There is a mad race for free trade areas and preferential trading agreements. There is no doubt that these are undermining the multilateral trading system based on the principles and rules of the World Trade Organisation (WTO). There may be some 500 or so such agreements. Pakistan is also in the race.
The basic principle of the WTO and the GATT is non-discrimination in the international trade relations, the most-favoured-nation (MFN) principle. The free trade areas, customs unions and preferential trade agreements are a departure from that basic principle. The GATT/WTO rules allow such arrangements as an exception from the basic principle; only as an exception. The multilateral trading system is the main basic system serving all member countries. Free trade areas, customs unions and regional arrangements were meant to cater to the needs of those, relatively fewer, members who desire to go beyond and above the WTO. However, recent trends show that more and more countries are going for FTAs.
It has become a fashion to negotiate and conclude FTAs. Some times, one gets a feeling that countries go for FTAs that they may not be left behind. According to some observers, FTAs are becoming the rule and most-favoured-nation principle, which was supposed to be the rule, becoming the exception.
What is worse is that the conformity of most of the FTAs with the WTO rules has not been conclusively decided by the WTO supervisory bodies. What should be Pakistan’s strategy in respect of FTAs. To begin with, it should be remembered that each FTA has costs and benefits. Those FTAs would make sense where benefits outweigh the costs. Where it is the other way round, we should not go in for an FTA simply for the sake of having one more FTA.
An FTA provides access to a market for Pakistan’s goods and services, and competitive conditions of access with other countries enjoying preferential access. However, in exchange free access to Pakistani market has to be provided for the goods and services exported by the FTA partners. Can Pakistan afford that in all cases? Can Pakistan’s industries and services enterprises afford that? That is the litmus test for any proposed FTA.
A recent trend is that FTAs, especially with developed countries such as the United States, the European Union, etc, cover not only goods and services but also investment, competition policy, government procurement and even environment, human rights and labour standards. In other words, FTAs are going much beyond WTO rules. Can Pakistan afford to include these subjects in its FTAs?
As stated earlier, a thorough study of costs and benefits is a must before considering to entering into any negotiation for an FTA. Similarly, a study of cost-benefit analysis may also be made of existing FTAs. Questions that need to be explored in such studies are: Pakistan’s exports and imports to and from the proposed FTA country for the last five years.
Which countries are Pakistan’s competitors in that market? What are the conditions of market access of those countries? Do they enjoy preferential access? Will Pakistan enjoy similar preferential access?
What is the potential for increasing Pakistan’s exports to an FTA country?
What would be the impact on Pakistan’s imports?
What would be the impact on domestic industry and domestic services enterprises? Can domestic industries face competition with duty free imports?
How would the revenues be affected?
What would be the prospect for attracting more foreign investment?
What would be the impact on employment?
Can Pakistan include government procurement in FTA agreement? Can Pakistan include some of the non-trade issues in the FTA?
These are some of the important issues to be examined before jumping to an FTA. There could be other country-specific issues that may be looked into. It is obvious that FTAs with some countries may not be beneficial for Pakistan while FTAs with some other countries or groups of countries would appear to make eminent sense. The yardstick should be: would there be net benefits for Pakistan’s economy. Would the FTA increase Pakistan’s exports, improve its balance of trade and generate additional employment opportunities, and avoid damage to Pakistani industries.
Pakistan, of course, is no stranger to regional trading arrangements. In fact it was an early starter. Pakistan, along with Iran and Turkey, established the Regional Co-operation for Development – RCD – way back in 1964. But this experiment unfortunately did not prosper. Economic and trade integration was not deepened. Many meetings and conferences were held. But the organisation remained without teeth. It was jokingly referred to as recreation, conferences and dinners. In the trade field, Pakistan asked for too much too soon, whereas Iran wanted to give too little too slowly. Turkey looked to the West with one eye and to the east with the other eye. Thus this promising venture failed to take off. It is important to learn lessons from that failed experiment in our new desire for more free trade areas and regional trading arrangements.