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Stumbling Blocks From Arvind Panagariya Sir--Your
leader and article on the dangers of so-called free trade areas
(FTAs)--or, more accurately "preferential trading arrangements",
since not all tariffs are reduced to zero--are excellent. But the threat
from these arrangements may be even more serious than you state. Criss-crossing
FTAs are replacing non-discriminatory tariffs with a spaghetti bowl
whereby tariffs vary according to the ostensible origin of the product.
The origin itself is, in turn, determined by complex "rules of
origin" that are product-specific and span, in the case of NAFTA, 200
pages. Overlapping FTAs create perverse incentives. Once Chile, which
already has an arrangement with Mercosur, joins NAFTA, a Chilean firm will
have to buy components in Brazil if it wants to rake advantage of the
preferential tariff in Mercosur, and in the United States if it wants to
exploit the preference in NAFTA. This
notwithstanding the fact that the most efficient supplier of the
components may be in Asia. FTAs
also lead to increased protection against outside countries, turning
even an initial movement towards free trade into a movement away from it.
In bad times, pressures for protection grow and when a an FTA member is
unable to raise trade barriers against its partners, the burden of
increased protection often falls disproportionately on outside countries.
For example, in the aftermath of the peso crisis, and despite a $40
billion rescue operation organised by the Clinton administration, Mexico
raised tariffs on outside countries on 503 items from less than 20% to
35%. Economist,
January 11, 1997 |
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