Tuesday, March 3, 2009

Great Speeches: FREE TRADE AGREEMENTS: ISSUES, COMPLICATIONS AND RECOMMENDATIONS FROM THE LENSES OF THE BUSINESS SECTOR

I would like to thank you for inviting me here today. It is a distinct honor for me to be in this event.

Preferential trade and the rise of discriminatory blocs have become prominent features of the world economy.

Free trade areas (FTA) and customs unions (CU) continue to mushroom across the globe. Approximately 240 preferential trading arrangements (PTA) have been notified to the WTO, accounting for over 50 per cent of global trade.

Nearly every WTO member is now a member of a preferential bloc.

Many have gone further than WTO rules and cover subjects which have so far been excluded from, or not fully discussed in, multilateral negotiations including areas such as services, investment and intellectual property among others.

The US, for one, has at least five bilateral FTAs in force with Canada, Mexico, Jordan, Chile and Singapore. It has also initiated the US-Central America Free Trade Agreement and the Free Trade Agreement of the Americas.

Worth noting is the ASEAN Free Trade Area which has succeeded in pushing tariffs below 5 percent on 99 percent of the products traded within the area, eliminating $1.4 billion in tariffs.

The failure to launch a global trade round at the WTO Ministerial conference in DOHA led many to doubt the continued viability of the multilateral trading system.

That event highlighted the misgivings that developing countries have had about the outcome of the DOHA trade round. Many feel shortchanged and question the unequal balance of benefits and concessions made after acceding into the wide-ranging treaty.

This is one of the stated reasons for resorting to FTAs. A bilateral FTA, especially if it is initiated by a developing country would naturally have the advantage of “ownership” that can sometimes be perceived to be missing in a multilateral framework.

Two countries are said to be engaged in an FTA when they allow their products and services to leave and enter their ports freely, meaning without tariffs or restrictions.

An FTA removes the barriers in the flow of commodities and human services between two or more countries. Countries have different objectives when they decide to engage in free trade agreements.

Obviously, countries establish free trade areas to obtain improved market access through reciprocal exchanges of trade concessions. The elimination of tariff and quota restrictions is directed at opening up markets to and boosting trade between the two partner countries.

There are also a variety of non-trade reasons for signing an FTA.

Entering an FTA is partly motivated by the desire to attract greater foreign investment with an expanded market.

Countries also enter into these arrangements for strategic alliances and to improve bargaining positions in multilateral negotiations. FTAs can help lock in domestic policy reforms.

The proliferation of preferential trade agreements, especially bilateral ones, raises new challenges to Philippine policymakers and society.

At present, the Philippines is not a party to any bilateral free trade area. It is part of the plurilateral ASEAN Free Trade Area and is negotiating closer economic relations with Australia, New Zealand and China together with its ASEAN partners. There are discussions about initiating a free trade arrangement with Japan and the United States. Other than these, the Philippine government has not taken any significant step towards bilateralism.

It is sad to note that the government has no concrete strategies or deliberate policies toward FTAs yet. The Philippines appears to be more of a passive negotiator or participant in FTAs. Nonparticipation stifles the competition environment, prevents firms from reaching economies of scale in production, and limits trade expansion that a trade agreement may make possible.

While there is no template for an ideal FTA strategy, the country should at least be able to have a clear objective with respect to the elements of an FTA, the scope and institutional framework, the assurance that the FTA is a mechanism toward achieving a stronger purpose, and the criteria for choosing a partner to the FTA.

It is here that the business community would like to suggest a policy framework for FTAs.

We have to be clear that FTA negotiations are expected to be kept within the principles of multilateralism. Among the reasons being considered for pursuing a bilateral approach are to use it as a testing ground, as a step to multilateralism or as a defensive mechanism.

The business sector would like that the government map out industry-by-industry adjustment and competitiveness strategies with industry leaders in order to maximize the potentials of the FTA and manage the challenges of integration of economies.

We must know what products we produce in abundance and whose markets we need to pry open.

We must know what local industries or sectors to open for competition without endangering the survival of players already in them.

We also need to balance the interests of players in the same sector, not pit them against each other.

Another important task for the government, apart from determining what the country wants, is the identification specifically of its sensitive products.

Prior to the start of the negotiation, there must already be a classification of what products are negotiable and nonnegotiable.

We need to redefine what constitutes our National Economic Interests and identify the segments in our economy that are not negotiable.

In the heat of globalization, nations must know what they need to keep exclusively for them to avoid becoming hostages to foreign interests in the future.

Other possible issues that the government needs to address would be in services liberalization. This is an advantageous prospect because an FTA is seen to relax the rules on the deployment of the overseas Filipino workers, or OFWs.

The market access list would most likely include agricultural products, electronics, information technology, professional and business service, telecommunications, financial transfers and a horde of other sectors.

Attention should also be given to the so-called enhancing features of new-age FTAs, including rules on investments, competition policy, government procurement, transparency, and trade facilitation measures.

More than anything, there is a need to improve the country’s competitive edge, if it is to compete and trade directly with the world’s most competitive economies.

This would only be possible by upgrading the technical skills of Filipinos, improving the level of education in the country, developing the country’s infrastructure and logistics systems, reducing the cost of production in the country, and stabilizing the economy.

Without these factors in place the Philippines would be at the losing end of trade cooperation or competition with any country in general.
Also, the country’s legal framework should be considered. Apart from restricting foreign ownership of land, the Philippine Constitution mandates the 60 percent-40 percent joint ownership of businesses in key sectors, with Filipino nationals enjoying the bigger share. The law also prevents foreigners from practicing professions in the Philippines.

If something will not be done to address these restrictive provisions, foreign investments will have a hard time coming in this country.

The benefits of free trade areas, even in the short term, go beyond trade. In this respect the relationship between trade and investments should be stressed. Thus, to the extent that the employment generated from foreign investments can make up for the losses of the import competing industries that fail to compete, joining an FTA can be welfare enhancing.

An FTA will attract FDI not only from the partner country but also from non-members as well.

Joining an FTA is an exercise in political economy that we must carefully engage in.

There are benefits to gain from an FTA, however, it should be recognized that FTAs are not a panacea to cure the sluggish economy.

It is a strategy that should be carefully crafted, negotiated and implemented. It comes with both benefits and costs.

The question then is how to make an FTA work for the country. I hope that the business sector’s voice will be heard as far as creating policy guidelines for negotiating FTAs are concerned.

Thank you and good morning.

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