Who wins and who loses from the “ChAFTA”, as it’s formally and clumsily known? Has China got the better end of the deal? Or did Australia succeed in winning unprecedented access to the vast Chinese market? Which sectors will benefit?

They’re the wrong questions, driven by a misunderstanding of the benefits and costs of bilateral free trade agreements.

Judging by today’s Essential Report, voters think bilateral free trade agreements are a good thing, though they’re not really sure why. The conclusion of an agreement is thus a political win for the government (which desperately needs one). But the media doesn’t appear to be much better informed, lauding the ChAFTA as a win for Australia and explaining how much extra access we will get to China.

What precisely China will get in return, however, is a matter shrouded in mystery. We know that remaining tariffs on Chinese manufactured goods will be progressively removed. We know reporting thresholds for Chinese investment will rise. But in the absence of the text of the agreement — awaiting finalisation and translation, allegedly — all we can go on is the information provided by that paragon of trade agreement transparency, the Department of Foreign Affairs and Trade, which has helpfully provided a series of fact sheets on each area of the agreement. So, for example, at the very bottom of the “fact sheet” on agriculture, we’re told:

“Consistent with all of Australia’s FTAs, Australia will eliminate remaining tariffs on agricultural and processed food imports from China. To allow adjustment by domestic industry, the elimination of some of these tariffs, in particular on a range of canned fruit products and peanuts, will be phased in over a period of years.”

Otherwise, DFAT is mainly interested in explaining what Australia will get from the deal. It’s a bit hard to blame the media for overselling the deal when specific details aren’t provided.

Then again, you might wonder why we even have any tariffs at all on Chinese products (as with agricultural and processed food imports, tariffs on manufactured products will be removed over four years). Or why until now we subjected Chinese investment to restrictive regulations. Such measures mean, in effect, Australians pay an additional consumption tax on Chinese imports, and Australian businesses have less access to investment capital. Why has Australia waited until China gave us access to its markets in order to remove policies that harm us?

This is one of the central complaints of the Productivity Commission about bilateral and regional free trade agreements, which it studied in 2010, looking at a series of agreements negotiated by both sides of politics. The biggest benefits from such agreements come from us removing restrictions in our own economy, not access to other markets. Thus:

“…contrary to mercantilist notions that focus on export promotion and market access and often cloud debates about trade policy, the main benefits that arise from trade liberalisation result from a country purchasing its inputs and final goods from the lowest cost sources of supply, and exposing its industries to greater import competition by reducing its own trade barriers. This creates a competitive environment that drives productivity and a more efficient utilisation of resources within the economy … the modelling conducted as part of this study suggests that much of the future economic gains available to Australia from tariff reductions could be achieved through unilateral reform.”

So the question about whether China or Australia “won” from the FTA doesn’t make any sense. Negotiating a bilateral FTA is like two people  punching themselves in the face and insisting they won’t stop it until the other does.

“Did anyone do a full modelling of the benefits and costs of an agreement with China over the last decade? Not under the Howard government that began negotiations, not under the Rudd and Gillard governments that continued them, and not under the Abbott government that concluded them.”

Indeed, as the Productivity Commission says, using access to Australian markets, or lower tariffs, as “bargaining coin” in FTA negotiations simply delays the economic benefits that liberalisation provides to Australia. This is a critical and underappreciated point. The Department of Foreign Affairs and Trade is actively harming the national interest and undermining economic growth by seeking to use liberalisation as a bargaining chip in trade negotiations. Australians would benefit from simply getting rid of these sort of negotiations (and the expensive DFAT bureaucrats and travel needed for them) altogether and liberalising areas where we’re still punching ourselves in the face.

How about which sector did best? Is it dairy? What about legal services or financial services? The question makes a little more sense than which country “won”: FTAs “could have a significant impact on aggregate trade flows between partner countries,” the Productivity Commission says — so, yes, particular export sectors could benefit from the agreement with China — “although some of the estimated increases in those trade flows are likely to be offset by trade diversion from other countries”. Oh — so we might sell more stuff to China, but at the expense of selling less stuff in other markets. That’s not so useful.

This is why the Productivity Commission basically doesn’t rate FTAs particularly highly: “improvements in national income from bilateral preferential agreements are likely to be modest”, it concluded. It specifically criticised the most famous FTA, that concluded by the Howard government with the United States, for its draconian Intellectual Property provisions (and US data shows that the AUSFTA coincided with a big rise in Australia’s trade deficits with the US). The Productivity Commission also noted the “investor-state dispute settlement provisions in some BRTAs for which there appear to be few benefits and considerable risks” to Australia. And, yes, there’s an ISDS provision in the ChAFTA.

For such reasons, the Productivity Commission recommended that “[b]efore entering negotiations with any particular prospective partner, it should undertake a transparent analysis of the potential impacts of the options for advancing trade policy objectives with the partner. All quantitative analysis and modelling should be overseen by an independent body.”

Did that happen for the ChAFTA? Did anyone do a full modelling of the benefits and costs of an agreement with China over the last decade? Not under the Howard government that began negotiations, not under the Rudd and Gillard governments that continued them, and not under the Abbott government that concluded them. Yesterday, Trade Minister Andrew Robb — who has diligently and successfully pursued the government’s ambitions to sign a number of FTAs as rapidly as possible — said they there hadn’t been “time” to do any modelling.

Let’s hope ChAFTA yields at least the “modest” benefits that the PC says can come from FTAs.

Peter Fray

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