Free Trade Agreements; Boon Or Bane

FREE TRADE AGEEMENTS; BOON OR BANE

 

Free trade, one of the greatest blessings which a government can confer on a people, is in almost every country unpopular.

                                                                  Thomas B. Macaulay

Khushbakht Ibrar

Lawyer at Trek Law

 

Introduction:

Trade is the center to ending global poverty. When the International trade is welcomed by the countries, they tend to develop faster, innovate, improve productivity and supply higher income and more opportunities to their citizens. Open trade also benefits lower income households by offering consumers more inexpensive good and services. Free trade agreement (FTA) or treaty is a multinational agreement according to international law to form free trade areas between the cooperating states. FTAs are a type of trade pacts that determine the tariffs and duties that countries impose on imports and exports with the objective of reducing or eliminating trade barriers, thus encouraging international trade. Such agreements usually provide special tariff management, but they also often consist of clauses on trade facilitation and rule making in areas like investment, intellectual property, government procurement, technical standards.

Free trade area comprises of group of countries which have agreed to abolish tariffs on most goods and services traded to them. The countries that are in agreement with other states for free trade enables them to focus on their competitive advantage to freely trade on the goods and services at which they lack experience, thus increasing efficiency and profitability of every country. Several free trade agreements are

  • North American Free Trade agreement (NAFTA)
  • Common Market for Eastern and Southern Africa (COMESA)
  • ASEAN Free Trade Area (AFTA)
  • Southern African Development Community (SADC)
  • Central European Free Trade Agreement (CEFTA)
  • Greater Arab Free Trade Area (GAFTA)

As far as the question to whether the Free Trade Agreements are boon or bane, is concerned, in my opinion Free Trade Agreements are beneficial to the world especially the developing countries. Free trade also increases fiscal development and reduces cost of livelihood as it eliminates government interventions such as duties and taxes which permit the products and services to be accessible to consumers at lesser costs as well as giving rise to good relationship among countries involved which leads to better domestic governance and peaceful international ties.

Origin and History

The significance of free trade was initially observed and documented in 1776 by Adam Smith in “The Wealth of Nations”, stating:

It is the axiom of every sensible master of a family, never to try to make at home what it will cost him more to make than to buy. If a foreign country can supply us with a product cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage

The concept of a free trade system encompassing numerous sovereign states originated in a elementary form in 16th century Imperial Spain. According to American jurist Arthur Nussbaum the Spanish theologian Francisco de Vitoria was the first to lay down the ideas of freedom of commerce and freedom of the seas[1]. Nevertheless, it was two early British economists Adam Smith and David Ricardo who later developed the idea of free trade into its modern and recognizable form.

In a well-known book written by Adam Smith “An Inquiry into the Nature and Causes of the Wealth of Nation”, published in 1776, Smith argued that economic development is dependent upon specialization and the distribution of labor. Specialization helped encourage larger production that is, producing more goods from the similar resources, which is necessary for achieving advanced standards of living. Therefore, international trade efficiently increased the size of the market for any agreed country. It formed an international distribution of labor and thereby benefited all countries by increasing the world’s productivity and output.

In 1817, Ricardo gave the idea of comparative costs, now called comparative advantage in his famous writing “Principles of Political Economy”. David Ricardo has received nearly all of the credit for developing this important theory although James Mill and Robert Torrens had similar ideas at the same time. The idea provides that a country that imports products at lower cost from another country is better off than if it had made the products at home.

The Ottoman Empire had moderate free trade policies. The first commercial treaties were signed with France in 1536, reducing duties to 3% on imports and exports. Ottoman free trade policies were admired by British economists supporting free trade.

Free trade was adopted by United States as a result of American Revolutionary War. After the British Parliament blockaded colonial ports and issued the Prohibitory Act, the Continental Congress responded by successfully declaring economic independence, and thus opened American ports to foreign trade on 6 April 1776.

In Britain, free trade became an important principle practiced after the revocation of the Corn Laws in 1846. Major agitation was sponsored by the Anti-Corn Law League. In the Treaty of Nanking, China opened five treaty ports to world trade in 1843. The earliest free trade agreement, the Cobden-Chevalier Treaty, was put in place in 1860 between Britain and France which led to successive agreements between other countries in Europe.

Legal and Political perspective of FTA:

The expansion of free trade areas is regarded as an exemption to the most favored nation (MFN) principle in the World Trade Organization (WTO) because the preferences that parties to a free trade area entirely grant each other go outside their accession commitments. Although Article XXIV of the GATT allows WTO members to set up free trade areas and to adopt several conditions and temporary agreements essential for the establishment.[2]  The  establishment of a free trade area to grant preferential treatment among its member is legal under WTO law, but the parties to a free trade area are not allowed to treat nonparties less favorably than before the area is established. A second requirement set by Article XXIV is that tariffs and other barriers to trade must be eliminated to substantially all the trade within the free trade area.

