fta assessment

Is there a point in free trade agreements?

Which real benefits did free trade agreements ever deliver? And what harm have they actually caused for the involved economies? A critical look at things.

In my last posts I tried to focus on benefits the world could derive from new and extensive free trade agreements (FTAs) such as the TTIP. My last analyses were driven by optimism and wishful thinking. Today, I want to take a more critical look and identify real and measurable FTA results.

Why are FTAs out there anyway?

In 1948 the first breakthrough for international trade was achieved with the General Agreement on Tariffs and Trade (GATT). Initiated by 23 countries, the idea of this multilateral agreement was to reduce tariffs and other trade barriers, and to generate a basis of fair trade that would apply equally to all participating states. This involved, for example, a most-favored-nation clause, prohibition of quantitative restrictions, and the principle of national treatment. The initiative eventually resulted in the foundation of the World Trade Organization (WTO).

One common global trade agreement with the lowest possible tariffs and equal regulations for all involved players in all markets – how perfect would this have been?

But in the end, negotiations were suspended. Mainly, but not exclusively, because of one key conflict: the US demanded easier access to large markets such as Brazil, China, and India in the area of agricultural and industrial goods, while these – and other – emerging markets asked for wider US concessions prior to opening their markets to strong US enterprises.

Decades later, in December 2015, some progress on such a central solution – one common agreement for all – was made during discussions in Nairobi. At this point, however, with numerous bilateral agreements in place across the globe, a central agreement does not seem that relevant anymore. The automatic mechanism of bilateral negotiations is well-established and its high-speed progress seems to be unstoppable by now.

So to date, we have about 612 regional free trade agreements in place, and at least 406 of those are currently ratified and in use.

Tangible FTA benefits: are there any?

Each of these 600+ agreements in force – or in negotiations – were originally initiated because the partners expected mutual benefits. Let’s see whether these expectations have ever been fulfilled by taking a look at the North American Free Trade Agreement (NAFTA) of 1992 between the US, Mexico, and Canada.

Former US Vice President Al Gore called it the world’s most important agreement at the time – right after the foundation of the NATO. Mexico wanted to transform the country into a modern state while the US and Canada saw a potential market for their own goods.

In the first years, it seemed quite possible for all parties to achieve their individual objectives. Growth in all three countries developed above average. But then things changed over the years: Asia became much more important for the major market US and local companies shifted their focus accordingly.

They opened factories and initiated sales activities in Asia despite the fact that there no trade agreements were in place between the US and various Asian markets, and tariffs and the involved procedures were (and are) highly diverse. The new agreement currently underway – TPP – may boost this trend even more – you can learn more about TPP in my colleague Frans' article.

Example NAFTA: results from all three angles

  • As a direct result from NAFTA, the US consumer protection organization “Public Citizen” estimates a loss of about 1 million jobs and a shift from high-wage industrial jobs to more low-wage service jobs in the US. Additional wage pressure was boosted by millions of migrant workers and today, wages are almost at the same level as in 1979. The income gap has grown tremendously and only the few percent at the top benefit far more than the average.
  • The outcome for the Mexican agricultural sector was even worse. US agriculture companies flooded the Mexican market with highly subsidized products. Some think-tanks estimate that another million jobs were lost in the Mexican agricultural industry as a result. A vicious cycle established itself that sees huge US companies growing larger and more productive every year, while Mexican farmers lag more and more behind without being able to keep up with the competition. And looking at Mexico’s exports to the US, we’re still talking about cheap products: unfortunately, no high-tech industry could ever be established.
  • And Canada? Canada’s hope to significantly raise productivity levels couldn’t be fulfilled either. On the contrary, productivity dropped and Canada continues to focus on the export of commodities – oil in particular. So structurally, the Canadian economy did not develop any further.

Interestingly, however, some critical analysts eventually came to the conclusion, that NAFTA has been successful. In fact, very successful. But for whom? Only a small number of huge US companies and their shareholders actually reap benefits. But millions of people have to deal with more difficult conditions in their work environment as a result.

A bit of a bird’s eye view on things

According to the International Trade Administration (ITA) in the US, there was a $7.3 billion surplus in non-oil products traded with US FTA partners in 2014. Some industries such as machinery, plastics, and aircraft parts benefitted exceptionally. In direct comparison, trade volumes with FTA partners have increased 20% compared to trade with countries that have no agreement in place.

Even small and medium sized companies benefit from the reduction of trade barriers and more transparent trade environments. And in the end, this helps increase the gross domestic product (GDP), which aims to generate jobs and wealth for a national economy. At least, this is the common understanding amongst supporters of the classic theory of economics (characterized by Smith, Malthus, or Mill), which on the other hand, is highly challenged by the counter position and supporters of the Keynes-theory, or “Keynesian economics”.

So, who is right?

For today, I come to the conclusion that ultimately, FTAs seem to provoke the exact opposite of what they are meant to do: they counteract consistent and unified trade rules and make international business even more complex because of the sheer number and details of different regulations.

A few days ago I stumbled across a website called www.bilaterals.org. It’s an initiative by an independent group of people who are also concerned about the number of bilateral agreements. They focus especially on the social impact of bilateral FTAs that nobody seems to be aware of because it is all hidden in the small print within thousands of pages of hundreds of FTAs. Their work and findings are quite interesting, too.

So FTAs are in a way both a blessing and a curse. As long as the WTO doesn’t implement proper structures and standards for bilateral FTAs, these agreements will continue to blur the edges and corners of a rather uncontrolled process of globalization. And some of those involved simply put too much emphasis on the mere capitalistic side of things.

So, would the world be a better place with or without bilateral FTAs? To be honest: I don’t know. I am certain, however, that FTAs are only the second-best option. What is your opinion? 

How do you manage trade under FTAs? Learn more about Origin & Preferences with AEB