Free Trade Agreements - Bane or Boon?
This article appears on Digital SLEN (The Official E-Newsletter of the IESL) in Issue 38 - January 2018.
Free Trade Agreements - Bane or Boon?
In the current climate of arguments against Free Trade Agreements (FTAs) that border on histrionics, it is useful to look back into the history of development of free trade ideas. The first coherent treatise on the subject was the book authored by Scottish economist and philosopher Adam Smith in 1776 titled "An Inquiry into the Nature and Causes of the Wealth of Nations" (widely known by its short tile of "The Wealth of Nations").
Adam Smith's work was in response to the Mercantilism prevalent at that time which was in vogue since 1500s. Colonialism, from which Sri Lanka suffered greatly (the Portuguese arrived in Sri Lanka in 1505 when their merchant fleets were rowing the seven seas to plunder wealth of other nations), was fueled by Mercantilism that posited wealth to be fixed and finite and the only way to enrich was to hoard gold and impose tariffs on products originating from abroad.
In short, the theory of Mercantilism is that for a country to prosper, it should sell their goods and services to other countries while buying nothing from them. It is easy for one to see in the absence of deadly coercion (as practiced by the Portuguese, Dutch and the British colonialists in Sri Lanka) how retaliatory tariffs and other trade barriers would quickly escalate choking off global trade.
Adam Smith's argument was that if a foreign country is able to produce and supply a commodity or product cheaper than what it would cost to produce it ourselves, then it is more sensible (and profitable) to buy that commodity or product from the foreign country with some part of the commodity or product which we have produced where we have an advantage.
This idea on comparative advantage as a driver for international trade and the free market economic theories associated with it were developed by the British businessman, economist and parliamentarian David Ricardo. His publication in 1817 titled "On the Principles of Political Economy and Taxation" expounded the idea that free trade between countries can be mutually beneficial even when one country holds an unassailable advantage over other countries in all areas of production.
The core idea of Adam Smith's work is that self-interest of people (to maximize profit and minimize loss) would result in a self-regulatory mechanism for trade (sell what you can sell at the highest profit margin and buy what you can buy at the lowest cost with other factors such as quality of products and services also expressed as cost components). This self regulation of an open and competitive market place was identified as "The Invisible Hand" by Adam Smith.
Adam Smith also expounded on the role of government in this free-market open-economy. He was a proponent of small or limited government where the government had the responsibility for providing public works and infrastructure, universal education and apprentice, enforcement of law and legal rights, and ensuring national security and defence of the nation. He expected the government to not entangle itself in commerce but to act as a guide and as an enforcer if market players acted with short-term interest.
Among these short-term interest actions to which governments fall are the imposition of coercive tariffs (to make naturally cheaper foreign products and services more expensive), preferential taxation (that makes a previously level playing field uneven), caving to lobbying groups to delay or terminate efforts towards building an economy based on free market policies.
This seminal work by Adam Smith on economy is important as it is cast in the same league as other work that have profoundly changed human history including Isaac Newton's Principia Mathematica on physics, Antoine Lavoisier's Traité Élémentaire de Chimie for chemistry, and Charles Darwin's On the Origin of Species for biology.
The French economist Claude-Frédéric Bastiat, who lived in the first half 19th century and explored the concept of economic cost in his work implied that it is profitable to engage in free trade even unilaterally. Presently, the public discourse of the professional organizations has been tilted towards protectionism and much of language used is clearly one of trade unionism and not that of a learned society of reason and analysis.
Therefore, it is important that the intelligentsia of this country discuss on the expectations of the public from the government and decide whether what is required is for the government to enact a set of laws that seek to entrench protectionism for Sri Lanka or a set of laws that seek to ensure fair play for everyone.
