bout de papier, Vol. 12, No. 4 (1995-1996) — Winter 1995–96 // Hiver 1995-1996, pp. 29–31
Towards an OECD Free Trade Area and Optional Free Trade Areas for the Newly Industrialized and Lesser Developed Countries
The development of post-World War II institutions for Western economic, political and defence/security cooperation was based on a trans-Atlantic compact and an acceptance of the division of Europe as agreed at Yalta in 1945. The bloodless revolution against Communist rule in the old Soviet Union and Eastern Europe symbolized by the demolition of the Berlin Wall mark the end of this post-war era.
Half a century has elapsed since Yalta, and the problems raised by the changes in the old Soviet Union and Eastern Europe, as well as in the rest of the world, now need to be addressed in the context of key developments in multilateral trade and economic relations and present realities.
In terms of multilateral trade relations, several key developments stand out, including:
• the creation of what is now the EU, its gradual enlargement and progressive integration;
• the creation of other continental-size regional free trade areas and arrangements, e.g. NAFTA, LAFTA;
• the emergence of Japan, the NICs and China, both as industrial powers and large markets;
• the proliferation of independent LDCs, which represent potentially large markets but depend on economic aid from, and preferential trade access to developed countries to sustain their development;
• the revamping of the OEEC into the OECD, broadening economic cooperation beyond Europe to include Canada and the USA and subsequently Australia, New Zealand, Japan, Turkey and Mexico and adding Development aid to LDCs;
• the establishment of the World Trade Organization (WTO) to succeed the GATT. It includes in its eighty-eight country membership several multilateral and bilateral regional or non-regional free trade areas and arrangements and over 50 LDCs. Its provisions also now cover services, intellectual property, and trade-related investment issues.
Present realities include:
• the European Union, its free trade arrangements (e.g. Norway, Switzerland, Israel), its association agreements (e.g. Turkey), its preferential arrangements with LDCs under the Lomé Convention and its potential arrangements with Eastern European countries;
• the Canada-USA-Mexico Free Trade Area, the emerging arrangements in the Pacific involving Australia, New Zealand, Japan, South Korea, Malaysia, Hong Kong, Singapore, Thailand, Indonesia and the Philippines and China’s affirmation as a major industrial power;
• the perception of the USA, EU and Japan as a dominant economic triumvirate of the industrialized democracies;
• the emergence of about 100 LDCs and 18 newly industrialized countries (NICs) in Asia, Africa, the Middle East and South America;
• the rapid development of innovative and sophisticated technologies in aerospace, satellite communications, information technology and robotics, with widespread automation of production of goods and services and the electronic transmission of information (e.g. Internet) and of massive movements of capital (US $1 trillion/day);
• Globalization: the expansion of worldwide operations of multi-national corporations;
• structural or systemic unemployment resulting from the phasing out of the blue-collar labour force following the automation of production in major OECD countries;
• problems of structural adjustment and the need for convergent policies of sustainable non-inflationary growth following the deep recession of 1990-93 and slow growth recovery in 1994-95 in OECD countries;
• the burdensome level of foreign indebtedness and of budget deficits in the G-7 countries (USA, Canada and several EU member states);
• the volatility of exchange rates of major currencies;
• the continuing development and reconciliation of domestic policies to provide for an acceptable balance between social welfare and the free play of internal and international market forces;
• LDC indebtedness and its implications for the economic development and social and political stability in these countries;
• and not least, the continuing degradation of the environment in the absence of stringent regulations and laws covering fossil fuel emissions and the disposal of industrial waste; and deforestation and the depletion of fish stocks by irresponsible exploitation.
The new WTO is now in place to address the trade and trade-related issues of today looking to the twenty-first century. But a GATT-type organization with ground rules for a non-discriminatory multilateral trading system works effectively when the membership can fully undertake and implement all its obligations. The waivers, exceptions and agreements that are not of general and uniform application (e.g. anti-dumping and countervailing codes) and the differential treatment in favour of LDCs reflect widespread disparities among the membership.
