Explaining... free trade agreements

Finbarr Thomas looks at whether there's such a thing as free trade, and why it has so many opponents

Ushered in by a series of symbolic events, the 1990s began as a time of great international optimism. The Berlin Wall had fallen in August 1989 and by February Nelson Mandela had been released from prison, with apartheid in South Africa taking its dying breaths to the rapture of television audiences around the world.

The message was clear: barriers were being broken down, borders opening, people becoming more integrated. In short, the world was becoming smaller.

This rhetoric percolated through the business world too. The buzzwords "globalisation" and "free trade" became ubiquitous. With the fall of the Soviet Union, capitalism became the system de rigueur almost everywhere and western products flooded post-communist markets from which they'd previously been excluded.

The red of Coca Cola replaced that of the hammer and sickle in Russia in 1992. Three years later, the establishment of the World Trade Organisation (WTO) sought to "provide a framework for negotiating and formalising trade agreements" and the free trade agreements (FTAs) followed.

Of course, the European common market had been in place since 1957 through the EU and its precursors. But, with the inception of the North American Free Trade Agreement (NAFTA) in 1994, the concept of free trade went global.

Twenty years on, FTA announcements are commonplace, but the evangelical zeal that characterised the movement's wildfire spread in the 1990s is now often met with cynicism, from both advocates and opponents.

On the pro-free trade side, many argue that agreements are announced for the sake of making announcements. Indeed, some appear to be superficial, making minimal adjustments to the preexisting bilateral or multilateral relationships between the signees. To explain, it's worth looking at the different components of FTAs, which may help us see why commentators find some of them so underwhelming.

What is a free trade agreement?

In its purest form, an FTA is a treaty between two or more countries to establish an area in which goods and services can be bought and sold without tariffs or barriers, and without hindrances to the free movement of capital and labour. Barriers to trade can be loosely separated into two categories:

  • Tariffs

These are the trade barriers most commonly removed through FTAs. Tariffs are taxes placed on imports or exports to protect domestic employment, consumers, national industries or national security. For example, last year the EU imposed heavy tariffs on the import of Chinese solar panels in an attempt to protect 25,000 jobs in the EU's solar industry.

  • Non-tariffs

These are any trade barriers that don't involve placing a levy on goods coming into a country or region from overseas. Common non-tariff barriers include government subsidies. For example, a megawatt hour of wind-generated power fetches about £55 in the UK's wholesale market. But in a bid to increase investment in the renewable energy sector, wind generators earn about £90 per hour, with the government paying the difference. This arrangement has led to accusations of "protectionism" and "market-distortion" from other European nations.

Other non-tariff barriers include labeling disparities (the EU famously waged war on UK vendors who were determined to use imperial measures for goods rather than metric), labour laws (by which employees in different jurisdictions have different regulations governing their employment) and quota shares (for instance, the US may have a limit on the amount of Japanese cars that can be imported each year, in order to protect its flailing automotive sector).

How free is free?

FTAs adhere to the principles of free trade to varying degrees, as outlined below.

The EU

The closest thing the world has to a 100 per cent pure FTA is the EU. People and capital can move freely throughout the zone (although this is a component some on the British right seem determine to rectify). But as the previous example of renewable energy subsidies illustrates, even the EU hasn't committed to blanket free trade within its borders. Most other FTAs are watered-down versions of the EU.

NAFTA

NAFTA was established to eliminate barriers to trade and investment between the US, Canada and Mexico and has spawned a host of similar inter-American FTAs. But it has clear boundaries and imbalances. Only a certain percentage of goods from each country is subject to NAFTA rules.

The US corn industry, for example, receives subsidies of more than $10 billion (around £6 billion) a year, leading to accusations of protectionism from the Mexican agricultural sector, which has suffered as a result of US imports.

The WTO Doha Development Round

The WTO began talks around lowering trade tariffs between its 159 member states in Doha in 2001, with a conclusion being reached in December last year in Bali. Many of the original principles around free trade had been dropped from the discussions by that stage, with the WTO determined to pass the first major agreement of its 19-year existence, in the face of accusations over its validity. Many countries, for example, were able to insist on subsidies for their agricultural sectors, in order to support local farmers and ensure food security.

At the time it was passed, trade lawyer at global law firm DLA Piper, Aline Doussin, told me: "All the sticking points were put aside so that something had to be agreed on by everybody. There was no other way around it - no ministers flying back to the capitals without getting a deal done. It only covers a number of sectors and the main result is trade facilitation."

The Transatlantic Trade and Investment Partnership (TTIP)

Talks on this FTA between the EU and the US commenced last year, in a move to implement the biggest FTA the world has ever seen. Combined, the pair contribute half of the world's economic output, and the EU says a deal could bring in an extra £99 billion in revenue to its member states.

However, talks were beset with problems from the outset. The French government immediately called for a number of its industries to be made exempt, including its cultural sector. Furthermore, many of the "easiest" barriers between the pair have already been removed, leaving some to speculate that discussions were on a hiding to nothing.

At the time, economic research consulting firm Capital Economics' senior international economist Andrew Kenningham told me: "The bigger bilateral deals become more difficult to do because the easy things have already been agreed. The early agreements are always on tariffs. You can quite easily trade off one country's tariff against another. But once they start getting into the non-tariff barriers it's harder and the tariffs between the US and the EU are already very low."

Criticisms of free trade

In November 1999, mounting disillusionment with the negative effects of globalisation came to a head in the "Battle of Seattle". Tens of thousands of protestors staged running battles with the police in the streets of the US city, which was paying host to the WTO convention.

Advocates of free trade argue it galvanises international commerce, boosting the living conditions of people across the world. However, opponents claim it has negative effects on international stability and welfare. Here are three of the most common criticisms:

1. Poor working conditions

The offshoring movement of the 1990s and 2000s led to thousands of multinational firms outsourcing their production facilities to low-cost centres, many of which were in East Asia. But as the sweatshop scandals that enveloped companies from Nike to Gap revealed, the benefit can often be unilateral, with workers in the offshore destinations sometimes working in horrendous conditions, for very low pay.

2. Environmental impact

Human rights group Global Exchange says free trade "is being used by corporations to dismantle hard-won local and national environmental protections, which are attacked as 'barriers to trade'".

The very first WTO panel ruled that a provision of the US Clean Air Act, requiring both domestic and foreign producers alike to produce cleaner gasoline, was illegal. A common view among anti-globalisation campaigners is that a free market cannot be expected to be responsible for the environment.

3. Loss of jobs

The offshoring trend facilitated by free trade led to the loss of thousands of jobs in Europe and in the US, with production sites moving to cheaper locations. As a result, capitalism and, by default, free trade, acquired a reputation for being predatory.

In the past 12 months, a movement known as "onshoring" has taken root in the US as companies and politicians are now attempting to buck the offshoring trend in the face of public opposition. Of course, onshoring is considered by the purists to be an effort to flout free trade.

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