The Age | October 21, 2009
Free-trade deals are a losing gamble
HORSE racing’s spring carnival is upon us. It is the only time when most Australians bet on the horses. After our experience of the past year, many people would think that stockmarket and financial-derivatives investment is not that different to a punt on the Melbourne Cup. There are always a lot of predictions based on form analysis but most of us find a way to lose money on the day.
Free-market economics, free trade and free-trade agreements have been favourites of federal governments over the past 10 years. Much of their popularity has been based on predictions by modelling pundits who have been closely associated with the promoters, who, in turn, have had a lot to gain from public acceptance of the credentials of the policies regardless of performance.
We are unlikely to swallow the free-market economics argument again for some time. Yet its stable twins of FT and FTAs are still being followed with enthusiasm by Kevin Rudd and the Minister for Trade, Simon Crean.
It is instructive to review the performance of the FTAs that have been in place for a few years. Their past performances are a good indication of the likely outcomes of trade agreements in the pipeline.
Negotiations have begun for agreements with ASEAN countries, Gulf Cooperation Council members, China, Japan and Malaysia. Feasibility studies are in progress for Indonesia, India and Korea.
Our present FTAs were negotiated by the Howard government. They are the US Australia Free Trade Agreement (USAFTA, January 2005), the Thailand Australia Free Trade Agreement (January 2005) and the Singapore-Australia Free Trade Agreement (2003). For some reason we also have an agreement with Chile, which is our 41st largest trading partner.
The Department of Foreign Affairs and Trade commissioned economic modelling before we entered into the agreements. The modelled prospects of a substantial return for Australia have always been optimistic.
In every agreement the results have been dismal. A background note by the Commonwealth Parliamentary Library (December 8, 2008) provides data for each agreement up until 2006/07 and states: ’’Research suggests that FTAs offer little in the way of trade liberalisation and a shift to more liberal trade policies particularly in agricultural trade. Rather FTAs are used more often to promote other non-economic, diplomatic and regional interests.
’’Of the four FTAs currently in force a common feature has been their impact on trade flows. The FTAs were followed by higher trade deficits favouring the FTA partner country, long phase-in periods for free trade (particularly for agricultural trade) and negative impacts on the Australian economy which are related to trade diversion.
’’The anticipated gains for Australian exporters have fallen well short of estimates.
’’In light of the current experience it is questionable whether Australia’s FTAs on a country-by-country basis can speed up trade liberalisation by delivering benefits to Australian producers faster than through the multilateral process.’’
The Parliamentary Library note also made the point that the WTO frowns upon bilateral agreements and has approved only one of 300 bilateral trade agreement submissions made to it.
The DFAT has provided some updated import and export statistics for the trade agreement countries. The data for the past six years shows that our merchandise trade deficit on the current account with our FTA partners is a total of $127.5 billion. The trend of the deficit is inexorably upwards. Since 2004, our total merchandise trade deficit with our three partners has more than doubled.
If the consequential interest expense was included in the calculation, it is likely that the addition to our foreign debt from our trade with our FTA partners is more than $150 billion.
These agreements are a legacy of the Howard government. We should repudiate them. The proposal that we need a lot more FTAs with most of our major trading partners is a quick way to the poorhouse.
In February 2007, Mr Crean said "bilateral trade agreements are a very poor second cousin to multinational or regional agreements". By the time of the 2009 Labor Party conference, Mr Crean was a convert to bilateral agreements.
On the road to Mr Crean’s conversion, free-trade rhetoric and modelling has overwhelmed the evidence-based policy the Labor Government said must be the basis of its policy development. The negative deficits for our existing FTAs cannot be ignored. Why didn’t Mr Crean respond to the evidence from the Parliamentary Library?
The banks, the Government and the media finally agree that we have a foreign debt problem. The FTAs are making it worse.
The past form of the FTAs should convince the Rudd Government to ignore FTA modelling and rhetoric from special interests and find diplomatic solutions for diplomatic problems. The bilateral trade solution costs too much and delivers too little.
Martin Feil is a tax and industry policy consultant and a former director of the Industries Assistance Commission.