The Turnbull Government has attempted to use questionable modelling on the benefits of ‘free trade’ to drive a new Trans-Pacific Partnership (TPP) agreement. From The Australian:
Australia is at risk of a 2 per cent hit to economic activity, a loss of more than a quarter of a million jobs and a fall in real wages should the rest of the world continue to shift towards greater trade protectionism, according to a key economic modelling report commissioned by the federal government…
Commissioned by the Department of Foreign Affairs and Trade and released ahead of this week’s APEC world leaders meeting in Vietnam, the report underpins the case against emerging protectionist sentiment.
Tensions over trade will expose a central point of difference between Malcolm Turnbull and US President Donald Trump during their planned bilateral meeting, with the Prime Minister pushing for an 11-nation Trans-Pacific Partnership deal to be finalised at APEC, without the US, which withdrew from the pact…
The ability of world leaders to “advance trade liberalisation, contain protectionism and enforce international rules faces greater challenges than any time since the creation of the multilateral trading system in the 1940s”, Mr Turnbull said in a speech in Perth…
“The economic modelling suggests that if tariffs on manufacturing imports were raised such that there was a 10 per cent price increase in such products across the world, real GDP in Australia would be 1.8 per cent lower; while global real GDP would be 3.5 per cent lower.
“If tariffs on all merchandise imports were increased to raise all import prices by 10 per cent, real GDP in Australia would be 2.2 per cent lower, and global real GDP 4.1 per cent lower.
“The short-term impacts of tariff increases would see job losses in Australia, while over the longer-term, real wages for Australian workers would be lower, in turn cutting household consumption and Australian living standards overall.”
The report is the first modelling since 2009 to evaluate Australia’s trade contribution to GDP and living standards. It found average household income in Australia was $8448 higher last year than it would have been without trade liberalisation, with real GDP 5.4 per cent higher.
The modelling also showed that investment was 11.7 per cent higher, real wages 7.4 per cent higher and prices 3.4 per cent lower due to trade liberalisation that began in the 1980s.
“Increasing protection sees distortions being introduced into the Australian economy, culminating in capital earning a lower return and therefore making Australia a less attractive destination for investment,” the report says.
“In the short run, increased protection could lead to a decline in employment of up to 2.2 per cent, or up to 270,000 jobs…
“Lowering the barriers to free trade has made Australians richer and our economy more competitive. This independent study is a timely reminder of trade’s benefits and shows why the Turnbull Coalition government is committed to further liberalisation and more trade agreements.”
Earth to Malcolm Turnbull: the original TPP, negotiated by your government in late-2015 (but junked by the Trump Administration), was the antithesis of “free trade”. Why? Because it contains a whole bunch of measures, like the strengthening of patent and copyright laws, as well as controversial investor-state dispute settlements (ISDS) provision that would permit foreign corporations to sue sovereign governments.
But don’t just take my word for it. Here’s Nobel Prize winning economist, Joseph Stiglitz, speaking about the TPP in a recent episode of Planet Money:
Interviewer: So is the TPP even a trade deal?
Stiglitz: Not really. It’s mostly about other things than trade.
Interviewer: So is it possible to be pro-free trade but anti-TPP? Is that a consistent view?
Stiglitz: Yes.
Stiglitz went much further in another interview on CNN Money:
“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”.
The bottom line is that 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.
And yet the Turnbull Government and other vested interests enthusiastically embraced the TPP with both arms under the charade of “freetrade, jobs and growth”. This comes despite modelling showing no material benefits, and maybe even costs, for Australia.
For example, modelling by the Global Development and Environment Institute at Tufts University has found that the TPP “would lead to losses in employment and increases in inequality”, with employment in Australia contracting by 39,000 jobs.
Instead of relying on questionable (and irrelevant) paid for modelling by the Centre for International Economics, how about the Turnbull Government instead seek the view of a genuine expert – the Productivity Commission (PC) – which has spent decades examining the whole free trade issue?
Moreover, how about getting the PC to rigorously evaluate those so-called “free trade agreements” (FTAs) already concluded and putting processes in place to avoid pitfalls in the future?
Because, the available evidence suggests that the FTAs negotiated by this and past Coalition Governments have been a failure.
Back in 2010, the PC comprehensively criticised Australia’s FTAs, noting:
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”.
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”.
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.
Senior academics also recently warned that FTAs have become less and less about opening markets and more about entrenching monopolies.
None of the above are an endorsement of FTAs, nor suggest that Australia should double down on more agreements. Quite the opposite in fact.
My overall view is that FTAs have the potential to offer modest trade benefits if executed well. However, this requires the Government to implement a proper process around negotiations, including engaging the PC to analyse trade deals for their equity and efficiency impacts both before and after negotiations are completed.
To date, the Coalition has shunned the PC altogether and instead forged ahead with FTAs in an ad hoc, evidence free, manner for political rather than economic reasons, and without due regard for longer-term consequences. Accordingly, these agreements have resulted in poor outcomes for the Australian people.
Rather than trying to sell us on the virtuous benefits of “free trade”, the Malcolm Turnbull should focus its efforts on putting rigorous processes in place to ensure future FTAs actually deliver as promised for the Australian people.
Doing the same thing over and over again, and expecting a different result, is the definition of insanity.
