Thinking strategically about FTAs

By Eric Chiou 邱奕宏  / 

Sun, Mar 10, 2013 - Page 8

The global trade and investment landscape has changed dramatically in recent years. With the virtual demise of the Doha-round trade negotiations between WTO members, various regional and bilateral free-trade agreements (FTAs) have been on the rise.

This phenomenon reveals a noticeable trend that countries, either collectively or individually, are competing to sign FTAs with other countries to facilitate trade while attempting to gain strategic commanding heights in the global economy.

The latest news regarding the launch of a Transatlantic Trade and Investment Partnership between the US and the EU, as well as Japanese Prime Minister Shinzo Abe reaffirming Japan’s willingness to join the Trans-Pacific Partnership (TPP) negotiations, are vivid examples of this fierce race.

Some may be puzzled as to what drives countries to feverishly devote enormous effort to this FTA battle and why it gives such importance to a country’s economy, since the level of tariffs worldwide has been significantly reduced over the past decades.

The unspoken answer lies in that the scope and depth of the latest FTA negotiations, either bilateral or regional, have gone beyond the traditional concept of trade liberalization by reducing tariffs “on-the-border,” but convey a more profound and encompassing impact on “behind-the-border” issues.

As a result, newly initiated FTA negotiations are usually pledged to be “WTO-plus” or “21st-century” trade agreements, since these treaties not only include ambitious goals of eliminating all tariffs and no tariff barriers to trade and investment, but also contain wide-ranging issues, such as investment facilitation, regulatory coherence, protection of intellectual property rights, promotion of competition policy, government procurement, etc, topics not typically covered in FTA negotiations.

The ongoing TPP negotiations have demonstrated the extreme complexity of modern FTAs. It is believed that related subjects discussed in this negotiation process cover more than twenty chapters, outnumbering those of conventional FTAs, such as the North American Free Trade Agreement, and including numerous behind-the-border and next-generation issues, such as labor, environment, digital economy, state-owned enterprises, etc.

The overarching goals of the TPP indicate the US’ ambition to utilize it as an illustrated template to establish a new model in shaping the rules of the game in the global trade arena. This mindset has also been reflected in the US’ latest initiative in pursuing the transatlantic FTA with the EU.

As US President Barack Obama publicly announced in his State of the Union address last month, the Transatlantic Trade and Investment Partnership is designed to go beyond the classic approach of removing tariffs and opening markets to investment, services and public procurement, but instead places more emphasis on aligning regulations and technical product standards, which are widely regarded as the most significant hurdles to transatlantic trade.

Despite the multifaceted economic repercussions of FTAs, it is important to recognize that they are more than an economic instrument for a state to expand its commercial interests in other states. They also connote political and strategic meanings.

US FTA strategy, for example, is a prudently designed product of sophistication, broadly taking its domestic and overseas interests into account.

As outlined in the US’ national economic strategy, boosting exports and creating high-quality jobs are two of the primary goals in revitalizing its economy.

The Obama administration has worked assiduously to use the TPP talks as a wedge to dismantle trade barriers hindering US products’ penetration into overseas markets, while also attempting to take advantage of agenda-setting and rule-making to embed a new set of regulations favorable for US corporations to maintain their comparative advantages to compete with foreign firms in the global market.

All preceding endeavors are eventually converged on, reinvigorating the US economy and consolidating US supremacy in the world order.

By the same token, if one examines the latest FTA development from a strategic perspective, it is apparent that an FTA implies at least four aspects of significance externally.

First, it signifies the competition of trading blocs between the West and the East.

The Trans-Pacific Partnership and the Transatlantic Trade and Investment Policy can be regarded as a US proactive move to revitalize the economic momentum of the existing global triumvirate — the US, the EU and Japan — by employing FTA frameworks to reconnect and reinforce economic links between the three to compete with emerging Asian trading blocs, such as the Regional Comprehensive Economic Partnership led by ASEAN and the trilateral FTA talks composed of China, Japan and South Korea.

Moreover, these latest FTA initiatives also signify a contest between two incompatible approaches in terms of treaty-making. The contrast between the rigorousness of “high-standard” TPP and the “flexibility” of the Regional Comprehensive Economic Partnership with regard to treaty compliance is going to generate diverging effects on the global trade regime in the foreseeable future.

Third, the prospective outcomes of emerging trading blocs are likely to trigger significant shifts in existing industrial agglomerations and therefore lead to dramatic changes in global supply chains.

Due to the effects of trade diversion and trade creation generated by FTA, firms in the members of new trading blocs tend to maximize their economic welfare at the expense of non-member countries by relocating their manufacturing facilities to member countries for lowering production cost.

As global production chains gradually change in respond to the realignment of trading blocs, global trading networks will be adjusted as well. The final outcomes of this transformation in the global production networks may significantly rewrite the current landscape of economic relations among states.

Finally, launching FTA negotiations also represents a strategic move to offer an olive branch to a feasible political and economically.

Although an FTA is essentially an economic treaty, its completion cannot be sustained without political will and domestic support.

As two or more countries decide to conduct FTA negotiations, they also send a clear signal of intent to jointly pursue economic benefits by peaceful means, rather than military force. Hence, it is much easier for like-minded countries in the same alliance to form a trading bloc, rather than countries from opposing political camps to successfully conclude trade treaties.

This logic may explain why FTA talks between China and Japan are so arduous and highlights why Taiwan’s free-trade engagement with China is so unusual. Therefore, selecting trading blocs or FTA partners is not just a question of economic calculation, it is also a strategic choice and ultimately a political decision.

An FTA can be a game changer. However, it would be misleading to see FTAs as a panacea for a state’s long-term economic illness and to alleviate its eroding industrial capacity. After all, the core of a country’s economic strength lies in its industrial competitiveness in the global economy, which usually stems from robust and balanced development of innovation, technology, human capital, entrepreneurship, a business-friendly environment and so forth.

If the solid combination of these factors could be compared to a strong pair of wings allowing a state’s economy to fly, the FTA would be like the wind beneath the wings, facilitating the state’s economy to perform better and to fly higher into the sky.

As policymakers ponder over how to boost Taiwan’s economy through more FTA initiatives, they had better keep a strategic understanding of the FTAs in mind, which could help to avoid unwarranted illusions and actually improve the efficacy of free-trade treaties.

Eric Chiou is a deputy head for FTA and Regional Integration at the Taiwan Institute of Economic Research’s Economic Development Strategic Planning Center.