Free trade agreements usually lie outside the dominion of the multilateral trading system. Nonetheless, WTO members must notify to the Secretariat whenever they conclude new free trade agreements and the texts of free trade agreements are subject to review by the Committee on Regional Trade Agreements. Despite the fact that dispute taking place within free trade areas are not subject matter to litigation at the WTO’s Dispute Settlement Body, but there is no guarantee that WTO panels will abide by them and refuse to exercise jurisdiction in a given case.

There are certain geographical and political economy factors that are important for the formation of Free Trade Agreements. In accordance to the Stolper-Samuelson theorem, there are both winners and losers from FTAs. This redistributive outcome will be present as long as a country differs from its trading partners in factor endowments. FTA decisions will be ultimately determined by how the preferences of politicians and their parties, interest groups and voters are aggregated in political processes. There are two main divisions of the political economy of trade policy. The former division represents direct democracy or median voter approach with the implied assumption that voters vote directly upon trade policy or government chooses trade policy according to majority opinions (general interest). The subsequent is the interest group approach (special interest).

The administrative ability of the state is also seen as an important factor shaping free trade policy. It is well recognized fact that developed countries tend to have fewer trade barriers than do lesser developed countries. Institutional capacity of the country develops with the development of the country and thus reducing their need to depend on import taxes for revenue. Political leaders may also support trade liberalization merely because it increases government revenues. Additional revenues are generated with the Liberalization because of the increased economic activity and higher volumes of trade it produces, even at lower tariff rates. The government arrangement and the nature of the party system have also been seen as important institutional factors shaping free trade policy. Countries with extremely polarized party systems, in which the main parties are divided by large ideological differences, may incident huge swings in policy and generally produce indefensible trade reforms.

Not only domestic forces affect the trade policy, there are numeral factors in the international system have been connected to countries’ free trade policy choices. A preferential argument among Realists has been that the distribution of capabilities in the international system has a fundamental effect on trade. The theory of hegemonic stability (HST) provides that when the international system or economy was dominated by one country then free trade would be most likely.

Free trade agreements for developing countries:

The debate over the advantages and disadvantages of international trade dates back several decades. Today it is well established fact that countries stand to gain through trade because the advantages often far exceed the disadvantages. Free trade leads to a situation where citizens of a country can freely buy and sell goods and services with other countries without any restrictions. It is process whereby countries can import and export goods without apprehension of government involvement. Government interference includes tariffs and import/export bans or limitations. Free trade offers numerous benefits to countries, especially those in the developing phase. A country with low levels of economic resources and low standard of living is a developing country. Developing countries can often advance their economy through planned free trade agreements.

Increased Economic Resources

Developing countries can gain from free trade by growing their amount of or access to economic resources. Nations usually have limited economic resources. Economic resources include land, labor and capital. Land represents the natural resources found within nations’ borders. Small developing nations often have the little amounts of natural resources in the economic marketplace. Free trade agreements ensure developing nations can obtain the economic resources needed for production of consumer goods or services.

Improved Quality of Life

With the free trade, the quality of citizen’s life can be changed. Nations can import goods that are not readily available within their boundaries. For a developing country importing goods may be inexpensive than attempting to produce consumer goods or services within their borders. Many developing nations do not have the manufacturing processes available for converting raw materials into important consumer goods.

Better Foreign Relations

Better foreign relations are generally an unintended outcome of free trade. Developing nations are often subject to international pressure. Developing free trade relations with more powerful countries can help ensure that a nation has additional protection from international threats. Developing countries can also use free trade agreements to improve their military power and their domestic infrastructure, as well as to get better politically.

Improved Production Efficiency:

Developing countries can use free trade to develop their manufacture efficiency. Most nations are able of producing some type of goods or service but deficiency of knowledge or proper resources can make production inefficient or ineffective.

Globalization, Bilateralism and Regionalism:

Globalization is similar to free trade which allows the amalgamation of world economies through the reduction of barriers to the movement of trade, capital, technology and people. This has been influenced by two main factors, the first one being the advancement of technology which reduced  the costs of transportation, computation and improved communication which would  facilitate a growing company to locate different phases of production in different countries and the liberalization of trade and capital markets. Most governments have reduced limitations on international movements of products and services, for mainly the reasons that their citizens want a larger range of goods and services at lower prices. Competition drives domestic producers to turn out to be more efficient. They look forward to encourage other countries to lower their barriers in turn. And that’s where institutions such as the WTO emerged to play important roles in order to help the countries involved to endorse free trade in place of protectionism. This has improved economic growth in developed countries and some developing countries because not all developing countries are equally involved in globalization.

