Free trade agreements

Thursday, 25 November 2010 00:01 -     - {{hitsCtrl.values.hits}}

Free trade agreement is a well known term used in global trade today. The term free trade agreement is used to describe a special trade agreement between two countries or a number of countries belonging to a grouping agreeing to eliminate tariffs between the agreed parties.

It is estimated that currently, in Asia alone, around 80 FTA s have been negotiated, while about 47 are in operation, as compared to a mere three agreements in 2000.

A major factor for the popularity and proliferation of FTA s is that multilateral trade liberalisation which was expected to take place through the WTO (World Trade Organisation) trade negotiations known as the Doha Round after many years have failed to reach finality. Therefore, countries in need to develop bilateral and regional trade found a fast track method through such free trade agreements.

Another reason for the proliferation of such agreements, particularly in Asia, is the sluggish economic growth in the EU and US on which most countries depended in the past, resulting in the fast-growing developing countries or countries known as emerging economies needing to find new sources of growth and in doing so would also contribute to the rebalancing of the global economy.

Free trade agreements are in place today between economies in the North and South lines and countries that are right across the globe, indicating how globalised the world is today. Some of the better known free trade agreements are AFTA (ASEAN), SAFTA (South Asia) and NAFTA (North America).

Critics of FTAs consider the numerous such agreements entered into by countries as being a ‘spaghetti bowl’ or an ‘Asian noodle bowl,’ by increasing transaction costs for businesses through variable tariffs, complicated rules of origin and different bureaucratic requirements.

It is also argued that such agreements go against the principle of non-discriminatory world trade and provide an opening for powerful countries to extract unjustifiable concessions from weaker trading partners on issues such as labour standards and intellectual property protection.

However, some others argue that FTAs are useful, particularly with the development of production networks across regions.

An ADB report on surveys conducted in South East Asia in 2007 and 2008 found that businesses in the region tend to view FTAs as a benefit than a burden and that they use them to expand trade to a far greater degree than had been previously thought and while rules of origin ‘may add some administrative and transaction costs,’ the larger majority of exporters do not view them as a significant hindrance to business.

The ADB report concludes that countries and businesses in South East Asia have used FTAs to build and expand production networks, decrease input costs and open new markets.

An ADB economist foresees the eventual development of a “hub” of harmonised regional trade agreements in East Asia centred on the ASEAN with spokes ultimately expanding to Europe and the US. He also sees the first step in such a development in place in the shape of ASEAN’s agreements with China, Japan and Korea.

Sri Lanka too has attempted to go with the trend by signing bilateral FTA s with India and Pakistan.

Sri Lanka is also a signatory to SAFTA (South Asian Free Trade Agreement) However, these agreements have not been sufficiently utilised by our exporters.

Further, the two bilateral agreements have also not been effectively carried forward to the logical conclusion of being converted into comprehensive partnership agreements which would have incorporated the services sector in addition to the goods sector.

Being a small economy, integration through such agreements is necessary for the country’s trade and economy to grow effectively.

(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.)

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