Get processes right before inking more “free trade” deals

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By Leith van Onselen

Here we go again. The Turnbull Government has inked another “free trade agreement” (FTA), this time with Peru, which once again promises to shower Australian exporters with riches:

Australia and Peru will sign a Free Trade Agreement in Vietnam on Friday, and farmers will be one the biggest beneficiaries of the deal, which eliminates 99 per cent of tariffs facing exporters to the South American country….

It is the fastest FTA Australia has ever negotiated, as talks started only in May this year…

“The equation is simple: more trade means more exports; more exports means more jobs, higher wages and better incomes,” Mr Turnbull said…

Under the Peru Australia FTA, or PAFTA, Australian farmers who have effectively been shut out of the market will be able to compete on a level playing field.

The Trans-Pacific Partnership (TPP) mega trade pact, involving 11 of the original signatories (but excluding the US), is also looking likely to be rebooted at the Vietnam APEC meeting:

At the APEC leaders meeting this weekend, the Trans Pacific Partnership will move a step closer to adoption and implementation.

Together with Japanese Prime Minister Shinzo Abe, who held his nerve through the visit of US President Donald Trump this week, Prime Minister Malcolm Turnbull has been essential to keeping faith in the TPP.

The decision to pursue an 11-country agreement after President Trump dumped the TPP seemed like folly to many (including this writer) a year ago.

But now, in a period where most other plurilateral trade talks have ground to a halt, persevering with the TPP looks like a sensible and necessary expression of faith in global trade – not to mention an important economic boost to the remaining participants who will benefit from uniform trading rules and procedures.

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And there are likely to be more trade deals coming down the pipe:

At the Australia-Germany Asia-Pacific Regional Conference in Perth on Saturday, Turnbull… set out his personal commitment to trade outcomes, and his engagement in achieving them, both of which are vital to lifting the aspiration and quality of Australia’s forthcoming trade deals which include Peru, to be signed at APEC, as well as Hong Kong and Indonesia to be concluded in coming months, and in time the larger and more challenging FTAs with the Pacific Alliance and the European Union.

Missing in all of this hoopla are the proper processes to ensure that these various FTAs deliver tangible net benefits to Australia.

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We know that the original TPP contained a whole bunch of ‘anti-liberalisation’ measures, like the strengthening of patent and copyright laws, as well as a controversial investor-state dispute settlement (ISDS) provision that would have permitted foreign corporations to sue sovereign governments.

Thus, the original TPP was an agreement that would have granted greater power to multinational corporations – particularly big pharma and Hollywood – and would have done very little (if anything) to open-up trade and investment or spur jobs, as noted by Nobel Prize winning economist, Joseph Stiglitz:

“Let me explain to you why I and a lot of other people are against the TPP. It’s not that we are against trade. Way back to Adam Smith economists have talked about expanding markets, opening up advantages of economies of scale, and taking advantage of comparative advantage.

[But] this is not a trade agreement. Even the [Obama] Administration’s economists have come to calculations that the effect on GDP is minuscule. And more realistic estimates say that the effect on the economy is actually negative.

What people care about is the provisions on intellectual property that will drive up drug prices. What they call the investment provisions, which will make it more difficult to regulate, and actually harm trade”.

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Similar criticisms extend to several of Australia’s other FTAs.

Back in 2010, Australia’s Productivity Commission (PC) gave the following scathing assessment of the FTAs that had been signed to date:

The Commission concluded the benefits of these agreements have been oversold and the processes for developing them should be improved.

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.

More recently, the PC lamented that Australia’s trade negotiations have been “characterised by a lack of transparent and robust analysis, a vacuum consequently filled at times by misleading claims”, and has called on the “final text of an agreement to be rigorously analysed before signing”.

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Other studies have delivered even worse assessments.

The Crawford School of Public Policy at the ANU conducted a study of the Australia-US FTA (AUSFTA) and found that a decade after signing, the agreement has diverted more trade than it has created.

The ANU’s Peter Drysdale has also estimated that “Australia alone has suffered trade losses [from AUSFTA] the annual equivalent of the current price of around 18 Japanese, German, Swedish or French submarines through this deal”.

Peter Martin noted in July 2016 that a study commissioned by the Government “on the new Japan, Korea and China agreements found that taken together they will boost our exports 0.5 to 1.5 per cent, while boosting our imports 2.5 per cent, which means they will send our trade balance backwards”.

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Whereas earlier this year, The Australian reported that the China-Australia FTA was failing to deliver as promised, weighed down by “non-tariff measures made worse by slow bureaucratic processes [which] are imposing costs and delays”.

Meanwhile, research by HSBC and the Australian Chamber of Commerce and Industry found that Australia’s FTAs have been drafted poorly and are so complex that they are next to useless in a commercial sense. As such, there has been a poor take-up rate by Australian businesses exporting to partner countries.

Finally, senior academics recently warned that FTAs have become less and less about opening markets and more about entrenching monopolies.

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None of the above are an endorsement of FTAs, nor suggest that Australia should double down on more agreements. Quite the opposite in fact.

What they also highlight is that the Government needs to implement proper processes around negotiations, including engaging the PC to analyse trade deals for their equity and efficiency impacts both before and after negotiations are completed.

Forging ahead with FTAs in an ad hoc, evidence free, manner for political rather than economic reasons, and without due regard for longer-term consequences, is a recipe for poor outcomes.

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The Turnbull Government should focus its efforts on putting in place rigorous processes to ensure future FTAs actually deliver as promised for the Australian people.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.