Myths about bilateral free trade

Published August 29, 2005

OF late, there has been an outbreak of activism in the realm of bilateral free trade and investment agreements across the world. Many developing countries have found themselves swept off by the wave of bilateralism, not realizing it only weakens the cause of multilateralism.

They are engaged in long-drawn negotiations with each other and also with rich states such as the United States, European Union, Japan and Australia under an assumption that bilateral agreements will offer them, particularly in the case of those with the latter, extraordinary dividends of enhanced trade on favourable terms and increased inflow of investment. The hard fact is that it is the developed countries which reap benefits of such treaties.

The United States has been more active in bilateral free trade agreements (FTAs) for it finds it difficult to obtain the desired results at the forum of the World Trade Organization. It is easier for it to dictate its terms in case of bilateral accords. The US has approached, in recent years, more than 20 countries for FTAs and some have already signed them. Similarly, it has been inclined to conclude sub-regional trade agreements with some countries such as Nafta which covers Canada and Mexico. The latest is Cafta, covering certain Latin American countries.

In all such trade deals, Washington has been crudely pressuring the other countries to concede to its dictates. A case in point is Pakistan’s intention to sign a bilateral investment treaty with the US, after the latter refused to have a free trade agreement.

Islamabad believes it will pave way for bulk of US investment in the country particularly in areas other than consumer goods. But the negotiations have run into difficulties over two major issues which are of vital importance to Washington — dispute resolution mechanism and enforcement of trips-plus laws.

For some time, the US has been laying stress on inclusion of a provision in the draft under which Pakistan will pay damages to US (future) investors for the losses they suffer in case of the infringement of IPR laws and unilateral cancellation of licences.

According to Pakistani officials, US negotiators insist that in case Islamabad fails to pay immediate compensation to affected US firms, the World Bank’s International Centre for Settlement of Disputes (ICSID) should pay the compensation and treat the amount as a loan to Pakistan.

Pakistan is not ready to accept these (harsh) terms and also ICSID as a forum for dispute resolution or arbitration but would agree to the United Nations Commission on International Trade Law (UNICITRAL) for this purpose. Americans are averse to seek justice from Pakistani courts.

It is stated that Attorney-General of Pakistan and other legal experts have cautioned Islamabad against rushing into signing bilateral investment treaties (BITs) with foreign countries (the US in particular) for these can create ‘painful’ legal implications.

However, Pakistan has, of late, been inclined towards bilateral activism. Only recently its FTA with Sri Lanka has gone into operation. Another 14 FTAs are to be or already being negotiated. The countries are China, Malaysia, Singapore, Indonesia, Tunisia, Mauritius, Morocco, Laos, Saudi Arabia, Oman, Kuwait, the UAE, Bahrain and Qatar. With China, there already exists a preferential trade agreement for tariff concession on numerous items.

Another issue that disturbs American investors is the inadequacy of intellectual property rights protection in Pakistan, also mentioned by US-Pakistan Business Council in its recent statement.

This year’s report of the US Trade Representative (USTR) has placed Pakistan on Priority Watch List or “Special 301” for overall piracy and counterfeit problems. The establishment of Pakistan Intellectual Property Organization (PIPRO), though admired, has not impressed the US authorities. And the US copyright industry remains disappointed.

The US has always viewed WTO’s agreement on trade-related intellectual property rights (Trips) as being inadequate and had always wanted the WTO and World Intellectual Property Organization (WIPO) to set higher standards. The US attitude has largely been influenced by its failure to obtain an agreement on trade in counterfeit goods at end of the Tokyo Round (1979) and later by resistance of the developing countries (led by India and Brazil) in the first half of the 1980s to include intellectual property as a negotiating item in a new Gatt round.

So, the US took to another route to solve the problem. It changed its Trade Act of 1974 to create a linkage with intellectual property. Its section 301 was amended and a mechanism known as ‘Special 301’ was created requiring the USTR to identify countries denying ‘adequate and effective’ protection for IP rights.

Since Trips confers on WTO members a discretion to implement “more extensive protection” which is now called Trips- plus, the US has found it convenient to insist on an IPR regime in the light of this provision and thus have the negotiating country removed from 301 Watch.

The US has been quite explicit in approaching and pressuring weaker countries for a BIT or FTA and keeping momentum in a manner that finally they give in. It avoids such deals with economically strong countries unless the US multinationals have certain interests there. Australia is a case in point. The FTA signed in January was billed to be a breakthrough but official statistics show Australia’s exports to the US have fallen by three per cent in the first six months.

So, the US has signed agreements with countries like Chile and Central America which have no real economic importance for it. And there is a rush to sign similar accords with Morocco, Thailand, Bahrain, Peru and Ecuador, also of little importance.

Washington has already made it clear that the pattern it wants to follow in its future FTAs or BITs is the text signed with Chile which is what the US negotiators had dictated. This is despite what we are made to believe about benign character of such deals by creating certain myths.

The first myth is that BITs are economic accords. In practice, these are political agreements under which the developing countries are put in a position of extreme political subordination. Without trying to hide this, the US has stated officially that the agreements with the Andean Community nations are a “natural extension” of Plan Colombia — the initiative of the US to send troops to Colombia and to support military action against the Colombian people with the excuse of controlling drug trafficking.

At the start of talks on the US-Pakistan bilateral investment treaty in September 2004, the then USTR chief Robert Zoellick said: “ Pakistan and the United States are partners in combating global terrorism. A BIT based on the high standards contained in our model text can play an important role in strengthening Pakistan’s economy, so as to create new opportunities for exporters and investors in both economies and assist in meeting the economic conditions to counter terrorism.”

In the case of Morocco, the US presents the agreement as a means of supporting its desire to “promote more tolerant, open and prosperous Islamic societies”, which means imposing the standards of the US government on the Arab world.

The second myth is that within the economic context we are truly dealing with ‘free trade’ agreements. The ‘free trade’ aspect — meaning allowing free flow of goods — is clearly marginal. The WTO has already done that job, and did it very well. Less than a third of WTO members keep tariffs for agricultural products above 20 per cent, and a quarter of them charge duties below 10 per cent for products which a decade ago were affected by tariffs of more than 100 per cent. Here, the US is ready to make certain concessions regarding tariffs for agricultural products in exchange for political subordination together with privileges and guarantees for US investors.

Another myth is that by obtaining concessions for agriculture, the effects of the agreements will be tolerable for farmers and native peoples. The fact is that agreements will make possible the expropriation of farmers’ and native peoples’ lands. They will also make agrarian reforms impossible.

It is interesting to note that on-going negotiations have nothing to do with these agreements. The agreements already signed show that this is an exercise in promoting packaged products that are almost identical to the letter, and are merely reorganised to clarify the protection of major investors’ interests.

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