Labor’s treasury spokesman, Chris Bowen, will address the Lowy Institute today whereby he will argue for Australia to pursue larger-scale multilateral free trade deals rather than bi-lateral and regional deals. From The AFR:
In a push to swing the free-trade focus away from “second-best” smaller regional agreements and “third-best” bilateral agreements, which are deals between two nations, Mr Bowen will outline a think-big policy and urge Australia to take a lead role and revisit multilateral agreements such as the Doha free-trade deal…
“Thought should be put into whether genuine multilateral agreements like Doha should be held to ransom to the positions of one or two member countries blocking them,” he will say.
“This may sound radical but a more pragmatic approach might be desirable, such that when WTO agreements achieve a critical mass or a coalition of the willing, they can still move forward.
“We should be continuing to work with like‐minded countries to prepare the ground for when international political circumstances allow for multilateral negotiations to take off again.”
One option Labor has advanced with the WTO via back channels is to give a deal the green light if 95 per cent of the WTO’s 164 member states agree.
Bowen is on the right track here.
As argued way back in 2014, the first best option in trade policy is to seek trade liberalisation at the multilateral level, whereby all parties agree to drop trade barriers all at once.
However, such liberalisation has proved time and again next to impossible, with successive multilateral trade negotiations collapsing during the 2000s, held captive by a few rogue members. So if a solution can be found that makes these large multilateral agreements possible, Labor should embrace them with gusto.
Labor should also jettison the Coalition’s agenda of pursuing trade agreements bilaterally. Such bilateral “free trade agreements” (FTAs) impose real costs that undermine their efficacy.
For instance, FTAs typically include complex ‘rules of origin’ (ROO) that raise administrative costs for businesses (including complying with paperwork requirements) and custom services in administering and auditing the ROO, thereby undermining the benefits from such deals. Costs associated with ROOs tend to also be larger where there are a large number of FTAs each with different requirements, resulting in a ‘spaghetti bowl effect’ of increasing complexity.
Indeed, a few years back, the Australian Chamber of Commerce and Industry (ACCI) raised similar concerns, claiming that the Korean FTA was so poorly drafted that it was next to useless in a commercial sense. Moreover, technical problems inherent in most recent FTAs precluded Australian exporters from taking advantage of the deals, according to the ACCI, whereas in a different ACCI survey, fewer than 30% of the firms responding used the concessions available to them under FTAs.
There is also the costly “trade diversion” caused by the FTAs themselves – 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 (see here for a stylised example of trade diversion).
Finally, some FTAs (including the Australia-US FTA) include costly non-trade provisions, such as copyright and patent extensions, which can harm domestic consumers and governments. Similarly, the inclusion of Investor-State Dispute Settlement (ISDS) mechanisms in some FTAs has given authority to multinational corporations to challenge laws made by a domestic country’s government in the national interest in international courts of arbitration, and potentially sue taxpayers in the process.
The above concerns also help to explain why the Productivity Commission (PC) is generally against bilateral FTAs, previously noting:
…the Commission found little evidence that Australia’s recent bilateral agreements had provided substantial commercial benefits. The main factors that influence decisions to do business in other countries are likely to lie outside the scope of such agreements. The study concluded that while preferential trade agreements could increase national income, the net effect is likely to be modest.
The study also found that some provisions included in Australia’s recent preferential trade agreements — including investor-state dispute settlement mechanisms, government procurement requirements, intellectual property protections and provisions affecting areas traditionally the province of domestic policy, such as culture — potentially entail significant costs or risks.
Let’s hope that Labor can steer Australia’s trade policy in the right direction.
