FREE TRADE AGREEMENTS - DO THEY WORK?   

Marek Dubovec in conversation with Ravi Mehta

Q1: Free Trade Agreement (FTA) is fashion or necessity?

I would say that an FTA is neither fashion nor necessity. It depends on respective countries. Take for instance the countries in Central America, which rely on commodities and exports. Trade-promoting FTAs greatly facilitate the production and other commercial activities in these countries. On the other hand, countries in Eastern Europe that are members of the EU rely more on foreign direct investment and financial assistance from the EU. Therefore, for these countries it is much more important to negotiate investment rather than trade treaties. Furthermore, free movement of goods and services is guaranteed by the EU within its customs union. In both forms, whether investment or trade, treaties serve helpful purposes.

Q2: What are the factors that necessitate free trade agreements?

An obvious reason for entering into FTAs is the development of trade and economy. We hear about it frequently. However, let me explore other interests that influence the decision-making of the countries. FTAs have important political dimensions as well; particularly, in the areas of national security and foreign policy. These factors may be the raison d'être why the U.S. promotes the negotiations of FTAs with countries in the Middle East. Nevertheless, I believe that the primary function of FTAs is to help foreign economies rather than to control them. 

Q3: What's free in free trade? Are trade-related banking services free in FTA-based trade?

An FTA is a bilateral or multilateral arrangement that is aimed at reducing trade barriers between the signatories. I would not say that “free” means absolute freedom and anarchy with no barriers and regulation whatsoever. Trade barriers are minimized over a period of time, but in some cases not all trade has been completely freed of restrictions. Therefore, the meaning of “free” in FTAs depends on the implementation of particular agreements and the countries' ability and willingness to live up to their obligations. I think that banking services are “freer” than trade and production-related activities. Major banks are truly multinational institutions with branches all around the world. The expansion of their services does not depend on FTAs to such an extent. Of course, the variety of services that they provide is linked to the capabilities of local merchants to market their products. FTAs broaden these capabilities and thus indirectly promote the expansion of banking services as well.

Q4: An FTA revolves around tariffs, trade relaxations, trade facilitation. Does it include banking, payment, finance, foreign exchange, risks management and dispute resolution arrangements?

FTAs are designed to promote trade, a part of which are financial services. If you look at Chapter XIV of NAFTA, you will find out that this chapter applies to financial services. Furthermore, if any disputes with respect to issues covered by this Chapter arise, they may be settled pursuant to the provisions of NAFTA Chapter XX. Financial aspects are also covered in the General Agreement on Trade in Services (GATS) that prescribes the most-favored-nation (MFN) treatment for the provision of financial services. On the contrary, payments and risks management are specific issues that do not quite fit within the structure of FTAs. There are other proper instruments and legislative bodies that regulate this area.  

Q5: Do FTAs work to achieve the intended objectives?

I believe so. Since the inception of GATT in 1948 and its transformation to WTO at the Uruguay Round in 1993, numerous FTAs and bilateral investment treaties have been signed. Tariffs have been significantly reduced (the average is 5% in industrial countries), economies are growing faster (averaging at about 8 %) and the markets are more competitive. The graph shows the success.

Q6: Why some politicians speak against FTA concept? What are the disadvantages of FTA?

Some politicians and “experts” argue against the FTA on the basis of protection of environment and consumers, or some vaguely defined “state” interests. In my opinion, most of these arguments just couch the governments’ real intent to protect domestic entrepreneurs from competition. FTAs incorporate detailed rules on various issues (e.g., rules of origin) and for some local merchants it may be difficult to adjust to a new system imposed by the FTAs. Adjustments may also increase transactional costs and therefore, not every merchant will benefit from the new regime.

Q7: What are the famous FTAs in the world? Could you please help us with their web addresses or links. 

Perhaps, the most well know is the North American Free Trade Agreement (NAFTA) that was signed by the U.S., Canada and Mexico. Recently another important FTA entered into force that was initiated by the U.S. with the countries in Central America (Costa Rica, El Salvador, Honduras, Guatemala, Nicaragua, and the Dominican Republic)- the Central American Free Trade Agreement (CAFTA). The US. has also signed an FTA with Chile. Other recent FTAs include agreements with Bahrain, Singapore, Jordan, Morocco, Israel, and Australia. I presume that the readers are familiar with the WTO system. 

There are many websites that provide information on free trade agreements. For the sake of simplicity, the readers of LCVIEWS may refer to http://www.ustr.gov/Trade_Agreements/Section_Index.html which is an official website of the United States Representative or our database of the National Law Center that may be accessed at http://natlaw.com/interam/. All important FTAs are posted at those links.