It allows countries to phase their liberalisation to optimise the benefits.
The current trade war between the US and China has put multilateralism in a bind. Erratic and inconsistent stand of the US has sent out confusing signals to the world economy and thwarts the very existence of both the World Trade Organisation (WTO) and multilateralism. Under such uncertainties, many developing countries are left with limited options of signing regional trade agreements with their emerging and comfortable trade partners. Therefore, the idea of establishing free trade agreements (FTAs) is gaining ground. Policymakers and economists believe FTAs could play a crucial role in pursuing the trade reform agenda. It’s important to discuss the issue in detail.
First, the complementarities that exist between FTAs and the multilateral trading system governed by WTO rules can benefit member countries in various ways, like 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 converge to 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 a country’s confidence and competitiveness, and pave the way for eventual free trade at the global level.
Second, 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.
Third, the long-term political and ethnic hostility among various member countries can be minimised to an extent with the signing of FTAs, and this, in a way, can contribute towards the efforts of establishing a multilateral trading regime as FTAs are flourishing across the continent in tandem. In other words, formation of FTAs can be seen as a strategic move to consolidate peace and increase regional security among member countries. Ideally speaking, this arrangement should help benefit countries forming a trade bloc. But the realpolitik played by developed countries sometimes tends to deliver different things to developing country or countries if it is, or they are, part of that regional arrangement. For instance, RTAs often used by developed countries provide increased discriminatory access to a larger market, and as a result developed countries are always in the lookout of garnering maximum support on the political front to pacify the overall hostility arising out of this arrangement. It is also apparent that most political RTAs are not driven by pure economics. However, in political arrangements, particularly where a large developed country is involved, there is always the possibility that the interests of smaller countries are going to get marginalised. It cuts ice both ways, depends how best one can reap the benefits of this arrangement.
Fourth, setting up of FTAs can promote the spirit of open regionalism which would be complementary to a non-discriminatory multilateral system, as espoused by the WTO. The open regionalism—i.e. 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 many complexities such as restrictive rules of origin of international trading system.
Fifth, among other economic factors that are propagating regionalism or formation of FTAs are FDI and the advantages associated with the economies of scale. FDI has become an important source of foreign capital inflow and key promoter of economic growth for developing countries. It is increasingly felt that countries join RTA or FTA to attract FDI. On somewhat similar reasons, it is also suggested that smaller countries join FTAs because it can offer domestic firms the advantage of the economies of scale.
Sixth, another angle to this entire debate of forming FTAs—whether it is productive or beneficial to developing countries—is propagated by a few experts who express that there has been a consistent dominance and monopoly of developed countries, particularly the US and the EU, with their huge presence of large and foreign capital in developing regions. With this capital, they may be luring various developing countries to make more and deeper trade and investment commitments through regional agreements with them in anticipation that it would help them 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 to believe and argue by the same group of experts that 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 and that’s the reason why there is a surge towards establishing so many RTAs or FTAs in different regions, especially in the developing part of the world.
All this suggests why there is an upward march towards forming regional arrangements of any kind among developing countries in the world. Until and unless a fair, transparent and trustworthy multilateral regime governed through the WTO is in place, the world is going to witness more of these FTAs.