The Sri Lanka - Singapore FTA
This FTA is now a done deal. Moving forward, what Sri Lanka needs is a comprehensive and easy-to-use international trade facilitation portal such as "International Enterprise Singapore" [1] operated by the Singapore government. The FTA Portal in site [2] provides comprehensive details about all already signed and implemented FTAs [3] listing 12 Bilateral FTAs and 9 Regional FTAs.
While the Sri Lanka-Singapore FTA is still listed under FTAs undergoing negotiations, it is safe to assume that full details of the FTA and how Singaporean companies could benefit from it will soon be available in this portal. After all, the slogan of Singapore Government is:"Integrity - Service - Excellence".
The site also provides the texts of already concluded/signed but not yet implemented FTAs (at present, there are two such FTAs with the European Union and the Trans Pacific Partnership). This Singaporean government operated site does not provide any details for FTAs that are undergoing negotiations with 10 such FTAs listed (5 bilateral and 5 regional). This list includes Sri Lanka - Singapore FTA as well. One positive aspect of the FTA with Singapore could be that even if Sri Lanka does not build a portal as the Singaporeans have done, Sri Lankan businesses and entrepreneurs stand to benefit immensely when Singapore government update their portal and provide a detailed insight to the opportunities unlocked by the FTA and the process for benefiting from it.
It is useful look at FTA activity of Singapore and shown below is a summary of 2 key economic indicators (GDP and Per Capita GDP) for countries that have signed and implemented Bilateral FTAs with Singapore.
*Data sourced from the site [4], which get primary data from United Nations COMTRADE database on international trade and valid for 2016.
It is interesting to see from above summary of data that even for a country such as Singapore, which is considered an Asian economic tiger and a country that consistently ranks at the top of many global economic indicators (such as ease of doing business, most livable country, strong intellectual property rights enforcement, comprehensive trade dispute arbitration, stable fiscal and taxation policies, etc), has only managed to sign 12 FTAs over a period of 18 years. This is in an era where bilateral FTAs are considered essential for economic prosperity and sustained economic growth. Also, it should be kept in mind that the Singapore government is renowned for its efficiency and does not have to deal with an effective political opposition.
The trade balances for international trade in services with Singapore (positive values are in favour of Singapore) computed from the data provided by the Singapore Department of Statistics [5] is shown below for a set of countries with which Singapore has FTAs. The highlighted cell indicates the year in which the FTA was signed with the particular country and it should be noted that it could take several years before an FTA becomes active consequent its signing.
As shown in the table, China has benefited from the FTA by stabilizing its trade deficit in services which was in an upward trajectory prior to the signing of FTA. Both India and South Korea have converted the deficits that were earlier unfavourable to those countries to favourable trade balances since the signing of FTAs. Countries that already had trade balances favourable to them prior to the signing of FTAs, US and Panama, have continued to post major gains in their favour.
In contrast, Japan, New Zealand and Australia have continued on an upward trajectory of trade balances that are unfavourable to them on international trade in services. It is essential for Sri Lanka to study the nuances in these different behviours of service trade between Singapore and other countries with which it has FTAs and develop strategies to improve the economic performance of Sri Lanka.
The graph below shows the deficit in trade in merchandise between Singapore and Sri Lanka for which data is available at the Singapore Department of Statistics (positive values are favourable to Singapore and values are in SGD millions). As can be seen from the graph, Sri Lanka need to develop both new products and marketing strategies to deal with the rapidly increasing deficit in this area of trade.
These should be lessons for us as we seek to develop the economy of our country and provide employment for a workforce that is growing (in the short-term) amidst a population that is aging (in the long-term).
[1] https://www.iesingapore.gov.sg/
[2] https://www.iesingapore.gov.sg/Trade-From-Singapore/International-Agreements/Free-Trade-Agreements
[3] https://www.iesingapore.gov.sg/Trade-From-Singapore/International-Agreements/free-trade-agreements/Singapore-FTA
[4] https://tradingeconomics.com
[5] http://www.singstat.gov.sg/
Author:
Eng Dr Chandana Gamage
Chairman – IT & Computer Engineering Sectional Committee, IESL
Free Trade Agreements - Bane or Boon?
