The contemporary free trade agreements including recently resurrected Trans-Pacific Partnership (TTP) are subject to multiple protectionist clauses or special deals which impede competition based comparative advantages and hence, in disagreements with economic theory. No wonder why these free trade agreements do not generate reasonably equal economic benefits for all partnering countries.
Economists’ advocacy on “free trade agreement” is premised on the Theory of Comparative Advantage discovered by David Ricardo, a British economist, in 1815.
As we all benefit from specialising in an occupation we are good at or trained in, similarly exchanging goods and services with people of other specialities in other countries, we can reap further gains from trade by extending specialisation in our country and exchanging with producers/consumers beyond our borders in other countries.
Expected benefits of international free trade are purely based on comparative specialisation which would be impaired if the agreement is highly flawed with politically compromised deals between selected countries.
Free trade will create relative winners and losers in the international markets. Fair agreements will compensate losers by relative winners and reduce barriers to trade as well as protectionism.
Modern free trade agreements are more aligned to issues such as regulatory standards, health and safety rules, investment, banking and finance, intellectual property, labour and environment than measures which would facilitate a freer trading ecosystem.
International free trade agreements in the contemporary times produce economic consequences that are far more ambiguous than what should be the purported benefits. This is mainly due to the following protectionist features of these agreements:
- Intellectual property such as patents, copyrights and trademarks are legally protected from copying by other nations which as monopoly restrictions hugely benefit rich countries against poor countries. The US happens to be a colossal exporter of intellectual property in the forms of software, hardware, pharmaceuticals, music and movies. Profits arising from these enterprises are protected for US corporations through intellectual property rules.
- Restrictions on cross-border capital flows. The US with world-dominating financial markets profoundly pushes for unrestricted capital inflows and outflows. The developing nations have less ability to manage cross-border capital flows and often experience net outflows or lack of inflows of scarce financial resources to finance development initiatives.
- Protection from domestic laws and policies in relation to profit-making by multinationals. These are vaguely termed as investor-state dispute settlement procedures allowing multinationals to sue host governments in special arbitration tribunals and seek damages for regulatory, tax and other policy changes merely because those changes reduced their profits. Hence, taxpayers would be liable to make up any potential reduction in profits caused by domestic measures which might be necessary for the well-being of the domestic population.
- Harmonisation of regulations such as protection of the environment, working conditions, food, health, safety and so on. This harmonisation process is often skewed producing economic benefits for rich partners against the poor partners and at times could be excessive and/or protectionist.
In the current settings, who mostly benefit from international free trade agreements? Multinational companies, international banks, pharmaceutical corporations and industry groups such as farm lobbyists.
Rather than achieving a redistributive justice, the outcome is a redistribution of wealth from the poor to the rich under the guise of the free trade and investments.