FTA-ing APEC?

APEC members are to be commended for being cautious with U.S. proposal for a giant FTA. The proposer is the main culprit behind DDA's failure. Why trust them now?

"Balance" in trade balance is overrated

I bought a donut from Dunkin. In trade terms, I ran a deficit, Dunkin a surplus. Does Dunkin need to buy some good from me? Of course not. They're fine with my money, I'm OK with my donut. Trade balance (or, imbalance, for that matter) is a positive concept. Meaning, it is useful to describe what is going on between two parties -- or countries. It is not a matter of good or bad. So, this kind of news that we still have a trade imbalance with Russia (and implying that progress should be made to balance the account) is misleading.

EPA, PTA, FTA: tomato potato

This whole EPA party scares me. You may call it EPA, or FTA. To me it is PTA. And I am no fan. As we argued in this paper:

However, Indonesia’s engagement in FTA talks might not go as planned. Despite series of negotiations, only a few FTA schemes show progress, if any, with regards to trade liberalization. There are three factors that contribute to it. First, thus far FTA facilities are underutilized. Second, the proliferation of FTA distorts resources away from multilateral agreement, i.e. WTO. Third, FTAs are prone to overlaps which in turn will create very complicated conflicts across rules of origins – ‘spaghetti bowl effect’ (Bhagwati, 1995; Panagariya, 1998). This should not be underestimated as in any FTA there are competing protectionist interests in all sides.

Unfortunately, further unilateral liberalization is not easy amidst the creeping protectionism, whereas the progress of multilateral agenda is still in limbo as Doha seems to go nowhere. So Indonesia is left with a difficult position. That is, to rely on FTA/PTA for trade liberalization. There are at least three caveats to this. First, FTA should be in line with MFN non-discriminatory principles.

Second, engagement in any trade arrangement with foreign partners should be consistent with the effort to improve the quality of institutions at home. Third, when progress is made in the supply side, further unilateral liberalization should be resumed.

Recent development in this regard is rather mixed. So far, AFTA seems to be on track in this regard, but some bilateral FTAs might lead more toward trade diversion rather than trade creation. Indonesian government considers regional cooperation as a building block for longer term multilateral trade liberalization. It claims that AFTA and APEC are consistent with the Multilateral Trading System of WTO, including the enabling clause and General Agreement on Trade in Services (GATS) (WTO, 2007).

I am skeptical.

Update: Yudo at Ruang 413 is less skeptical, here and here. He says, trade diversion is not necessarily welfare deteriorating if you make an FTA with someone who is not too different (in terms of efficiency) from someone else outside the FTA. But why would you want to make an FTA with someone who is not significantly different from others?