TRADING BLOCS: by Colin TeeseNews Weekly
Risks in the US Free Trade Agreement
, November 15, 2003
The guiding light for the world trading system, the World Trade Organisation, is in trouble. The world is in the process of dividing into trading blocs, which will define the way countries relate to each other so far as trade is concerned.
The final outcome seems as if it will be three blocs: Asia, the American continent and Europe. This process is being assisted - perhaps even facilitated - by the proliferation of bilateral trade deals which will help consolidate the blocs. However, that story is too complicated for discussion here and must await consideration at another time.
Closer to home, and of more immediate importance, are Australia's trading relations. These appear to be heading into trouble and yet, nobody seems to have noticed or is concerned.PM trapped
Like almost every important aspect of policy our trading relations appear to be driven by the Prime Minister. And Mr Howard - without a strategy deliberated upon and refined through Cabinet discussion - appears to have been trapped into allowing foreign policy to drive trade policy. [And, having the Trade Department inside the Foreign Affairs Department doesn't help.]
Whatever may be the truth of all this, Mr Howard's attitude to trade policy seems, at best, undesirable, and, at worst, highly dangerous.
The matter of a Free Trade Agreement with the United States illustrates the point. At this moment, Mr Howard's idea appears ready to subordinate every other trade policy consideration to the conclusion of a FTA with the US: and it is easy to get the idea that he does not seem to care much what the content of such an agreement might be.
For example, he is reported as saying that an FTA is essential for Australia's economic health because the US is where the world's best economic growth will be for the next fifty years.
That is a breathtakingly simplistic view, and would still be so if the time horizon was ten years rather than fifty years. Indeed, there has hardly been a time in modern history when uncertainty has so much prevailed.
But one thing does seem clear. And that is that the dominant economies a decade from now will be in Asia. And those obviously will include China and India, and possibly, Japan. And if - as seems likely - those get together and form a bloc with the Aseans and the rest of North Asia, then they will constitute the most formidable economic and trading bloc on the planet.
The possibilities for these kind of outcomes are quite strong, if we go on the example of the recent past. In the study done a few years ago about economic growth rate in individual countries comparing 1960 to 1980 with the following twenty years, only India and China did significantly better in the latter twenty years.
And those remember, were the only major countries NOT to follow the economic prescription of free trade, privatization, floating exchange rates and open financial markets.
In other words, those countries which ignored the economic prescriptions of the English-speaking Western world have done better - in terms of economic growth - than those who followed them. And remember, the US was in the forefront of those countries leading the deregulationist push.
It is hard to imagine that the US, whether of not it clings to its present economic policies, can hope to match the combined growth rates of the emerging Asian countries.Internal problems
None of this is to suggest that such a trading bloc would not have its internal problems. China itself is wrestling with enormous economic problems without the additional difficulties of being part of a trading bloc.
For example, to keep living standards rising at the same modest rate the country has been enjoying over the last five years, it must create 23 million jobs per year. To give some idea of the magnitude of the problem, this is the same number of new jobs that the US has managed to create in the last fifteen years.
And of course if follows, if China is able to achieve anything like this job creation, then its output - which is already closing on that of the US - will certainly surpass it. And this could happen within five to ten years. China would then begin to rival the US as an economic power.
While all of these facts are staring us in the face, our Prime Minister is rushing to complete an FTA with the US before the end of the year; apparently because he fears if it is not finished by then nothing can happen until after the next US election.
True enough. But so what! The US will still be there after the election, and a new administration - whether or not led by George W. Bush - might not be any less keen to tie us into some kind of trade deal. Meanwhile, we will have had time to think the whole thing through.
Plainly, no agreement which takes account of our concerns can possibly be concluded in the next two months. As a negotiation, the conclusion of a Free Trade Agreement with the US requires the solution of enormous problems. The two economies are vastly different in size. And the trade is heavily imbalanced in favour of the US. Apart from farm products, precisely what is it we would expect to gain in new trading opportunities?
As far as the trade in goods is concerned, all of the concessions the US is asking could only increase the imbalance. Furthermore, the US is pressing for concessions in the area of trade in services which certainly would create and perhaps perpetuate a significant imbalance to the US's favour in a new area of trade.Dangerous policy
There is more. The US is asking for a relaxation of our quarantine rules. And the government is putting out signals that it might be willing to accommodate that request. Now this is extremely dangerous territory. The WTO rules expressly forbid the use of quarantine restrictions as trade barriers. We can't keep imports out on health grounds, if there is no danger to health. By signalling to the US that our quarantine regulations are up for negotiation in the context of an FTA negotiation, we are admitting they are being used as trade barriers.
The rest of our trading partners, no doubt, are watching closely, and the moment we settle something like that with US they will invoke WTO rules to obtain the same privileges. Our quarantine protection will be stripped away.
And what about agriculture? Remember, this is the one big area of possible gain for Australia. But Mr Howard must know - as do all of the rest of us - that the United States Administration and Congress (and both are needed for any deal) will certainly not take the necessary commitments to adjust their farm subsidy program and border protection to the point where we can have free access to the US market for our agricultural products.
So if none of this is possible to be settle definitively by the end of December what is the likely outcome?
The sensible result would be to acknowledge that a Free Trade Agreement cannot be concluded before the next US election and to postpone further discussions until after that election. However, that is the most unlikely outcome; our Prime Minister has politically committed himself to a result this year.
What kind of result might that be? The best outcome would be that the US President and our Prime Minister agree in principle on the shape of and content of an Agreement and leave the detail to be negotiated later by experts on both sides.
The nature of the difficulties in putting flesh on the bones of any such broad understandings settles at a political level would probably mean that the detail could never be agreed and the idea would lapse after a respectable time. Such a practice has been used before, but is unlikely to be acceptable on this occasion - at least to Mr Howard.Unfavourable
Something much more unfavourable is likely to emerge. The US has already hinted that outcomes on agricultural subsidies and access to markets should properly be left to the WTO. Which could mean an agreement with all the concessions on our side will be written into a firm and committing document.
At the same time what we want on agriculture will be at the mercy of the WTO negotiations. As we already know, the likelihood of getting what we want from those negotiations is very slim.
What would emerge for Australia from such an outcome is the worst of all possible worlds. All our concessions would have been given to the US alone, and could not be used as bargaining coin with, say, the EU, and what we gain in return would be nothing more than a WTO negotiation would have given to the entire world. Not much of a bargain.
Worst of all, suppose nothing comes out of the WTO on agriculture - a not unlikely scenario - what then would be the status of the US/ Australia Free Trade Agreement? Our concessions would be locked into the FTA with the US for no corresponding benefit.
Common sense certainly suggests we should put the matter aside for the moment. The question is: having a invested so much political capital in the idea of a Free Trade Agreement with the US, can our Prime Minister afford to let go of the idea?Colin Teese was Deputy Secretary of the Department of Trade