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Free Trade Agreements: Cost and Controversy

Updated On: Mar 09, 2007

Singapore, one of the most aggressive states in pursuing Free Trade Agreements (FTA) seems to be reaping the benefits.

The Trade and Industry Minister, Lim Hng Kiang told the Singapore parliament that Singapore’s 11 FTAs have led to increased trade volume and tariff savings of over $470 million for companies in Singapore.

Singapore’s trade with its FTA partner, the United States (US) has grown by 19% to US$42.5 billion in 2006. The Executive Director of the American Chamber of Commerce in Singapore (AmCham) said that the US-Singapore FTA had “the effect of increasing business confidence in Singapore and has supported theSingapore government’s efforts to promote the country’s standing in the region as a high-trust economy….. This has had the effect of not only increasing trade, but also ensuring that Singapore is attractive to US foreign direct investment (FDI).” Singapore is now the second-largest recipient of US FDI in Asia in 2005.

Thailand, which had been previously been very aggressive in pursuing FTAs, also seems to have benefited from its FTA with Australia. Bilateral trade betweenThailand and Australia has risen by 15% to reach 295.52 billion baht in 2006 compared to the previous year. Thai’s exports to Australia rose by 30% in 2006.

The economic ties between these two look set to expand further.  Australian Senior Trade Commissioner to Thailand, Sean Riley, said, “We only expect two-way trade to grow as only 14% of Australian exports and 63% of Thai exports took advantage of the tariff privileges.”

Notwithstanding the seeming success of Thai-Australia FTA, the Thai government is wary of entering another FTA- with Japan. There are three main concerns over the FTA with Japan. The first was the fear that Thailand might end up with an influx of hazardous waste from Japan. Due to pressure from the environmental non-governmental organizations (NGO), the Thai government has added a one-page annex- “the understanding on the interpretation of the agreement” in which both sides reaffirmed their commitment to the Basel Convention on the Control of Transboundary Movements of Hazardous Waste and their Disposal.

Secondly, some of the Thai producers in the steel industry are concerned that the FTA might mean the end of their businesses. The FTA is likely to result in an adjustment period of 7-10 years (in which the current tariffs of zero to 5% is applied) for commodity grade steel and an immediate zero tariff on specialty steel products not made in Thailand. The founder of NSM Plc (a hot-rolled coil producer), Sawasdi Horrungruang said, “How dare the government open the local market to others despite an awareness that Thai operators still lack competitiveness? I don’t know why they have to rush to reduce our tariff protection.”

Last, there are also concerns that the Thai auto-parts sector could suffer with the FTA since the Japanese car manufacturers would then source supplies from Japanrather than from Thailand. The Permanent Secretary for the Industry Ministry, Chakramon Phasukvanich assured that Japanese car manufacturers in Thailand were likely to continue to buy from Thai suppliers due to the well-established relationships.

Chakramon Phasukvanich reiterated that the Thai-Japan FTA would increase Japanese investments in Thailand. He also pointed out that Japanese companies preferred to source quality local raw materials to importing raw materials from Japan. The former would be more cost-effective.

The Thai government not only has to deal with domestic resistance to signing the FTA but also to consider the potential costs of not signing the FTA. The competitive nature (vis-à-vis the other ASEAN members) of these FTAs was revealed in the comment by the Secretary-General of the Auto-parts Manufacturers Association, Thavorn Chalassathien who said that through the FTA, "… Thailand would acquire a similar advantage to Malaysia when the country signs a free trade agreement with Japan due to the fact that Thailand is also a member of AFTA [ASEAN Free Trade Area]," he said.

Besides ThailandMalaysia is also coming to grips with the issue of pursuing FTAs. In the case of Malaysia, its FTA negotiation with the United States has reached a critical stage. On Wednesday (7 March 2007), the Malaysian Cabinet discussed the findings by the various ministries and agencies on the potential impact of the FTA.

There are some fears in Malaysia that the United States (US) would be the main beneficiary of the Malaysia-US FTA. The influential son-in-law of Prime Minister Badawi, Khairy Jamaluddin wrote a strongly worded article in the New Sunday Times urging the government, “not [to] sign away our freedom and dignity.” The Malay newspaper, Utusan Malaysia carried a whole page of letters and text messages from readers, most of whom were opposed to the agreement.

One of the key concerns is that the US-Malaysia FTA would end the practice of awarding government contracts to bumiputra companies. Other concerns included the tightening of the intellectual property rights regime in Malaysia and liberalization of the service sector (which could eliminate many Malaysian companies).

The International Trade and Industry Minster Datuk Seri Rafidah Aziz was careful to emphasize that the decision to sign the FTA or not will be a collective Cabinet decision and not one to be made by the Trade Ministry alone. Against the accusations that the Malaysian government was rushing to sign the FTA with the United States, Rafidah asserted that it had no deadline for concluding the FTA talks with the United States.  Prime Minister Badawi in responding to the chorus of opposition also sought to reassure that the government “will always safeguard the nation’s interest in its negotiations on the Free Trade Agreement with the United States”.   (8 March 2007)

Sources:

Nations comes first in FTA talks, says PM (The Star, 8 March 2007)

No Rush To Conclude FTA Talks With US, Says Rafidah (The Straits Times, 7 March 2007)

FTA Saves S’pore Business Over $470m in Tariffs (The Straits Times, 6 March 2007)

Assessments of FTA Impact (Bangkok Post, 6 March 2007)

Rafidah: Cabinet to Discuss Malaysia-US FTA Findings Tomorrow (Business Times Malaysia6 March 2007)

Steel Tops Debate on Japan Deal (Bangkok Post, 6 March 2007)

FTA To Boost Investments From Japan (Bangkok Post, 6 March 2007)

On the Record; Efforts to Ease FTA Anxiety (Bangkok Post, 5 March 2007)

Thai-Japanese FTA Negotiations; Toxic Waste Annex to Be Tabled in Tokyo (Bangkok Post, 5 March 2007)

FTA Must Promote Fair, Not Free Trade (New Sunday Times, 4 March 2007

S’pore-US Trade Rose 19% to US$42.5 billion (The Business Times Singapore, 2 March 2007