The Hindu Business Line : Challenging times for free trade

TRADE ministers from 34 countries in the North and South American continents initiated a process, on November 20, that will create a Free Trade Area of the Americas (FTAA). Now that the speeches have been made and the flags waved, the ministers will leave and negotiators will come in with the objective of reaching a core agreement that will be formalised in January 2005.

The group neatly sidestepped the usual controversial topics, such as agricultural subsidies, leaving it for the WTO forum. The original intention for the US was to arrive at an ambitious agreement that would set new rules on foreign investment, government procurement and intellectual property, apart from cutting tariffs on goods.

But facing resistance from Brazil, Argentina and Venezuela which wanted the US to cut its agricultural subsidies, the agreement would now at least aim for some market access apart from lower tariffs and some investment rules.

Still, a step towards cooperation

The idea of an FTAA was first mooted in 1994 and even this time around, ambitions were scaled back to come up with this agreement. It has been a long time to get to even this stage for an agreement that would cover about 800 million people. Meanwhile, individual deals between the countries will move apace. It is not easy to arrive at free trade rules when the parties to the trade are at such highly varied stages of economic development but there is constant pressure to have common rules for all.

The US already has free trade deals with Canada and Mexico and is near to finalising one with the Central American States of Guatemala, Honduras, Nicaragua, El Salvador and Costa Rica.

In a speech given later to the business community, the US Commerce Secretary promised to protect US employees from unfair practices while pursuing the free trade agreement.

Unfortunately, the US always forgets that it managed to industrialise at a time when there was no one watching the labour rules and environmental practices in the US. Is it fair to set rules for others that you did not follow yourself at a similar stage of development?

Hard-nosed economists may well ask what is a free trade deal if it leaves aside all controversial topics. The simple answer is that it is easier to visualise `free trade' as a kind of holy grail that is good to talk about and pursue but is very difficult to reach.

Local opposition to free trade deals continues. While the ministers discussing the FTAA were meeting in a hotel in Miami, thousands of protestors were marching outside to protest the notion of free trade.

The labour unions took out processions, and other activists fought to break through barriers to show their concern that the agreement would undermine local democracy, damage the environment, and lead to a loss of high-wage jobs.

Free trade is a difficult concept Even the US, one of the staunchest champions of free trade, is finding that the rules set up to guarantee freer trade are difficult to follow especially when they run counter to local interests.

On November 10, the WTO handed down a ruling that US steel tariffs were in violation of WTO rules. The WTO had first ruled against the tariffs last year and the US had appealed which it lost again.

The steel tariffs were originally to end in 2005 and in an effort to help out the administration, the US steelmakers agreed to the tariffs ending a year earlier in 2004 itself.

However, this has not pleased the Europeans who are sharpening their knives as they are now allowed to impose duties on US products in retaliation.

The EU has said that it will start charging tariffs of 30 per cent on more than 100 goods that represent about $2.2 billion (Rs 10,120 crore) of trade. This is a most uncomfortable time for such disputes, given that we are entering an election year and the President needs all the votes he can get to be re-elected. He does not want to alienate states such as Pennsylvania and Ohio that are home to many steel manufacturers.

Even before the ink on the WTO ruling went dry, the US announced that it would impose temporary quotas against a surge in imports of bras, bathrobes, and knit fabrics made in China.

The US stand is that China agreed to a provision limiting growth in imports of these commodities as a condition for its joining WTO in 2001 and actuals had far exceeded what was intended. These items would be limited to a growth of only 7.5 per cent in the future. The new import restrictions were enough to worry the currency markets into thinking that we are seeing the start of a trend in protectionism and the dollar hit a new low against the euro. Miffed at the US restrictions, China responded by cancelling the visit of a trade delegation just hours before they were to leave.

The US is already upset at what they see as little response from Beijing to the US request to reconsider the dollar-yuan peg that they say makes the Chinese currency undervalued by anything from 25 per cent to 35 per cent. As the US economy faces mounting deficits, every bit helps and the US hopes that a revalued yuan will reduce imports from China.

Certainly it is not going well for free trade. Things are only likely to heat up further in the coming year as the candidates for the US presidency will accuse free trade of being the reason for the joblessness in the country.

A start has been made by Mr Dennis Kucinich, an underdog Democratic Party candidate, for the presidency. A sitting Congressman (that is, Member of Parliament, from Ohio), he strongly opposes the FTAA and puts the blame on the ten-year old North Atlantic Free Trade Area for a lot of the economic ills of the US.

He pokes fun at the term `free trade' by saying ``where is freedom when jobs are lost, wages are cut, and the right to bargain collectively is crushed? NAFTA has attacked federal laws meant to protect workers' rights, human rights, and environmental quality principles.'' The US has lost 2.6 million manufacturing jobs since 2001 that many blame on companies who have shifted manufacturing to China and other low wage economies.Perhaps Mr Kucinich is right and the term free trade makes no sense. We often get stuck with the wrong terms. We use the term ``non-proliferation treaty'' when we actually mean ``no further proliferation treaty'' since enough proliferation has already taken place.

``Most favoured nation'' status actually means ``same as every other nation'' status. We should learn from the politicians who do not talk about peace any more for the troubled areas of the world, and instead talk of a ``peace process". In a similar vein, it makes more sense to talk of ``freer trade'' rather than free trade so as not to get everybody's hackles up.

(The author is a professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@suffolk.edu)

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