PC fires another shot at Australia’s FTAs

By Leith van Onselen

The Productivity Commission (PC) has released its 2014-15 Annual Report, in which Commission chairman, Peter Harris, has fired a direct shot at Australia’s so-called Free Trade Agreements (FTA), claiming they have been “characterised by a lack of transparent and robust analysis, a vacuum consequently filled at times by misleading claims”.

The Annual Report then refers directly to the PC’s Trade and Assistance Review, released in June, which warned on the efficiency impacts of regional and bilateral FTAs [my emphasis]:

Although the priority given to these and future bilateral agreements is often justified on the basis of the value of gross export flows from Australia (and the potential for expanded market opportunities) these gross measures of trade are misleading indicators of actual trade. They do not take account of the trade diverted from non-partners which may be lower-cost producers, the efficiency costs of preferential arrangements or the opportunity costs of preferential arrangements relative to unilateral or multilateral approaches…

Preferential trade agreements add to the complexity and cost of international trade through substantially different sets of rules of origin, varying coverage of services and potentially costly intellectual property protections and investor-state dispute settlement provisions.

And called on the texts of Australia’s trade deals to be publicly released for scrutiny before they are signed:

The emerging and growing potential for trade preferences to impose net costs on the community presents a compelling case for the final text of an agreement to be rigorously analysed before signing. Analysis undertaken for the Japan-Australia agreement reveals a wide and concerning gap compared to the Commission’s view of rigorous assessment.

The PC has essentially touched upon two key hidden costs commonly associated with preferential FTAs: 1) trade diversion; and 2) complex rules of origin.

Trade diversion arises when 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 the nation worse-off as a whole.

In order to explain, consider the below stylised example.

Country A imposes a 10% tariff on motor vehicles and, prior to the FTA, imports these vehicles at a cost of $20,000 from the World, taking the total import cost to $22,000, and earning its government $2,000 per vehicle in tariff revenue.

Country A then negotiates an FTA with Country B, who is less efficient at producing motor vehicles, and can produce a virtually identical car for $21,500.

After the FTA is concluded, Country A shifts its car purchases from the World to Country B. As a result, the total import cost of motor vehicles into Country A falls to $21,500, providing consumers with a benefit of $500 ($22,000 less $21,500). However, the government loses $2,000 in tariff revenue, making Country A worse-off overall.

Obviously, this is simple stylised example only, designed merely to highlight one of the potential costs of FTAs via trade diversion. But these efficiency costs can be real, especially when FTAs are negotiated with parties that are not world’s best producers in goods and where high tariffs exist (e.g. clothing and footwear).

Rules of origin (ROO) are designed to stop imports coming from third party (non-FTA) countries via an FTA partner, in order to circumvent tariff requirements. The ROOs, which can be either based on value-added requirements (i.e. the percentage of value-added by the FTA partner) or product specific (i.e. individual rules for each individual product imported), 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. The AFR’s Alan Mitchell includes some good examples of these costs in his column today.

Of course, there are other potential competitive distortions that can arise from binding rules within an FTA, which have also been touched upon by the PC.

For example, the Australia-US FTA, concluded in the mid-2000s by the Howard Government, saw the inclusion of non-trade provisions, such the extension of patent and copyright terms, which will lessen competition and increase costs for Australian consumers over the longer-term. The Australia-US FTA  also saw large chunks of agriculture carved-out, draconian price-based safeguards protecting US horticulture (see Annex 3A), as well as complicated product ROO numbering hundreds of pages.

The recently concluded Trans-Pacific Partnership (TPP) agreement has also strengthened rules around intellectual property and entrenched our current IP law in the agreement, meaning we will be unable to backslide in the future even if we wanted to.

The bottom line is that the Government’s FTA agenda offers modest trade benefits if executed well. However, this requires “transparent and robust processes”, without which the costs are more likely to outweigh the benefits, as was the clear case with the US FTA.

Prime Minister Turnbull needs to take note of the PC’s warnings and rein in Trade Minister Andrew Robb before he embarks on further FTA negotiations without first improving the process.

