Yes, that is what the Free Trade Areas (FTA) should be called. An FTA is not free trade. It is a PTA, preferential trade agreement/arrangement. And "preferential" means discrimination. Suppose we have JFTA -- Jakarta Free Trade Area. Goods exported by West Jakarta to North Jakarta are tariff-free. But goods from Depok, Tangerang, and Bekasi are imposed some tariff if to be sold in Jakarta area. As a result, they can't compete with goods made in Jakarta. What do you call this, free trade? Nope. It's discrimination.
Suppose again, labor from Tangerang are cheaper than those of West Jakarta in producing hats (I use hats here, so that I can assume similar technology, no?). In the absence of tariff, Tangerang-made hats should be cheaper than West Jakarta-made ones. In the meantime East Jakarta doesn't produce hats. But their people like hats. Which hats they would rationally buy? Tangerang hats, of course. But what is the main goal of JFTA? To make the Tangerang-made hats less competitive. That is, by imposing the damn tariff, JFTA makes the Jakarta-made hats cheaper. Or more precisely, deceptively cheaper. East Jakartans now are buying hats from the inefficient West Jakarta's producers. And you're calling this free trade? Give me a break.
That was the main point in my presentation this morning in Kuala Lumpur for the 8th Annual Conference of Economic Freedom Network Asia. The theme this year is "Preferential Trade Agreements: Local Solutions for Global Free Trade?". Of course I wasn't talking about my imaginary JFTA. I was concerned with all the current movements in the region toward PTAs (and other type of discrimination, bilateral trade agreements, BTAs). I know WTO's Doha Agenda was fractured. But at least, if you really have to have some kind of "clubbing", do it on MFN (most-favored nations) principle. That is, a non-discriminatory way. And if you don't want the "spaghetti bowl effect" (boy it's messy), try unilateral improvements at home. While waiting for the WTO's major surgery.
Oh by the way, the Network also launched the 2006 Annual Report of Economic Freedom of the World. As usual, the Report has some interesting stuff inside, including of course the Economic Freedom Index; and now with a special chapter by William Easterly. Ape, who's also here will be talking about that. Ape, the floor is yours.
FTA | PTA | WTO | Economic Freedom Index
Hi Aco,
ReplyDeleteCongrats on your presentation! I agree with you on the preferential/ discrimination argument. However, aren't most people pro-discrimination if it serves their interest? Even the U.S. and European countries. Consider how the U.S. imposes tariffs on high sugar content goods to protect its sugar industry. Or how Switzerland reciprocates towards U.S. beef. Economic theory-wise, free trade is the way to go. But if the avant-gardes of free trades are not embracing it, then I wonder if the concept is realistically implementable.
Hi, Muli, you're darn right. Of course people always try to find ways to max their utility, including discriminating against other. It's stupid not to use opportunity.
ReplyDeleteBut calling an FTA a free trade system is plain wrong and dishonest. I was just trying to remind the participants at the seminar not to fall into this kind of cheap talk.
If the world total welfare is at stake, non-discriminatory trade system is the way to go. PTAs, FTAs, BTAs, are not. Is the GATT-type of arrangement realistic? Maybe not. As I said elsewhere, so long as US keeps abusing its power, GATT is difficult. But, as Joan Robinson aptly put it years ago, "Just because your neighbours throw rocks into their harbors, that is no reason for you to throw rocks into your own". So, while waiting for more improvement, albeit gradual one, I suggest unilateral approach. That is, to clean up the mess at home without having to have prior agreement with other countries whatsoever.
McGuire (2004) in his paper "Trade Policy at The Crossroads: The Indonesian Story" estimates the welfare effect of six different scenarios of Indonesian trade policy using General Equilibrium Model. The result stands in different line with you Mr. Aco. If Indonesia continues to form a regional agreement between the ASEAN member+Japan, China and South Korea then it will gain $2,720 million, on the other hand if Indonesia try to stick up with the WTO's way then the gain is only $380 million. Of course i understand that a simulation using general equilibrium model contains some unrealistic assumptions but i think it is wise enough to consider the regional trade strategy as an realistic strategy for the time being. Last thing, the unilateral strategy itself only grabs $1,599 million as the gain effects.
ReplyDeleteJay, I don't think regional trade strategy or preferential trade agreement is the way to go. Yes, Indonesia does gain much when engaging in PTA, however this type of trade agreement creates an unlevel playing field in trade.
ReplyDeleteTo illustrate my point, consider this hypothetical situation. Suppose Indonesia and Malaysia are having PTAs with the U.S. And suppose Malaysia and the U.S. have completed their PTA while Indonesia is still in negotiation with the U.S. Say one of the agreement between Malaysia and the U.S. is that the U.S. would reduce its barriers (tariff and/or non-tariff) on palm oil from Malaysia. Wouldn't that create problems of market access for Indonesia, which is also one of the largest exporters of palm oil?
So where does the benefit from PTA? The benefit exist only if one country successfully increase its market access to another country BY limiting other countries from accessing its market. Put it simply, you gain if you discriminate.
That is exactly what is happening in Asia and the rest of the world. Countries are racing with one another to create and complete PTAs. This proliferation of PTAs, as Aco said, would put total welfare at stake. Because there's no level playing field. Unilateral approach to this date is still the best alternative.