May 4th 2002

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Articles from this issue:

COVER STORY: The limitations of American power

When will John Howard step down?

BANKING: Kiwibank takes off in New Zealand

QLD: Philippines banana imports endanger Australian industry, wildlife

Straws in the Wind: Monocultured multiculturalism / Reporting China

LAW: High Court ducks IVF issue

ALP must put forward alternative program: Doug Cameron

Refugee stance defended (letter)

Banks' deceptive conduct (letter)

Tax holidays for multinationals (letter)

MEDIA: Shoot the messenger

The promise - and pitfalls - of free trade

What Gusmao's election means for East Timor

COMMENT: Holocaust taunts misguided

BOOKS: Bias: A CBS Insider Exposes How the Media Distort the News, by Bernard Goldberg

Demons and Democrats: Kim Beazley's view

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The promise - and pitfalls - of free trade

by Colin Teese

News Weekly, May 4, 2002

Free trade agreements are bobbing up like mushrooms in a fertile field. And Australia is in the middle of it. The danger for us is that some of the mushrooms on offer threaten to poison our economic well-being, and that the Australian Government and the advisers it listens to don't seem to be able to tell the difference between the good and the bad.

A number of so-called free trade agreements have been concluded in recent times. Others are in contemplation. Most involve Australia, if not as a direct participant, then as an international trading nation.

The first thing to be said about these agreements is that most, though not all, are concerned with the trade in goods. And second, it is extremely doubtful whether any of them fully comply with the rules of the World Trade Organisation and of the General Agreement on Tariffs and Trade from which the WTO derived its basic rules.

Article 1 of GATT 1994, which has been carried into the WTO, is the organisation's most fundamental rule: in effect, it requires that concessions and benefits extended to one Member Country must be extended unconditionally to all other Member Countries.

Shorthanded, Article 1 is called the Most Favoured Nation (MFN) rule. In theory, at least, the MFN rule is what makes WTO membership valuable to smaller countries.

Exceptions to Article 1 may be made in cases where members are engaged in the creation of 'customs unions' or 'free trade areas'. These arrangements, notwithstanding that they obviously discriminate against those not party to them, are seen, nevertheless, as beneficial to overall trade expansion, and are therefore allowable.

Strict conditions do, however, apply to the creation of these arrangements. What amount, effectively, to discriminatory concessions between parties, may be exchanged, providing that their creation does not result in any increased protection against those outside the arrangements.

There is a second consideration. Any 'customs union' or 'free trade area', to qualify for the exception, must cover substantially all of the trade between the parties.

It is not possible, for example, under the guise of creating a free trade agreement, for parties to agree to exchange concessions covering only a few selectively chosen items of trade.

Such arrangements may be concluded, but only on the basis that any concessions exchanged are also afforded to all WTO members, in accordance with the MFN rule referred to earlier.

This is a necessary safeguard against members using the guise of a free trade agreement to cover up what is nothing more than a narrow exchange of preferences between parties to the exclusion of others.

The WTO understanding on the interpretation of the relevant rules relating to 'customs unions' and 'free trade areas' is perhaps stretching credibility when it suggests that the number and importance of legitimate such arrangements has grown enormously since the GATT was formed in 1947.

As mentioned earlier, it is doubtful if any of those created fully comply with the rule that requires that they cover substantially all of the trade of the parties.

The EEC - now the European Union - was created in 1956 when six countries (France, Germany, Italy, Belgium, Luxemburg and the Netherlands) decided to create a Customs Union. It was the first, and is perhaps, the most perfectly created customs union so far, in terms of conformity with the rules of the GATT (forerunner of the WTO).

The newly created Community of six countries established a common tariff and other trade barriers against the rest of the world, covering 100% of the trade of all six Member States (as they were called). In that respect, it achieved what has, perhaps, not been accomplished by any other free trade agreement since.

The creation of the Common Market was, however, deficient in one important respect. And the deficiency was never corrected. Free trade areas must conform to the stricture that they do not create new barriers to trade against outsiders.

Much debate went on within the GATT on this point, most of it involving this writer, but there was no resolution of the matter.

It is a matter of record that the GATT, for pragmatic reasons, never ruled for or against the legality of the creation of the EEC.

There was no agreement in support, and a ruling against would have resulted in the six Member States leaving the GATT - which would have destroyed the organisation. (That of course once again underlines the point that the powerful can and do bend the rules of the organisation to suit their purposes.)

The same is probably true of the North American Free Trade Agreement (NAFTA); since agriculture is not part of it, then it clearly does not cover substantially all the trade - at least of the United States.

Therefore, all of its benefits should be afforded to all members of the WTO. But it would be unwise to bet upon the possibility of taking such a proposition successfully through the WTO. Not merely because the US is rich and powerful, but because others, too, including Australia, are not above concluding similar arrangements!

For example, while insufficient information is available to opine fully on Australia's Free Trade Agreement with Singapore, it is doubtful if all of the trade of both countries is covered.

As to the proposal for a Japan/Australia Free Trade Agreement, which has Australian business firmly behind it, well, we know that could not possibly qualify.

It has been said from the outset that it will not cover agriculture, 'at least in the beginning'. The question to be asked is: if agriculture is not covered how could it possibly benefit Australia?

We know the EEC agreement has denied us some of our rights under the GATT, and that NAFTA has similarly undermined our rights in the WTO. Why then do we praise such arrangements, and why does the government seek to emulate them?

Only the Government can answer those questions. And we should not expect too much from them. But perhaps we are entitled to expect them to listen to those who might point the way to a different direction.

Meanwhile, this much may be concluded. If Australia's trading interests have been harmed by these departures from WTO rules, it is certainly reasonable to assume that the interests of other poorer countries, members of the WTO, will have been even more seriously affected.

OXFAM certainly believes so. Its findings - which relate to the trade in services, but are equally applicable to the trade in goods - and their relevance to Australia, and to the future of the WTO, will be considered in the next issue of News Weekly.

  • Colin Teese

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