[email protected]

Unconventional Economist


  1. .Good. A bit of hard truth telling about these BS so-called FTAs, or rather what they really are, preferential trade and intellectual property treaties for the benefit of certain politically connected, vested interests at the long term expense of everybody else and future generations whose sovereign rights are being given away by our ministers.

  2. Here you go all you in-favor of FTAs with a communist regime!

    “…..this requires “transparent and robust processes”, without which the costs are more likely to outweigh the benefits..”

    Good luck getting your transparency with a stealthy Red Dragon ally of North Korea.

    “Oh, but property investment in Australia by the Chinese is a good thing…..it allows the construction industry to flourish”….What a crock of bs……the cost of living aint going down, the only benefactors are the construction industry – NOONE ELSE.

    While we obliterate the green to make way for the grey, we lower standard of living for our kids, we inflict on them an everincreasing burden to increase infrastructure spending to cater for more and more people……money we dont have.


    Robbing our kids to fuel our own existence of property property property..

    Well done Australia allowing your own land and property to be bought up by speculative money offshore, where these same people have to put down a massive ZERO% deposit on property, while our own children have to suffer the absurdity of local rules that put them at such a disadvantage.

    We live in a country that is fast becoming the laughing stock of China.

    A place where the Chinese see Australia as a weak, pitiful, but attractive place to exploit.

    And if you dont believe me, take a look at the below…

    1.The Chinese can buy property in Australia at 0% interest. Our kids cannot. What does that tell you about how and where we rate our own relative to people we have nothing in common with? Team Australia – vomit. We dont live in a nation, we live in a joke. A backward nation that bends over.
    2.The Chinese wish to sit on local Councils in Australia. So they can inject political weight and influence domestically. When this happens, see the mass exodus of locals given they dont go count for anything anymore. We have sold ourselves off.
    3.So many more examples could be given where our elder generations sit idly by, and question “where is the world going?” but doing diddly squat to curb curses that our kids will have to bear due to our inaction.

    And you lazily wonder why our kids are disconnected?
    Why there is a rise of animosity by our children at the state of things?
    Why kids are turning to drugs and crime since they see no future given insane property prices, fuelled by the same generation that has the audacity to blame everything other than themselves.
    Since they see a life of long-term renting, a life of unpredictable employment, a life with FTAs with a nation that has alterior motives. Congrats Australia. Congratulations Andrew Robb (thiief).
    Why there is angst against a generation that takes the gold prize in gluttony, neglect and self-interest.

    You wonder why globally, our youth are turning against elder generations?

    Wake up muppets.

    Your kids will thank you.

    • SJ and SN, you are both on the money, but, no one cares.
      Given that no one cares, as long as they have a McMansion, Wide screen and SUV and sport makes up the majority of the MSM content, nothing is going to change, and that is what the politicians are relying on, to fulfill their term and piss off like Hockey has. If the Chinese are knocking us off it is because they are assisted by their system of govt, and until we ditch this political system we have and adopt a more autocratic system as they have and as Big Don proposes for the USA, it is just going to get worse.
      How you turn it around without public support is beyond me, but when circumstances become dire enough, the public will act. (and many may just be surprised how many guns are still in the community, seems Muslims can get their mits on hand guns no probs, and to brass up a couple homes in Melbourne is still no probs)

      • The ALP was set up partly to guard against this kind of wealth and sovereignty destroying crap, but now they are run by slimy lawyers and think you can do deal with the devil himself. They have betrayed their principles for a fist full of dollars and “respectability”. They need to harden up and take the hard line – the public would support them.

  3. The Chinese are not backwards. Maybe they deserve to own Australia, since we value their opinions more than we value our own judgement. Let them run the place. Maybe they can look after our kids better than we can.

    • China, of course! Because Ping An lend them the 30% deposit against collateral domiciled in China, then get a local subsidiary or an Aussie bank to lend them the other 70%. It may appear to be 0% deposit at our end, but someone, somewhere is holding the deeds to 30% of something to get the ball rolling….It’s all part of the China offshore asset buying programme that we here are to blind to see going on.