JOHN KERIN. ‘Free Trade’ (sic), Theory and Experience (Part 2)

Jan 21, 2019

As with most economic theories about the optimal way to proceed, there is a difference between theory and results. For example, do company tax cuts necessarily mean that companies will invest in new production? If demand is suppressed will they use them to invest? Will they spend them to invest abroad, spend on mergers, pay off debt, or pocket them? This is to be expected because of changed situations and the behaviour of many ‘actors’. The same applies to trade theory.

Trade theory is traditionally attributed to the analysis in 1817 by the English economist, David Ricardo (i.e. comparative advantage, based on constant returns in an equilibrium setting) which displaced the trade theory of Adam Smith (i.e.absolute advantage, based on labour ‘productiveness’).

Theory is always a good basis to economic policy, but the world today is somewhat different to the world of two centuries ago, then dominated by the imperial, colonial powers. I doubt Trump (he who lies to deceive), is much taken with trade theory or global economic development and the plight of the less developed world.

In Australia the preference of conservative governments is for bilateral trade deals due to their antipathy to multilateralism. The government I was part of preferred to argue for a multilateral approach to trade negotiations, hence emphasis in engaging in debate with the major powers, the formation of the Cairns Group and pursuit of success in the Uruguay Round for a multilateral agreement on the basis of ‘most favoured nation’, i.e. a tariff cut must be given to all countries. The advantage of the multilateral approach is agreed rules and procedures and non-discriminatory measures (not bullying and bluffing), and agreed dispute settlement mechanisms. In other words every nation, rich or poor, is supposedly on a more level playing field.

The Uruguay Round resulted in the GATT becoming the WTO, which meant embracing TRIPS (trade related intellectual property) and TRIMS (trade related investment measures). The first of these set minimum standards for intellectual property and an enforcement mechanism. The second relates to rules applicable to the domestic regulations a country applies to foreign investors. Both accord more to the reality of today in the terms of interchange between nations, but I fear they may be exploited by the most powerful countries and act as block to freer trade. For example, in my time phyto-sanitary claims and ‘rules of origin’ were being used to limit trade; this and debates about nomenclature has now been extended to ‘geographic indicators’ (champagne can supposedly only come from the Champagne Province). Also, TRIPS has been used by the US tobacco firms to attack our health policies. With TRIMS there is some debate about the loss of member state sovereignty and the measures designed by the US to protect US multinationals.

It is essential to pursue every opportunity to enhance existing bilateral deals and develop or be part of regional deals, e.g., the Trans Pacific Partnership, now minus the US. Regional deals are preferable to bilateral deals. It is true that today the multilateral Doha Round is bogged down due as much as anything to the long term impact of the GFC, and the rise of populist, protectionist and racist nationalism.

I pour no scorn on the recent bilateral deals (FTAs), or on deals still being negotiated, but one should be wary of the all the hypebeing attributed to such deals. Free Trade has become a slogan in the same category as Free Markets, Free Speech, Freedom of Religion etc., akin to the way the US citizenry regards the word ‘freedom’; if it is free it is good. The simple fact is that a lowering of tariffs and quotas doesn’t necessarily mean a bonanza for our exporters; markets still have to be won, supply chains have to be entered, traditional networks in customer countries negotiated with and requirements for packaging and labelling perfected.

Bilateral deals between countries, where two countries agree on their own trading rules, should be categorised as ‘preferential deals’. They may suffer from the costs of ‘trade diversion’, which diverts trade away from more efficient third country suppliers.

This feature is under debate by the economics profession. Will all bilateral deals lead to broad scale liberalisation or simply distort trade and divide the world into competing trade blocs? Further, in terms of ‘most favoured nation’ approach, will any drop in tariffs only lead to the likes of the US and China being able to gain even greater access to the markets of developing countries? The US mainly has bilateral trade deals with less developed countries and is not very trade exposed.

Our most important bilateral (preferential) trade deals are with Japan, US and China (any benefits too early to say regarding China). The Australia FTA with America has been in force for over 14 years. The US made few concessions regarding dairy products and sugar, and for the rest changes in tariffs and quotas were incremental. This was the deal where the Howard Government gave away so much on I.P. and pharmaceuticals – was this the price of trade diversion? Why does New Zealand have cheaper pharmaceuticals? An analysis by ANU academics estimated the loss by trade diversion to both countries combined was $53b over ten years. Supporters say that it increased trade by 32 per cent but with no period specified anything can change, such as our millennium drought and slowing down of investment in our minerals and energy industries?

The FTA with Japan came into place on 15 January 2015. The tariff on frozen beef was 38.5 per cent in 1991-92. It will be phased down to 19.5 per cent by 2031. All other concessions we gained are incremental.  We still have to compete for market share and the Japanese population is ageing.

A top US Harvard academic, Prof Dani Rodrik, has written, ‘free trade agreements are the results of rent seeking, self-interested behaviour … by international banks, pharmaceutical and multinational firms … likely to redistribute income from the poor to the rich ’.


John Kerin was Minister for Trade and Overseas Development 1992-93.

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