FTAs as a solution to expanding and retaining markets

In June 2007, the US and the Republic of Korea signed a Free Trade Agreement (KORUSFTA). In December 2010, they concluded new agreements reflected in letters signed in December 2011, providing market access to US auto manufacturers and workers.

Once the agreement comes into force on 15 March 2012, nearly 95% of bilateral trade in consumer and industrial products will become duty free within five years from the date of entry into force of the agreement and most remaining tariffs would be eliminated within 10 years.

Why do two economically powerful developed countries want to enter into such Free Trade Agreements? Aren’t their domestic markets and the export markets that they already have enough? Cannot their exporters compete effectively in overseas markets without such agreements?

Need their domestic manufacturers be exposed to cheaper competition from importers who are given tariff concessions to break into their preserved territories? Will their governments be so foolhardy as to sacrifice their local manufacturers if the benefits did not outweigh the losses? These are questions we need to ask ourselves.

The US International Trade Commission estimates that the reduction in tariffs and tariff rate quotas on goods alone will add $ 10 billion to the annual GDP and around $ 10 billion to annual merchandise exports to Korea due to the FTA.

As an example of the benefits in goods, apparel can be cited. In the case of apparel, US garments will enter Korea duty free if made up of regional yarns. Similarly, Korean textiles will enter US duty free of made of regional yarns. This is similar to regional cumulation available under the EU GSP for SAARC countries. In the services sector, the FTA would provide market access commitments extending across virtually all sectors.

It is not only the US and Korea that are entering into more and more FTAs. Developed and developing countries around the world, whether as regional groupings such as EU, ASEAN, MERCOSUR, emerging economies such as Indira, Brazil, Mexico, Russia are all in some such agreements or other.

In the absence of a successful conclusion in the foreseen future of the Doha Round, which would have disciplined and brought about reduced tariffs, more and more countries are looking at FTAs as a solution to expanding and retaining markets.

The reason is that governments in these countries have accepted the reality that we are living in a globalised village and not as isolated countries divided by land and sea borders and a positive way of grabbing opportunities that arise with globalisation is to establish links giving preferential access to markets which their exporters can penetrate.

FTAs help reduce barriers for exporters to enter the partner country’s market, assist in forming joint ventures in a country where it is cost effective to manufacture a product. The consumer is also allowed a choice of competitive products

While FTAS are not without faults, the pluses outweigh the minuses and in the absence of a successful conclusion of the Doha Round, FTAs – bilateral and regional – is also a way to move forward in international trade and enjoy the fruits of globalisation.

(Manel de Silva holds an Honours Degree in Political Science from the University of Ceylon, Peradeniya and has engaged in professional training in Commercial Diplomacy at ITC and GATT. She has served as a trade diplomat in several Sri Lankan Missions overseas and was the first female Head of the Department of Commerce as Director General of Commerce.)