When ‘Free Trade’ Isn’t

posted by
on August 29, 2007

Japanese Prime Minister Shinzo Abe was certainly busy promoting free trade last week. Following up on free trade agreements struck with Thailand and Brunei earlier this year, Mr. Abe flew to Jakarta and signed still another FTA with Indonesia on Aug. 20. Then he flew to New Delhi two days later, proclaiming that India would be the next special Japanese trading partner to participate in “an arc of freedom and prosperity” in a “broader Asia” that would include America and Australia (but not China). The intrepid traveler from Tokyo wrapped up his trip on Friday, Aug. 24, by jetting to Kuala Lumpur, where he praised the mutual benefits of bilateral economic cooperation thanks to a Japanese-Malaysian FTA that was signed in 2005. At week’s end, free traders had cause to celebrate.

Well, hardly. This wasn’t free trade — but the latest signs of the most important Japanese policy shift on international economics since the end of World War II. For more than half a century, Japan, an original signatory to the General Agreement on Tariffs and Trade in 1947, has strongly endorsed multilateral trade liberalization through the GATT and its successor international trade rules-making body in Geneva, the World Trade Organization. The core principle of the GATT and the WTO is treating all trading partners equally.

By contrast, today’s so-called free trade agreements are about treating different trading partners differently. While they lower some trade barriers for those included in the deals, the driving idea behind preferential trade is to put outsiders at a competitive disadvantage. Preferential trade is at odds with trade liberalization.
FTA advocates like Mr. Abe insist that the preferential bilateral trade deals actually create incentives for broader trade liberalization. The idea is that FTAs first inject momentum into regional trade accords like one that is currently being negotiated by the 10 members of the Association of Southeast Asian Nations. Then, the regional deals will build more pressures to help conclude the WTO’s ongoing multilateral Doha Round that holds the promise of breaking down global trade barriers. But despite the rhetoric, it doesn’t seem to be working. Of the WTO’s 151 members, only Mongolia doesn’t have any FTAs. Meanwhile, the Doha negotiations are comatose.

The multilateral WTO is being dismantled piecemeal. There were an estimated 130 preferential “free trade” arrangements at the turn of the 21st century, prompting economist Jagdish Bhagwati to liken them to a spaghetti bowl. Seven years later, the noodles that span the globe are even messier, as some 300 more FTAs have been concluded. More than half of world trade is estimated to be conducted through FTAs. So why is Japan now enthusiastically participating in such a disturbing global economic trend?

Simply put, Tokyo has followed America’s lead. Back in the 1980s whenever Japanese politicians would be temped by ideas that recalled the days of the Greater East Asia Co-Prosperity Sphere, their counterparts in Washington would offer discreet reminders that such talk wasn’t likely to be well-received throughout Asia.

But then the Americans struck their own preferential deal with Canada and Mexico, which was negotiated by the first President Bush and wrapped up by President Bill Clinton in the 1990s. The Japanese, recognizing that their manufacturers were being disadvantaged in North American markets, were steamed. Tokyo’s first response came in 2000, with the Japan-Singapore FTA.

In 2001 the United States, led by President George W. Bush’s first trade negotiator, Robert Zoellick, decided to plunge into the FTA business big time. The U.S. now has finalized 11 FTAs, nine of them by the Bush administration. So Tokyo began responding.

Japan inked its second FTA, with Mexico, in 2004, followed by the 2005 Malaysian deal, and another with the Philippines last year. With this year’s additions of Chile, Brunei, Thailand and Indonesia, Japan now has eight FTAs — part of a larger pattern of major trade distortion. The Europeans, masters of this game since Queen Victoria was Empress of India, have 21 FTAs that account for roughly one-third of world trade. China has some 20 more in some stage of negotiation. Mostly, the WTO, which is charged with leading global trade liberalization, has been left in the dark. Tokyo has only officially notified WTO officials of three of Japan’s eight FTAs, those with Singapore, Mexico and Malaysia.

Unconvinced that economic demons have been unleashed? Just look at how FTAs work at ground level. When Mr. Abe spoke last week in India of Japanese assistance in building a $100 million industrial corridor connecting New Delhi and the port of Mumbai, he was thinking that Japanese construction companies like Komatsu will build those roads, leaving in the dust Caterpillar Inc. and those big yellow bulldozers made in East Peoria, Illinois. As the Japanese ambassador to India, Yasuki Enoki, has bluntly put it to reporters, together India and Japan “can corner 60% of the Asian GDP.”

When Mr. Abe spoke about opening up Thailand’s steel and automobile sectors to foreign investment, he was thinking of the likes of Nippon Steel and Nissan, not General Motors and Hyundai. When he said in Jakarta that Japan wants to help Indonesia’s high-tech sector develop, the Japanese prime minister certainly wasn’t referring to business for Intel or Samsung.

Japan’s FTAs (like those of Americans and Europeans) talk free trade but practice protectionism. All of Tokyo’s trade bilaterals exclude Japanese rice, where tariffs remain in the stratosphere. For New Delhi, going along with Japanese agriculture protectionism is also convenient, as India has hundreds of thousands of uncompetitive subsistence farmers to “protect” from open markets. Even Thailand, the world’s biggest rice exporter, has reasons to go along. While Thai rice farmers are left out, the Japanese have opened the door for increased exports of Thailand’s shrimp, various fruits, chickens, jewelry and so on. The WTO’s Doha Round with its pressures for genuine market opening are conveniently ignored.

The FTA between Japan and Indonesia runs to 938 pages containing rules of origin, exclusions for politically sensitive products, and protectionist specifications for 40% of local content on “sensitive” — read, politically sensitive — products. There are special rules and various product exclusions for vegetables, sugar, various dairy products, fruits, tobacco and much else. Japan won’t cut tariffs for any kind of pineapples from Malaysia, Brunei or Singapore, but will gradually reduce duties for some fresh and dried pineapples from Thailand and the Philippines. But while tariffs on Thai dried pineapples are at 6% in the first year, and will be phased out entirely in six years, the Philippines’ dried pineapples will be taxed at 7.2% at first, and won’t be duty free until year 11.

This is special-interest politics, not sound economics. The Japanese boast that their FTAs give them preferential access to oil from Brunei, natural gas from Indonesia, and export platforms for Japanese manufacturers in smaller Asian economies. To readers of a certain age, this has a familiar ring.
While it’s premature to hit the panic button, it’s sure time to sound the alarms. It’s simply wrong for the world’s leading economies to act as if they want Fortresses Asia, Europe and America. It’s truly a cause for concern that while the WTO’s Doha Round gets lip service, FTAs get done.

Whatever happens to Doha, perhaps the WTO’s biggest challenge in the coming years will be to figure out how to harmonize all the conflicting rules of origin and protectionist arrangements in the proliferating FTAs. While Mr. Abe and his counterparts from Brussels to Washington have been smiling, they should be worrying.