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by Dr. Ruwantissa Abeyratne - Montreal, Canada

The economic rationale behind a free trade agreement is the consolidation of trading interests between the countries concerned in order to obviate adverse effects of other bilateral and multilateral trading agreements between other countries.

For example, as a result of COMESA (Common Market for Eastern and Southern Africa), it was reported that Egypt would buy Kenyan tea at a preferential tariff instead of Sri Lankan tea which is at a higher tariff.

Also, the emergence of dominant trading blocs arising out of such agreements as NAFTA (North American Free Trade Agreement), APEC (Asia-Pacific Economic Cooperation) and the formation of the European Union tend to polarize non parties to such agreements away from the trading blocs. It is not the purpose of this article to attempt to analyze possible provisions of a particular Free Trade Agreement. Rather, it would determine what steps should be taken to maximize the benefits of such an agreement.

Any bilateral Free Trade Agreement is a very pro-active measure, which brings to bear the willingness and ability of the governments of both countries to face trading issues squarely in the eye. However, any agreement for trading benefits would be ineffective without the element of competition.

The essential requisite for success in trading relations is competition, which in turn leads to national prosperity. A free trade agreement is merely the catalyst in the process.

International trade and foreign investment can both improve a nation's productivity as well as threaten it. They support rising national productivity by allowing a nation to specialize in those industries and segments of industries where its companies are more productive and to import where its companies are less productive.

No nation can be competitive in everything. The ideal is to deploy the nation's limited pool of human and other resources into the most productive uses. Even those nations with the highest standards of living have many industries in which local companies are uncompetitive.

Yet international trade and foreign investment also can threaten productivity growth. They expose a nation's industries to the test of international standards of productivity. An industry will lose out if its productivity is not sufficiently higher than foreign rivals' to offset any advantages in local wage rates. If a nation loses the ability to compete in a range of high-productivity/high-wage industries, its standard of living is threatened.

Defining national competitiveness as achieving a trade surplus or balanced trade per se is inappropriate. The expansion of exports because of low wages and a weak currency, at the same time that the nation imports sophisticated goods that its companies cannot produce competitively, may bring trade into balance or surplus but lowers the nation's standard of living. Competitiveness also does not mean jobs.

It's the type of jobs, not just the ability to employ citizens at low wages, that is decisive for economic prosperity.

It begs the question that seeking to explain "competitiveness" at the national level is to answer the wrong question. The significant considerations are the determinants of productivity and the rate of productivity growth. To find answers, we must focus not on the economy as a whole but on specific industries and industry segments.

We must understand how and why commercially viable skills and technology are created, which can only be fully understood at the level of particular industries. It is the outcome of the thousands of struggles for competitive advantage against foreign rivals in particular segments and industries, in which products and processes are created and improved, that underpins the process of upgrading national productivity.

When one looks closely at any national economy, there are striking differences among a nation's industries in competitive success. International advantage is often concentrated in particular industry segments. German exports of cars are heavily skewed toward high performance cars, while Korean exports are all compacts and subcompacts.

In many industries and segments of industries, the competitors with true international competitive advantage are based in only a few nations.

The most important feature of a competitive nation is its decisive characteristic that allows its companies to create and sustain competitive advantage in particular fields - the search is for the competitive advantage of nations. Of particular concern are the determinants of international success in technology and skill-intensive segments and industries, which underpin high and rising productivity.

Classical theory brings to bear the principle that the success of nations in particular industries based on so-called factors of production such as land, labour, and natural resources is based on the fact that nations gain factor-based comparative advantage in industries that make intensive use of the factors they possess in abundance. Classical theory, however, has been overshadowed in advanced industries and economies by the globalization of competition and the power of technology.

Any new approach must recognize that in modern international competition, companies compete with global strategies involving not only trade but also foreign investment. What a new theory must explain is why a nation provides a favorable home base for companies that compete internationally.

The home base is the nation in which the essential competitive advantages of the enterprise are created and sustained. It is where a company's strategy is set, where the core product and process technology is created and maintained, and where the most productive jobs and most advanced skills are located.

The presence of the home base in a nation has the greatest positive influence on other linked domestic industries and leads to other benefits in the nation's economy. While the ownership of the company is often concentrated at the home base, the nationality of shareholders is secondary.

The role of government

A new theory must move beyond comparative advantage to the competitive advantage of a nation. It must reflect a rich conception of competition that includes segmented markets, differentiated products, technology differences, and economies of scale. A new theory must go beyond cost and explain why companies from some nations are better than others at creating advantages based on quality, features, and new product innovation. A new theory must begin from the premise that competition is dynamic and evolving; it must answer the questions: Why do some companies based in some nations innovate more than others? Why do some nations provide an environment that enables companies to improve and innovate faster than foreign rivals?

