ANDREW FARRAN. To TPP or not to TPP? – Trade negotiators need to get back to first principles,

Jan 29, 2017

If the compounding mess of the global trading ‘system’ is to be overcome, trade negotiators need to get back to first principles.  

The current turmoil in international trade arrangements reflects a realisation that they are neither free nor fair for most if not all. The sudden US withdrawal from the ten-year negotiated Trans-Pacific Partnership (TPP) has its paradoxical side as the advantages there were seen to be largely with the Americans. The confusion over the TPP was illustrated further when Australia suggested that China should stand in for the US given that the TPP’s larger purposes was in the first place to check China’s economic and military expansion in the region.

‘Free trade’, ‘Fair trade’ have been the catch cries of the trade world ever since the core principle of the post-WW2 trade system, the most-favoured-nation principle (mfn), was abandoned as nations sought short-term advantage over their competitors through spurious customs unions and later even more spurious free trade areas when these arrangements, in many key cases, did not incorporate core legitimacy criteria such as genuine regionalism and ‘substantially all of their trade’.

The piecemeal inclusion of countries and trade sectors not only set up winners and losers in their own countries, but throughout the trading world more generally. The lessons of the respective decades prior to both world wars, where trade wars developed into armed conflict on a massive scale, have been lost to all sight. It will get worse unless countries learn again to separate trade from geo-politics and to avoid discrimination in their trade relations. That may sound idealistic when so much is about ‘the deal’ irrespective of principle. But there is wisdom in the saying that what goes around, comes around.

A return exactly to what existed in the system previously is not possible, because that system had flaws too. Constructed within the General Agreement on Tariffs and Trade, now embodied in the World Trade Organisation (WTO), was an inflexibility over the adoption of new rules to facilitate both the movement of goods and services and the removal of trade barriers other than tariffs. The requirement of unanimity for the adoption of new or amended rules has hamstrung many a good measure, thus generating frustration among those who see a genuine need for change. A major example is the first substantive WTO enactment known as the Trade Facilitation Agreement agreed by all States but vetoed by just one country, India.

Another area needing modification are the GATT rules for integrating centrally planned economies (e.g. former communist states with state trading corporations along with developing and newly industrialised economies) into a structured system. Measures taken to date have been either too ad hoc, too accommodating of poor practices, and sometimes over contrived. Anti-dumping and determinations as to whether an economy is genuinely ‘free market’ in that context are examples.

The decision-making processes of the GATT’s earlier years were manageable when membership was less than 30 countries or areas, but now with over 160 that has, as noted, become quite unwieldy.

Perhaps not much will change while major countries ramp on about their country ‘First’. But trade doesn’t have to be a zero sum business. It involves a deal, which should have its appeal. But when it favours some and cuts out others, by way of preferential treatment, it is discriminatory. A fair trade system is one which extends a benefit given to one to all, on condition that all beneficiaries accept the same terms. No free-riding, which the GATT in its original form allowed.

There will always be issues over the equivalence of benefits in complex negotiations involving numerous parties. But with modified rules earlier problems can be overcome, as can distortions arising from so-called ‘free trade’ agreements that do not have a genuine regional connection and do not involve ‘substantially’ all of the trade of the respective parties.

Another contributing problem is the tendency to combine too many variegated sectors in the one agreement. It would be best to confine trade agreements to ‘trade and services’ and treat other areas separately in their own right. Investor-state dispute provisions which override sovereignty issues, have no place in trade agreements. Nor does intellectual property, including copyright. These create complications that cause negotiators to lose the plot.

Such is the case of the Australian/US Free Trade Agreement. Too much paper. Too little plot. Moreover its benefits, far from creating billions of new trade, are estimated by the Productivity Commission to amount to just 0.7% growth not annually but between now and 2030.

If the compounding mess of the emerging system is to be avoided and overcome, the trading world needs to get back to first principles.

The alternative is increasingly bitter trade disputes, leading to conflicts that the world can no longer afford because of ideology or ‘me first’ attitudes.

Andrew Farran is a former diplomat, trade adviser, and senior academic in public and international law.

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