trade agreements (i.e. the Lamy Doctrine, named for the then EU Trade Commissioner, and former WTO Director-General Pascal Lamy), and that is partly why the EU has hitherto concluded only four FTAs. That said, were economies able to secure their trade interests by signing bilateral trade deals with their key partners, global trade dynamism would be bound to fade. Economies in turn will see much less necessity in making painstaking comprises in multilateral trade negotiations to push forward a global trade liberalization agenda that does not necessarily benefit them much. Economies’ subtle detachment in reaching FTAs with their major trading partners shields governments from the stigma of sounding the death knell for multilateralism, and the accusations of pursuing narrow economic gains to the detriment of others.

Second, economies engaged in international trade negotiations are restrained by the “gains for control” trade off. Empirical evidence suggests that economies are predisposed to prioritize trade agreements where they are able to exert more control. FTA negotiations are essentially a “give-and-take” game. Therefore trade negotiations are notoriously tricky and sensitive, especially when one’s influential trading partners’ national interests are also at stake. In 2006, the Japan-Philippines Economic Partnership Agreement (JPEPA) was signed; the treaty was the first comparable trade deal since the Philippines signed the Parity Rights Agreement with the U.S. in 1946. One provision in the JPEPA legally permits Japan to dump its trash and toxic waste in the Philippines, and it has elicited opposition for years. Critics argued that other countries will demand nothing less than the same concessions the Philippines gave to Japan, putting the country in a disadvantaged position in future FTA negotiations through precedent. In justifying their stance, the Filipino negotiators admitted that the provision was deemed to be a necessary evil in order to convince Japan to open up its markets to Filipino laborers, and that they had little control over this issue. To avoid committing similar acts of “economic treason,” governments keep respectfully aloof from signing FTAs with their major trading partners for fear that the latter may dominate the negotiation trajectory.

Third, a prerequisite for the successful conclusion of FTAs between major trading partners is the government’s ability to garner sufficient political support at the right point in time. The launch of the TTIP would have not been possible if it had not taken place at a time when the economic crisis had heightened the awareness of all political actors, including the European Council and the European Parliament, concerning the need to devise new ways of stimulating economic growth. Not many governments have the capacity to steer public opinion to convince domestic interests groups with varying, if not conflicting, political and economic aspirations, that sacrificing political control for economic gains, or vice versa, by engaging key trading partners in FTAs is in the best interest of the nation.

Trade, one of the oldest forms of international communication, lies at the nexus of national, regional and international politics. A government’s preference for FTA partners vividly reflects the complex nature of trade politics. In the larger picture, FTAs are at most the second best options in today’s “gated globe.” It remains critical for policymakers not to divert too much of their attention and trade negotiation resources away from multilateralism, which provides a platform to mitigate global risks.

Ji Xianbai is PhD candidate at S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University, Singapore. 

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