Bilateral free trade agreements like the one negotiated with Japan deliver few benefits. The only worthwhile trade reform is unilateral tariff reductions. Don’t hold your breath for that.
Remember the Australia-US free trade agreement? That FTA obsessed the political class in Canberra for much of 2004, with the Howard government and News Corporation outlets desperate to use it to wedge Labor leader Mark Latham, and considerable focus on how much benefit it delivered to Australian farmers.
Back in 2010, to the considerable dismay of the Department of Foreign Affairs and Trade, the Productivity Commission looked at the value of bilateral FTAs, including the AUSFTA (we’ll use the term “free trade agreement”, however much it’s a misnomer). Despite extensive work of its own, and consideration of the work of economists in Australia and internationally, the PC was unable to find anything beyond potential “small” benefits from FTAs, albeit offset by “material” negotiating costs to government. It concluded about trade in goods:
“Despite the potential for increased bilateral trade flows, once account is taken of the offsetting effects of trade creation and trade diversion and the resource allocation effects associated with changes in trade, the resulting changes in economic activity and income are likely to be small.”
And there had been “limited success” in using opportunities for freer trade in services under AUSFTA, it found. Benefits from liberalisation of investment rules had been “modest”. Other outcomes in areas like regulation had been “mixed” — indeed, the intellectual property components of the AUSFTA was a net cost to Australia. The PC found:
“The changes following the AUSFTA have make it less likely that an appropriate balance between supplier and user interests prevails in Australia’s intellectual property system.”
Of course, it was too early to tell if some benefits would accrue from the AUSFTA — we’re still, 10 years in, another eight years away from the end of US tariffs for Australian beef. US negotiators ensured that, basically, half a generation of US beef farmers would die before they had to compete with Australian beef.
Still, the AUSFTA is a splendid example of the howling gulf between political journalists, who see FTAs, particularly those announced with elaborate theatre and plenty of colour and movement in foreign capitals, as significant events, and economists, who see little of interest in what at best are trade diversion agreements.
And ultimately the real issue about FTAs isn’t whether Australia got a “good deal” or not, or how long the Japanese take to reduce their beef tariffs. As the PC patiently explained in its report, the best trade reform one can undertake is unilateral — dump your own tariffs regardless of what other countries do, because the benefits of reducing tariffs are mainly domestic, rather than flowing to foreign exporters …
It also dismisses what it calls the “bargaining coin” theory, that we should hold off on tariff reductions until we can negotiate their reduction in exchange for other countries reducing theirs, noting that simply delays giving ourselves the benefits of unilateral tariff reductions. “Free trade agreements” are basically a deal to stop punching yourself in the face so much if the other guy agrees to hit himself less.
At least the FTA with Japan will include removal of the remaining tariffs on new motor vehicles from Japan, although manufacturers are already hemming and hawing about passing on the cut to consumers. Seemingly left intact, however, is the absurd punitive tariff on imported second-hand cars, which continues to punish Australian consumers by depriving us of the sort of second-hand import market that New Zealand consumers enjoy.
And free trade agreements are often sold by both governments and the political media as a great example of the close relationship between the respective leaders. The AUSFTA was hailed at the time as a political masterstroke by John Howard and a demonstration of his close relationship with George W. Bush, forged in the heat of the “war on terror” and the invasion of Iraq. So, too, with this one: political journalists have overnight been regaling us with stories of how the two conservative prime ministers, Abbott and Abe, “nuanced” the final details over a “private dinner”, although in the same breath they report the deal had been struck before the leaders sat down to their sushi.
These days the AUSFTA is barely remembered, except as an example of the need to avoid bowing to US demands on intellectual property. The Japan-Australia deal will go the same way. As the Productivity Commission shows, if we want to have a really good FTA, we should get busy negotiating one with ourselves.