October 30, 2008
Negotiating free trade areas seems to be the latest hobby of trade policy officials.
The USA has started the ball rolling under the Bush Administration, irrespective of the ongoing Doha Round. From Chile to Morocco, Singapore, Jordan and Korea, the list is impressive, especially for the major advocate of multilateral trade rules, which until the 1980s had only concluded three free trade areas with Canada, Mexico and Israel.
Still, the EU remains the undisputed champion of bilateral free trade agreements. In the 1970s these helped consolidate European-wide free trade. In the 1990s, the EU expanded its network to the Mediterranean neighbours. For the last three years it has been busy trying to transform its unilateral free trade agreements with the 70-odd ACP countries into full-fledged FTAs, to make them compatible with WT0 rules. It is also in talks with Ukraine, the six GCC countries and South Korea. It has cast an eye on Canada and Russia, once it will have joined the WTO.
Does it make sense for the two biggest trading units on earth to engage in a competitive race for the biggest number of bilateral free trade agreements? That seems more than doubtful.
- First, the level of trade obstacles, in particular import duties on manufactured products and transport costs, has gone down sufficiently for international trade to grow by 4-6 percent annually.
- Second, the proliferation of FTAs has its administrative price. Trading becomes more complicated, when half the trading partners enjoy
customs advantages requiring the respect of complex rules of origin, which large scope for customs fraud and trade diversion.
- Third, and most important, climate change imposes restraining rather than encouraging international trade. This goes in particular for trade between very distant countries, even considering that container shipping has become remarkably energy-efficient. But considering that humanity will have to cut its C02 emissions by half during the next 40 years, it should abstain from stimulating international trade by cutting tariff and non-tariff barriers.
In conclusion, both the EU and the USA should tame the zeal of their trade officials, who seem impatient to negotiate additional free trade agreements. MFN treatment should remain the basic rule for international trade in goods and services.
The 2ost century has been a spectacular era for trade negotiations. In the future, climate and environmental considerations will have to dominate the thinking and action of policy makers and relegate trade issues to the periphery.
It is time for the trade policy establishment to awake to this new reality.