Bilateral free trade agreements (BFTAs) are agreements generally made between two countries or two regions, or one country and one region; it is widely accepted that they lead to economic growth by reducing poverty and increasing standards of living and generating employment opportunity. While some BFTAs can be narrow-range in their dealing of traded goods for a certain time period, some BFTAs can be much more comprehensive and cover other issues including services and investment, and can generally take existing World Trade Organization (WTO) agreements as their benchmark. The free trade agreements are like stepping stones toward international integration into a global free market economy, and they are seen as the manifestation of globalization, which requires governments to implement the liberalization, privatization, and deregulation measures.
The first important general factor for the popularity of BFTAs is the apparent disenchantment with the pace of liberalization at the multilateral level. Another general factor driving the growth of BFTAs can be the snowballing or domino effect. The number of BFTAs thus continued to grow, almost doubling to 109 between 2002 and 2004. By 2007, this number has more than doubled again as countries did not want to be left behind. Finally, it is often claimed that some, if not most, BFTAs are politically motivated. There is no doubt that political economic considerations, political parties, or even individual politicians have played a major role in driving the formation of BFTAs.
Negotiating a BFTA is a serious exercise as the outcome can have major implications for development policy and for social, economic, and development outcomes for many countries. While it can result in some export gains, it can also result in increases in imports, affect the local industries and farms, reduce tariff revenue, and restrict the options and instruments available to a country to institute certain social, economic, and development policies.
Therefore, before negotiating or even contemplating any BFTA, countries should concentrate on three important issues. First, when a proposal is put forward by the BFTA partner or potential partner, it should be evaluated in the context of national development policy framework (plans on local and sectoral levels and issue-based plans like intellectual property). In the absence of such a framework, it would be difficult to determine the objectives of entering any negotiation, or of the advantages/disadvantages of the proposed BFTA.
Second, this framework should also assess the benefits and costs of the BFTAs for the whole nation. By doing that, the gains and losses in terms of trade and jobs, effects of the agreement on the policy space and the degree of flexibility on national plans, effects on social issues such as health, and finally key effects on technology transfers would be examined in detail before the negotiations. The costs and benefits can be applied to the various aspects of the BFTAs, including market access (to the other country, and the partner country’s access to one’s own market) in goods; services; intellectual property; investment, competition and government procurement; and labor and environment standards.
Third, the country should establish or organize the resources and institutional base for assessing whether or not to enter negotiations for the BFTA. As part of the process, different agencies of the government should be consulted and should be part of the process of the formulation of policy and positions. It is equally important to involve stakeholders, such as local firms, trade unions, farmers, consumers, and groups representing patients and involved in health provision and environmental protection.
Then, the decisions have to be taken nationally whether it is a good idea to enter negotiations in the BFTAs; if the decision is on the side of entering, how to conduct the negotiations; how to manage the process; how to assess the costs and benefits of proposals; and how to conclude the negotiations.
In the context of developing country–developed country negotiations on BFTAs, the costs and benefits might significantly differ in nature whether two developed countries negotiate on BFTAs or one developed and one developing country negotiate on BFTAs. If any developing country contemplates a negotiation with a developed country, then the developing country’s production and export capacity should be satisfactory enough for the partner, and the partner should be able to offer significant concessions to the developing country. Otherwise the net cost of having this negotiation will be higher than the benefit. Furthermore, the additional costs of these negotiations can be higher for the developing country, as that country will end up paying more license payments, higher prices of the protected products, less access to medicines, loss in farmer’s rights, etc.
Bilateral Versus Multilateral Agreements
It is generally recognized that bilateral agreements, especially between a developing and a developed country, are not the best option, and that multilateral negotiations and agreements are much more preferable. Few reasons can account for that. One of them is that bilateral agreements generally lead to trade diversion that also results in inefficiency in trade. The other reason is that developing countries are usually in a weaker bargaining position due to their undeveloped economies and political instabilities. As a result, they might put themselves in a disadvantaged position. The third reason is that even within the WTO there are flexibilities open to developing countries in interpreting and implementing obligations in trade between countries. Nevertheless, developed countries tend to remove these flexibilities for developing countries in the BFTAs. This attempt would significantly reduce the policy space for developing countries. The proliferation of so many agreements also puts pressure on personnel and financial resources in developing countries and requires technical expertise for the use of limited resources.
There are also some views that BFTAs can even be handicaps in front of multilateral trade negotiations. Philip Levy discussed the position of BFTAs and claimed that BFTAs can undermine political support for further liberalization in the field of multilateral trade, and he suggested that if the BFTAs offer larger gains to some countries than to others, then the multilateral agreements would be blocked and liberalization activities in trade would be prevented. BFTAs can never provide the political support for multilateral free trade for political economic reasons. Similarly, Gene Grossman and Elhanan Helpman also examined BFTAs from the political-agreements point of view and they ask if these negotiations are politically viable due to interaction between special interest groups and an incumbent government. They concluded that if BFTAs are to be followed, then these negotiations should generate substantive welfare gains for voters, and the agreement would create profit gains for actual or potential exporters.
- Richard Baldwin, “Multilateralising Regionalism: Spaghetti Bowls as Building Blocs on the Path to Global Free Trade,” CEPR discussion paper (2006);
- Gene Grossman and Elhanan Helpman, “The Politics of Free-Trade Agreements,” The American Economic Review (v.85/4, 1995);
- Mohar Khor, “Bilateral/Regional Free Trade Agreements: An Outline of Elements, Nature and Development Implications,” Third World Network, www.twnside.org.sg (cited March 2009);
- Philip Levy, “A Political-Economic Analysis of Free-Trade Agreements,” The American Economic Review (v.87/4, 1997).
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