OF MULTINATIONAL AGREEMENTS, BILATERAL DEALS, AND LOBSTERS, Australian Financial Review, 7 April
Growing up, one of my favourite television shows was Minder. Its lead character, dodgy salesman Arthur Daley, lived by the philosophy ‘You make contact with your customer. Understand their needs. And then flog them something they could well do without.’ Daley sold water-damaged umbrellas, dodgy cars, fake watches, and one-legged chickens (‘they're easier to catch’). He spent his life chasing ‘nice little earners’, and lived by the saying ‘the world is your lobster’.
I hadn’t thought much about Minder until I watched the Abbott-Turnbull Government claiming that its trade policy was the best in Australian history. As an economist, I’m a strong supporter of scrapping quotas and lowering tariffs. Alas, the Liberals measure success not in terms of cutting tariffs, but signing deals.
Just as anyone can sell a car in five minutes, anyone can sign a bilateral trade deal. The question isn’t whether the Trade Minister can get the handshake, it’s whether the agreement is in our national interest. And this is where things start to get murky.
When it comes to lowering trade barriers, economists agree that it’s better to strike worldwide agreements. As the Productivity Commission noted last year, ‘Well-founded unilateral reform based on most favoured nation and national treatment principles can afford larger and timelier economic gains than achievable through preferential deals.’
In 1994, when Labor Trade Ministers Peter Cook and Bob McMullan finalised the Uruguay Round World Trade Organisation deal, global tariffs were cut by one-third, and other nations were required to slash agricultural subsidies. The Industry Commission (the predecessor to the Productivity Commission) estimated that this global deal would add $4 billion to Australia’s national income every year. That’s about 2½ percentage points of extra growth every decade.
By comparison, bilateral deals have smaller benefits and bigger costs. Global trade agreements don’t have to concern themselves with where goods and services originate. But with a two-country deal, you need to carefully define what is meant by ‘made in Australia’. As trade economist Jagdish Bhagwati once warned, bilateral deals can lead to a ‘spaghetti bowl’ of rules. For example, the Korean Free Trade Agreement introduced 5,200 individual origin rules. Each of these rules adds to the regulatory burden on our exporters.
On intellectual property rules, many economists have pointed out that bilateral trade agreements may well be pulling in the wrong direction. If we want a more innovative economy, extending monopoly protection for patent and copyright holders is likely to be the wrong way to go. And that’s before we’ve considered the potential costs to the community of placing restrictions on our pharmaceutical benefits scheme.
Rather than keeping the process shrouded in secrecy Governments should ensure Australians are fully informed about the objectives going into trade negotiations and the results achieved. Why not conduct rigorous assessments of the economic benefits and of the social and regional impacts? As Productivity Commission chair Peter Harris puts it, ‘The net gains may be positive, but how would we know? Detailed analysis is simply not available.’
If anything should dampen the enthusiasm of those who like to spruik preferential trade agreements, it’s their history. In the decade before the 2005 Australia-United States trade agreement came into effect, our exports to the United States rose by 98 percent. In the decade afterwards, they grew by 47 percent – less than half the rate. While the Global Financial Crisis makes it difficult to draw strong conclusions, facts like these should give pause to those who argue that bilateral agreements will unleash a new wave of exports.
It’s not just Australia’s Productivity Commission that is warning that the benefits of preferential trade agreements may be overblown. In the United States, estimates of the impact of the Trans-Pacific Partnership range from a Petersen Institute study anticipating very small positive effects (half a percentage point of national income by 2030) to a Tufts University study projecting very small negative effects (minus half a percentage point of national income by 2030). As one economist points out, it’s very hard to distinguish either effect from zero.
Among those who have gone cold on free trade agreements is Nobel Laureate Paul Krugman, who says: ‘We should no longer buy the statistically strained arguments about free trade agreements delivering growth and jobs. The evidence just isn’t there’.
As Labor Shadow Trade Minister Penny Wong has argued, trade agreements have the potential to deliver benefits for Australians, but whether these benefits are realised depends critically on the quality of the deals negotiated by governments.
That great salesman Arthur Daley went off the air in 1994, the same year we signed the last big global trade deal. Today’s trade negotiations environment is undoubtedly different, but the tests we apply should be the same. We can’t afford to applaud press conferences – we must carefully scrutinise every trade deal to make sure it’s in the national interest. If you think every preferential trade agreement must be good, then Arthur Daley’s got a warehouse full of garden gnomes you’re sure to love.
Andrew Leigh is the Shadow Assistant Treasurer. His predecessor as Member for Fraser, Bob McMullan, signed the World Trade Organisation’s Uruguay Round on behalf of Australia.
A version of this opinion piece was first published in the Australian Financial Review on 7 April 2016.
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You only get a benefit from trade when there is a comparative advantage. Unfortunately most flows and global competition is based on artificial comparative advantage and unfair competition. In real life, trade is not based on economics. It is overwhelmed by social and political imperatives.
Hence the result we have today’