Free Trade: A Quick Guide to the Acronyms
EEC European Economic
Community (now EU)
EFTA European Free Trade Area
EU European Union
G-7 Group of seven major
industrialized countries
GATT General Agreement on
Trade and Tariffs (now WTO)
GDP Gross Domestic Product
GSP Generalized System
of Preferences
LAFTA Latin American Free Trade
Area
LDC Lesser Developed
Countries
MNE Multinational Enterprises
NAFTA North American Free
Trade Agreement
NATO North Atlantic Treaty
Organization
NIC Newly Industrialized
Countries
OEEC Organization for European
Economic Cooperation
OECD Organization for
Economic Cooperation
and Development
RFTA Regional Free Trade Area
WEU Western European Union
WTO World Trade Organization
The present WTO membership represents countries whose economic, political and social structures place them in different centuries in time, but paradoxically translated into a contemporaneous existence exposed to intrusive interaction by electronic communications, television and air travel.
Hence, the WTO multilateral trading system might best be underpinned by separate but parallel processes of multilateral trade liberalization tailored to suit groups of like countries:
• the industrialized countries of the OECD with possible association arrangements with Eastern European countries;
• the NICs; and • the LDCs.
The WTO would establish the ground rules under GATT applicable to all and be responsible for monitoring the progress and coordinating the liberalization process of each group of countries. If, however, it were not found possible at this stage to proceed beyond an OECD FTA, appropriate institutional arrangements would need to be made under OECD.
The trend towards regional free trade areas (RFTAs), which may be regarded as the current alternative, gives rise to two main problems. RFTAs are apt to divide world trade into preferential geographical regions which is in turn conducive to region-centricity (e.g. the EU, NAFTA, LAFTA); and where RFTAs include countries with widely disparate levels of social and political development and of economic strength, they create unequal partnerships with attendant political tensions, particularly where there is no shared historical and/or cultural experience. Such disparities make difficult, if not impossible, the effective implementation of common obligations. And a differentiated scale of undertakings, while operational under a multilateral trading system (e.g. GSP), would not facilitate the removal of trade barriers at the frontier within the RFTA. It should be recalled that the original EEC and EFTA, albeit regional, involved common undertakings among equal or near-equal industrially advanced democracies with a shared historical experience and culture. The EU’s enlargement process has included other European industrialized democracies with relatively comparable levels of political, economic and social development. East Germany is a special case: it became part of the EU as a result of German reunification in which West Germany absorbed the burden of adjustment. But if the EU is relatively homogeneous, its regional character has tended to Euro-centricity.
Nor would the merging or fusion of two existing RFTAs, such as NAFTA with the EU or LAFTA, provide another practicable option. NAFTA and the EU would lead to an invidious division within OECD and the G-7 by isolating the Pacific members (Australia, New Zealand and Japan in the one case and Japan in the other). NAFTA with LAFTA would accentuate the tendency towards region-centricity. If the WTO is to be effective as an institution governing a multilateral non-discriminatory trading system, it is best supported by multilateral rather than regional (and, therefore, region-centric) preferential free trade areas.
The OECD countries, and particularly the major ones, have important world leadership roles and responsibilities. These rest on the premise that their economic viability and growth are central to the well-being of the world economy. Their challenge is the construction of a post cold-war Europe with viable economic and political ties to the industrialized democracies in North America and the Pacific. In this way the industrialized democracies will be better able to discharge their moral obligations (and pursue their enlightened self-interest) in assisting the transition of the NICs and LDCs to the twenty-first century. More importantly, there is a need for a new political impulse to impart a fresh sense of purpose and direction to trade and economic cooperation to ensure the long-term viability and political stability of the industrialized democracies as a necessary underpinning to their and world security. An OECD free trade area (FTA) could provide such an impulse.
