FTA deals hinder trade, says ADB expert

04/05/2013 | Elliot Wilson

The ADB's chief economist says the costs of negotiating and maintaining bilateral and multilateral agreements outweigh the benefits

Free trade agreements (FTAs) – the bilateral and multilateral deals designed to boost business between nations – hinder rather than help trade, a senior official at the Asian Development Bank told Emerging Markets.

“Do the costs [related to FTAs] actually outweigh the benefits? I think overall yes, they do,” said Jayant Menon, a trade expert and lead economist at the ADB’s office of regional economic integration.

Menon likened the fashion for pursuing and signing FTAs to the drive among sovereigns over the past three decades to cut business and retail taxes in an effort to suck in corporates and wealthy individuals from other territories.

He called the process a “domino effect”, in which an FTA is signed between two countries, in effect forcing a third-party country to cut its own deal, either with those two countries, or with other willing nations, to avoid losing out.

“If one of your trading partners negotiates an FTA with a competitor, the cost to you of doing nothing isn’t zero. Your exports to both countries will be hit, so you will be motivated to negotiating your own preferential tariff with those countries to prevent your own exports from shrinking.”

The desire for agreements designed to boost cross-border commerce has never been higher. Japan is in talks with the United States to join the mooted Trans-Pacific Partnership (TPP), ultimately designed to boost trade flows between the world’s largest and third-largest nations.

Several other Asian nations have expressed their desire to enter the talks, including Vietnam, Malaysia and Singapore. That compelled China to act. Beijing is now actively pursuing a raft of new FTAs with countries in Asia and beyond. 

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It is difficult to keep track of the sheer quantity of these deals. The ADB reckons the number of FTAs covering at least one Asian nation soared from 36 in 2002 to 109 at the start of this year, with a further 148 in various stages of development. India alone has signed 48 FTAs with countries as diverse Afghanistan, Nepal and New Zealand.

Quite apart from the high administrative costs of processing and maintaining an FTA with another country, there is the added cost levied on producers of goods and services.

Senior Asian government officials highlighted the downside of FTAs. Amando Tetangco, governor of Bangko Sentral ng Pilipinas, the Philippine central bank, said that when FTAs worked between member countries, “there have been clear net benefits, as trade has risen”.

But for those nations sidelined by agreements, the opposite holds true. There are “other effects” from FTAs, Tetangco added. “In some cases, FTAs have created divisions” between countries, with producers in one country suddenly finding their goods priced out of hitherto key markets.

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Tagged as: Asia trade ADB free trade agreements TPP

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