While free trade agreements (FTA's) may be an effective way of cementing relationships between two countries, few governments consider the credit worthiness of the prospective trading partners, according to Credit Guarantee senior economist Luke Doig.

“Generally preferential trade agreements between countries or regions are designed to boost exports and the manufacturing sectors of the respective countries.

“However, once the political fervour has moved on, exporters are faced with the potential pitfalls of non-payment with little legal or government support,” says Doig.

Credit Guarantee raises several important concerns about governments rushing in to secure FTA's.

“Firstly,” states Doig, “the competitiveness of the country's exchange rate has to be carefully considered.

“It will serve no purpose to conclude an FTA with the intention of securing greater access for a particular industry, only to see the exchange rate strengthen and vast investment stand idle.”

“Secondly, while an FTA formalises trade matters to some extent, it does little to guarantee further protection and safeguards for exporters.

“Governments often endeavour to advance and promote economic ties with particular countries, but thereafter business players are left to the vagaries of the markets,” he says. A recent case, albeit under appeal, ruled that government was under no obligation to ensure that contracts with third countries were actually complied with.

“One would expect that if a government was keen to advance trade with another country, it would impress upon such a trading partner the need to comply with contractual obligations in the commercial sector.

“The reality however is that payment is almost always under threat. This does not constitute an argument for greater government intervention but rather for government simply to put the rules of the game in place and then to leave it up to the markets to do the rest,” says Doig.

“A third risk is that the FTA's may be skewed in favour of one of the parties due to the lack of negotiating capacity on the other. This appears to be the case in the US-SACU FTA negotiations.”

The African Growth and Opportunities Act (AGOA) with the US gave rise to a trade surplus for sub-Saharan Africa of some $26,1-billion last year, dominated by the $14,8-buillion surplus in favour of Nigeria.

Despite this, many argue that the US is far from altruistic or philanthropic in their negotiations, seeking to secure sufficient oil supplies to satisfy their energy needs.

In South Africa's case, the trade surplus in its favour has risen from $1,8-billion in 2002 to $2,95-billion last year, although the first quarter of 2005 figure of $615-million is below 2004's corresponding figure of $850-million.

Doig notes that recently, the Lesotho Government expressed concerns that their country might be disadvantaged by an imminent SA-US FTA.

This does not necessarily mean that an agreement should not be concluded but rather that Lesotho's developmental interests should be carefully considered along with all other stakeholders interests in the nuts and bolts of the agreement.

“While FTA's play an integral part in trade liberalisation, businesses need to be aware that their existence does not imply that trading risks have diminished.

“On the contrary, they need to take all the necessary precautions before launching into exports.

“These include investigating the credit worthiness of the importing client; the legal infrastructure within the importing country; the rights of legal recourse in the event of a default; the foreign exchange situation of the importing country and its political and socio-economic stability,” Doig adds.