The OECD countries represent a relatively homogeneous group with comparable levels of political, economic and social development spanning Western Europe, North America and the Pacific. Given the time required for the necessary groundwork preparatory to negotiations, it may not be too early for OECD countries to begin to engage in such a process of trade liberalization. The aim would be to agree to a phased progress towards a free trade area by, say, 2015. In a sense, this would be integrating separate processes that are already well under way. Of the twenty-five members of the OECD, fifteen are members of the EU, Turkey is an “associate member” of the EU and Norway and Switzerland have individual free trade area arrangements with the EU. That leaves Canada, Mexico and the USA, and Australia and New Zealand (also joined by separate free trade areas and Japan. An OECD FTA would draw this process to its (logical) conclusion.
Additionally, the broad economic, trade, social development, aid and environment objectives and mandate of the OECD would allow the OECD FTA to proceed in tandem with policies and approaches dealing with the other non-trade issues. The liberalization of trade within OECD would be based on a balance of reciprocity and would cover not only tariffs, but also non-tariff barriers, agriculture, subsidies, services, intellectual property, rules of origin and other trade-related issues such as investment government procurement, national standards and competition policy. Efforts should also be made towards the liberalization of commercial air services. It would also need to include anti-dumping and countervail and to provide for binding dispute settlement. To register progress there would be a calendar. Each country would, in its own way, at its own speed and in the light of its own situation and priorities, deal with the adjustment process, but would undertake to complete each phase of liberalization by agreed dates. The calendar, as a common frame of reference, would also help bring about a greater convergence of trade and trade-related policies, impelled by a sense of common purpose and direction. The calendar is a neutral instrument: it establishes the phases achievement of common undertakings over time. It is technical: it provides an agreed measurement of progress and discipline. It is also irreversible: it only moves forward.
The proposed OECD FTA would be open to all other countries able and willing to undertake all the obligations of the OECD. If desired and appropriate, it could eventually be open to Eastern European countries and to the NICs; those NICs which were not yet in a position to join the OECD FTA may wish to opt for separate FTA, allowing for trade liberalization among themselves or with others under their own negotiated calendar, preparatory to their being able to assume the obligations of full membership in the OECD FTA, or to continue as they do. Like the NICs, the LDCs would be free to stay as they are or to conclude a trade liberalization calendar by the end of a twenty-year period.
In sum, therefore, if the NICs and the LDCs are also prepared to enter in separate FTAs there would be three parallel twenty-year calendars. Under the first, the OECD countries would attain free trade and allow progressive access to duty-free trade to the NICs and the LDCs. Under the second calendar, the NICs would also aim towards free trade among themselves and reduce their trade barriers by 75% to the LDCs and by 50% to the OECD countries. At the end of that period, or earlier if circumstances permit, the NICs might wish to negotiate entry into the OECD FTA. Under the third calendar, the LDCs would attain a free trade area by the end of the period and allow for a 50% cut in their trade barriers to the NICs and the OECD countries; at the end of the period, or earlier, it would be open for these LDCs to join the NIC free trade area, or to re-negotiate their calendar in terms of improved access leading to free trade with the NICs.
What would such a free trade area do for the OECD countries?
• It would contribute to the continued economic viability and growth of the industrialized democracies, thus underpinning their political stability and security. It would also enable them to discharge effectively their responsibilities towards the economic development of the Third World
• Politically, it could also contribute to a greater degree of coherence and solidarity and security among OECD countries, and provide a stronger economic base to their security.
• The process of trade liberalization, on the basis of an agreed calendar, common rules, standards and codes of discipline and conduct and binding dispute settlement should facilitate greater trade and economic policy coordination. Such a framework should also help constrain and contain confrontational trade situations.
• Resource rich countries would complement those less endowed.
• If the EU experience is a valid guide, a market of twenty-five industrialized countries with an educated and skilled population of over 800 million and relatively high incomes should offer the business community and multinational corporations an expanded zone of stability for twenty years, allowing for long-term planning, structural adjustment, investment and rationalization of operations. This would allow also for the generation of investment and jobs. It should be noted that US MNE investment did not await the completion of the European common market; it moved in immediately after the signing of the Rome treaty in 1957, acting as an important catalyst to the process.
