The pros and cons of free trade agreements

Vega Textile, a Bulgarian apparel maker, purchased last year polyester neat material worth 120,000 U.S. dollars from Daechang Trading, a small company in Daegu. The order amount was more than double of its 2010 purchase of 53,000 dollars. Vega hiked its purchase volume because the 10-percent tariff on textiles was removed following the effectuation of the Korea-European Union free trade agreement in July last year. With lower textile costs, the Bulgarian company also raised its price competitiveness and expanded distribution channels. Park Cheon-ho, a Daechang manager in charge of overseas sales, said, “Vega is poised to double its purchase volume this year from last year,” expressing high expectations.

Korea’s exports to the EU contracted 5.1 percent between July and November last year from the same period in 2010. This was because of a slump in the EU economy due to the continent`s fiscal crisis. Shipbuilding, semiconductors and mobile handsets, which are susceptible to economic cycles, were especially dealt a major blow. Despite this, however, Korean exports of cars, chemical products and batteries, which are considered sectors that have benefited from the free trade deal with the EU, saw significant gains. A survey conducted by the Korea Trade-Investment Promotion Agency found an even clearer picture. Nearly 80 percent of respondents said the trade pact is helpful to their business, with 68 percent saying the benefits result from tariff removal. Critics complain about free trade deals but those directly engaged in trade can vividly sense the benefits of the accords.

In contrast, imports of luxury cars and semiconductor equipment from the EU greatly increased. The sales of luxury brand handbags soared a whopping 70 percent. Likewise, a free trade agreement not only boosts Korea’s exports but also expands import from the trading partner. If Korea solely benefits from such a deal, no sane country will enter such an agreement. The original goal of free trade is to expedite trading of items not widely traded due to tariffs and non-tariff barriers.

If trade expands, international division of labor will advance and eventually elevate productivity of a national economy, which in turn will improve per capita income and quality of life. Industries at a competitive advantage will enjoy significant benefits, however, while those at a competitive disadvantage will suffer setbacks. This is the essence of trade. A country cannot tackle equitable distribution only with free trade agreements, which carry a policy of competition and market opening. If a nation wants to equitably distribute the pie that has expanded due to free trade, it will separately need a combination of policies. Even so, people should not harshly criticize free trade agreements as harmful and useless. A nutritional supplement should not be called useless if it does not ease a stomachache.

Editorial Writer Heo Seung-ho (tigera@donga.com)