The AFR’s Alan Mitchell has written a great article today questioning whether the Coalition’s fevered pursuit of so-called free trade agreements (FTAs) are in Australia’s best interest and the soundest way to achieve freer trade:
Abbott seems to see freer trade almost exclusively in terms of the proliferation of free-trade agreements…
But so-called free-trade agreements, or FTAs, with their grudging exchanges of trade concessions, are among the most restrictive forms of trade liberalisation.
As the Productivity Commission explained in its 2010 report on regional and bilateral trade agreements, most of the benefits from reducing import barriers accrue to the countries reducing the barriers…
Moreover, unilateral reform applies to the imports from all trading partners, whereas FTAs reduce the prices of imports only from countries that are party to the agreements. FTAs can even divert trade to more expensive sources of imports…
One of the Abbott government’s first initiatives was to accelerate the FTA negotiations it inherited from Labor.
“We’ve successfully concluded negotiations for a free-trade agreement with South Korea and are working on agreements with Japan, China, India and Indonesia as well as wider ones such as the Trans-Pacific Partnership,” the Prime Minister boasts…
Abbott, however, says he is willing to sacrifice quality in order to secure agreements.
…the risk of Australia getting the balance wrong is likely to increase as Abbott rushes to notch up FTA agreements as a demonstration of his claim that Australia is “under new management and open for business”.
Mitchell is spot on. As explained last year, there are reasons to be highly skeptical of FTAs, which can actually reduce welfare.
First, when barriers, such as tariffs, are reduced to one party (or a small number of parties), but maintained to the rest of the world, it risks creating “trade diversion” – effectively a situation whereby the importing country shifts its buying from a more efficient, lower cost country whose goods are subject to a tariff towards the less efficient and higher cost FTA partner whose goods are not subject to a tariff. In such circumstances, the importing country loses the tariff revenue, whilst its consumers do not fully benefit from a price reduction, potentially making them worse-off.
Another cost associated with FTAs is the complex rules of origin (ROO) that are typically attached to such agreements, which can raise administrative costs for businesses (including complying with paperwork requirements) and custom services in administering and auditing the ROO, undermining the benefits from the FTA.
The costs associated with ROOs will be greatest where there is a large number of FTAs each with different requirements, resulting in a “spaghetti bowl effect” of increasing complexity.
In my view, the Government’s view of trade barriers as being merely negotiating coins that can be traded-off in exchange for other nations dropping theirs is misplaced. Trade barriers, like tariffs and quotas, impose real costs on the domestic economy, both to consumers in the form of higher prices and to productivity overall by reducing competitive pressures.
Reducing one’s own trade barriers, therefore, not only improves outcomes for consumers via lower prices, but also increases competitive pressures on domestic industry, helping to spur greater innovation and productivity in order to survive.
The Government should be viewing Australian trade policy and trade liberalisation more in this light – as a form of domestic competition policy, rather than something that can be traded away for a bunch of questionable bilateral deals with spurious efficiency impacts.
Another growing concerns with FTAs are the non-tariff barriers that they can create. I have written extensively how the proposed Trans Pacific Partnership (TPP) – the proposed regional trade deal between 12 Pacific Rim countries – risks establishing a US-style regional regulatory framework that would grant greater powers to US pharmaceutical and digital firms at the expense of Australians.
I am not alone in my concerns, with Nobel Prize winning economist Joseph Stiglitz, recently posting an open letter questioning negotiators’ secrecy and warning about “grave risks on all sorts of topics” posed by the TPP:
As regards the provisions on intellectual property, negotiators should resist text that would, among other things:
- weaken the 2001 Doha Declaration on TRIPS and Public Health
- mandate extensions of patents terms
- mandate lower standards for granting patents on medicines
- mandate granting patents on surgical procedures,
- mandate monopolies of 12 years on test data for biologic drugs
- narrow the grounds for granting compulsory license on patents,
- increase damages for infringements of patents and copyrights,
- reduce space for exceptions as regards limits on injunctions, and
- narrow copyright exceptions
- requiring life+ 70 years of copyright protection,
- mandate excessive enforcement measures for digital information, and
- otherwise restrict access to knowledge.
At this point in time, we do not need a TRIPS plus trade agreement, we need a TRIPS minus agreement. The TPP proposes to freeze into a binding trade agreement many of the worst features of the worst laws in the TPP countries, making needed reforms extremely difficult if not impossible.
The investor state dispute resolution mechanisms should not be shrouded in mystery to the general public, while the same provisions are routinely discussed with advisors to big corporations.
The Abbott Government should heed Stiglitz’s warning.
