Free trade agreements have long been hailed by governments and the media as viable solutions that drive major benefits. As world geo-politics and economies shift, we take a look at the benefits — and limitations — of FTAs in the world today.
There was much hope that when China, Japan and South Korea, agreed to restart free trade agreement (FTA) discussions, this could nudge a recovery towards the regional economy, and perhaps even stimulate global trade.
Together, the three countries have a yearly trading volume of over US$800bn and account for 25 per cent of global gross domestic product. So, when in May 2024, China’s Premier Li Qiang, Japan’s Prime Minister Fumio Kishida and South Korea’s President Yoon Suk Yeol agreed to restart the talks, which had stalled since 2019 due to rising tensions around the region, Chinese state media suggested this FTA might lead towards a healthier economic trajectory. South Korea's Yoon also added that the three countries had “decided to create a transparent and predictable environment for trade and investment, and to establish a safe supply chain”.
As we enter 2025, and amid the threat of tariffs promised by incoming US President Donald Trump and a climate of economic uncertainty, can FTAs still be effective? According to Dr Denis Hew, Senior Research Fellow at LKYSPP, while such agreements have the potential to boost trade and investment among participating nations, there are concerns about their inclusivity.
Many developed countries are moving toward advanced free trade agreements or partnership agreements, such as the Digital Economy Partnership Agreement (DEPA). This shift raises questions about the opportunities available to less developed and poorer countries, which may not have the capacity or resources to engage in these high-level agreements. As a result, there's a risk that these nations could be left behind, potentially widening the economic gap and undermining efforts toward a truly collaborative regional and global economy.
The promise of FTAs
The idea of free trade was popularised over two centuries ago by British economist David Ricardo. He argued that when every country dedicates their resources and manpower according to their strengths, and the countries trade with one another, everyone benefits.
However, history has proven that not all FTAs can deliver on the promise of complete free trade. North American Free Trade Agreement (NAFTA) and The Transatlantic Trade and Investment Partnership (TTIP) both excluded a host of sectors in order to protect domestic jobs and intellectual property. Medicines, meats and other foods that have not been approved by regulators were generally exempted, while taxes were applied to ‘imported’ products to give local businesses an edge. As the race for innovation persists, semiconductors and electric vehicles (EVs) are also consistently excluded from FTAs.
In recent years, trade between the US and China — the two biggest economies in the world — has become tricky. The US imposed additional taxes on Chinese export, such as EVs, citing the unfair advantage the Chinese government allegedly provides to manufacturers. The US has also prevented its businesses from selling advanced technology, such as cutting-edge computer chips, to China to protect American technology and security.
Dr Hew sees that we are witnessing “an undoing of decades”, as trade liberalisation policies continue to be implemented by the US. And with tariffs potentially rising up to 19%, this will have an impact on many countries around the world.
“What we're worried about is that there's going to be an increase in trade barriers and different kinds of non tariff barriers as well”, he said.
The situation in East Asia is equally complex. Both Japan and South Korea have pledged to enter FTA talks with China, but they are also close allies with the US. How do the two build flourishing relationships with superpowers at the extreme ends of the spectrum and maintain amiability with both?
Very delicately, is how.
Japan has already agreed to ban its businesses from exporting advanced chip-making technology to China. It remains to be seen, however, whether they will follow in the footsteps of the US on other restrictions.
Aligning with the times
The World Economic Forum pointed out in a recent report that global cooperation has been on the decline due to “conflict, the climate crisis and economic challenges”. Global trade of goods saw a rare decline of 1.2 per cent last year,
according to the World Trade Organisation.
However, there is cause for optimism as the world seeks ways to overcome its hurdles. In a world where sovereign industrial capacity is prioritised, countries have continued signing new agreements and amending current ones to keep with the times.
With challenges facing multilateral frameworks like the WTO, there's a shift towards bilateralism. Dr Hew notes that countries like the United States may focus more on bilateral trade agreements with strategically important Southeast Asian nations offering crucial resources like nickel for electric vehicles. This could lead to more transactional regional engagement, prioritising individual deals over broader cooperation.
For trade-dependent economies like Singapore, increased protectionism and bilateral disputes pose risks amid potential US-China tensions. However, Dr Hew highlights that engaging in regional agreements like the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) allows Singapore to diversify its trade partnerships and buffer against global uncertainties, reducing reliance on any single trade partner and enhancing economic resilience.
Real world, real people impact
Consumers and businesses are invariably impacted by FTAs—sometimes positively, sometimes not so much. The agreements aim to lower the cost of goods in a market or make it easier for businesses to enter foreign markets and reach larger audiences. But the terms can change in extraordinary circumstances, usually without much forewarning. The US and European Union imposed tariffs on Russia in 2022 after its invasion of Ukraine despite a number of long-standing agreements with the Kremlin, driving up the global prices of its exports like oil, metals and wheat.
The road ahead
In January 2025, and for the first time in four years, South Korea and China
resumed negotiations on the expansion of their FTA to include services and investment. The two nations are holding the tenth round of talks for a three-day run in Seoul, which serves as hope that China, Japan and South Korea will soon reach a FTA that serves all parties.
The economic benefits of such an arrangement is clear, but the complex politics around it casts a gray cloud over its outlook even before it even begins. On the defense front, there is also growing concern about China's military influence. In July this year, the US, Japan and South Korea cemented their security ties in a pact that includes regular military training and drills. The key question now is whether economic fundamentals can overcome these geopolitical challenges.
Dr Hew points out that this balance depends first on economic fundamentals. For an FTA to be sustainable, it must make economic sense for all participants, considering factors like trade complementarities and market access. The success of strategies like "China Plus One" - where companies maintain Chinese operations while diversifying to other markets - demonstrates how countries can balance economic partnerships despite geopolitical tensions.
However, economic viability isn't enough; political will and shared interests are crucial. This includes effective negotiation, compromise on contentious issues, and domestic implementation. The experience of the economic and political bloc Association of Southeast Asian Nations (ASEAN) experience highlights the importance of political cohesion in managing trade amid global volatility.
Looking ahead, the potential success of RCEP illustrates how both economic and political factors determine whether FTAs can fulfill their promise of integration and prosperity. Said Dr Hew: "We have initiatives like the ASEAN Economic Community, with a new strategic plan in 2025. We need to step up given the growing uncertainties in the trade landscape.”