Trade deals need careful planning

By Eric Chiou邱奕宏  / 

Thu, Aug 29, 2013 - Page 8

Do free trade and liberalization benefit everybody and boost a nation’s economy? Recent controversies over the cross-strait service trade agreement have put this oft-asked question back in the spotlight. Economists are divided and provide no definite answers. They are similarly noncommittal on the proliferation of regional trade agreements around the world. Most people simply assume that, because of the trade liberalization they bring, trade agreements definitely do more good than harm to a nation’s economy.

This assumption not only ignores the negative consequences of such an agreement on an economy, but also wrongly perceives free trade as a panacea to a nation’s international competitiveness.

The nation seems to be misguided in this manner; it is bewitched by the promise of trade liberalization and craves attention from its potential partners — jumping at every trade opportunity, such as the Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP).

The economy relies heavily on external trade, but its free-trade agreements cover only a low ratio of all export goods, so it is understandable that Taiwan is eager to increase its number of trade partners to improve this ratio and accelerate its pace of liberalization.

Although the Chinese Nationalist Party (KMT) government’s earnestness to increase trade deals is understandable, it may be dangerous if policymakers only consider the benefits of joining regional trade blocs, but neglect the downside. They must learn strategic thinking: how to manage risks and use any strengths as leverage.

Despite numerous studies highlighting favorable results for the economies involved in trade agreements, it is regrettable that most research fails to specify potential risks to different industrial sectors. Leaders should not be so naive to assume that an agreement signifies the arrival of an economic paradise in which all the people in each member nation have their lives measurably improved. It is wishful thinking to believe that every industrial sector will see the same benefits.

There is no substantiation for such thinking, neither theoretically nor empirically. The theories of international trade say that deeper economic integration among free trade members is likely to generate better economic welfare and lead to more reasonable and efficient distribution of resources. However, these theories do not claim that each industrial sector within the partner states will benefit equally from the arrangement; neither do these theories promise that individual sectors will not suffer.

Despite likely increases in overall economic welfare for the members of a trade region, there is no guarantee of positive effects for every sector. Existing literature has not explored which industrial sectors in member nations are likely to receive most gains, let alone describe which sectors will lose out.

Because trade agreements inevitably create winners and losers, policymakers should be considering the consequences more, rather than painting a rosy picture of future trade formations. For instance, is it reasonable and right to chase an agreement after considering the interests of domestic industries? Which sectors are likely to be winners and which are likely to be more vulnerable? What if the study of an arrangement shows more harm than good will come to a state’s prioritized sectors, even though the overall economic projection is good?

For example, the auto industries of several nations are perceived as a prime industry sector and even a symbol of the national economy. Not only industrial nations, like the US and Japan, but developing countries, such as China and India, actively nurture and promote their automobile manufacturers. If the projections of a trade agreement study showed that it would harm this prize industry, it is unlikely that any nation would sign it.

My study, presented at the APEC Study Center Consortium Conference in Jakarta, Indonesia, late last month, said that different trade initiatives toward the goal of a free-trade area in the Asia-Pacific are likely to create various winners and losers in each economy and in each of their industrial sectors. The study investigated the results from three trade formations: the 12 TPP economies, the 16 RCEP economies and the 21 APEC economies. It also examined the possible repercussions of these three scenarios on different industrial sectors among APEC member economies by using a computable general equilibrium (CGE) model.

The study drew widespread attention and interest from the audience. Its conclusion found three things:

First, a state’s increased economic welfare attributed to access to a trade agreement does not imply that each sector within that state will equally benefit. Based on the rationale of international division of labor and comparative advantage, the agreement is likely to give more impetus to originally competitive sectors, while further limiting vulnerable sectors. Therefore, policymakers should thoroughly calculate the pros and cons to maximize the positive effects and minimize the consequences.

Second, the choice of which agreement to join is important. Different trade routes pose dissimilar challenges. For instance, simulated results suggest that Japan’s automobile industry may gain more by becoming a TPP member rather than by joining the RCEP. In other words, if a state carefully calculates before jumping into an arrangement, it may discover it prefers one route over another based on its assessments of industrial interests.

If the decisionmakers do not make a thorough assessment, they may mistakenly allow their vulnerable sectors to encounter intense competition too early. However, if the state chooses wisely, it can effectively leverage its competitive industries to expand their market shares. So selection and timing are crucial strategic decisions that must be made.

Third, because there are both positive and negative repercussions, it is vital for each state to consider carefully whether its winners from the deal are suited to a national strategy for economic development, and whether it is willing to bear the political and economic consequences of the adverse effects. Free trade does not provide a guarantee of economic growth and prosperity, neither does it prescribe a magical dose of industrial competitiveness. Without cautious assessments, the negative impacts could turn a state’s sanguine expectations into a long-lasting nightmare.

The ongoing controversies and opposition to the cross-strait service trade agreement demonstrate the importance of prudent decisionmaking, especially when the outcomes are expected to have long-term repercussions on domestic interests and create winners and losers among the nation’s industries.

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