EYES ON FREE TRADE AGREEMENTS

Naim’s views at the World Trade Institute workshop 28/4/08

INTRODUCTION

The proliferation of Free Trade Agreements (FTAs), especially between developed and developing countries, raises serious concerns for public interests and national development prospects.

These FTAs cover a very broad scope, including tariff reduction for a country’s products, investment, services, intellectual property rights, government procurement, competition policy, labor and environment. They also set up a dispute settlement system for investors of one country to sue the government of the other country in international arbitration tribunals.

Many of these issues such as investment, competition and government procurement have been rejected by developing countries at the World Trade Organization after many years of heated debate. The standards and obligations are also more burdensome than those found in the WTO, such as intellectual property rights protection favoring the firms and researchers of the developed country in an FTA.

We are aware that the scope of FTA negotiations covers a wide range of sectors of tremendous importance to Malaysian economics which can have very significant and profound impacts on jobs and food security, the access to affordable medicines, the resilience of the domestic industry and services providers, the viability of small firms and ultimately national sovereignity.

The local business, including the private sector deserves special mention because they are the ones who actually drive trade and investment. In the wake of liberalizations, business expansions and know the issues of FTA the local business has indeed become major force in integrating the regional economies. In fact, local business interests and expectations are set to rise and expand.

Government procurement is one of the key negotiating issues in FTA. Countries that sign on FTAs containing a chapter on government procurement in future will not be allowed to give preferences to local companies for the supply of goods and services and for the granting of our concessions for implementing projects. Should the government procurement be opened up through the national treatment, the scope and space for a government to use procurement as an instrument for development would be severely curtailed. For example, if the foreign share increases, these would be a “leakage” in government attempts to boost the economy through increased spending, during downturn. This is because an increased part of any expansion in government expenditure would be spent on imported products, thus decreasing the multiplier effects of public spending on domestic.

Furthermore the ability to assist local companies, and particular socioeconomic groups seriously curtailed. This is because “national treatment” would have to foreign firms to bid for supplying goods and services as well as development projects.

FTA signing with the US could literally wipe out our local software market. ICT and how such issues as copyrights software patents are not familiar with the general public. If you think that your patents is going to offer protection, think again. The local software industry which is quite new will not be able to afford the million of dollars in dealing with legal issues of patent. When we have 4 patents and they have 50 patents related to your product, your only option is to license theirs, but only for as long as they are willing to tolerate your company. ICT and software involves everything you do these days, ATM machines, point of sale terminals and inventory management, multimedia editing, banks, electricity, airport and day to day office productivity.

FTA sounds like good thing for Malaysia by opening up our market to other countries will increase export opportunities for Malaysia. But look closely at the clauses may stop you cold. Malaysia can expect little benefit from market access in goods from the FTA with the US, since such access wil inevitably be constrained and circumscribed by onerous conditions such as rules of origin and safeguard measures. On agricultural products, the gains will most certainly limited. For example, Australia could not get extra sugar quota in its FTA with the US, and on beef it only obtained 18.5% increase in its quota, confined to manufacturing grade beef spread over 18 years, or an extra half a cow per farm per year. Non-tariff barrier have also limited Mexico’s expected exports of agricultural products to the USA under the North America FTA.

The most affected will be the healthcare industry. Currently in Malaysia the pharmaceutical industry is feeling the heat due to the regulation brought over by the foreign. Though the Health Ministry through its subdivision called DCA doing their job in the name of protecting the public, they themselves also do not know what to do. The industry may suffer further if the generic drugs are totally eliminated from the market and the branded one will dominate. The poor have to pay for these branded drugs. The US especially may insisted stringent tests and so on for the generic drugs and the generic drugs manufacturer may not have the resources to do it and finally may close shop. The US may even use the so called the pharmaceutical guidelines to press the local manufacturer to unnecessary rule knowing that the locals are still catching up.

If the negotiations proceed in the same manner as with the US-Chile and US-Singapore trade agreement, as seems likely at present, US transnational companies will take control of the agricultural sector and the country’s genetic resource base. The treatment of US short and long term investors under the same regulations as Malaysia investors will allow giant US companies to take over many businesses, including public services like water, electricity and pharmaceuticals. This will take the country on the path to becoming a US colony. We will lose our economics by FTA.

One of the challenges we must face together are the realities of the global trade talks. We can better protect and promote our respective interests if we are able to present united and common positions in the multilateral negotiations.

Becoming competitive and innovative in a globalised, liberalized world is clearly a desirable outcome. But the journey to that outcome is paved with difficulty and pitfalls. Do we take a strict laissez-faire stance and risk a worsening in inequalities? Or do we protect local industries at the risk of being uncompetitive and forever unprepared? There is a handbook of sorts to open up your country’s borders, but there is no handbook or manual in dealing with the accompanying issues. Each country faces these same set of questions, yet every country has its own characteristics and its own constraints.

We must harness the synergy of our diverse economies. To enable us to do that, we need to strengthen regional economic cooperation. It will bring mutual benefits and create greater prosperity for all of us.

