The 7 benefits of forging FTAs

Countries are increasingly getting convinced that in the wake of the deadlock of  multilateral negotiations, the formation of regional cooperation between and among them is the best bet to optimise their economic and trade gains.

To that end, the just concluded visit of Japanese Prime Minister Shinzo Abe to India and the Indo-Australia FTA  are major initiatives.

Why there is a sudden spurt in FTAs is something which needs to be critically looked at. First, the surge in PTAs, FTAs, customs unions, common markets, economic unions and so on, suggests that early gains that were expected of multilateral trade negotiations through the WTO haven't been fully realised, at least in three key areas, viz, agriculture, services and textiles.

As a result, various member countries, mostly developing ones, are focusing on FTAs as a viable means of opening up to international trade. The failures of Seattle and Cancun highlighted the inherent difficulties of a multilateral trading system and pushed many countries to divert their negotiating energies toward RTAs.

Today, half of the global trade takes place within RTAs, which are outside the purview of the WTO. The total number of RTAs is currently over 300. Most WTO member countries, excluding Mongolia, are members of some RTA or the other.

Second, the complementarities that exist between FTAs and the multilateral trading system governed by WTO rules can benefit member countries in various ways. These include slowly boosting global free trade by allowing member countries to intensify their level of competition, providing time to the domestic industry to adjust, and creating an arena to tackle difficult issues like agricultural subsidies and trade in services.

Besides, the circles of trade that are created through this exercise can help form expansive multilateral agreements. Basically, the argument is that if a country is not yet ready for global competition, it can pick and choose trading partners with which it feels relatively more comfortable. This may help raise the country's confidence and competitiveness and pave the way for eventual free trade at the global level.

Third, a critical aspect of forming FTAs, which could be seen as an advantage, is the fact that it allows countries to phase and sequence their liberalisation episodes in a manner that can optimise the benefits. It may be argued that this has been one of the factors propelling countries to engage in FTA negotiations.

Fourth, long-term political and ethnic hostilities among member countries can be minimised to an extent with the signing of FTAs. This can contribute towards the efforts of establishing a multilateral trading regime. In other words, the formation of FTAs can be seen as a strategic move to consolidate peace and increase regional security among member countries.

Fifth, the setting up of FTAs can promote the spirit of open regionalism which would be complementary to a nondiscriminatory multilateral system, as espoused by the WTO. Open regionalism -- that is, agreements with low external trade barriers, non-restrictive rules of origin, liberalised service markets and a dominant focus on reducing transaction costs at borders -- can reduce complexities such as restrictive rules of origin in the international trading system.

Sixth, among the other economic factors that are propagating the formation of FTAs are FDI and the advantages associated with economies of scale. According to the World Trade Report (2003), preferential access to large regional markets is one of the key determinants of FDI in developing countries.

Also, since FDI has become the most important source of foreign capital inflow and a key promoter of economic growth for developing countries, it is increasingly felt that countries join RTAs/FTAs to attract FDI. For somewhat similar reasons, it is also suggested that smaller countries join FTAs because they can offer domestic firms the advantage of economies of scale. 

Seven, another angle to this debate is raised by a few experts who say that there has been a consistent dominance and monopoly of developed countries, particularly the US and EU with their large presence of foreign capital, in developing regions.

With this capital they may be luring various developing countries to make deeper trade and investment commitments through regional agreements with them in anticipation that it would help them to achieve higher growth. On the other hand, there has been a marked difference among developing countries in their approach to entering RTAs with developed countries.

That is, argue the same group of experts, developing countries are forging trade linkages among themselves through regional arrangements to resist the hegemony of large powers in world trade. This may be seen as a strategic move among like-minded developing countries to forge FTAs.