In the continuing debate over the competitiveness of nations, no topic engenders more argument or creates less understanding than the role of the government. Is government an essential helper or supporter of industry, employing a host of policies to contribute directly to the competitive performance of strategic or target industries? Or is it the "free market" view that the operation of the economy should be left to the workings of the invisible hand.

Professor Porter says that both views are incorrect. Either, followed to its logical outcome, would lead to the permanent erosion of a country's competitive capabilities.

On one hand, advocates of government help for industry frequently propose policies that would actually hurt companies in the long run and only create the demand for more helping. On the other hand, advocates of a diminished government presence ignore the legitimate role that government plays in shaping the context and institutional structure surrounding companies and in creating an environment that stimulates companies to gain competitive advantage.

Government's proper role is as a catalyst and challenger; it is to encourage - or even push - companies to raise their aspirations and move to higher levels of competitive performance, even though this process may be inherently unpleasant and difficult.

Government cannot create competitive industries; only companies can do that.

Government plays a role that is inherently partial, that succeeds only when working in tandem with favourable underlying conditions in the diamond. Still, government's role of transmitting and amplifying the forces of the diamond is a powerful one. Government policies that succeed are those that create an environment in which companies can gain competitive advantage rather than those that involve government directly in the process, except in nations early in the development process. It is an indirect, rather than a direct, role.

One of the most important considerations for both parties to a free trade agreement, in optimizing benefits of the free trade agreement through competition both in the public and private sector is the effects of trade and development on the environment. The symbiosis of trade and the environment emerged as a critical issue for trade negotiators in the last stages of the Uruguay Round of discussions, which commenced in 1986 under the aegis of the General Agreement on Tariffs and Trade (GATT) which is now the World Trade Organization.

At these discussions the focus remained on two approaches to the issue. The first approach was from the essentially pro-environment groups, who considered that those involved in international trade are primarily interested in the movement of their goods and therefore were not concerned about the environmental implications of their trading activities. The second approach was based on the belief that increased trading activity enhanced possibilities of solving environmental problems.

This trend of thinking leaned toward sanctions being introduced against environmentally detrimental trading activity, using GATT ( later WTO) as a tool of implementation. The official statement issued in support of the latter approach, which was not supported initially by the majority of States at the Uruguay Round stated:

GATT Contracting Parties believe that the successful conclusion of the Uruguay Round was an important step towards creating the conditions for sustainable development. Trade liberalization and the maintenance of an open, non-discriminatory trading system are key elements of the follow up to UNCED (United Nations Conference on the Environment).

Developing countries, however, were reluctant to embrace the idea of using trading sanctions towards environmental protection as their main priority remained to be development, and they were not fully convinced that already scarce resources should be deployed for purposes of protecting the environment. Being a new challenge and still esoteric, environmental protection was viewed in the context of trade liberalization by the developing States in the following manner:

For developing countries, where poverty is the number one policy preoccupation and the most important obstacle to better environmental protection, global trade liberalization, coupled with financial and technological transfers, is essential for promoting sustainable development.

The key issue in the developments taking place in environmental legislation must essentially be that economic progress through international trade and the conservation of the environment should not be viewed as mutually exclusive, but rather as inseparably linked and mutually supportive streams of activity.

The international profiles of these two prolific considerations have unfortunately been perceived and developed in isolation. While free traders advocating trade liberalization have been represented by some as being ideologically opposed to environmentalists who are allegedly in favour of trade restrictions in favour of environmental protection, environmentalists, in some quarters have been portrayed as purely one sided and anti-development. These perceptions are somewhat extreme and colours the necessary balance between the two activities.

Although free trade is seemingly the antithesis to environmental protection, it is a fact that the two interact in a complex manner.

The possibility that free trade would increase incomes, give access to more resources and education, thus creating more opportunity for environmental protection should be viewed with the counter argument that trade liberalization would reduce prices and increase demand, leading to an over-exploitation of natural resources and free trade across barriers which would, in turn, encourage the movement of environmentally hazardous material.

The most pragmatic view seems to be that free trade and the environment are equally crucial for sustainable economic development (See the Brundtland Report, 1987, G. Brundtland et.al, Our Common Future, WCED, Oxford University Press; London, 1987, p.13. Also, J. Biden, The Environment and World Trade (1993) 23 Environmental Law at p. 688, J. Dunoff, Reconciling International Trade with Preservation of the Global Commons, Can We Prosper and Protect? (Fall 1992) 49 Washington and Lee Law Review, at p. 1407).

Multilateral lending institutions such as the World Bank and the International Monetary Fund are beginning to lay more emphasis on the environmental impact of projects funded by them. However, in the ultimate analysis, both international trade and environmental protection are key issues for development, and they should be viewed as tools that could result in a win-win situation for the parties concerned.

(The author is senior official at the United Nations and a member of the Trade Law Committee of the International Law Association.)

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