Free trade agreements may not always be “sure win” strategies

Considerable debate still exists on what impact these deals make on trade in general

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By Patrick Burnson, Executive Editor
June 19, 2015

The Asia-Pacific Economic Cooperation(APEC) routinely produces a white paper on key trends and developments related to trade and investment in the world’s most dynamic marketplace. It’s most recent study is titled “Do Free Trade Agreements Matter?”

The question is hardly rhetorical, especially since enough members of the U.S. Congress are doing all that they can to resist comprehensive deals like the Transpacific Partnership.

Free Trade Agreements (FTAs) have proliferated since the 1990s and APEC members are among the most active economies in negotiating them. Presently, APEC members have 144 enforced FTAs – approximately 53 percent of all such agreements worldwide.

Considerable debate still exists on what impact these deals make on trade in general.

After all, analysis of top 20 intra-APEC trading partners in terms of average annual export flows for the better part of this Century showed that more than half (11 out of 20) are not covered by a trade agreement. In addition, less than half (44 percent) of APEC’s total exports value in 2014 were sent to partners with which it has an FTA.

Yet there are also data showing the possible positive contribution of FTAs to trade. For example, APEC analysts note that a higher percentage of the top 10 percentile economy-pairs have FTAs relative to the bottom 10th (50 vs. 16 percent).

At the heart of this debate, admits APEC, is the fact that trade agreements are not “sure-win” strategies. Indeed, various theories indicate that preferential trade agreements may have both positive and negative effects because it can lead to trade creation as well as trade diversion. It is for this reason that preferential liberalization is considered the second-best option compared to multilateral liberalization.

To maximize its positive effects while minimizing the negative ones, economists have proposed several possibilities such as increasing the number of FTA partners, enhancing “complementarity” between partners and improving the quality of FTAs by incorporating ways to overcome regulatory measures inhibiting trade.

Despite an environment of weak external demand and divergent economic conditions, export growth among APEC economies in 2014 was relatively robust1. APEC economies exported $9.1 trillion worth of merchandise goods in 2014, growing 2.0 percent over the previous year. In contrast, merchandise exports from the rest of the world recorded a contraction of 0.5 percent last year.

Finally, consider the latest forecast by the World Trade Organization. Its economists project continued modest recovery in trade, with growth in the volume of merchandise trade in 2015 and 2016 at 3.3 percent and 4.0 percent, respectively.

With APEC leading way, advocates of FTAs appear to have more sway over policy makers in the Pacific Rim than do their skeptics, however.