Bilateralism is the phenomena which explain the political, economic, or cultural relations between two sovereign states. It is an agreement undertaken by two parties i.e. a mutual agreement. Fiscal agreements, such as free trade agreements (FTA) or Foreign direct investment (FDI), signed by two states, are a common example of bilateralism. As the majority economic agreements are signed in accordance with the explicit characteristics of the contracting countries to give preferential treatment to each other, not a generalized principle but a situational differentiation is required. Thus through bilateralism, states can obtain more modified agreements and obligations that only apply to particular contracting states. Economic regionalism is institutional arrangement intended to assist the free flow of goods and services and to organize foreign economic policies between countries in the same geographic region. The association between economic bilateralism and regionalism has turned out to be important to understand the intensification of both forms of international association. The nature and development of economic bilateralism and regionalism posits that an increasingly dense pattern of bilateral FTA activity contributes to regionalism processes and to regional community building in general.

The bilateral trend in East Asia and Asia pacific has intensified the question of whether dense economic bilateralism will develop regional cooperation. As East Asia has no regional blocs so far therefore it allows us to make similar comparison in the development of bilateral-regionalism. The free trade agreements have developed regionalized harmonization. Regional integration creates new wide range domains across the borders removing national level barriers and providing wide access as the adoption of common regional policies which are important for the development of regionalism.

Since the late 1990s there has been a swift increase of bilateral free trade agreement (FTA) projects in East Asia and the Asia-Pacific, A novel pattern of bilateralism is evident in Southeast Asian economic diplomacy, and this may be broadly viewed from extra-regional and intra-regional perspectives. Concerning the former, an increasing number of states from the Association of Southeast Asian Nations (ASEAN) group have engaged in the Asia-Pacific’s new bilateral free trade agreement project trend, and two ASEAN member states i.e. Singapore and Thailand have been at its front position. As regards the second dimension, new developments in intra ASEAN diplomacy have revealed the emergence of a Singapore and Thailand bilateral alliance on matters of Southeast Asian economic regionalism. Such dimensions of economic bilateralism in relation to their implications for Southeast Asian or ASEAN led to the development of regionalism.

CASE STUDY: Pak-China Free Trade Agreement:

Free Trade Agreements are a common type of bilateral arrangement between two or more countries. FTAs facilitate the free flow of trade and investment and bring about closer economic integration between the binding parties by eliminating tariffs on each other’s commodities. More than 60% of global trade is being channeled through bilateral and regional trading arrangements. The purpose of these FTAs is not only to serve the economic needs of two countries, but to also have room for political motivations, that are to legitimatize trade between two associated allies.

China and Pakistan have signed phase-II of the free trade agreement (FTA), which has become effective on January 1, 2020, 15 years after the phase-I was operational. China is the second largest export goal for Pakistan with a share of 8% in Pakistan’s total exports. Major exports of Pakistan to China are concentrated in a few products such as cotton and rice, which account for 75% of Pakistan’s total exports to China. China has the largest share in Pakistan’s total imports at 29%. Since the Sino-Pak FTA, the trade amount between the two countries has increased from $2.2 billion in 2005 to approximately $15.6 billion in 2019.

Pakistan’s exports have increased to $1.74 billion in 2017-18 from $575 million in 2006-07.  Correspondingly, China’s exports to Pakistan have increased to $15.74 billion in 2017-18 from $3.5 billion in 2006-07. A review of the new FTA deal reveals that market access given to Pakistan is on a same level with Asian member countries.

The FTA-II offers innovative opportunities to the exporters. This requires joint efforts by the government and the private sector to turn these opportunities into concrete gains for Pakistan. The industries that are benefited from free trade are: textiles and clothing, iron and steel, auto, electrical equipment, agriculture, chemicals, plastics, rubber, paper and paper board, ceramics, glass and glassware, surgical instruments, footwear, leather, wood, articles of stones and plaster, and miscellaneous goods. These concessions give plenty of benefits to both China and Pakistan’s trade development; it grants China access to key agriculture, textile, and engineering commodities to satisfy the needs of its growing middle class, while enabling Pakistan to develop its export competitiveness and advance its industrial production.

 Conclusion:

To conclude, Free Trade Agreements not just lessen and eliminate tariffs but they also deals with barriers that would otherwise hinder the flow of goods and services, promote investment and advance the rules affecting issues such as intellectual property, e-commerce and government procurement. Free trade agreements can bring better trade and investment opportunities that add to the economic growth of under developed economies. Free trade agreements maintain stronger people to people and business to business links. Free trade agreements provide extra benefits to trading partners over time, through inherent agendas that promote ongoing domestic reform and trade liberalization.

 

 

 

 

Bibliography:

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https://www.ukessays.com/essays/economics/the-benefits-and-drawbacks-of-free-trade-economics-essay.php

Free Trade Agreements; Boon Or Bane

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