In the current climate of arguments against Free Trade Agreements (FTAs) that border on histrionics, it is useful to look back into the history of development of free trade ideas. The first coherent treatise on the subject was the book authored by Scottish economist and philosopher Adam Smith in 1776 titled "An Inquiry into the Nature and Causes of the Wealth of Nations" (widely known by its short tile of "The Wealth of Nations").
 |
| Adam Smith (image source: adamsmith.org) |
Adam Smith's work was in response to the Mercantilism prevalent at that time which was in vogue since 1500s. Colonialism, from which Sri Lanka suffered greatly (the Portuguese arrived in Sri Lanka in 1505 when their merchant fleets were rowing the seven seas to plunder wealth of other nations), was fueled by Mercantilism that posited wealth to be fixed and finite and the only way to enrich was to hoard gold and impose tariffs on products originating from abroad.
In short, the theory of Mercantilism is that for a country to prosper, it should sell their goods and services to other countries while buying nothing from them. It is easy for one to see in the absence of deadly coercion (as practiced by the Portuguese, Dutch and the British colonialists in Sri Lanka) how retaliatory tariffs and other trade barriers would quickly escalate choking off global trade.
Adam Smith's argument was that if a foreign country is able to produce and supply a commodity or product cheaper than what it would cost to produce it ourselves, then it is more sensible (and profitable) to buy that commodity or product from the foreign country with some part of the commodity or product which we have produced where we have an advantage.
This idea on comparative advantage as a driver for international trade and the free market economic theories associated with it were developed by the British businessman, economist and parliamentarian David Ricardo. His publication in 1817 titled "On the Principles of Political Economy and Taxation" expounded the idea that free trade between countries can be mutually beneficial even when one country holds an unassailable advantage over other countries in all areas of production.
 |
| David Ricardo (portrait by Thomas Phillips, 1821) |
The core idea of Adam Smith's work is that self-interest of people (to maximize profit and minimize loss) would result in a self-regulatory mechanism for trade (sell what you can sell at the highest profit margin and buy what you can buy at the lowest cost with other factors such as quality of products and services also expressed as cost components). This self regulation of an open and competitive market place was identified as "The Invisible Hand" by Adam Smith.
Adam Smith also expounded on the role of government in this free-market open-economy. He was a proponent of small or limited government where the government had the responsibility for providing public works and infrastructure, universal education and apprentice, enforcement of law and legal rights, and ensuring national security and defence of the nation. He expected the government to not entangle itself in commerce but to act as a guide and as an enforcer if market players acted with short-term interest.
Among these short-term interest actions to which governments fall are the imposition of coercive tariffs (to make naturally cheaper foreign products and services more expensive), preferential taxation (that makes a previously level playing field uneven), caving to lobbying groups to delay or terminate efforts towards building an economy based on free market policies.
This seminal work by Adam Smith on economy is important as it is cast in the same league as other work that have profoundly changed human history including Isaac Newton's Principia Mathematica on physics, Antoine Lavoisier's Traité Élémentaire de Chimie for chemistry, and Charles Darwin's On the Origin of Species for biology.
The French economist Claude-Frédéric Bastiat, who lived in the first half 19th century and explored the concept of economic cost in his work implied that it is profitable to engage in free trade even unilaterally. Presently, the public discourse of the professional organizations has been tilted towards protectionism and much of language used is clearly one of trade unionism and not that of a learned society of reason and analysis.
 |
| Frédéric Bastiat (image from Wikipedia) |
The Sri Lanka - Singapore FTA
This FTA is now a done deal. Moving forward, what Sri Lanka needs is a comprehensive and easy-to-use international trade facilitation portal such as "International Enterprise Singapore" [1] operated by the Singapore government. The FTA Portal in site [2] provides comprehensive details about all already signed and implemented FTAs [3] listing 12 Bilateral FTAs and 9 Regional FTAs.