• It would extend the EU, NAFTA and Australia-New Zealand FTAs to each other and Japan. This may pose a fundamental difficulty for the EU countries which tend to regard the Community as their own captive market and the common external tariff and Community common policies as its bonding element. If so, the following considerations might be brought to bear:
– the EU and its institutions have been established for thirty-seven years and its customs union has been in operation for twenty-three years. 1993 marked the completion of a single market with the free movement of goods, services, capital investment and labour. The expansion of trade within the EU has been more than twenty-fold. It is also the world’s richest market. In an institutional sense the EU is now well rooted, and need no longer rely on the crutch of Euro-centricity.
– In political terms, the EU was in large part inspired by the need to provide a framework for co-operation between France and Germany to assure peace in Europe. This has also now been achieved. The OECD FTA would provide a stronger and broader framework for the integration of a re-united Germany and eventually for a close association with Eastern Europe.
– This proposal will also need to find acceptance in the NAFTA countries, Australia, New Zealand and Japan which have their separate free trade calendars and/or related arrangements. This will require statesmanship to broaden their vision to an OECD context. Enlightened self-interest may persuade them that participation in, may be preferable to excluding oneself from the OECD FTA club.
– For the EU, NAFTA, Australia and New Zealand, today’s challenge is Japan and how it can best be engaged in close and meaningful cooperation such as to encourage it to open further its domestic market to goods and services and foreign investment. A broad political commitment to join together in an OECD FTA, where each party can strike an acceptable balance of reciprocity between sacrifice and compensation, may facilitate the integration of a liberalized Japanese market with the rest of the OECD countries under common ground-rules.
– The association arrangements with individual Eastern European countries and the NICs could contribute also to their gradual integration into an open, non-discriminatory trading system by means of negotiated reciprocity over time. These arrangements might also provide a framework for the coherent development of aid policies. Such ground rules could also generate a climate of confidence for industrial/ agriculture/services/energy/investment/ development programmes. The parallel calendars for the NICs and the LDCs would establish a predictable, transparent framework for trade liberalization and an environment for trade expansion within each PTA and among the three FTAs. In addition, there would be increased opportunities for the transfer of technology and the development of modern, trained and skilled labour forces.
What would the proposed OECD FTA do for Canada?
It would afford duty-free and liberalized access to a vast market beyond NAFTA to Europe and the Pacific. Essentially, the loss of our preferences under NAFTA should be more than offset by the gains in the EU plus Norway, Switzerland, Australia, New Zealand and Japan. We should also benefit by the rationalization of MNE operations. Our resource and agricultural base as well as our technological and innovative capacity should attract an improved quality (R&D, high tech) and pattern of MNE investment as part of a rationalization over a large market.
There is no doubt that such an OECD FTA, let alone the NIC and LDC FTAs, will give rise to massive problems. Questions will be raised that the approach is too long-term to deal with immediate issues such as unemployment or structural adjustment or how to deal with Eastern Europe and Russia; that differences in economic approaches may make its negotiation impossible; that asymmetrical complementarity between economies would sharpen competition with attendant unemployment; that it is too ambitious and that its complexity may defeat the exercise, and so on. But the present watershed calls for a new bold move.
To sum up, in 1947 the Havana Charter established trade liberalization on a multilateral non-discriminatory basis. In 1957, the EEC initiated a molecular approach to free(r) trade, where the nucleus of six relatively homogeneous economies could move to free trade over fourteen years (in the result, twelve years). This was enlarged in 1972 to nine, in 1981 to ten, in 1986 to twelve and in 1995 to fifteen. This represents sixty per cent of the OECD membership (and 40% to OECD GDP). If one adds NAFTA and the Australia/New Zealand FTA as well as Norway and Switzerland’s FTAs with the EU, it is clear that most of OECD trade is already moving under preferential albeit separate regimes or arrangements. The time has now come for political vision and statesmanship to take the next step to integrate and complete the process. Given its mandate and expertise, the OECD would be the appropriate forum to set this initiative in motion.
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Originally published in bout de papier, Vol. 12, No. 4 (1995-1996) — Winter 1995–96 // Hiver 1995-1996, pp. 29–31. Read the rest of this issue →
