FTAs’role in international trade system

劉嘉偉

【Abstract】In the recent years， many countries including not only industrialized economies but also developing countries seek to reach bilateral or regional trade agreements， for example， the Australia and China free trade agreement （ACFTA）， Trans-Pacific Partnership Agreement （TPP） and so on. The first part of this paper will argue the reasons of pursuing free trade agreements， particularly focusing on the political strategy and economic considerations that motive the agreement of bilateral trade liberalization. Then the paper discusses the benefits of FTAs for specific sectors of memberships. In particular， analyzing the strategy of Chinas FTAs， the paper explains the impact of FTAs on the participants and then analyze the downsides of free trade agreements. And the paper is going to explain the different roles of the WTO and free trade agreement in the international trade system. In the end， the paper concludes by summarizing the two sides of free trade agreements and the comparison with the world trade organization.

【Key words】FTA， International trade system， China

1.Introduction

In the recent years， many countries including not only industrialized economies but also developing countries seek to reach bilateral or regional trade agreements， for example， the Australia and China free trade agreement （ACFTA）， Trans-Pacific Partnership Agreement （TPP） and so on. More and more countries are pursuing bilateral or regional trade liberalization that could bring benefits for them. The paper aims to explain the reason why memberships in the World Trade Organization（WTO） increasingly participate in the FTA and analyze the two sides of FTAs critically. Specifically， using China as an example， the essay argues that not only economic benefits could FTAs bring for member nations， but also enhancing the political influence in the region. On the other hand， developed countries always impose their wills over developing economies through FTAs.

The first part of this paper will argue the reasons of pursuing free trade agreements， particularly focusing on the political strategy and economic considerations that motive the agreement of bilateral trade liberalization. Then the paper discusses the benefits of FTAs for specific sectors of memberships. In particular， analyzing the strategy of Chinas FTAs， the paper explains the impact of FTAs on the participants and then analyze the downsides of free trade agreements. And the paper is going to explain the different roles of the WTO and free trade agreement in the international trade system. In the end， the paper concludes by summarizing the two sides of free trade agreements and the comparison with the world trade organization.

2.Explanations of the motivations of FTAs

First of all， FTAs could facilitate free trade flows between participating countries and create opportunities for traders to access to foreign markets across all areas， for example， goods， services and investment. By reaching the trade agreement at the national level， participating countries could encourage multinational corporations （MNCs） enhance trade collaborations with each other across border.

Secondly， by eliminating tariffs and reducing non-tariff barriers， FTAs could encourage investment and promote business cooperation with trade partners. It is because of the decreased transaction cost of trade collaborations that FTAs could help memberships attract more business investments from trade partners. Meanwhile， FTAs can add to the attractiveness of participating countries as investment destinations.

Thirdly， by allowing participating countries businesses access to cheaper inputs， introducing high technology， advanced management mode and fostering innovation， FTAs can help memberships increase productivity which contributes to higher growth of gross domestic product（GDP）， especially for less developed countries （Chand， 1999）.

Furthermore， according to Sally （2006）， FTAs could facilitate regional economic integration and develop economies of scale. And through the broader adoption of common product standards， countries included in the free trade agreements can build shared methods to trade and investment. Within the framework of FTAs， businesses could be done between partners without too many negotiations that could heavily add more transaction costs. Moreover， regional economic integration and scale of economies could improve the efficiency of transaction and productivity of firms.

FTAs could foster the comparative advantages of memberships and the competitiveness of their exports in the foreign markets. By facilitating industrial agglomeration and forming scale of economies， free trade agreements could facilitate regional economic integration. For instance， being the most competitive advantage of Japan， Japanese automotive firms account for nearly 80 percent of automobiles in Southeast Asian market （Anna， 2008）. Taking advantage of the free trade agreement， Japan could access to low labor cost market and thus decrease its production cost. And the free trade agreement like TPP could also help Japanese firms protect its intellectual property rights of automotive industry. Therefore， FTAs could create efficient trade environment for business and promote development of industries that have competitive advantages in participating countries.

