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FTAs protectionism in disguise: Garnaut

Inside Business, ABC, Australia

FTAs protectionism in disguise: Garnaut

24 April 2005

Reporter: Alan Kohler

ALAN KOHLER: This week, to the fanfare of headlines trumpeting talk of a $24 billion bonanza, Australia and China announced the start of formal negotiations on a free trade agreement (FTA). However, the Federal Government’s pursuit of FTAs all over the globe has its detractors who argue that they are a sort of Trojan horse for protectionism and they also damage relations with countries that we don’t have deals with.

I caught up with one of the most trenchant critics, the former ambassador to China and eminent economist, Professor Ross Garnaut.

Ross Garnaut, there’s an absolute blizzard of free trade agreements being studied and negotiated at present - Indonesia, China, Japan - the Government says all of these are worth doing. Do you agree with that?

PROF. ROSS GARNAUT: Well, I think it’s a big pity from an economic point of view that we’ve got this proliferation of preferential arrangements - lots of problems, lots of trade diversion, big problems of rules of origin, big diversion from the unilateral and multilateral trade liberalisation that would bring the most benefits.

ALAN KOHLER: I suppose you can’t fault the Government’s commitment to engaging with Asia and also the World Trade Organisation (WTO) process does seem to be going nowhere.

PROF. ROSS GARNAUT: Well, the WTO system is actually working. It’s been in the last few years stronger and more effective than it’s ever been. Even if there is no further progress in the Doha round, the existing system is worth preserving, and quite a lot of things are happening that’s weakening the system as evidenced in the recent report to the director-general of the WTO.

ALAN KOHLER: Just going back to the US free trade agreement - which is the only one we’ve actually done lately - do we know yet whether it was worth doing, whether there have been any benefits?

PROF. ROSS GARNAUT: Well, we’ve only got the very early figures, we’ve got January figures. Total United States imports have grown quite rapidly over the year to January. Imports from Australia have fallen by one-eighth if you look at the US data.

ALAN KOHLER: So it hasn’t worked at all?

PROF. ROSS GARNAUT: Well, one would hope that things could not have been worse if there had been no FTA.

ALAN KOHLER: Do you believe the free trade agreements are actually protectionist because of the way they set up preferential bilateral arrangements?

PROF. ROSS GARNAUT: Yes. In any FTA, as economics has known for a long time, there are protectionist elements and free trade elements. The free trade elements is when low-cost production in one country pushes out high-cost production in another. Trade diversion is where the preference leads you to take imports from a high-cost country - your preferential partner - rather than a low-cost country. Trade diversion is protectionist.

In practice, when you negotiate a bilateral FTA, you emphasise the protectionist elements and not the free trade elements. We saw that in the discussions in China this week, where the Chinese were at pains to say that they were on the defensive on agriculture and would resist liberalisation there. We were at pains to say we were on the defensive in textiles and would resist liberalisation there. So we’re systematically promising not to do the things that would bring us gains, that would move us to free trade, but it’s open slather on the protectionist element.

ALAN KOHLER: Yes, but the joint feasibility study on the Chinese free trade agreement details benefits to Australia of $24 billion and $83 billion for China over 10 years. Do you agree with those figures and, if it’s true, that’s worth having, isn’t it?

PROF. ROSS GARNAUT: If you had completely free trade, if we from - I think it was from July 1 in some early year - had completely free trade in both directions, if you had all of those changes, all of those liberalisations in regulatory arrangements in services that are assumed, you might get something like that. You’d have to set against that the systemic costs, the costs of breakdown of the international system to which we referred earlier on. The report wasn’t asked to look at those systemic effects, and of course doesn’t do so.

ALAN KOHLER: Is a free trade agreement worth having with Japan if it doesn’t include agriculture?

PROF. ROSS GARNAUT: Well, you know my doubts about FTAs in general, Alan, but the main reason for doing one with China is that we’ve done one with the US. If we let in US goods duty-free and not Chinese, we are discriminating against a major trading partner. If and when we do one with China, we’ll be discriminating against Japan in favour of both China and the US and...

ALAN KOHLER: Well, that would suggest it is worth doing something with Japan as well then.

PROF. ROSS GARNAUT: Well, for that same sort of reason, but hopefully we see all of these things as transitional things on the way to genuine free trade.

ALAN KOHLER: Isn’t the real world that an FTA is simpler and easier to negotiate than the immensely complicated WTO rounds?

PROF. ROSS GARNAUT: Yes, preferential trade agreements, so-called FTAs, are easier to negotiate for the same reason that governments find it politically easier to introduce protection than free trade. You establish vested interests, you give special benefits to particular firms, and they like it, and governments seem to be doing something. But the fact that it’s easier doesn’t mean to say that it’s a good policy or that it increases welfare of Australians.

ALAN KOHLER: Do you think this proliferation of free trade agreements will damage or even mean the end of the WTO process?

PROF. ROSS GARNAUT: There’s no doubt that it’s already damaged it, and we can see that in that very important report to the director-general of the WTO by eminent trade policy people and economists from around the globe. That’s already happened. Proliferation of FTAs from now on can make things worse. At some point, the damage that this is doing will become more apparent, and you will begin to build the political will to do something about it. But I’m afraid that things will have to get worse before they get better.

ALAN KOHLER: We’ll have to leave it there, Ross Garnaut. Thanks very much for joining us.

PROF. ROSS GARNAUT: OK, Alan. Good to be here.