Monday, October 21, 2013

An FTA Is Always Good For Trade

Hafiz Noor Shams on FTAs, external trade, and the TPPA (excerpt):

[2713] Is Bantah TPPA right about FTA causing trade balance to deteriorate?

One claim made by Bantah belong to the latter categories is that free trade agreements will hurt a country’s trade balance. This is based on their assumption that free traders claim that FTA will increase trade balance.

But, “free trade” itself says nothing about trade balance. “Free trade” has an agnostic a priori assumption on trade balance. In fact, if one trades, somebody has to have a surplus and somebody has to have deficit at any particular point of time. To say free trade/FTA increases trade balance ignores the fact there are at least two sides trading. “Free trade” does not make that argument that Bantah opposes. Bantah is opposing a straw man here.

The traditional argument is that free trade increases total trade (not trade balance). That means the sum of exports and imports for a country increases (not the net of the two, which is net exports). Bantah misunderstands this.

My thots? What he said…

I have no qualms over TPPA with respect to trade. The whole issue in my mind revolves around the non-trade provisions. Even for many of those, I can find economic or cost-benefit justifications that make sense for all parties.

Some however, are indefensible, and those are the real stumbling blocks.  But trade isn’t one of them.


  1. Which non-trade provisions do you find indefensible?

  2. I like the idea of bigger market for trade among the members. But the idea of a corporation can sue a sovereign state for laws meant to protect the local population and businesses is something Im not to pleased to know. What ever the case I hope the government do not allow Mosento, Dupont/Pioneer, Syngenta, Dow AgroScience or any GMO seed company to set up shop in Malaysia.


    1. Dzul,

      I can construct two good justifications for the state-investor dispute issue:

      1. Reduces home bias in investment
      2. Cost-benefit analysis suggests governments still come out ahead financially

  3. The IP rights are a bit unnecessary, but they are not that big a deal really. Taking the Singapore-US FTA as an example, copyright extension is hugely overblown, as the value of the vast majority of works seriously deteriorates after say 5-10 years, much less 50 years. I wouldn't spend my time reading 70 year old scientific tomes. Would you? And anyway, if the work is so great that copying it remains necessary after 120 years, the author must really be somebody special.

    Patent rights extending beyond 20 years is hardly likely, and that term hasn't been extended by much for the past few centuries. What you may get are patents extending to new variations or formulations of the patented drug, but that means that the patent holder can only prevent people from using the new variations (which we all want to steal if it's better of course). We are still free to use the old drug in its original formulation after 20 years of patent, so long as we don't steal the new and improved version.

    I've read summaries of the Ecuadorian fine, and I do agree that the fine was necessary. The TPPA is about quid pro quo. The same rules apply to the US. If a Malaysian company decides buy a building in the US, and, upon breaking some technical zoning regulations, gets the building confiscated without compensation, I think it is fair for the Malaysian company to sue the US government to get some of it's money back.

    In fact, it seems like a way to ensure that the governments don't feel like they have the freedom to act like barbarians to foreigners in the name of sovereignty.

    1. @anon 10.59

      My problem with the whole IP rights thingie is that there's no justification for them. The whole idea of copyright and patent rights is that without them, there would be no creation of IP or innovation. But we're not talking about starting from scratch, so the cost-benefit would need to focus on the margin i.e. would extending rights increase the rate of innovation? If the answer is no (which is likely), then it becomes pure economic rent.

      But I fully agree with your second point.

    2. Ah, I was guessing that you were objecting to IP and independent dispute resolution against sovereign states.

      There is actually a lot of justification for IP rights being to be harmonised across the TPPA states as this would greatly ease assignments, licensing and the exploitation of IP across the TPPA states. This explains much of European harmonisation Directives being in the furtherance of the "Common Market". Of course, some degree of consistency is already provided by the Paris and Berne Conventions, but the TPPA will probably harmonise things further.

      There is of course less justification for the harmonisation to be based upon US IP law which is necessarily biased towards IP owners in the US, and bad for IP consumers in Malaysia. However, seeing as the US economy is larger than all the other TPPA states combined, it's hardly reasonable for us to expect them to conform fully to our standards. The best solution is to find some middle ground.

      On the free-flow of capital part, it is a tricky issue. On one hand, you lose the trick pulled by Mahathir to get out of a currency crisis. On the other hand, foreign investors can never be sure on the safety of his/her capital in Malaysia if this provision isn't in place. Can I ask what exactly are your objections to the free-flow of capital part?

    3. On IP, I was thinking more on the impact in pharma, not necessarily copyrights, though even there, an extension of copyright appears excessive.

      On capital flows, the empirical evidence in favour of FDI is generally positive for growth and development (even then it depends on the type).

      But for portfolio capital, the evidence suggests the opposite - free flow of capital tends to be destablising, especially for countries with less-developed capital markets and banking systems. Which pretty much describes virtually every middle and low income economy.