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Free Trade Agreement

A free trade zone is established between two or more states. The import duties and non-tariff trade barriers between them are eliminated. Moreover, rules for the mutual trade, services and protection of intellectual property are established. Goods and services can be traded between the member states without duties or levies and investments can be negotiated without barriers (cf. Malcher 2005: 86). In Latin America the first FTA was set up in 1960, with the Associación Latinoamericana de Libre Comercio (ALALC), followed 1969 by the Pacto Andino and in 1980 ALALC was replaced by the Associación Latinoamericana de Integración (ALADI). These were intended to promote regional cooperation under the strategy of the Cepalismo.

FTAs became popular in the 1990s during which a “Welle des Regionalismus” (Dieter 1998: 207) can be observed. Many FTAs were created in case of a failure of the Uruguay Round at the General Agreement of Tarifs and Trade, the predecessor of the World Trade Organisation (WTO). No only ambitious projects such as the Asia-Pacific Economic Cooperation (APEC) oder der Free Trade Area of the Americas (FTAA) were on the agenda. It was also intended to set up interregional agreements such as a free trade agreement between the European Union and the Mercosur. For peripherical countries FTAs like the Pacto Andino or the Mercosur these were instruments to tighten regional cooperation and to insert the countries into the world market. During the 1990s the driving force was „die Frage nach dem effizienten Weg in die Weltwirtschaft“ (Dieter 1998: 206). Between 1957 and 1990 Sáez/Valdés count 30 regional trade agreements registered at the WTO. Only between 1991 and 1997 they count 61 which have been signed (Sáez/Valdés 1999: 90) Very often FTAs as they harm efforts made through the WTO in terms of liberalizing world trade.1

It’s usually the multinational corporations together with national companies which are lobbying in favour of FTAs, since they’re well prepared to take advantage of different business environments in different countries and can then trade and invest without borders. FTAs play an important part in the process of globalization, since they prepare global free trade and within them there are production chains, which can pass through several countries (worldwide sourcing). In literature, distinctions are drawn between various levels of regional cooperation. Bela Balessa (Balessa 1961: 2; Balessa 1987: 43) suggests five levels:

1. Free Trade Zone: Duty-free domestic trade, but different levels of external tariffs.
2. Customs Union: Free trade zone with uniform external tariffs.
3. Common Market: free circulation of goods, labor, capital, services.
4. Economic and Currency Union
5. Political Union

In the sense of this definition, the North American Free Trade Agreement (NAFTA) (1992) is a free trade agreement, the Common Market of the South (Mercosur) (1991) a customs union, albeit an "incomplete customs union", as not all tolls are lowered to the same level and trade conflicts arise time after time. The Free Trade Area of the Americas (FTAA) planned by the USA would be a Free Trade Area from Alaska to Tierra del Fuego after coming into effect.

This distinction between free trade area, customs union, common market, economic and currency union, and political union does not, however, reveal much about the character of an individual regionalization project. Plehwe objects to such a multi-level model: „Neben globalen Interessenslagen müssen zum Verständnis von regionalen Integrationsbemühungen die Binnenverhältnisse der Regionen stärker in den Blick geraten, damit die Grundlage für die jeweils spezifische Intensität und den Charakter der Regionalisierung erfasst werden kann.“ (Plehwe 2000: 9). The reasons leading to the establishment of a regionalization project, its position in the global market and the internal balance of power are left out of this model. However, a distinction is sensible in order to determine the intensity of regionalization, since the intensity of regional integration projects always has an interior effect on the individual nations in which certain reforms are carried out. Through a free trade agreement, however, not only internal pressure is created, but also the pressure of conformity with other nations or regions.

The state actors expect a larger domestic market of regional integration projects. Through a larger economic area, they attempt to intensify trade and draw investments. Free trade agreements tend to serve not as alternatives to integration into the global market. They serve much more as a preparation for global market integration by improving the competitive conditions of the national companies and of the state as the investment location. A further aim is to expand the home base of multinational concerns and "Bedingungen ihrer Systemführerschaft zu verbessern und den eigenen (Binnen-)Markt zu vergrößern" (Narr/Schubert 1994: 169).

In general, the global competition is the motive for signing free trade agreements. Within the scope of free trade agreements and larger regional projects such as Mercosur, a polarization takes place to the benefit of the stronger nations, which frequently results in the solidification of the differences in development between the nations through a regionalization project (cf.: Dieter 1998: 213).

Narr / Schubert point out a drive towards cooperation between nations in economically strong nations. It is "weltökonomische Beweggründe, die regionale Zentren wie die EU, den von den USA bestimmten Block (...) oder den los-engen Japan ‘Block’ schaffen", according to Narr/Schubert (1994: 169). They further claim that the states are even forced into strategic alliances, because, "globale Konkurrenz erzeugt Kooperation; Kooperation schließt weitere interne Konkurrenz der Staaten ein, die teilweise kooperieren; sie verschärft die Konkurrenz mit anderen kooperierenden Blöcken" (Narr/Schubert 1994: 176). This means that within a free trade area the competition between the states is not lifted: rather competition partnerships come into being, in which states join together in order to be able to compete better at a global level. Thus, the competition between the sub-regions is intensified.

