Spero News

Legal aspects and politics of US and Taiwan accord
A U.S.-Taiwan FTA is expected to produce more trade diversion than trade creation.
Monday, January 08, 2007
by Jacques deLisle

The international law of free trade areas/agreements (FTAs) reflects a simple liberal logic of international economic relations. The pursuit of FTAs, however, often falls short of these legal and economic ideals and reflects more complex political calculations. This is true for proposed FTAs in East Asia, specifically those involving the region’s two key political actors, the People’s Republic of China and the United States. FTAs that might include Taiwan (for the U.S.) or exclude Taiwan (for the PRC) provide distinctive variations on this theme.

International Law, Economic Liberalism and Free Trade Areas

The basic economic ideas underlying the international law governing FTAs are rooted in the concept of comparative advantage. The efficiency gains offered by economic specialization consistent with comparative advantage can only be reaped fully in a world without the artificial barriers to international trade created by protectionist national laws.

Almost all states have imposed significant restrictions on trade, but many states are willing to remove most barriers with some of their trading partners, and most would be willing to remove or reduce some barriers toward some trading partners (provided they are free not to do so with others).

Given that a global free-trade regime is unattainable, what achievable option should a liberal international economic regime’s rules tolerate? The World Trade Organization (WTO) opts primarily for a most favored nation (MFN) or normal trading relations (NTR) rule that requires a state not to discriminate among its trading partners, thereby according each trading partner treatment no worse than the most generous terms it provides to any other partner.

This is consistent with the idea that such a regime is likely to come closer to the idealized liberal and efficient order than would a regime in which each state negotiates a bilateral arrangement with each of its trading partners. The plausible claim is that the series of discrete agreements including some especially liberal and some especially illiberal arrangements would, in the end, be dominated by the latter.

The WTO regime allows a major “carve out” from its MFN/NTR principle: FTAs. In simplified terms, the FTA exception allows two or more member states to remove substantially all trade barriers among themselves while maintaining their less liberal structure of MFN/NTR-conforming laws regulating trade with all other WTO members. This is based on the assumption that true FTAs are likely to produce significant net gains in trade liberalization--that the radical lowering of restrictions on trade among FTA members will stimulate trade and specialization along the lines of comparative advantage among the FTA members, and that this will outweigh any marginal liberalization that might have been foregone among FTA members and other WTO member states. The basic trade-off is the same as that underlying WTO’s embrace of the MFN/NTR norm. But it is claimed that the balance is likely to come out the other way in the special circumstances of an FTA.

Increasingly, the economic argument for FTAs and trade liberalization has become bound up with issues of investment. Capital-exporting countries’ firms go abroad to establish facilities to produce goods and services for consumption in their home markets or in third-country markets. Such a strategy benefits from, and may depend on, low barriers to exports from the host country. Through rules limiting protectionist Trade-Related Investment Measures and through terms in individual members’ protocols of accession (including China’s), the WTO has begun to provide mechanisms to support such liberalization of investment restrictions.

These liberal principles of global economic efficiency and welfare are often honored in the breach and fail to account for the content of real-world FTAs and the motivations behind them.

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