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Trading Places: Some Perspectives on Australia’s Participation in Regional Free Trade Agreements

Tuesday, 31 March 2015  | Amar Breckenridge

The renowned Indian economist Jagdish Bhagwati once wrote about the “spaghetti bowl” of regional trade agreements. That is, treaties concluded by two countries or a group of countries in order to cut trade barriers between themselves. He argued that the increasing number of such deals—over 600 have been notified to the World Trade Organisation—made it difficult to untangle their effects. Nearly two decades after Bhagwati’s words, the spaghetti bowl seems to have become a veritable alphabet soup: trade negotiators are currently scurrying around the globe trying to negotiate the Trans Pacific Partnership (TPP), The Transatlantic Trade and Investment Partnership (TTIP), the Regional Comprehensive Economic Partnership (RCEP); the Pacific Agreement on Closer Economic Arrangements (PACER), and many more. Australia is currently involved in six such negotiations.

Negotiations such as the TPP have been dubbed “mega-regionals” because of the large number of countries involved, and their economic clout. In Australia, the TPP has attracted a fair amount of media commentary, much of it critical. While some of the more vocal criticism has come from non-governmental sectors, it is also important to note that a wide range of economists, with views ranging across the political spectrum, have also evinced scepticism, if not hostility, to these arrangements. Indeed, even the impeccably neo-classical Productivity Commission produced a report in 2010 seriously calling into question whether Australia had anything to gain from pursuing such agreements

What accounts for this hostility? The key to understanding the way economists view these agreements is to consider that the alternative is not to do nothing, but rather for Australia to reduce its trade barriers regardless of what others do (unilaterally), and do so on a basis that does not discriminate between trading partners. The trade jargon for this is liberalisation on a Most Favoured Nation (MFN) basis, which, perhaps confusingly, means that no one nation is favoured over others. MFN is also one of the key principles of the World Trade Organisation, of which Australia is a member.

Unilateral, non-discriminatory liberalisation was also one of the key principles of the Hawke-Keating reforms that underpin much of Australia’s current material prosperity. The idea was also taken over by the Howard governments of the late 1990s. With the exception of the Australia-New Zealand Closer Economic Relations Trade Agreement (ANZCERTA), Australia’s approach was resolutely one of non-discrimination in the international arena.

The consensus in favour of unilateral trade liberalisation by academic economists and, initially, the Australian government, is what distinguishes this critique of regional trade agreements from those of non-governmental activists, who have usually had a reflexive aversion to free trade, grounded, in some instances, to a more general and irrational phobia of economic growth.

But the consensus on the Government side changed rapidly at the start of the new Millennium. Both Coalition and Labour governments actively pursued regional agreements and concluded deals with the United States, Singapore, Thailand, Chile, Malaysia, Japan, China, Malaysia, Korea and the ASEAN countries. This policy reversal was explained partly by the non-progress of negotiations at a multilateral level, but was also borne of a fear of being left out as many other countries followed the regional route – as one economist put it, it is a bit like choosing to join a gang because the neighbourhood is filling up with gangs. But it was a policy reversal that, particularly if we follow the Productivity Commission’s report of 2010, was never substantiated in coherent economics, unlike much of Australia’s other key reforms.

One problem with these regional trade agreements, and the touted mega-regionals, is that they don’t really do what it says on the packet. Simply put, they are not very good at liberalising trade – despite the multiplication of regional trade agreements worldwide, only a relatively small share of global trade occurs through these arrangements.

A second problem, paradoxically, is that these agreements might try to do much. Many of these agreements go well beyond trade as commonly understood, to include issues such as intellectual property rights and other questions of public policy—the issue of the pharmaceutical benefits scheme(PBS) being particularly sensitive in Australia. Concerns about this are exacerbated by proposals to include special investor-state dispute settlement procedures that would by-pass the normal courts system. While economics has fairly well established findings about the benefits of conventional trade liberalisation, it is much more ambiguous, if not pessimistic, about the value of some of the broader issues that trade deals claim to tackle.

And though governments often undertake economic modelling to try and substantiate the case for these types of agreements, these models are singularly ill-suited to demonstrating anything of the sort. This is partly because their results are sensitive to various assumptions made by modellers (who are usually commissioned by the government, or other parties, making the case for the deals). But it is also because these models generally rely on the assumptions that markets work efficiently, when the economics of public policy, on matters such as the PBS and a host of regulatory issues, is predicated on the notions of market failure.

A third issue lies in the discriminatory nature of these arrangements – they are as much as about who is out as who is in. The TPP, for instance, does not include China and has been dubbed as a “China-containment” strategy with geopolitical aims in mind. Economists have also pointed out large trade deals are likely to be detrimental to poorer countries as they divert trade opportunities away from them.

From a Biblical point of view, several issues stand out. The first thing is the importance of recovering Australia’s tradition of strong, independent institutions, capable of holding governments accountable and providing sound advice. Indeed, this is a point that has been made repeatedly is recent years, and not only in relation to trade policy.

If regional trade deals are pursued for geo-political reasons rather than economic ones, there is rich vein of Biblical theology into which one may tap. Broadly speaking, the Bible is sceptical, if not hostile, to regional power-plays and aspirations to regional hegemonies. The notion that it is better to be in a gang because everyone else is doing the same seems to be the counsel of fear, and not one that is consistent with the sort of principled governance favoured by the Bible.

Finally, the possibility that these deals could trade off delicate public policy issues—such as access to medicines—is particularly problematic for the well-being of the most vulnerable sections of society; those that the Bible suggests ought to be of central concern in policy-making.


Amar Breckenridge


Ian Hore-Lacy
April 14, 2015, 5:23PM
It would be good to hear re the recent so-called free trade agreements with Japan, S.Korea and China.

Also, re penultimate para, the OT Israel had particular reasons in God's providence to avoid regional alliances. I don't see how that applies to Oz now.

Finally, cannot the public policy issues such as re PBS (which I understand is questionable anyway) be sorted in the context of greater benefits of FTAs?
Amar Breckenridge
April 18, 2015, 4:07AM
The key issue with the Japan/ China/ and Korea bilaterals is how far they will address trade barriers over and above existing commitments.

On Israel and the OT, I did not intend to imply that arrangements applicable to Israel apply pari passu to Australia. What I meant was that the biblical theology of Israel's history can in part be read as a polemic against "great powers" and the games they indulge.

Re the PBS, the logic in favour of the PBS is that because Australia is a small market in global terms, pricing decisions on medicines and other drugs will have little influence on the incentives for global companies to carry out R&D. But lower prices do increase the welfare of Australians. The government tries to use its buying power (as a monopsony) to lower prices. Pharmaceutical companies don't like this - hence the reason they have lobbied to have the PBS brought into discussions on trade.
Whether it is in Australia's interest to trade off aspects of its PBS for other putative gains (say improved market access for exports) is an empirical question, though you would be very cautious about this since the gains from overseas access accrue to a limited number of producers while affordable access to medicines is concern for society as a whole.

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