3.Chinas FTA diplomacy

In the last decade， China actively engaged in the process of trade liberalization and has been enrolled in the framework of bilateral and regional trade system. As an emerging country， China aims to gain economic benefits from the free trade agreement and seems to take it as a useful device to deal with political and economic relationships with neighbor countries. For example， the China-ASEAN free trade agreement which was proposed in 2002 reached the treaty that reduced tariffs of trade among memberships （Chin， 2008）. And in 2002， China reached free trade agreements with Japan and South Korea. Moreover， China concluded free trade agreements with Shanghai cooperation organization including Russia， Tajikistan and other three countries. The partners of Chinas free trade agreements have been around the world including Chile， Peru， Australia and some other countries.

In the view of Chinese government， the motivation of its FTAs is to keep an image of a big country which takes leadership in Asia-Pacific region and to take free trade agreement as an opportunity access to foreign market for goods and investment and take advantage of scale of economies in the Asian region. Furthermore， to keep pace with the global trend toward trade liberalization and to enhance trade collaborations with regional neighbors are also the intentions of Chinese government.

4.Political interests

According to Sheng （2006）， the development of Chinese free trade agreements could enhance its competiveness and leadership in the Asian region. Thus， through signing free trade agreements with regional neighbors， China is to develop its forces and to balance the influence of Japan and America in Asia-Pacific region. For example， ASEAN-China Free Trade Agreement is motivated by the desire to build a leadership role in the region and foster political and economic influence on regional partners. According to Antkiewicz （2005）， the purpose of Chinese government to pursue free trade agreement with South Korea， Australia and some other Asia-Pacific countries is to build regional security and strategically against American political influence in the Asia-Pacific region.

Especially for emerging countries like China， india， political strategy plays an important role in its international trade system. However， Searight （2009） argued that ‘Countries driven by strategic and political considerations in their FTA initiatives may be more willing to negotiate trade deals with relatively soft coverage， long phase-in periods， and generous exemptions for sensitive sectors. Therefore， the free trade agreements that mainly focus on the political strategies are usually lack of depth and characterized as low quality.

5.Economic interests

Security consideration is absolutely one aspect that Chinese government pursued free trade agreements. Kawai （2011） claimed that the economic interests should be the major reason of the emerging countries trade policy. Engaged in the FTAs diplomacy， Chinese government aims to take the advantages of the scale of economies that FTAs could form to improve trade efficiency and decrease its transaction costs. And another purpose is to promote Chinese foreign direct investment entering the partners capital market through investment liberalization. On the one hand， the FTAs could help China engaged in the regional economies by forming supply chain， promoting scales of economies and foster trade cooperation. On the other hand， Chinese government could also take the opportunities to reform its industrial structure and avoid the risks of competiveness on the labor intensive industries.

For example， the free trade agreement between China and Australia entered into force in 2015 which facilitates the relations and trade liberalization further. Being the largest export market of Australia， China accounts for nearly one third of its overall exports. The free trade agreement between China and Australia contains issues of agricultural， processed food and investment. And it significantly reduces the tariffs on agriculture products and facilitates Australian firms exports to Chinese market. In terms of Chinese costumers， they could access to Australian high quality agriculture products and processed food like beef， dairy with much lower price. Moreover， the CHAFTA could decrease the transaction costs and spur Australian firms exporting to Chinese market that has a huge demand for high quality food. According to the Australia bureau of agriculture and resource economics and science， Chinas agricultural demand will account for 43 percent of global overall growth by 2050 （Jiang， 2008）. The huge demand for agriculture products and processed food is a great opportunity for Australian firms.

