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Apr 8, 2014

Sorry, but free trade agreements are duds, no matter how ‘nuanced’

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.

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18 comments

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18 thoughts on “Sorry, but free trade agreements are duds, no matter how ‘nuanced’

  1. klewso

    Like a bunch of feathers tied to a piece of string, for a cat, aren’t they? …. Or “Honours”?

  2. Chris Hartwell

    Sooo … I should have held off on my new mitsubishi for just a little longer? Bugger. #ThanksAbbott

  3. Migraine

    One positive aspect of AUSFTA was that it became easier for Australian researchers to go and work in the US. Unfortunately, this has also worked out to be more to the US’ advantage than Australia’s …

  4. MJPC

    BK, please don’t take away Citizen Abbott’s moment of glory, when he comes back there still Arthur up in NSW doing the rounds of ICAC trials and PUP Senators about the spoil his hoped for dream run in the Senate come July.
    I am excited to learn I will be able to buy a new Jap car for $1500 less, good for the economy and environment I am certain. Shame it will be as a result of the destruction of the Australian auto industry; the auto workers can extend their redundancies that much more now.

  5. The Pav

    The cargo cult mentality of the LNP led by dictator Abbott has resulted in a PUP,

    Calling this a free trade agreement is the same as calling Richmond a football team.

    Free Trade means Free Trade it isn’t that complicated but in this case a budget in alleged crisis takes a further hit just in case that maybe some time in the future the sons of sons of sons of cattle farmers may get to shift a feww extra steaks.

    Abbott sold the mine but kept the shaft just for party propaganda benefits

  6. Damien Cruickshank

    Economists support ANY movement towards tariff reductions. Yes, negotiated bilateral tariff reduction goes a small way for everyone, but as you say, unilateral tariff reductions help the most. Tariffs are the equivalent of shooting ourselves in the foot, just because Japan does. It’s stupid, and I can’t believe some politicians still support them.

  7. Bill Hilliger

    Don’t worry you’re in good hands with the negotiation skills of T rAbbott and co. Wait till they stitch up China as well. Riches to be had for all, especially the farmers. The farmers will now owe a great thanks to the ever diminishing National Party.

  8. Hunt Ian

    As Bernard says, it is not clear what the gains will be: all we can say is they will come in soon for Japan and long after for the limited range of products whose tariffs will be lowered. When Bernard talks of simulations, though, we must know the assumptions. The trouble with economists is that their theory does not tell us that unilateral removal of tariffs will improve things. We simply don’t know. We do not live in a perfectly competitive international market and tariff removal could be damaging to industries like the car industry, if Abbott had not so thoughtfully shoved it offshore.

  9. Scott

    It’s funny…when ever any one mentions that Productivity Commission report into bilateral trade, no one mentions the Dissenting Appendix A (which disagrees a lot with the findings and recommendations).
    The dissenting opinion was, after all, written for the international trade expert specifically hired for the study from the WTO, Andrew L Stoler.
    Maybe best to read the entire report, rather than just the findings page, hey BK?

  10. Iskandar

    Did I hear Abbott say cheaper electronic goods from Japan? I looked over the items on my desk and found: laptop (China), printer (Thailand), scanner (Indonesia), digital camera (Malaysia), desklamp and speakers (China, again). No FTA as far as I know with those countries. The trip sounds like another taxpayer-funded junket to allow Abbott and company to grand-stand. Even down to the obligatory lycra and pushbike.