INTERNATIONAL TRADE: by Colin TeeseNews Weekly
Promised benefits from free trade fail to materialise
, July 11, 2009
Avid economic fundamentalist Dr Andy Stoeckel, head of the Centre for International Economics (CIE), is at it again. He proclaims that every Australian family has been made $3,000 better off every year by our embracing "free trade".
The CIE has long been a voice of those arguing that farming and manufacturing should be cut free of industry "protection" and left helpless before the full-face of international competition.
It helped the Department of Foreign Affairs and Trade (DFAT) to convince gullible trade ministers - and former Prime Minister John Howard himself - that the various so-called free trade agreements (FTAs) constituted a legitimate part of the overall movement to liberalise trade.
Along the way its researches routinely concluded that specific bilateral FTAs greatly benefited the Australian economy and its consumers. Naturally, the CIE anticipated spectacular benefits to Australia from the bilateral Australia-United States FTA.
But now, thanks to a Commonwealth Parliamentary Library background briefing by Michael Priestley on FTAs (see reference below), the Australian public have access to figures with which they can assess what has really happened and balance it against what was predicted. Almost nothing has gone the way the CIE led us to believe it would.
So-called free trade agreements (FTAs) have proliferated in the past decade or so. In 1998 there were only six in the Asia-Pacific region. By the end of 2006, there were more than 60 FTAs, either completed or in various stages of negotiation.
The Parliamentary Library briefing reminds us, in passing, that FTAs are not favoured by the World Trade Organization. Indeed, so far, the WTO has approved only one.
This is hardly surprising. All bilateral "free trade" agreements have been characterised by the exclusion of sensitive industries. In contrast, free trade arrangements, to meet WTO rules, must comply with an overriding basic condition: their product coverage must cover all trade. There may not be any significant exclusions.
In fact, on a strict interpretation of that condition, only the European Union qualifies as a genuine FTA, since it covers all the trade between the parties. Paradoxically, the EU itself has, in recent years, concluded with outside governments bilateral agreements that contain significant exclusions.
WTO members like to convince themselves that they are meeting WTO rules, by phasing out over long periods the restrictions placed on sensitive product categories.
Non-trade issues are sometimes as important as trade in some agreements, and sometimes the two are inextricably connected. As to the importance of non-trade issues in FTAs, just one example from Australia's FTA with the US is enough to illustrate the point.
Shortly after our former Government took a decision to support the 2003 US invasion of Iraq, we were still holding out for a better overall deal. (Later, we caved in on all the issues important to the US, and made only futile efforts to hold the line on access to the US for our dairy sugar and meat exports).
Perhaps there was an unstated expectation that our support for the US in Iraq would get us a better FTA. That hope was immediately dashed when US Deputy Secretary of State Richard Armitage remarkably stated in public that the US believed that an ally as staunch as Australia would want to co-operate with Washington's wishes for the FTA that the US wanted with Australia. He was talking specifically about the tough stand we had been taking on holding on to the status of our pharmaceutical benefits scheme.
The message was clear. According to Armitage, being an ally meant giving in to US demands on trade. The US got most of what it wanted on pharmaceuticals.
These considerations aside, the Parliamentary Library has much to tell us about the balance of advantage for Australia and its trade partners in the FTAs that we have so far concluded.
Since 2003, we have concluded bilateral agreements with Singapore, the US, Thailand and Chile. None of these agreements allows for full exchange of benefits across the entire range of our trade to apply immediately.Strict conditions
The trade in non-controversial or non-sensitive areas is, of course, immediately liberalised in all the agreements. But the more sensitive areas, where the real advantages are exchanged, are subject to strict conditions: trade benefits are usually phased in over periods of five, 10 or 15 years.
Let us consider how Australia has fared in the agreements so far concluded. With Thailand in 2004, bilateral trade has doubled. But the deficit on our side has increased by $A711 million to $A3.5 billion. The main sources of gain for Thailand have been in computers (up 105 per cent), cars (up 317 per cent) and household goods (up 93 per cent).
On the Australian side, exports are up 44 per cent - mainly comprising oil, aluminium, gold and copper. Do we really need an agreement to sell these goods to Thailand?
