TAKING STOCK: Treaties or unilateral free trade


Governments worldwide enter into treaties for removal of trade restrictions. The European Union (EU) is the result of such a treaty, North America free trade Agreement (NAFTA) is another example. WTO is yet another organisation formed for freeing world trade. Nepal too has entered into treaties and regional pacts. There is WTO and there is the South Asian Association for Regional Cooperation (SAARC). In addition, each of the seven countries comprising SAARC may have its own bilateral agreements with others.

Does the government need to ‘manage’ free trade? Must we have treaties before we open our borders to imports? Would unilateral free trade destroy us?

Look at countries, which opened up to trade without reciprocity. Whenever countries have eliminated tariffs, or cut regulations hindering trade, they have gained irrespective of what other countries have done. Hong Kong and Singapore opted for unilateral free trade much before these treaties came into fashion. They became rich.

Singapore has an average tariff rate of less than one percent. 96 per cent of its imports are duty free. There are no import quotas. Licence requirements exist only for a handful of items.

Hong Kong is a duty-free port and levies no custom duties except on tobacco, alcohol and fuel. The average rate of tax on imports is below even Singapore’s and close to zero. There are no licensing requirements or other barriers.

These two dots on the map prove conclusively that you do not need treaties to ‘manage’ free trade. If free trade was good only if your trading partners practiced it, then, Hong Kong and Singapore would both have died under the onslaught of free imports flooding their territories.

Far from perishing, both have thrived like no other country in the world. Yes, their imports are huge, Singapore’s imports in 2002 were $117 billion, Hong Kong was showered with goods from all over the world with imports of $ 273 billion in the same year.

Did this destroy their currency reserves and break their economy? Far from it. These duty free imports allowed the puny ‘Davids’ to become trading ‘Goliaths’. Singapore in 2002, exported goods and services valued at $126 billion, Hong Kong was one of the world’s do-minant trader with its exports at $288 billion. And why should it not be that way? If your imports are duty free, you automatically become a low cost producer of everything. It does not take a PhD to figure out that with this advantage you will become a big exporter as well.

Imports and exports go hand in hand. India, after trade liberalization in the 90’s, has seen its trade multiply. This happened even though India is still highly regulated and duties on imports at over 20 per cent are amongst the highest in today’s world. When India was closed to imports, its currency reserves fell to zero and it had to pawn its gold reserves to fund its ‘essential’ imports of oil etc. Now, its foreign currency reserves are $145 billion. However, even this great performance of India is nowhere near its potential; despite its billion plus population India’s exports and imports are just 25 per cent of Hong Kong’s.

The average tariff in the US is 1.8 per cent. Though the US is not as free as Singapore or Hong Kong, for it maintains restrictions on imports of textiles, beers and wines, cotton, chocolates and other items, it, by global standards, is poorly ‘protected’ from imports.

The US imports are by far the highest in the world at $1.6 trillion, its exports too are the highest at $1.08 trillion. Imports exceed exports by $ 600 billion. This ‘deficit’ was higher than any other country’s. People are happy to send goods to the US for its paper — the US dollar. Did the US suffer because of its imports? No. The people over there enjoy the world’s highest standard of living with access to cheap goods from all over the world.

Anytime trade restrictions are removed — with or without treaties — we gain. The good news is that treaties are not essential to free trade. Nepal can, therefore, unilaterally, become a free trading nation today and reap the benefits denied to it for far long.

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