firmly in place has been confirmed through an abundance of historical evidence.
FTA for true free trade
The negotiation process for ROK-US FTA has begun, provoking strong resistance against it. Some radical anti-FTA demonstrators even flew to Washington where the negotiations are being held. No matter how strong the resistance is, the ROK-US FTA should be concluded in the best interests of the Korean economy since free trade is a shortcut to economic growth.
Yet it is also not desirable to blindly support FTAs since they are not based on true free trade as most believe. Originally, ‘free trade?referred to freedom from governmental interference, which allowed people to freely exchange goods and services without restrictions by the government.
According to that definition, FTAs are far from it. They establish a number of trading rules and certain institutions to interpret and govern those regulations. All member countries must observe, adapt and implement resolutions made by those governing bodies. In short, FTAs create a type of international regulation.
In addition, true free trade is established without any tariffs or quotas, but there are a number of FTAs that provisionally collect tariffs, governmental subsidies and import quotas for a certain period, as well as force certain rigid and oftentimes costly environmental restrictions, production standards, and/or food safety guidelines onto member countries. Those FTAs only extend governmental interference instead of minimizing it, ultimately reducing benefits that were supposed to be derived from free trade.
In spite of the above, FTAs can play a key role in promoting a liberal economy as well. Trade agreements with other countries amid prevalent protectionism can serve as a useful means to make way for a nation's free trade, and also can prevent a protective government from unilaterally building up trade barriers. Also, they can help in reducing the possibility of destructive trade wars by establishing the removal of trade barriers trough negotiations.
However, it should be noted that contributions by FTAs to free trade cannot justify some undesirable behaviors in the course of trade negotiations, such as the exchange of import quotas for certain goods based on the principle of reciprocity. For instance, Korea imports a certain amount of rice from the US, and in return the US imports corresponding units of Korean cars. This is not free trade but protective trade.
If Korea imports a certain amount of rice from the US under a trade agreement, but the rice does not fit Korean taste and sells poorly in the Korean market, the agreement benefits neither Korea nor the US. It can lead not only to wasting Korea's resources but also ultimate damaging people's perception of American agriculture. If the US imports Korean cars but American customers do not find them attractive, this also can be detrimental to both the US and Korea. Such reciprocal agreements only help inefficient enterprises or industries, thereby facilitating conflicts among special interest groups.
Among other things, customers should determine which goods have comparative advantage and thereby should be imported or exported. This will help maximize the benefits from FTAs. If decisions are made through negotiations among governmental officers, there will be no benefits expected from free trade.
In this respect, negotiations for FTAs should be focused on exposure of the national market to overseas competition so as to gain the same effect of net free trade. In other words, FTA negotiations should progress centering on the removal of diverse barriers that interfere with free trade, such as tariffs, quotas, subsidies, restrictions or approvals.
Only in this way will the enterprises of each country make every effort to meet the needs of both foreign and domestic customers and bring long-term benefits to everyone. Also producers will end up getting new export markets, technology, and less expensive productive factors, which will contribute to the economies of both countries. This will lead to a natural selection of industries with comparable advantages for each nation.
One can hardly predict who will end up winning a competition. Who knew that the Korean national soccer team and baseball team would advance to the semifinals in 2002 World Cup and 2006 World Baseball Classic, respectively? We have seen many seemingly disadvantaged industries or enterprises become winners in a high competition without governmental interference. Some say that the Korean rise is less competitive than that of the US, but no one can be sure if the Korean rise will sell in the US market in case of no governmental interference.
An Jaewook (Prof. of Economics, Kyunghee Univ. jwan@khu.ac.kr)
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