Free Trade Agreements (FTA) - My Overview...

The whole TPPA brouhaha once again highlights the intricacies and complexities of FTAs. But what exactly are FTAs and why should we care?

Essentially liberal economic theory suggests that if we allow the factors of production (i.e. machinery, technology, workers, financial capital) to move around freely so it can be used where it has the highest marginal return, then eventually there will be an equalisation of these returns. In other words, expect a worker in Germany who produces iphones to earn the same as one in China. Of course, that is just theory and even proponents of these theories would not take such a conclusion too seriously. What they would state however is that should we be able to have free trade in not just goods and services, but also factors of productions, the most efficient producers (in terms of comparative advantage not absolute advantage) will specialise in what they are relatively better at, and societies across the world will be better off as we trade to buy and sell efficiently produces goods and services. That is why FTAs are argued to be 'good'. By making it easier for those who are relatively better at something to produce that good and sell it to you while you do the same to them makes both parties better off. Why then are FTAs so controversial?

First of course, FTAs are almost always about the greater movement of goods, services and inputs EXCLUDING labour. Essentially how many FTAs do you know beyond the internalising of the EU economy that allows for a free flow of workers across borders? The theory specifically includes the movement of labour to ensure production is efficient. That labour is still highly immobile across borders is a strong reason to be skeptical of FTAs since most production is conducted by workers. It is one thing then to move the machines to HK for example, while the best workers for those machines are holed up in Guatemala. Efficiency is lost, and the theory breaks-down. Again, proponents will say this is admittedly true but that we should not throw the baby out with the bathwater. FTAs excluding labour is imperfect but this second-best solution is still preferable to no movement of anything whatsoever.

Second, and continuing with the above to a certain extent, FTAs are controversial because of the exclusions and conditions attached to them. I mean, any FTA signed should be on a 1 page document with one sentence. 'We now agree to an FTA with X beginning from Y". End of story. Instead FTAs take years to negotiate and the eventual document will run into well over a thousand pages. Why? Because of CONDITIONS and EXCLUSIONS, that's why!!! This ain't even second-best anymore. It is, well I don't even know what it is now...

Third, why the conditions and exclusions? Because people and countries are not what economists often refer to as homo economicus, or rational man. In such a world we respond only to incentives and disincentives. If a Japanese realises her best marginal return rests with becoming a coalminer in Zimbabwe, then off she goes. What about family, language, culture, history? What about it? Who cares really? What kind of homo economicus worries about such frivolities? It is all about marginal returns man!!! Ok, I just exaggerated, but you get the message. We are more than economic beings. We are also products of our cultures, histories and societies. We sure as hell respond to economic incentives and disincentives, but we also respond to other stimuli. France will never agree to free trade in agriculture because it will destroy their hugely inefficient farmers. They get criticised for protecting their farmers on the basis that the French farmers are a powerful lobby group that wield disproportionate power in the country. All true of course. Much less reported are the concerns of successive French governments, that the destruction of the agricultural sector will also result in a loss of an important part of French culture. Apparently that is just too bad in the eyes of some people...

Fourth, these conditions and exclusions also arise due to power asymmetry. Essentially this means that we aren't equal in terms of our political and economic power, and the more powerful can throw their weight around. Economics really fails to account for politics in its theories. It is a real weakness of ours. For example, our theories on markets tend to marginalise the role of authorities that rule and regulate markets. With FTAs, we tend to be silent (complicit even perhaps?) regarding the role of power-play. By keeping silent, we are saying that we expect these powerful players to be nice and play fair. Ask the Ecuadorian banana farmers how that went....expect the US to push its weight around regarding its interests in the TPPA and for Malaysia to have far less wriggle room.

Fifth, and related to point 3, is the loss of the past. When we concentrate on say producing shoes rather than handicrafts because that is where our comparative advantage lies, we lose a thousands year old history. But we also lose more than the past. Our present is tied to our past. Expect a loss of culture and other societal aspects related to these change sin production. Rapid industrialisation in the UK, China, Indonesia are clear examples of these. Mind you, this is not all bad. I'd argue that some aspects of the past and some cultural traits should be extinguished. But what we create in their stead are also both good and bad. Things will change, Some will be better off, others not. Power play comes into this too.

Finally, even when FTAs produce a net benefit, how do we compensate the losers? For example, say an FTA creates 200,000 jobs and destroys 150,000. The net benefit is positive as we are 50,000 jobs better off. But how do we compensate the losers? The theory explicitly notes that they'll be winners and losers and notes that the losers must be compensated. How? When? 'Ah, ask the government, we are just economic theorists...' What we often see is that even when the losers are compensated it is inadequate. How do you compensate for loss of culture anyhow?

It is a complex issue. I must admit, I am these days rather agnostic about FTAs. I'll agree to support or oppose each one on their merits. But their merits are subjective. In these TPPA debates I suggest we respect our opponents. You may want to protect 100 coconut farmers with a rich history in country X, even if this means we lose the chance to create 10,000 jobs in the banana sector. That is important to you. The other side may be very exasperated with your point of view. 10,000 jobs man, 10,000 jobs, and you care more about 100 farmers? And vice-versa. See their point of view as well. Best to talk to each other, not past each other...


  1. Power asymmetry... I think you hit it spot on. Just take a ook at NAFTA. I even studied international trade in college everyone was so excited about it. And then it hit us: the maquiladoras (sweat shops as far as I am concerned), the trash dumping on our side of the border taking advantage of the lack of regulations, driving thousands of SMEs out of business, people in the coutryside being unable to compete with the oranges from California... You name it. As far as I am concerned, NAFTA just made it best for the rich to get Twix Bars in the supermarkets. The poor got some low skilled jobs... In conditions such as Ciudad Juarez (not a happy read if you want to dwelve on that one). Thanks for the bloc post!

  2. NAFTA. Certainly changed Mexico forever and is a classic case of how not to do an FTA. I hope we learn from such lessons though....I guess I'm not so hopeful.