Pearls and Irritations

Next Tuesday Prime Minister Abe will visit Australia. I expect the Free Trade Agreement with Japan or its new name the Economic Partnership Agreement with Japan will feature prominently.  I repost below what I said on March 29 about the limited value of these bilateral agreements.

Only last week, the Productivity Commission expressed similar reservations. It said ‘Australia recently agreed to bilateral trade agreements with Korea and Japan. Trade agreements can distort comparative advantage between nations and consequently reduce efficient resource allocation. The rules of origin in Australia’s nine bilateral agreements  vary widely and are likely to impede competition and add to compliance costs of firms engaging in trade‘. 

I expect that we will see more hype about these bilateral trade agreements. The results are invariably disappointing.  John Menadue.

Repost

Tony Abbott and Andrew Robb have been hyping up the Free Trade Agreement (FTA) that has recently been concluded with the Republic of Korea, although most of the preparation and negotiation had been conducted by the Rudd and Gillard Governments.

Andrew Robb the Trade Minister has now escalated the rhetoric by saying that the pending FTA would “turbo charge” our trade with Japan. If only!

There are many more FTAs in the pipeline, including with China. Seven FTAs are in force including one with the US.  The proposed agreements with Japan and China have both been under negotiation for 9 years!

Unfortunately the record shows that FTAs don’t achieve very much.

The most important way to free up trade is through multilateral agreements, not bilateral agreements. Failing multilateral agreements, the next best approach is unilateral action by ourselves to reduce protection. The third best way to improve trade and economic prospects is through bilateral FTAs. But they are seen as political trophies rather than a genuine liberalisation of trade.

Bilateral FTAs are regarded as sub-optimal for a number of reasons.

• They divert trade from one partner to another partner, rather than create new trade.
• FTAs entrench the power of the larger and stronger partner e.g. USA and potentially Japan and China.
• They increase the cost of doing business because of complex ‘rules of origin’.  A tangled and complex web of FTAs increases the cost of implementing and administering diverse FTAs.
• They marginalise peripheral countries with smaller markets, and polarise regions.
• Most importantly, they divert time and energy of governments, ministers and officials, from the more important issues of multilateral negotiations, which, for us, as a small to medium sized country is more likely to serve our interest.

The FTA concluded with the US in 2004 is an example of the limited economic and trade benefits of bilateral agreements. The agreement with the US was politically hyped up but the outcome was very marginal for Australia

• The outcome in agriculture was far less than Australia hoped and sugar was excluded completely. The US Farm Bill which subsidises US agriculture across a wide field was untouched.
•  Australia effectively conceded that agricultural trade is different to other trade, something that Japan has always maintained.
• Our export growth has been minimal

Australian officials recommended that the government not sign the agreement with the US, but John Howard over-rode their objections because he wanted a deal that would be politically and strategically useful for him in Australia’s domestic politics and in our relations with the US.  Australian trade policy was subordinated to electoral, political and strategic concerns. It may happen again with Japan and China.

A survey undertaken by the Australian Industry Group found that”5 years after the much heralded Australia-US FTA the US market remained difficult for Australia. Almost 80% of respondents said the FTA was not very effective in improving export opportunities and 85% said it had failed to help in setting up an operation in the US”.

Rod Tiffin the Professor of  Government and International Relations at Sydney University described the agreement with the US as “a dud”( SMH March 3 2010)  He commented that “Australia’s exports to the US in the 5 years(since the agreement was signed) grew by only 2.5 % compared with double digit growth for exports to all the major Australian trading partners. America has slipped from third to fifth among Australia’s export destinations.”

The previous government was aware of the poor quality of a lot of earlier FTA’s and was trying to improve the quality. That was a reason for slow progress. But the Abbott Government seems more intent on a rush to a good media headline than making real progress in trade liberalisation and the quality of trade agreements.

Andrew Robb is showing inexperience and naivety about FTA’s He said he is giving priority to concluding an FTA with Japan and doesn’t want the whaling dispute to get in the way.  Furthermore in being so politically anxious he is undercutting our bargaining position.

Tony Abbott should use his position as Chair of the G20 to breathe some life back into the stalled MTN (Doha) round. That is where our best interests lie and where we should put our effort .There is not mush political glamour in messy and lengthy international negotiations but that is where we should put our effort both in our own interests and also in the interests of other agricultural exporters.

A second-best approach would be to unilaterally reduce our own trade barriers. That makes sense for consumers who would pay lower prices. It promotes competition, innovation and productivity.  The Productivity Commission in 2010, in examining regional and bilateral agreements said that the economic gains from trade come more from access to cheaper imports rather than from increases in exports.

The third and least satisfactory way is to keep pursuing FTAs where the trade benefits are quite modest. These agreements are politically hyped out of all proportion to the benefits they secure.

Few trade experts take a rosy view of bilateral FTA’s. Unfortunately governments see them as political trophies.  John Howard hailed the FTA with the USA as a great political success but it was a dud in economic and trading terms. Just wait for a lot of political exaggeration on the upcoming “agreements” with Japan and China.

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