The price of free trade

As the struggle for regional economic dominance in Northeast Asia heats up, the battle for free trade agreements (FTAs) has reached a new level, which may not only see the weakening of the multilateral trade system, but also the cancerous growth of geopolitical influence in regional trade. Today, nearly 55% of world trade occurs through free trade agreements, but economists differ on their virtues. Some see them as stepping stones to freer trade - they are easier to negotiate and can achieve more than multilateral deals. Others see them as potholes on the road to freer trade - adding unnecessary complexity and diverting valuable negotiating resources. But nobody can argue that the importance of free trade agreements to regional states has grown. As economist Peter Lloyd noted, free trade agreements are like street gangs, if everyone else in your neighborhood is in one, you'd better be in one too. It is widely accepted that recent US trade policy has been somewhat tainted by its cozy relationship with Bush administration foreign policy goals. Strong supporters of US action in Iraq, Singapore and Australia were rewarded with expedited free trade agreements. Others opposed to action, such as Chile, had their agreements postponed, while other countries long opposed to US policies such as New Zealand - which since the 1980s has refused to admit nuclear-powered or armed vessels in its waters - were not even allowed in the negotiation room. The use of trade to support and reinforce foreign policy is anything but new. The United States' first free trade agreement occurred back in 1985 with Israel, a country that accounted for an indistinct fraction of US trade. The economic benefit to the US was negligible; the geopolitical benefit was much greater. The US, arguably, bolstered its position in the Middle East and ensured the economy of its key ally remained strong. More recent free trade agreements with Jordan, Bahrain and Morocco fit into similar moulds, with questionable economic benefit but immeasurably more geopolitical gain. Free trade agreements in Northeast Asia may be following the same trend. China and Japan are well aware that the regional economic dominance that both seem to be struggling for depends on the ability to control the direction of regional economic integration. South Korea, the Association of South East Asian Nations (ASEAN), Australia and New Zealand are all thrown into the fracas as Japan and China compete. The start of July saw the first dent in Japan's economic armor with the implementation of the ASEAN-China Free Trade Area (ACFTA). The ACFTA will allow immediate duty reductions for over 7,000 products, with all duties to be removed by 2010. This will soon be followed by services and investment liberalization. However, the real benefits are geopolitical. With an already extensive expatriate and ethnic Chinese network ready to exploit potential economic gains, China's political influence will naturally increase. In contrast, negotiations toward a Japan-ASEAN agreement have only just begun and full implementation is not expected until 2012. China is clearly edging ahead. The importance and size of the Chinese economy to the region lends it substantial weight in obtaining political leverage in return for increased trade. It is quickly becoming the most important trading partner for each individual economy in the region and with analysts predicting that growth will continue, the temptation for it to use free trade agreements as foreign policy tools will only grow greater. China is already proving to be more strategically astute than the United States in trade geopolitics. New Zealand, with which the United States refused to negotiate a free trade agreement, has been steadily tempted to the Chinese way of thinking. New Zealand was the first Western nation to reach a bilateral deal with China on its accession to the WTO, and similarly the first to recognize China's full market economy status; in return, in 2004 it became the first to commence negotiations with China toward a bilateral free trade agreement. With the US having already used its FTA leverage with Australia, it is now China's turn. The promise of a free trade agreement with China has already seen the Australian government recognize China's market economy status, respond favorably to relaxation of the European Union arms embargo, and turn a blind eye to accusations of Chinese spy networks operating in Australia. Here lies the real threat to free trade. In the extreme, free trade agreements can become comparable to the use of economic sanctions in their attempts to influence political behavior. Preferential trade agreements are simply the opposite side of the coin - the "carrot" as opposed to the "stick" of sanctions. Both are discriminatory trade measures that deviate from the happy medium of the "most favored nation principle" which lies at the heart of the multilateral system. Most favored nation dictates that trade privileges between any two states should also extend to third parties. Discriminatory trade measures can be used to influence political decisions; either positively, in the case of FTAs, or negatively, in the case of sanctions.
Sanctions have a long and sordid history of ineffectual political interference in international commerce - diverting trade, harming domestic producers and exporters, and creating economic inefficiencies. It seems free trade agreements could be going the same way. Complexities abound for the average exporter today. They must wade through the rules of origin and the thousands of product codes that govern the applicability of preferential tariff rates. This has to be repeated for each market and sometimes more than once for each market. For example, for Thai exporters to Australia, there will be the Australia-Thailand free trade agreement preferential tariffs; Australia-ASEAN preferential tariffs; and Australian developing country preferential tariffs. After the question of which preferential rates apply, comes the question of who applies them, the exporter, the importer or the importing country customs official...and so on. Multilateral trade is far from perfect, but is definitely less prone to geopolitics, and for the average exporter in Asia, is always going to be simpler as the "spaghetti bowl" of free trade agreements gets ever deeper.