Trade agreements: Net positives and negatives

One common characteristic with most FTAs is the significant expansion of trade between member countries.

Since the 1950s, the global economy has actively pursued the liberalisation of international trade to form a common, unified marketplace that eliminates all trade barriers, previously used by countries to protect their domestic industries against foreign competition. This policy shift was largely driven by technological advancements that drastically lowered costs in transportation, communication and computation, thereby expanding the reliance of the world economy on international trade.
According to World Bank data, the share of trade (goods and services) in world GDP increased from 43 per cent in 1995 to 60 per cent in 2013, while, for the Mena region, this share expanded from 62 per cent in 1995 to 90 per cent in 2013.
Furthermore, the post-World War II era also witnessed the formation of international trade institutions - such as the World Bank, the International Monetary Fund and the General Agreement on Tariffs and Trade, which was later succeeded by the World Trade Organisation in 1995 - also played a crucial role by providing a suitable platform for multilateral trade negotiations, which gradually led to a legacy of free trade agreements, or FTAs, in place of protectionism.
For participating countries, these FTAs provide access to larger markets coupled with benefits from international division of labour. Moreover, they also assist domestic producers to improve efficiency levels due to international specialisation and pressure from foreign competition while consumers enjoy a wider variety of domestic and imported goods at lower prices. Consequently, FTAs gained traction in the past two decades, with over 270 regional FTAs being enforced in 2014 as compared to 27 in 1990.
Furthermore, FTAs amongst neighbouring countries also led to the formation of economic blocs such as the North American Free Trade Agreement, or Nafta, amongst Canada, the US and Mexico, the European Union comprising 28 member countries, the Association of South East Asian Nationsm, or Asean, and the Gulf Cooperation Council.
These economic blocs essentially dictate the modern-day international trade with the EU representing 33 per cent of world merchandise exports in 2014, followed by the Nafta with a share of 14 per cent. Similarly, the Asean shipped seven per cent of world merchandise exports while the GCC countries accounted for six per cent in 2014. Notably, the contribution of the EU and the Nafta in world trade has declined in the past decade given the rise of developing countries such as Brazil, Russia, India and China, while the share of the GCC in world trade has tripled thanks to the growing demand of hydrocarbons.
One common characteristic with most FTAs is the significant expansion of trade between member countries. For instance, merchandise exports amongst Nafta countries tripled to $1.25 trillion in 2014 from $392 billion in 1995. Further, intraregional merchandise exports accounted for almost 50 per cent of the total exports globally, suggesting strong regional self-sufficiency and economic integration. A similar pattern was also observed in the EU wherein merchandise exports amongst member states increased from $1.4 trillion in 1995 to $3.8 trillion in 2014 and the share of intraregional exports in total exports stood at 63 per cent in 2014.
Expansion of intraregional trade also led to economic integration through new job creation and industrial linkages amongst member states. For instance, the US Chamber of Commerce estimates that increased trade from the Nafta supported almost five million jobs in the US during 1994-2007 and also led to a modest increase in wages (0.17 per cent in the US, 0.96 per cent in Canada and 1.3 per cent in Mexico). Moreover, the Nafta also facilitated the development of intraregional supply chains that allowed North American manufacturers of automobiles, electronics, machinery and appliances to remain globally competitive by spreading production lines into a low-cost country - Mexico, which invariably also boosted the country's manufacturing sector. Similarly, the EU economy benefits from free mobilisation of goods (expanded market access) and citizens (increased employment and education opportunities) through the member countries.
Despite success on multiple fronts, opinions in favour of pursuing FTAs is not unanimous. Firstly, some critics argue that the development of large and competing economic blocs such as the Nafta, the EU, etc, could be regressive to the principles of "free trade" as they diminish the bargaining power of individual countries, which often consent to trade restrictions in exchange of access to large markets. Consequently, FTAs can also be used as foreign policy and intervention tools by the economic blocs.
Secondly, the labour-dislocation and trade imbalances could be unfavorable for some participating members, thereby creating significant socio-economic challenges. For instance, the US trade surplus of $1.7 billion in 1993 (before signing the Nafta) swung to a deficit of $61.4 billion in 2012. Similarly, the Nafta was also criticised for dislocation/loss of almost one million manufacturing jobs in the US. These challenges were widely publicised during the 2008 US presidential election, with many Democrats calling for an amendment of the Nafta. However, most economists still maintain that free-trade deals generally produce long-term benefits despite some painful short-term costs.
From a Mena perspective, the achievements of free trade agreements are rather limited. According to the United Nations Economic and Social Commission for Western Asia, the total inter-Arab trade as a percentage of total Arab foreign trade has remained marginal (less than 10 per cent) in the past two decades due to high trade costs, bureaucratic and administrative inefficiencies along with ongoing conflicts and a desire among smaller countries to retain their autonomy. The Greater Arab Free Trade Area that came in to effect in 2008, saw tariffs between 17 Arab states rapidly decline from an average 15 per cent in 2002 to six per cent in 2009. However, the overall trade costs still remained significantly higher, so much so that it was cheaper for some Arab states to trade with Europe than between themselves. For instance, bilateral trade costs for industrial products between the Maghreb states and France, Italy and Spain is lower than that of trading with the GCC.
Notably, the six member states of the GCC are well ahead of the rest of the Mena in terms of both intraregional and international trade. According to the World Bank, the GCC's intraregional merchandise export increased from $7 billion in 1995 to $60 billion in 2014 while total merchandise exports expanded from $103 billion in 1995 to $1 trillion in 2014. The GCC customs union, which came into force in 2003, enforced a common five per cent tariff on imported goods across the region and also improved the freedom of movement and right to employment for the citizens. However, non-tariff barriers continue to restrict greater trade between GCC states. For instance, the region has historically been discussing several groundbreaking initiatives such as "common market", "single currency" and "monetary union", something similar to the EU trade model, however the progress to date has been limited. Similarly, plans for a GCC-wide railway network and a Pan-Arab customs union have yet to gain traction while older issues such as a combined value-added tax have only recently surfaced due to the crash in oil prices.
On the other hand, the GCC's total merchandise exports increased from $103 billion in 1995 to $1 trillion in 2013, partly due to several FTAs with other countries. However, a majority of these FTAs are signed at individual country level and therefore, could be detrimental when the GCC, as an economic bloc, signs a trade agreement with other prominent economic blocs such as the EU and the US. For instance, the negotiations for a GCC-US deal have not been helped by Bahrain and Oman's unilateral agreement with the US. Nevertheless, the GCC as an economic bloc, is actively negotiating FTA deals with several countries including Japan, China, India, Turkey, Australia, Korea and Brazil, which will be beneficial in the long term.
In conclusion, Gulf economies should continue to emphasise on trade agreements for exports diversification, especially in the wake of declining oil prices and cost-pressures from Asian markets. Adoption of positive takeaways from the Nafta and the EU, such as common market, open intraregional immigration and service-sector liberalisation, could pave the way for regional economic integration going forward. However, it is equally important to note that FTAs involving lower tariff environments, can at times be detrimental for domestic sectors as they would invariably raise competition from foreign companies.
For example, Morocco's trade deficit with the EU increased by more than five times between 1999 (the year before a FTA came into place) and 2009 while the trade deficit with the US increased fourfold in the four years after an FTA came into force in 2005. Therefore, it is imperative that new FTAs are carefully drafted so that the net effect is beneficial for the region.
The writer is the founder and CEO of Al Masah Capital. Views expressed are his own and do not reflect the newspaper's policy.