The critical theory of international relations assumes that the transmission of values and norms is a central characteristic of hegemony, which expresses itself in the norms of international organizations and agreements: hegemony is institutionalized, especially in free trade agreements in whose contracts binding rules are agreed on. Cox affirms the significance of rules for regulating economic exchange: "The rules governing world monetary and trade relations are particularly significant. They are framed primarily to promote economic expansion. At the same time they allow for exceptions and derogations to take care of problem situations." (Cox 1993: 63)

Dieter (1998: 207) also sees chances for the Third World in the regionalization process. The regional cooperation can become a cornerstone "eines sinnvollen Entwicklungskonzepts (...). Durch die Schaffung eines größeren Wirtschaftsraums können Skaleneffekte in der Produktion erzielt und zugleich die Attraktivität einer Region als Investitionsstandort gesteigert werden." This means that through the creation of regional economic blocs, an attempt is made to improve the region in international competition. Dieter (1998: 208) also sees a political benefit: "Durch die Bündelung von Souveränität (...) können Regionen in der Weltpolitik ihre Interessen gegenüber anderen Akteuren besser durchsetzen".

Free Trade Area of the Americas

In 1990, the then-president of the USA George Bush announced the formation of a pan-American free trade areas from Alaska to Tierra del Fuego. On Dezember 9, 1994, negotiations for this free trade area began at the first Summit of the Americas in Miami under then-US president Bill Clinton. At this summit, the 34 heads of state and government of the Americas (Cuba was not invited) to establish the Aerea de Libre Comercio de las Américas (ALCA) or Free Trade Area of the Americas (FTAA) by 2005. This, however, did not occur. The last presidential summit for the establishment of the FTAA took place in Mar del Plata, Argentina in 2005, where many Latin American governments opposed the ideas of the USA. The negotiations on the topic of a free trade area were centered above all on four points:

1. Free access to all markets in Latin America for US products and investors; abolition of all tariff and non-tariff barriers to trade.
2. Equal treatment of US concerns in the privatization of state companies and the awarding of state contacts with national companies.2
3. Protection for the intellectual property of US firms in Latin America. The Latin American nations should recognize the patent laws of the USA; this mainly affected the pharmaceutical industry, software and trademark protection. Protection mechanisms against biopiracy was, however, not included.
4. Opening of the Latin American states for services from the USA.

Accordingly, the interest of the USA lay in protecting its own national economy from the products of its southern neighbors. In 2009, the USA issued agricultural subsidies of 22 billion US dollars, which made market access to agricultural products difficult and weakened productivity of the producers. Thus, the main problem for Latin American nations in trade with the USA is not external tariffs. It is the non-tariff trade barriers of the USA and the politics of subvention.

With lowered tariffs on products and services from the USA, the abolition of investment barriers and the recognition of US patent laws, an enormous market would have opened to the USA. Sensitive topics for the USA, but which were existential for the Mercosur countries (agricultural trade), were topics which the USA only wanted to discuss within the scope of the WTO. This would mean that the access to the market were non-reciprocal, especially when one considers that the US external tariffs are in any case considerably lower than those of the Latin American countries. The negotiations in 2005 failed especially on operations from Brazil and Argentina, who demanded a reduction in agricultural subsidies from the USA. A new Summit of the Americas is planned in Cartagena, Columbia, for 2012.

Already before the failure of the FTAA, many countries in the region had fixed bilateral free trade agreements (see Table 1), through which a free trade area was effectively created through the back door. Free trade areas generate pressure for conformity, as states secure an advantage over others in competition between locations.

Table 1: Free Trade Agreements in the Americas

1 See Renato Ruggiero’s, WTO’s former General Secretary, remarks in Financial Times, 16.4.1998, p. 7

2 This so-called domestic treatment and non-discrimination clause with respect to investments counts among the contentious rules of the Multilateral Agreement on Investment (MAI), whose introduction in April 1998 was (initially) postponed due to massive worldwide protest.

Ingo Malcher

Please cite as:
Malcher, Ingo. 2012. “Free Trade Agreement.” InterAmerican Wiki: Terms - Concepts - Critical Perspectives. /einrichtungen/cias/wiki/f/free-trade-agreement.xml.

Bibliography

Balessa, Bela. 1961. The Theory of economic integration. Homewood (Illinois).

Balessa, Bela. 1987. "Economic Integration", in Eatwell, John/Milgate, Murray/Newman, Peter (Hrsg): The new Palgrave. A Dictonary of Economics, Vol. 2 (E to J), London and Basingstoke, S. 43-47.

Cox, Robert (1993): Gramsci, hegemony and international relations: an essay in method, in: Gill, Stephen (Hrsg.): Gramsci, historical materialism and international relations, Cambridge, S. 49-66

Dieter, Heribert. 1998. "Regionalismus im Zeitalter der Globalisierung: Eine neue Gefahr für die Länder des Südens?", pp. 206-229 in: Heinrich, Michael/Messner, Dirk (1998): Globalisierung und Perspektiven linker Politik. Festschrift für Elmar Altvater. Münster.

Malcher, Ingo. 2005. Der Merosur in der Weltökonomie. Eine periphere Handelsgemeinschaft in der neoliberalen Globalisierung. Baden-Baden.

Narr, Wolf-Dieter/Schubert, Alexander. 1994. Weltökonomie. Die Misere der Politik. Frankfurt am Main.

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Sáez, Sebastian/Valdés, Juan Gabriel S. 1999. "Chile and its "lateral" trade policy", in: CEPAL Review, Nr. 67, April, pp. 85-99.