FOREIGN TRADE: by Colin TeeseNews Weekly
The perils of bilateral trade agreements
, March 26, 2005
The trading world's appetite for bilateral and/or regional trade agreements appears to be insatiable. And Australia has been part of it.
Dr Francesco Duina, a sociologist at Bates College in the US, has examined the reasons behind this development. As a preamble, he informs us that, between 1990 and 1994, the World Trade Organization (WTO) was notified of 33 new agreements. Between 1995 and 2000, another 100 were added to the list.
Some, of course, preceded the WTO - most notably, back in 1957, the European Economic Community, which later became the European Community and is now the European Union.Integration
Many of the later agreements have, no doubt, been of minor consequence, in some cases doing little more than integrating relatively small trading entities into much larger economic units. Some, however, have been of great significance. As Dr Duina and other observers have rightly noted, most are truly regional trade agreements (RTAs).
(He doesn't say so, but it is worth noting that our agreement with the US is quite obviously not an RTA.)
The best known of the RTAs are the North American Free Trade Agreement, covering the US, Canada and Mexico (NAFTA), and the European Union. Mercosur, bringing together a number of South American countries, is less well-known in Australia.
ASEAN, in our region, is, of course, an association of long standing; it is, essentially, a political rather than an economic grouping, though its parties appear in the process of moving towards closer economic integration. Significantly, Australia is not part of it.
These various groupings, and the others like them, share a number of important characteristics. Invariably, they are designated as free-trade agreements (FTAs), and, at the very least, number liberalisation of trade among their objectives. But all of them are prepared to compromise that principle if it threatens to cut across an important national practice or objective of a major party to the agreement. Our FTA with the US certainly underlines that point. The political and social imperatives of participants invariably overrule any free-market economy principle.
If all of this seems contradictory, don't be daunted. It becomes more easily understood by looking at the economic effects these compromises have on the parties to the agreement.
Dr Duina neatly illustrates the point about impact on the economies of the parties by reference to the differing treatment of dairy products in the RTAs of Europe and South America, though the differences are not driven entirely by economics.
Economic efficiencies may suggest that the dairy market should be standardised - for example, that specific identification should not be given to regionally-based cheeses such as, say Brie in France and Gorgonzola in Italy.
The member states of the EU, when they decided to associate back in 1957, ignored that stricture. Because regional considerations were deemed more important than economics, the EU's rules of association specifically protect the identity of the Union's cheeses, and many other products. The reasons for this are associated with the special standing given to agriculture, particularly in France and Italy, but also elsewhere in the EU.
The practice does, however, have a direct economic impact. One important consequence is that, in practice, dairy factories in one country don't expand into another. They don't because the goods they produce are specifically tied to a location and cannot be duplicated elsewhere.
By contrast, the South American RTA has standardised dairy products and dairy factories are setting up outside their originating countries.
The EU makes no apology for its practice in that it keeps agriculture well protected. It could also have explained that the creation of the EEC, and its later evolutions into the EU, could never have occurred without this protectionist policy.
It's no wonder that these important RTAs take so long to negotiate. And, as far as Europe is concerned, it underlines, once more, the utter futility of our attempts to open up the EU market to our exports of agricultural products. If one member state is protected against another for agricultural and social policy reasons, how can mere outsiders hope to crack the barriers?
Now all of this is highly relevant for Australia, and especially for the way it has approached the idea of so-called free-trade agreements - and even more so, as we approach the possibility of negotiating an agreement with China.
Most of the agreements Australia has so far negotiated - except the recent one with the US - have been regional in character. And, it should be noted that, of the most worthwhile and successful RTAs, all have involved more than two countries. There have been reasons for this, of course. One of the important purposes of getting together is to strengthen the collective bargaining position of individual members of an RTA - in other words to enhance their economic power.
Australia's RTAs have been concluded bilaterally with certain of our Southeast Asian trading partners. It therefore follows that, in all instances, we have denied ourselves many of the benefits of wider associations.
And we are not learning the lesson. All of the agreements we currently have in the pipeline are bilateral. By far the most important of these are the plans our Government has to advance towards a so-called free-trade agreement with China. Following statements, initially by the Trade Minister, and more recently by the Prime Minister, the media have taken hold of the idea: and, as usual, with more favourable attention than the proposition deserves. And, as a corollary, with that attention has come an overstatement of the possible trade benefits which might flow in our direction.
In fact, to a careful observer, the way the Government has floated the idea seems fraught with dangers - both economic and political. How, for example, given our security and economic links with the United States, do we imagine we can draw closer to China without opening the possibility of a major conflict of interest?
Certainly, we will not be allowed to fall back on the old idea that trade and politics are separate. Neither of the interested parties will permit that.
In a recent Financial Review
(March 14, 2005), columnist Geoffrey Barker took up certain of the political aspects of this problem. He has pointed to the fact that the Chinese are about to pass legislation which will give them a legal basis for taking action to recover Taiwan. Nobody is yet suggesting that the Chinese have any imminent intention of doing so; but supposing they did, we would be left with the prospect of offending one or other of our great, powerful friends.
If we are serious about drawing closer to China, would it not be wise for the Government to have a clear idea of how we would deal with such a circumstance? And, while all of this has been going on, what have we heard from the Opposition, whose leader usually hardly knows how to stop talking? Not a single word.
Nothing coming out of ministers' mouths is in the slightest bit reassuring. Minister for Trade, Mark Vaile, opened discussion with an amazing statement. There would, he insisted, be no outcome without agriculture, and the Chinese were well aware of that. Does the minister really think he has the Chinese on a string? Presumably those remarks were intended to capture the support of Australian farmers, for the idea of a trade agreement.
The question for Mr Vaile is whether farmers' memories are short enough to forget how he failed them in negotiations with the US. And will they believe he can achieve with China what he was unable to do with the US?
The Prime Minister's remarks were no less unsettling. In appearing to elaborate on Mr Vaile's remarks on agriculture, he seemed to let a rather smelly cat out of the bag.
Mr Howard assured us that, in our joint examination of the feasibility of an agreement, the Chinese at first wanted no part of negotiations on agriculture or services. But they had been persuaded to change their minds, when he suggested the possibility of offering them recognition as a market economy. In the Prime Minister's own words, "We have to be pragmatic about these things."
There are good reasons why we should be concerned about the Prime Minister's "pragmatism". Pragmatism got us an agreement with the United States, giving the US free access for its agricultural exports to Australia in return for almost nothing for our farmers in the US.
And may not Mr Howard's latest example of pragmatism, perhaps unwittingly, deliver China a pearl beyond price? So far they have been denied, rightly, the advantage of market economy in their important markets.
Our Prime Minister's pragmatism was signalling to the Chinese that, even though they were not properly a market economy, he was prepared to recognise them as such and afford them, among other things, all the benefit of dumping rules which WTO rules reserve for genuine market economies.
One wonders whether this concession has been discussed with our other powerful friend, the United States, who, along with the European Union, has refused to recognise China as a market economy.
As far as Australia is concerned, affording China market economy status would expose Australian manufacturing and farm industries to the full weight of dumped Chinese imports without adequate protection.
This is hardly the way to encourage local production, at a time when it is already hard hit. And remember we need its export performance if we are ever to overcome our current account deficit problems.
No less important is that all this is being offered to China without our ever being told what will be the substantial gains for Australia.
Given that our main exports to China are chiefly raw materials, our minerals exports won't be materially affected, whether or not we conclude a trade agreement with China.
- Colin Teese is former deputy secretary of the Department of Trade