Free trade agreements, or FTAs to the cognoscenti, are popping up like daffodils in April. The European Union and South Korea just recently inked a bilateral agreement. U.S. President Barack Obama has promised to push ratification of a U.S.-Korea deal through Congress and is also rushing to complete and submit to Congress similar deals with Colombia and Panama. Washington is also in the midst of negotiating the so-called Trans-Pacific Partnership, a proposed FTA between Australia, Brunei, Chile, Malaysia, New Zealand, Peru, The Philippines, Singapore, Vietnam, and the United States.
Free trade always sounds like a good thing, especially for Americans, for whom the word "free" has very positive connotations. In this highly globalized world, however, the truth is that "free trade" agreements are actually anything but. They are a return to the ad hoc commerce of the early 20th century. And like their predecessors, they often close as many doors as they open and avoid the real issues that are tipping the trade balance from free and open to unbalanced and opaque. While the world has grown more interconnected, our trade policies have grown ever more fractious.
As an illustration, take discussions I had recently in Singapore about various "free trade" arrangements being negotiated in the Asia-Pacific region. During our conversation, one of the Singaporean negotiators warned that the United States would find itself locked out of key Asian markets if it didn't join in all the free trade deals. The implication, of course, is that the parties to an FTA will have different and more favorable trading conditions among themselves than with outsiders. In a word, they will have a preferential trade deal. That's all that FTAs really are; we should call them preferential trade agreements, or PTAs. And they are very similar to the kinds of arrangements that prevailed prior to World War II.
Over the last half of the 20th century, the world's trade negotiators did everything they could to simplify the complicated, inefficient web of bilateral compacts that were weighing global trade down. The motivation was to get all trading countries onto the same playing field. Indeed, it was to forever avoid the evils of preferential trading that the General Agreement on Tariffs and Trade (GATT) was concluded in the wake of World War II and its successor, the World Trade Organization (WTO), was formed in 1995.
Now, however, quite the opposite is happening, and the PTAs are back in force. It is quite possible, for example, that a new FTA between players A, B, and C will nullify or impair the "free trade" results of an earlier FTA between players A,Y, and Z. Consider the Caribbean Basin Trade Partnership (CBTP) of 2000 between the United States and most of the countries around the Caribbean Sea. Part of that deal gives Caribbean countries such as Honduras lower-than-average tariffs on imports of their apparel into the U.S. market on the condition that they use U.S.-made yarn or fabric for making the clothes. Because it is conditioned on use of U.S. yarn, this deal is far from true free trade. Still, it has stimulated a huge amount of trade between the United States and the Caribbean countries and has provided jobs and a way out of poverty for hundreds of thousands of Latin Americans. The proposed Trans-Pacific Partnership (TPP) could undermine this success by extending tariff reduction on apparel to the Pacific countries as well as the Caribbean countries. But this time, producers likely wouldn't have to use U.S. yarn; they could use cheaper, locally sourced raw materials. That would likely disrupt or even destroy the Caribbean industry, which still relies on more expensive American thread.