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The price of free
trade
By
Jeffrey Robertson
As the struggle for regional economic
dominance in Northeast Asia heats up, the battle
for free trade agreements (FTAs) has reached a new
level, which may not only see the weakening of the
multilateral trade system, but also the cancerous
growth of geopolitical influence in regional
trade.
Today, nearly 55% of world trade
occurs through free trade agreements, but
economists differ on their virtues. Some see them
as stepping stones to freer trade - they are
easier to negotiate and can achieve more than
multilateral deals. Others see them as potholes on
the road to freer trade - adding unnecessary
complexity and diverting valuable negotiating
resources. But nobody can argue that the
importance of free trade agreements to regional
states has grown. As economist Peter Lloyd noted,
free trade agreements are like street gangs, if
everyone else in your neighborhood is in one,
you'd better be in one too.
It is widely
accepted that recent US trade policy has been
somewhat tainted by its cozy relationship with
Bush administration foreign policy goals. Strong
supporters of US action in Iraq, Singapore and
Australia were rewarded with expedited free trade
agreements. Others opposed to action, such as
Chile, had their agreements postponed, while other
countries long opposed to US policies such as New
Zealand - which since the 1980s has refused to
admit nuclear-powered or armed vessels in its
waters - were not even allowed in the negotiation
room.
The use of trade to support and
reinforce foreign policy is anything but new. The
United States' first free trade agreement occurred
back in 1985 with Israel, a country that accounted
for an indistinct fraction of US trade. The
economic benefit to the US was negligible; the
geopolitical benefit was much greater. The US,
arguably, bolstered its position in the Middle
East and ensured the economy of its key ally
remained strong. More recent free trade agreements
with Jordan, Bahrain and Morocco fit into similar
moulds, with questionable economic benefit but
immeasurably more geopolitical gain.
Free
trade agreements in Northeast Asia may be
following the same trend. China and Japan are well
aware that the regional economic dominance that
both seem to be struggling for depends on the
ability to control the direction of regional
economic integration. South Korea, the Association
of South East Asian Nations (ASEAN), Australia and
New Zealand are all thrown into the fracas as
Japan and China compete.
The start of July
saw the first dent in Japan's economic armor with
the implementation of the ASEAN-China Free Trade
Area (ACFTA). The ACFTA will allow immediate duty
reductions for over 7,000 products, with all
duties to be removed by 2010. This will soon be
followed by services and investment
liberalization. However, the real benefits are
geopolitical. With an already extensive expatriate
and ethnic Chinese network ready to exploit
potential economic gains, China's political
influence will naturally increase. In contrast,
negotiations toward a Japan-ASEAN agreement have
only just begun and full implementation is not
expected until 2012.
China is clearly
edging ahead. The importance and size of the
Chinese economy to the region lends it substantial
weight in obtaining political leverage in return
for increased trade. It is quickly becoming the
most important trading partner for each individual
economy in the region and with analysts predicting
that growth will continue, the temptation for it
to use free trade agreements as foreign policy
tools will only grow greater.
China is
already proving to be more strategically astute
than the United States in trade geopolitics. New
Zealand, with which the United States refused to
negotiate a free trade agreement, has been
steadily tempted to the Chinese way of thinking.
New Zealand was the first Western nation to reach
a bilateral deal with China on its accession to
the WTO, and similarly the first to recognize
China's full market economy status; in return, in
2004 it became the first to commence negotiations
with China toward a bilateral free trade
agreement.
With the US having already used
its FTA leverage with Australia, it is now China's
turn. The promise of a free trade agreement with
China has already seen the Australian government
recognize China's market economy status, respond
favorably to relaxation of the European Union arms
embargo, and turn a blind eye to accusations of
Chinese spy networks operating in Australia.
Here lies the real threat to free trade.
In the extreme, free trade agreements can become
comparable to the use of economic sanctions in
their attempts to influence political behavior.
Preferential trade agreements are simply the
opposite side of the coin - the "carrot" as
opposed to the "stick" of sanctions. Both are
discriminatory trade measures that deviate from
the happy medium of the "most favored nation
principle" which lies at the heart of the
multilateral system. Most favored nation dictates
that trade privileges between any two states
should also extend to third parties.
Discriminatory trade measures can be used to
influence political decisions; either positively,
in the case of FTAs, or negatively, in the case of
sanctions.
Sanctions have a long and
sordid history of ineffectual political
interference in international commerce - diverting
trade, harming domestic producers and exporters,
and creating economic inefficiencies. It seems
free trade agreements could be going the same way.
Complexities abound for the average exporter
today. They must wade through the rules of origin
and the thousands of product codes that govern the
applicability of preferential tariff rates. This
has to be repeated for each market and sometimes
more than once for each market. For example, for
Thai exporters to Australia, there will be the
Australia-Thailand free trade agreement
preferential tariffs; Australia-ASEAN preferential
tariffs; and Australian developing country
preferential tariffs. After the question of which
preferential rates apply, comes the question of
who applies them, the exporter, the importer or
the importing country customs official...and so
on.
Multilateral trade is far from
perfect, but is definitely less prone to
geopolitics, and for the average exporter in Asia,
is always going to be simpler as the "spaghetti
bowl" of free trade agreements gets ever deeper.
Jeffrey Robertson is a political
affairs analyst focusing on international
relations in Northeast Asia, currently residing in
Seoul, South Korea.
(Copyright 2005
Asia Times Online Ltd. All rights reserved. Please
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