MB has long derided Australia’s ‘free trade agreements’ (FTAs) for their complexity and deleterious efficiency impacts, their anti-competitive measures around intellectual property, as well as some FTAs containing clauses enabling trading partners to sue sovereign governments (called Investor-State Dispute Settlement or ISDS).
On Friday, the University of Chicago’s Pro-Market Blog published an interview with a leading US expert on trade and globalisation, Harvard’s Professor Dani Rodrik, whereby he explained why so-called free trade agreements (FTAs) have become political documents that “often serve rent-seeking by politically well-connected firms”:
Q: In a recent paper, you argue that contrary to the prevailing view among economists, trade agreements are the result of rent-seeking by politically well-connected firms. Can you elaborate?
Trade agreements are political documents. Special interests, lobbyists, industry, and labor groups have always played a critical role in shaping them. I think what has changed is not that trade agreements involve special interests and political horse-trading, but the balance of interests.
The traditional economists’ story about trade agreements is that they tend to restrain or rein in protectionist interests. In this story, trade agreements are political, but essentially are a way of limiting the influence of groups that would close off the economy from the rest of the world. I think economists haven’t sufficiently appreciated that the world and the nature of trade agreements have changed and that the balance of interests, in terms of who shapes these trade agreements, has also changed. I think there is less and less reason to believe that, on balance, trade agreements are pursuing what an economist might consider the gains from trade or appropriate social objectives and are more and more being shaped by the agenda of special interests.
Q: When did this change occur?
I think the watershed event was probably the 1990s. The creation of the World Trade Organization, for me, is the turning point. In the ’50s and ’60s, the world was very heavily protected, economies were insulated from each other, and the struggle then was to push against the prevailing protectionism. By the 1990s, the world economy had already become fairly open, and the WTO marked a fundamental transformation in the nature of trade agreements. They changed from trying to remove barriers at the border—the traditional import tariffs or quotas that economists tend to think about when they talk about trade barriers—and instead began to focus increasingly on behind-the-border rules and regulations, things like investment rules, rules on subsidies and health and safety, intellectual property rights.
These are all areas where the economic benefit of global agreements has to be scrutinized very, very carefully because there is no natural benchmark. It becomes very difficult in these new areas to determine whether more trade agreements and international rules is a good thing or a bad thing.
By fetishizing globalization and exaggerating its benefits and understating its downsides, we have essentially privileged and prioritized a set of powerful interests. The fact that pharmaceutical companies or foreign investors find it so easy to get what they want is in part because of our existing narratives, or existing ideas, about how the world does or should work…
Q: Who are the rent-seekers empowered by trade agreements?
I’d say there are three groups, when it comes to trade agreements. First, financial institutions, banks; second, multinational institutions; and third, pharmaceutical companies. We see the impacts of these groups in investment rules, financial services agreements, intellectual property rights.
The Productivity Commission has similarly noted 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”, while also calling on the “final text of an agreement to be rigorously analysed before signing”.
I will also add that recent surveys show that FTAs have been next to useless in a commercial sense for Australian small-to-medium sized businesses, primarily because of their immense complexity, their lack of consistency between FTAs, and the high administration costs attached to satisfying FTA requirements.
So why is the federal government so gung ho about signing more FTAs? Presumably it is because it gives them something to spruik to voters – a ‘deliverable’ – as well as buys them good grace from certain vested interests within the business community that may benefit from specific clauses at the detriment of the broader community.
