March 15, 2001

March 15, 2001 | News Releases on Foreign Aid and Development

Heritage Proposes Expanding Trade Via Global Free Trade Association

WASHINGTON, Mar. 15, 2001-U.S. Trade Representative Robert Zoellick has told Congress he wants free nations to be "bound together by free trade," and The Heritage Foundation today suggested a way to achieve that goal: a Global Free Trade Association (GFTA) that would reinvigorate efforts to expand trade.

The concept-a voluntary association of nations sharing a firm commitment to open markets-was first proposed last fall in the 2001 "Index of Economic Freedom," published by Heritage and The Wall Street Journal's editorial page. And according to Gerald P. O'Driscoll Jr., director of Heritage's Center for International Trade and Economics and host of a news briefing held today on the proposal, interest has been growing ever since.

Zoellick met March 12 with BG Yeo, trade and industry minister for Singapore. An article in the Business Times of Singapore, headlined "Moving Towards the Establishment of a Global Free Trade Association?," reported that the two would discuss a bilateral trade agreement between the United States and Singapore, and that Yeo planned to raise the issue of a GFTA.

O'Driscoll and his colleagues-Heritage trade analyst Denise Froning, and John Hulsman, Heritage's expert on Europe-say the idea is to form an association united solely to promote "free trade by any route." A GFTA would supplement, but not supplant, other multilateral, regional or bilateral trade agreements. But it represents a marked departure from recent trade agreements, O'Driscoll says.

Typically, negotiated agreements call on all parties to alter various trade practices, from tariffs to taxes to regulation, to reach common ground. By contrast, "no country would be asked to barter away any political sovereignty to join the GFTA," O'Driscoll says. Instead, to qualify for and retain GFTA membership, countries would need only a firm commitment to protecting basic economic freedoms in four critical areas: trade policy, capital investment, property rights, and regulation.

Currently, only 11 countries would qualify for membership: Chile, the Czech Republic, Denmark, Estonia, Hong Kong, Ireland, Luxembourg, New Zealand, Singapore, the United Kingdom and the United States. Another 26 countries are "within one short step" of qualifying, O'Driscoll says. "Most could meet GFTA entrance requirements with only modest reductions in the regulatory burdens they impose on businesses."

Though small in number, the group of nations that currently qualify for membership in the GFTA accounts for nearly one third (32.4 percent) of the world's gross domestic product. The prospect of gaining full access to such a massive market should be enough to tempt other countries to loosen the reins on their own economies, O'Driscoll says.

"Australia was upset that it didn't make it," he says. "I wouldn't be surprised if Australia and some other countries that came close last year did qualify this year. Of course, we may lose some, too. It's always possible."

The Australian Financial Review has taken note of the country's status vis a vis the proposed free trade association. In a recent article, the newspaper said Sydney wouldn't have become a prosperous, world-renowned city had Australia not liberalized its trade practices. The paper essentially called on the government to erase any trade barriers that would exclude it from the proposed GFTA.

"Membership in an elite U.S.-led free economy club and integration with wider Western political, economic and knowledge networks will make us more attractive and worthier of respect in Asia, even in China," the paper said. "Australian FTA aspirations will therefore exert useful pressure to eliminate offending regulations, and relapses into regulatory fervor would be penalized."

With regard to trade, the proposal requires that countries conduct an open policy, maintain minimal barriers to imports-an average overall tariff of less than 9 percent-and keep subsidies to domestic industries to a minimum. Non-tariff barriers, such as import quotas or licensing requirements, must be limited as well.

As for investments, countries must maintain transparent, open and impartial foreign regulations and an efficient approval process. They may impose only a limited regulatory burden with simple licensing procedures. Also, they must apply regulations uniformly and refuse to discriminate against foreign-owned businesses. Finally, property rights must be protected with firm and reliable adherence to the rule of law.

Most of the countries that fell just short did so because of excessive regulations, O'Driscoll says. Belgium requires too much of those trying to start a business; Australia needs to deregulate its agriculture sector, among other things. With El Salvador, concerns revolve around property rights and its struggling judicial sector. With Japan, the government's cozy relationships with major industries make foreign investment difficult.

"Now that we know where a lot of countries stand, it will be interesting to see what happens," O'Driscoll said. "Who wouldn't want to be in a good, free-market-oriented trade association with the United States? Even if this proposal doesn't go forward, the concept, I hope, will promote free trade."

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