6.Downsides of free trade agreement

Although free trade agreement could bring economic and political benefits for memberships， it could also result in disadvantages for less developed countries. Because powerful countries always impose their wills on less developed countries and set unequal treaties in the agreement. For instance， the unequal treaty contained in the free trade agreement between US and Chile is that Chile was required to promise not to use any capital control in its domestic market. To gain economic benefits from trade liberalization， developing countries usually lose their policy autonomy and are compelled to accept powerful countries conditions （Schneiderman， 2010）.

In addition， some free trade agreements have been launched for political reasons primarily. In other word， to reach foreign policy purposes， countries choose to propose free trade agreements which should have been used for economic benefits. Dent （2009） argued that it always results in the low quality of free trade agreements. For example， Chinas FTAs are always characterized by a low quality in dispute resolution procedures. Chinese government has taken FTA as a political device and for economic interests. Therefore， many of Chinese FTAs are lack of profundity that focus on sensitive sectors and issues， which result in the deficiency of intellectual property protection， environment protection and dispute resolution procedures （Yu， 2004）.

Moreover， to some extent， free trade agreements merely facilitate major and competitive trade blocs like America， China and so on. In the long run， it could result in the economic instability because of the imbalance of regional economic development which is characterized as undeclared protectionism （Aggarwal， 2013）.

7.WTO and FTA

In fact， in the WTO system， powerful countries benefits could be protected in the process of negotiation， and developing countries are always forced to accept what they have decided （Nagai， 2002）. In other word， there are increasingly inequality and discrimination existing in the WTO. The differences between developing countries and power economies are always difficult to deal with， for example， the DOHA round lasted four years and did not reach a consensus because of the differences in agriculture sector. It is also the major reason that contributes to the development of bilateral and regional trade liberalization.

Yang pointed that Chinese government has realized the developing countries weakness in the system of WTO and limited influence on the process of decision making. And the limited effectiveness in eliminating tariffs and reducing non-tariffs barriers of the WTO has disappointed developing countries. Therefore， free trade agreement has become a substitution framework for less powerful countries. Specifically， in the Cancun ministerial meeting of the WTO in 2003， the negotiation between developed countries and developing countries stalemated because different benefits. And the deadlock of DOHA round negotiations about agriculture and industrial issues also disappointed countries like China and raised their doubt about the effectiveness of the WTO system （Lee， 2009）.

In the short term， bilateral or regional trade system could be more useful and effective for less powerful countries （Zeng，2010）. Althoughthere is inequality existing in the FTAs， developing countries are more willing to engaged in the bilateral and regional trade liberalization where the cost of negotiations is lower than in the WTO system （Barfield， 2001）. However， as far as I am concerned， the WTO system could not be substituted by FTA in the long run. Because the WTO is an organization that includes most countries of the globe. Even though the system is not perfect， its existing could bring a stage for international trade dispute and trade negotiations. And its purpose that elimination of trade barriers and facilitate trade liberalization could indeed stimulate economic growth of memberships like China.

8.Conclusion

Because of the low efficiency of dealing with multilateral trade negotiations in the WTO system， more countries are proposing the bilateral or regional trade agreement （Woolcock， 2003）. And in addition to the economic benefits that FTAs create for participating countries， the political interests are usually taken into considerations by states. Specifically， free trade agreements could promote free trade flows between participating countries， eliminate tariffs and reduce non-tariff barriers， attractive investment from host countries， facilitate regional economic integration and foster the comparative advantages of memberships. In terms of political interests， countries like China take the free trade agreements as political device to deal with relations with neighbors states. However， the political and strategic considerations would result in the low quality of free trade agreements that lack of dispute settlement procedure， environment protection and intellectual property protection.

In addition， while the free trade agreements functions better than the WTO in the international trade system， the WTO should not be substituted by bilateral or regional trade agreement. On the one hand， free trade agreement could impose disadvantages on less powerful countries and result in the unequal treaties. On the other hand， as a global trade organization， the WTO could provide a relatively fair stage for dispute settlement and focus on multilateral trade system rather than bilateral or regional trade that could result in the economic instability.

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