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FTAs: myth posing as policy

It's time to close the gap between trade diplomacy and economic reality.

Australian Trade Minister Steven Ciobo expects negotiations for a free-trade agreement (FTA) with Indonesia to be completed by November.

" The folly of approaching negotiations in this way is no longer in doubt, and the value of Australia’s free-trade-agreements is increasingly being challenged"

In view of the government's commitment to these agreements it is time to clarify the objective of trade policy, to review how Australia’s free trade agreements are being negotiated and to identify what needs to change.

Australia's experience in the Uruguay Round of multilateral negotiations confirmed its major gains from trade negotiations come from reforming its own trade barriers.

The government's goal in negotiating FTAs, however, is limited to gaining access to foreign markets.

As a result of this limited objective, the clarity of what is at issue in trade policy - to secure the gains in national wealth from engaging in trade on the basis of what Australia does best -has been translated into the language of trade diplomacy. And much gets lost in translation.

Allocative efficiency

In this approach, the ongoing gain at issue for Australia’s economy -improved allocative efficiency -has become the accidental result of what negotiators happen to agree about in the to-and-fro of negotiations, rather than a central objective in deciding which domestic barriers to offer in negotiations.

The folly of approaching negotiations in this way is no longer in doubt, and the value of Australia’s free-trade-agreements is increasingly being challenged-- most recently by the Queensland government, which believes they disadvantage Queensland export industries.

In each of the agreements completed to date the ‘scoping’ and ‘feasibility’ studies released prior to negotiations projected the maximum possible gains available for Australia. They did not -and could not - project what was actually achieved in the subsequent negotiations. In each case the outcome for Australia was limited to the gains from winning preferential access to (just some) external markets.

This meant the estimate of potential gains made available by the government at the outset conveyed nothing about what Australia achieved from the ensuing negotiations.

Yet in each case the studies prepared before negotiations began were the basis used to win public support for the agreements after they were signed, leaving us to conclude they reflected the negotiated outcomes for Australia.

As a result of this misleading process each agreement has received public support, because we have had no basis for questioning the myth each has brought enormous benefits to the economy.

That has now changed.

Reliable assessment

The Productivity Commission developed an analytical framework to assess the economy wide effects of the free-trade-agreement with the US (AUSFTA) in 2010 but at that stage not enough time had passed to enable a reliable, evidence-based, assessment of the agreement's impact.

Shiro Armstrong, a respected ANU economist, has now used the analytical framework developed by the Productivity Commission, and the decade of performance data now available since AUSFTA came into force, to conclude "the data shows....Australia and the United States...are worse off than they would have been without the agreement."

He has suggested the agreement was responsible for “reducing — or diverting — $A53.1 billion of trade with the rest of the world."

Armstrong's colleague at the ANU, Peter Drysdale (the architect of APEC), has measured that cost in terms we can all understand.

"Australia alone has suffered trade losses the annual equivalent of the current price of around 18 Japanese, German, Swedish or French submarines through this deal," he says.

This does not mean a strong trading relationship with the United States is not in Australia’s interests. But it does mean such a relationship, offering the substantial benefits promised, has not emerged from the bilateral agreement negotiated.

As economist Saul Eslake has reminded us, Australian economists “have long recognised that most of the benefits from trade liberalisation come from reducing Australia’s own trade barriers, rather than from foreigners reducing theirs — notwithstanding the way trade negotiations are usually portrayed by governments as a matter of reluctantly making ‘concessions’ to foreigners … in exchange for them making ‘concessions’ to us.”

Eslake’s message was confirmed by Australia’s approach in the Uruguay Round. Australia had reduced its trade barriers unilaterally during the 1980s — not to meet its commitments in the Uruguay Round but for purely domestic reasons — to secure the gains in national wealth from improving allocative efficiency.

Those unilateral reductions were subsequently offered - and accepted - in Uruguay Round negotiations to meet Australia’s market opening commitments. That produced the win-win outcome Australia should be seeking from all trade agreements.

When we fail to structure our market opening offers to improve domestic allocative efficiency, by reducing the barriers protecting Australia’s less competitive industries, we forgo the major gains from negotiations.

These efficiency gains strengthen the economy not by enabling us to "produce more" (that is, not by doing more of what we are already doing) but by moving from things we do less well to those we do better. 

Worthwhile

In negotiating the FTA with the United States, for instance, Australia gained no worthwhile access for beef (in which we are world competitive) for the next eighteen years, but secured immediate and unrestricted access to the US market for Australia’s motor vehicle industry (one of its least-competitive industries).

If we are to close the gap between trade diplomacy and economic reality, we need to respect three lessons from experience : first, the major gains available from trade agreements depend on what we take to the negotiating table, not what we hope to take away from it;  second, liberalising through trade negotiations cannot be pursued simply as an extension of foreign policy ; and third, as the Joint Standing Committee on Treaties (JSCOT) has recommended on a number of occasions, future agreements should be subject to cost-benefit analysis before ratification. 

The Department of Foreign Affairs and Trade (DFAT) has defended its limited role in negotiating access to external markets on the grounds the scope for reducing Australia’s own trade barriers has been exhausted.

In the same year as this defence was published, in October 2015, the Productivity Commission (PC) reported assistance to Australian industry (that is, remaining trade barriers) exceeded $A17 billion.

Australia’s tariffs are now quite low, but the PC's assessment confirms non-tariff "behind-the-border" barriers are now the major part of those remaining barriers. These can only be removed as part of domestic reform.

In defending the secrecy with which trade policy has been conducted negotiators argue public involvement would compromise their position in trade negotiations. But there is no conflict between the need for secrecy during negotiations and a Productivity Commission involvement which introduces a public input to negotiating agenda.

Both objectives can be met by a process in which the Productivity Commission conducts a public inquiry and reports on Australia’s market opening offers before negotiations get under way. The Commission’s report would be released only when negotiations were complete, but before future agreements are ratified.

This modest change would allow the community into the debate about trade policy. It would also remove the general disquiet about secrecy during negotiations, by providing a basis for parliamentary and public scrutiny of the outcome before future agreements are ratified.

The change has been supported on several occasions by Parliamentary committees reviewing free-trade- agreements. When it was recommended again recently by the Joint Standing Committee on Treaties,  trade minister Ciobo formally rejected it on the government's behalf.

The limitations of the present approach, which is now enshrined as government policy, cannot be waved aside as of little consequence. Each new negotiation provides an opportunity for economy-wide gains which enhance national welfare.

Why wouldn’t Australia seek to benefit from those opportunities, as it did in the Uruguay Round?

Bill Carmichael is former chairman at the Industries Assistance Commission

Paul Kerin is an Adjunct Professor, School of Economics at the University of Adelaide

Glenn Withers is a Professor of Economics at ANU and UNSW

Greg Cutbush is a Visiting Fellow, ArndtCorden Department of Economics at ANU

Alan Mitchell is a former Economics Editor at Australian Financial Review

Martin Richardson is a Professor of Economics at ANU

Malcolm Bosworth is a Visiting Fellow, ArndtCorden Department of Economics at ANU

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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