Free Trade Agreements (FTAs) are designed to enhance the economic prosperity of participating nations; yet they are often hugely controversial within the wider society. The underlying issue is that these agreements aim to create fair and equal conditions for businesses competing across free trade zones – and that requires participating nations to adapt their regulatory requirement to some jointly agreed standards. But these agreed upon standards imply compromises that invariably do not please everyone.
At least four broad areas of potential conflict come to mind.
1. Consumer protection
In an era of food safety scandals and broader discussions about food security, efforts – both genuine attempts and those that are less than authentic – to protect consumers at home may often be seen beyond a country's borders as barriers to trade. What is legal in one country may be considered unsafe elsewhere. Consider for example conflicts between the EU and the USA over genetically modified foods or hormone treated beef. With different societies holding diverse views (which shape domestic regulations) on what is ethical and safe, tensions are unavoidable. Trade agreements can go a long way in finding common ground. But when authority is delegated to supranational bodies such as the WTO, there is a danger of domestic players feeling as if outsiders are determining their fate.
2. Environmental & social responsibility
There is an undeniable gap between the standards of developed and developing countries when it comes to issues such as labor standards and environmental protection. The challenge, when pursuing free trade, is deciding whose standards should be used when goods are being produced for export. There are arguments for and against using the criteria of both sides. If the standards of developed countries are used, developing nations will not easily accept decisions made beyond their borders. On the other hand, if the standards of developing nations are used, developed ones will argue that these rules make them – who are holding their producers to higher and more expensive standards – less competitive. No matter what the ultimate decision made through free trade agreements, there will be accusations of unfairness.
3. Shifting bargaining power between MNEs & host governments
As multinational enterprises become increasingly powerful, there has been a noticeable shift in the way they engage and interact with the governments of countries in which they do business.
FTAs often include international investment agreements (IIA) which empower MNEs to take legal action – in international arbitrage councils – against nation states. While it is true that this shift is not entirely a result of globalisation, there is no denying that countries' voters and those they elected to represent them have lost some of their ability to shape the rules by which people live in their country.
4. National security
In the past, national security concerns were largely confined to industries related to defense, an area where there were tight controls over imports and exports as well as flows – both in and out – of foreign direct investment (FDI). Today, the scope is a lot wider, covering everything from food deals to real estate. It's no longer just about concrete threats related to technology, it's now often about the perception that a deal may have implications for national security. With no clear cut rules agreed upon internationally, or even within individual countries, this is a particularly challenging issue for investors. The days of being guided by clearly defined rules of the game, under the umbrella of trade agreements, appear to be behind us.
International trade and investment agreements ask signatory countries to make compromises and to give up some of their power, their sovereignty as independent nations. Yet, to be politically sustainable these agreements need the support of the people living in the countries involved. Going forward, policy makers need to aim for less complex, more transparent FTAs, and perhaps be less ambitious in the scope of these agreements.
This article was first published by The Economist Intelligence Unit.