And does not the increase in computer and car imports from Thailand probably arise - given the bilateral agreement - because we now source from Thailand much of what we previously bought elsewhere? If so the trade agreement has not so much promoted new trade, as shifted its direction.
Furthermore, we need to calculate how much of the overall increase in bilateral trade between Australia and Thailand is attributable to natural growth in the world economy, rather than to any trade agreement.
As to the bilateral trade agreement we concluded with Singapore in 2003, the Parliamentary Library reminds us that a study undertaken before negotiations began could identify no benefit to Australia from any bilateral agreement. Nevertheless we went ahead.
In the period since until 2007, bilateral trade between the parties increased from $A9.4 billion to 14.5 billion - mostly to Singapore's benefit. Our deficit rose from $A3.0 billion to $A6.5 billion - apparently due to a big increase in the price of refined oil we import from Singapore. No gains for Australia have been identified.
All that having been said, we should concede that the bilateral FTAs concluded with our Asian partners - at least from the Australian perspective - have been less concerned with narrow trade considerations than with wider diplomatic and regional issues.
As to the US, the 2005 bilateral agreement we negotiated with our most important ally is by far the most important, and most comprehensive, that we have concluded. Gains identified in advance singled out our agriculture and manufactures as the likely big winners.
Since most of the provisions for agriculture are being phased in over long periods, it is not yet possible to quantify the benefits to Australia.
Australia's motor vehicle exports, with a big tariff reduction, were also expected to gain. Yet, in 2006 and 2007, our car exports to the US fell 200 per cent from their 2004 peak. Vehicle parts exports also fell by 100 per cent.
We are now running a $A13.6 billion trade deficit with the US, and two-way trade has fallen to a record low of 9.5 per cent of total trade, down from 14 per cent in 2002. To be fair, this is probably because, despite the agreement, we are both sourcing more from lower-cost suppliers.
IMF officials are among the commentators who say that the agreement with the US has been against Australian interests. Nothing we know suggests otherwise.
Finally there is the agreement with Chile concluded in 2007. Trade with Chile is quite small, but since the agreement our deficit with that country has doubled.
So what can be said overall? Well, first, in every bilateral agreement thus far negotiated, the result for Australia has been a widening trade deficit - and, as well, in the case of the US, an actual fall in the overall trade flows.
How does all this sit with what is claimed by the Centre for International Economics? If all these agreements are so beneficial to Australia, how can we explain the fact that, in every case so far, our deficit with the partner countries has worsened?
The CIE insists, without explaining why, that our tariff-cutting and commitment to free trade over the last 20 years - has benefited each Australian family by $A3,000 per annum. Even if we take that figure on trust, we know it ignores the welfare costs of workers being laid off as a result of our shrinking manufacturing industry.
We also know, for certain, it takes no account of the $A60,000 of debt each Australian has accumulated since we began substituting imports for local manufactures.
Neither does the CIE discuss what has happened to manufactured exports. The Keating Labor Government, as well as cutting tariffs, also put in place arrangements to stimulate manufactured exports. These were dismantled by the incoming Howard Government - supposedly for cost-cutting reasons. Had they remained in place, and imports had maintained their growth path, the present debt burden Australians are now facing would have been very much less.
At the same time, as Melbourne industry economist John Legge has pointed out, 400,000 new full-time, well-paid jobs would have been created within Australia.
Many more full-time jobs and much less debt seem a better outcome than possibly two or three thousand dollars a year per family from the practice of free trade.
The Rudd Government claims to have identified the basic flaws in fundamentalist free-market economics. Good on them. But "free trade" is part of that fundamentalist equation.
The Government must accept the fact that a trading system that permits individual countries to accumulate large permanent surpluses or deficits on their trading accounts brings instability to the world economy. Indeed, that has been a major cause of the present world economic downturn. Free trade, without the means of stabilising currency relationships, promotes destabilisation.
Thus far, it has cost the world's consumers not millions, not billions but trillions, and with no end in sight. Talk about gains of a few thousand dollars here and there surely misses the point.Colin Teese is a former deputy secretary of the Department of Trade.
Michael Priestley, "Australia's free trade agreements", Background Note
(Parliamentary Library, Canberra), December 2, 2008.