While the Sri Lanka-Singapore FTA is still listed under FTAs undergoing negotiations, it is safe to assume that full details of the FTA and how Singaporean companies could benefit from it will soon be available in this portal. After all, the slogan of Singapore Government is:"Integrity - Service - Excellence".
The site also provides the texts of already concluded/signed but not yet implemented FTAs (at present, there are two such FTAs with the European Union and the Trans Pacific Partnership). This Singaporean government operated site does not provide any details for FTAs that are undergoing negotiations with 10 such FTAs listed (5 bilateral and 5 regional). This list includes Sri Lanka - Singapore FTA as well. One positive aspect of the FTA with Singapore could be that even if Sri Lanka does not build a portal as the Singaporeans have done, Sri Lankan businesses and entrepreneurs stand to benefit immensely when Singapore government update their portal and provide a detailed insight to the opportunities unlocked by the FTA and the process for benefiting from it.
It is useful look at FTA activity of Singapore and shown below is a summary of 2 key economic indicators (GDP and Per Capita GDP) for countries that have signed and implemented Bilateral FTAs with Singapore.
*Data sourced from the site [4], which get primary data from United Nations COMTRADE database on international trade and valid for 2016.
It is interesting to see from above summary of data that even for a country such as Singapore, which is considered an Asian economic tiger and a country that consistently ranks at the top of many global economic indicators (such as ease of doing business, most livable country, strong intellectual property rights enforcement, comprehensive trade dispute arbitration, stable fiscal and taxation policies, etc), has only managed to sign 12 FTAs over a period of 18 years. This is in an era where bilateral FTAs are considered essential for economic prosperity and sustained economic growth. Also, it should be kept in mind that the Singapore government is renowned for its efficiency and does not have to deal with an effective political opposition.
The trade balances for international trade in services with Singapore (positive values are in favour of Singapore) computed from the data provided by the Singapore Department of Statistics [5] is shown below for a set of countries with which Singapore has FTAs. The highlighted cell indicates the year in which the FTA was signed with the particular country and it should be noted that it could take several years before an FTA becomes active consequent its signing.
As shown in the table, China has benefited from the FTA by stabilizing its trade deficit in services which was in an upward trajectory prior to the signing of FTA. Both India and South Korea have converted the deficits that were earlier unfavourable to those countries to favourable trade balances since the signing of FTAs. Countries that already had trade balances favourable to them prior to the signing of FTAs, US and Panama, have continued to post major gains in their favour.
In contrast, Japan, New Zealand and Australia have continued on an upward trajectory of trade balances that are unfavourable to them on international trade in services. It is essential for Sri Lanka to study the nuances in these different behviours of service trade between Singapore and other countries with which it has FTAs and develop strategies to improve the economic performance of Sri Lanka.
The graph below shows the deficit in trade in merchandise between Singapore and Sri Lanka for which data is available at the Singapore Department of Statistics (positive values are favourable to Singapore and values are in SGD millions). As can be seen from the graph, Sri Lanka need to develop both new products and marketing strategies to deal with the rapidly increasing deficit in this area of trade.
These should be lessons for us as we seek to develop the economy of our country and provide employment for a workforce that is growing (in the short-term) amidst a population that is aging (in the long-term).
[1] https://www.iesingapore.gov.sg/
[2] https://www.iesingapore.gov.sg/Trade-From-Singapore/International-Agreements/Free-Trade-Agreements
[3] https://www.iesingapore.gov.sg/Trade-From-Singapore/International-Agreements/free-trade-agreements/Singapore-FTA
[4] https://tradingeconomics.com
[5] http://www.singstat.gov.sg/
Author:
Eng Dr Chandana Gamage
Chairman – IT & Computer Engineering Sectional Committee, IESL
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