ADVANTAGES OF FREE TRADE

Free trade occurs when there are no artificial barriers put in place by governments to restrict the flow of goods and services between trading nations.

When trade barriers, such as tariffs and subsidies are put in place, they protect domestic producers from international competition and redirect, rather than create trade flows.

i. Increased production

Free trade enables the countries to specialize in the production of those commodities in which it had a comparative advantage.

With specialization countries are able to take advantage of efficiencies generated from economies of scale and increase output.

International trade increases the size of a firm’s market, resulting in lower average costs and increased productivity.

ii. Production efficiencies

Free trade improves the efficiency of resource allocation. The more efficient use of resources leads to higher productivity and increasing total domestic output of goods and services.

Increased competition promotes innovative production methods, the use of new technology, marketing and distribution methods.

iii. Benefits to consumers

Consumers benefit in the domestic economy as they can now obtain a greater variety of goods and services.

The increased competitions ensure goods and services, as well as inputs, are supplied at the lowest prices.

iv. Foreign exchange gains

When Malaysia sells exports overseas it receives hard currency from the countries that buy the goods. This money is then used to pay for imports such as electrical equipment and industrial goods [roduced more cheaply overseas.

v. Employment

Trade liberalisation creates losers and winners as resources move to more productive areas of the economy. Employment will increase in exporting industries and workers will be displaced as import competing industries fold in the competitive environment. With free trade many jobs have been created in Malaysia , especially in manufacturing and service industries.

vi. Economic growth

The countries involved in free trade experience rising living standards, increased real incomes and higher rates of economic growth.

DISADVANTAGES OF FREE TRADE

Although free trade has benefits, there are a number of arguments put forward by lobby groups and protestors who oppose free trade and trade liberalization. These include:

o With the removal of trade barriers structural unemployment may occur in the short term.

o Increased domestic economic instability from international trade cycles, as economies became dependent on global markets. The Asian economic crisis in 1998 and economic slowdown in the global economy in 2001 illustrate this situation.

o International markets are not a level playing field as countries with surpluses may dump them on the world markets below cost. Some efficient industries may find it difficult to compete for long periods under such conditions.

o Developing or new industries may find it difficult to become established in a competitive environment with no short-term protection polices by governments.

o Free trade can lead to pollution and environmental problems as companies fail to include these costs in the price of goods.

ARGUMENTS AGAINST FREE TRADE

1. Infant Industry Argument.

If developing countries have industries that are relatively new, then at the moment these industries would struggle against international competition. However if they invested in the industry then in the future they may be able to gain Comparative Advantage.

o This shows that comparative advantage can change over time

· Therefore protection would allow them to progress and gain experience to enable them to be able to compete in the future

2. The Senile industry argument.

If industries are declining and inefficient they may require large investment to make them efficient again. Protection for these industries would act as an incentive to for firms to invest and reinvent themselves. However protectionism could also be an excuse for protecting inefficient firms

3. To diversify the economy

Many developing countries rely on producing primary products where they currently have a comparative advantage. However relying on agricultural products has several disadvantages

§ Prices can fluctuate due to environmental factors

§ Goods have a low income elasticity of demand. Therefore with economic growth demand will only increase a little

4. Raise revenue for the govt.

Import taxes can be used to raise money for the govt however this will only be a small amount of money

5. Help the Balance of Payments

Reducing imports can help the current account. However in the long term this is likely to lead to retaliation

6. Cultural Identity

This is not really an economic argument but more political from what they see as an Americanisation or commercialisation of their countries

7. Protection against dumping

The EU sold a lot of its food surplus from the CAP at very low prices on the world market. This caused problems for world farmers because they saw a big fall in their market prices

8. Environmental

It is argued that free trade can harm the environment because LDC may use up natural reserves of raw materials to export. Also countries with strict pollution controls may find consumers import the goods from other countries where legislation is lax and pollution allowed.

• However supporters of free trade would argue that it is up to individual countries to create environmental legislation

SOME CURRENT DEVELOPMENTS IN ASIA PACIFIC REGION

• Japan has been negotiating with Singapore a free trade agreement, and has studied the feasibility of agreements with Mexico and Chile.

• The United States concluded a free trade agreement with Jordan in October 2000, and is negotiating bilateral free trade agreements with Singapore and Chile. In 1998, leaders of 24 countries from the Americas committed to negotiate a Free Trade Area of the Americas by 2005.

• New Zealand in 2000 conducted a joint feasibility study on a free trade agreement with the Republic of Korea and expressed interest in agreements with Canada and the United States. It is examining a three-way agreement with Singapore and Chile.

• Singapore is pursuing a number of free trade agreements. Its free trade agreement with New Zealand has been concluded and it has commenced bilateral negotiations with Australia, Japan, Mexico and the United States. It is exploring a possible free trade agreement with Canada. Singapore has indicated interest in negotiating a free trade agreement with the European Free Trade Association (the European Union, Switzerland, Norway and Iceland.)