FREE TRADE AGREEMENTS BETWEEN DEVELOPING AND DEVELOPED COUNTRIES

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FREE TRADE AGREEMENTS BETWEEN DEVELOPING AND
DEVELOPED COUNTRIES
Based on UNCTAD, Trade and Development Report
2007 Regional cooperation for development
Alfredo Calcagno, UNCTAD UNDP Regional Trade
Workshop Penang, 17-18 December 2007
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Present trends in regional trade agreements
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The number of trade agreements notified to WTO
has increased rapidly since the 1990s. New
agreements are bilateral rather than plurilateral

Cumulative number of trade agreements, by type
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they consist of Free Trade Agreements rather
than Custom Unions or Common Markets
Cumulative number of trade agreements, by degree
of commitment
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and they are increasingly signed by countries
from different regions and with different levels
of development.
Cumulative number of trade agreements, by
economic classification of members
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Market access vs. policy space?North-South trade
agreements pose a dilemma to developing countries

• Developing countries may wish to secure or
  increase market access to developed countries
• They may seek to obtain concessions that are not
  granted to other countries
• Countries may feel forced to conclude these FTAs
  for fear of losing competitiveness vis-à-vis
  other developing countries that have entered into
  FTAs with the same major trading partner.
• However, developing countries are often unable to
  derive the full benefits of improved market
  access because of limited supply capacity,
  protracted subsidies to sensitive sectors in
  developed countries and because their firms are
  frequently unable to comply with restrictive
  rules of origin.

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At the same time, North-South agreements reduce
the options for developing countries to carry out
proactive policies

• Special and differential treatment is replaced by
  full reciprocity
• Developing countries must accept deeper
  liberalization on trade in goods and services
  than has been agreed in WTO.
• North-South FTAs include provisions that extend
  beyond WTO rules in areas such as foreign
  investment, intellectual property rights,
  competition policy and government procurement
  (Singapore issues)
• They also cover areas that have been excluded
  from trade multilateral negotiations, such as
  rules on labour and environment.
• Developing countries have to abandon capital
  controls and positive discrimination subsidies
  to agriculture in developed countries are not
  affected.

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Trading partners and composition of trade
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The composition of the trade of developing
regions depends crucially on their trading
partners
Composition and direction of exports, selected
regions, 2003-2005
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The composition of the trade of developing
regions depends crucially on their trading
partners
Composition and direction of exports, selected
regions, 2003-2005
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The composition of the trade of developing
regions depends crucially on their trading
partners
Composition and direction of exports, selected
regions, 2003-2005
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Mexico and NAFTA
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In Mexico, foreign trade in merchandises grew
faster than manufacturing value added.
Trade and value added in manufactures, 1984-2005
(Billions on dollars)
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Real GDP growth rates in Mexico and Latin
America, 1971-2006 (per cent)
1971 1981 1989 1994 2001 1981
1988 1993 2000 2006 Mexico 6.4 0.6 3.9 3.6 2.3 L
atin America (excl. Mexico) 5.5 2.0 1.6 2.9 3.
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Source UNCTAD secretariat calculations, based on
UNCTAD Handbook of Statistics database.
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Mexico NAFTA-related performance indicators(Per
cent)
1990 1994 2001 2005/06 Manufactured exports as
of world manufactured exports 0.5 1.4 2.7 2.1 To
tal manufactured exports as a share of
GDP 5.2 11.8 22.6 22.9 Manufactured exports to
NAFTA as a share of GDP 4.0 10.6 20.8 20.5 Manufac
turing value added as a share of
GDP 20.6 18.2 19.2 17.5 Inward FDI stock as a
share of GDP 8.5 7.9 22.6 27.3 Ratio of gross
fixed capital formation to GDP 17.9 19.4 20.0 19.3
GDP per capita as a of US GDP per capita
(PPP) 26.9 27.1 26.1 24.4 Inflation 29.9 7.1 4.4 4
.1 Mexican nominal wage as a of US nominal wage
(in manufactures) .. 17.5 16.9 17.3
Source UNCTAD secretariat calculations, based on
UNCTAD Handbook of Statistics database UN
COMTRADE World Bank, World Development
Indicators database UNCTAD, WIR database and
Instituto Nacional de Estadística, Geografía e
Informática (INEGI) database. Note To ensure
data comparability, the definition of
manufactures in trade data follows the ISIC
classification of industrial statistics. It
therefore includes processed primary products in
addition to manufactures as defined in trade
statistics.
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In Mexico,

• Remarkable trade expansion did not lead to growth
  acceleration
• Higher inward FDI did not lead to higher
  investment rate
• Wages, income distribution, illegal emigration
  and poverty remained largely unchanged
• A considerable proportion of employment was
  created in low-productivity or informal
  activities, mainly in services
• Traditional agriculture was adversely affected by
  imports of subsidized products from the US, with
  important employment reduction.

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In conclusion,

• In North-South deep FTAs, developing countries
  usually accept conditions they refuse in
  multilateral negotiations
• The gains for developing countries from improved
  access through FTAs are not guaranteed, and may
  be short-lived, but the loss of policy space is
  certain
• The composition of exports and their linkages
  with the rest of the economy matter as much (or
  more) as the volume of trade
• FTA with developed countries tend to reinforce
  the specialisation in natural resources or in
  low-skill and low technology-intensive
  manufactures
• Intra-regional trade can often be more conducive
  to diversification and industrial upgrading than
  extra-regional trade.

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Decisions related to trade and finance
integration are not just about trade and finance
they have an impact on the ability to carry out
development policies in a wide range of economic
matters. Trade integration should be part of a
broader development strategy.