This article appeared originally in Gulf News: link to original article
What is the future of Free Trade Agreements (FTAs)? How does it fit into this new shift back to protectionism and imposing tariffs or duties on all imports?
It is normal for a developing nation to protect its local industries, but not for a developed nation to do so as a way to increase its competitiveness, if that is the target. Just to better understand this, the norm with international trade is that it is governed by rules of the World Trade Organizations (WTO), with countries choosing to alleviate the rules of trade via bilateral, or multilateral, agreements.
And, so, independent bilateral trade deals could set different rules to govern the relationship between countries or economic/trade blocs. Consider Brexit for instance. If no separate deal is reached between the UK and the EU, then WTO international trade rules will by default, apply.
So how do FTAs fit into all of that? First of all, FTAs could also be bilateral or multilateral, without those trade deals being necessarily called ‘FTAs’. When FTAs are mentioned, the term itself could deceive you into thinking that this is a guarantee that countries will be exchanging goods free of charge, in terms of import duties and tariffs, etc.
That is not necessarily true. An FTA is normally governed with what the agreement states in terms of the products that are included in the FTA. And so it doesn’t ensure increased, free trade of all products across different countries, but rather facilitates trade in selected products by removing restrictions, those being the bureaucratic, import duties and tariffs, and supposedly borders taxes if applicable.
It is relatively easier to negotiate an FTA when it is bilateral. However, can the same be said about multilateral agreements?
Enter the Trans-Pacific Partnership (TPP). As an agreement, it does remove all taxes imposed on products, which means better access to markets of countries that are signatories. However, the TPP as an agreement goes further by ensuring that certain reforms, such as labour, take place for the agreement to be applicable, or even enforceable.
On its official website, the TPP clearly states that failure to oblige by the terms of the deal may lead to trade sanctions imposed by the US. So is the TPP an FTA?
It is technically, but terms and conditions apply. It is thought easier to sign similar agreements compared to bilateral ones between countries that are signatories of the multilateral agreement.
So where is the world going? Increasing free trade between countries. It is only a matter of time before countries realise — ones that impose import duties and tariffs — that this is not going to make their local industries more competitive, neither makes the “Made in X country” label more widespread.
For a market to have products of lowest prices with solid quality, there is no way other than FTAs — bilateral and multilateral trade agreements. Trade agreements ensure fair competition that eliminates the need for currency manipulation, lowering currency value and hence products’ prices.
It also enhances competition by having the countries that can be the most efficient in their production of a certain good be given fair access to other markets where access is restricted by tariffs and import duties on its products. The latter makes products more expensive and undesirable when compared to domestic products, as they would raise production costs.
This is clearly illustrated in imposing tariffs on Chinese imported steel by the US. And so what should always be considered when introducing any type of tariffs, is whether the benefits would exceed the direct and indirect costs of introducing the tariffs.
The last thought that I want to leave you with: how different is a border tax from a tariff?