As government and economists around the world struggle with the populist backlash against free trade and globalisation, the Productivity Commission has warned that the battle against protectionism will be lost unless the benefits of trade are shared more widely and governments stop negotiating deals in secret.
In a recent paper, the commission has tried to get to grips both with the potential damage to Australia if protectionism surges around the world, and what Australia could do to combat it. But it’s the commission’s efforts to work out how to deal with the growing, bitter resistance to globalisation that is most interesting.
As always on protectionism and free trade, the PC argues that unilateral reductions in tariff barriers will provide the greatest benefits to Australia, rather than waiting to trade them off with other countries:
“[T]he mercantilist approach that regards tariffs and market access as negotiating coin to be used in exchange for access to a partner’s market misses the point and is clearly self-defeating. Maintaining protectionist measures against imports is the trade policy equivalent of shooting yourself in the foot.”
One way it could do so would be to simply extend to every country the tariff cuts we’ve negotiated to undertake with partners in so-called “free trade agreements”. It also warns of creeping non-tariff protectionism in areas like local content requirements in government procurement and anti-dumping provisions that force up the cost of inputs for Australian businesses. But it recognises it can be difficult for governments to resist calls to lift protectionism if other countries are doing the same, so it suggests trying to form trading groups with other free trade-oriented countries that would agree to keep tariff levels steady, or even to lower them while other countries were retreating into protectionism.
But it also considers other issues that complicate the task of supporting genuine free trade in an environment of growing hostility to trade and globalisation. The PC was a strong critic of the way the government handled the Trans Pacific Partnership, criticising the principle of bilateral and multilateral trade agreements that primarily act to divert exports rather than drive growth, the inclusion of investor-state dispute settlement mechanisms that enable corporations to seek compensation for changes in public policy, and the refusal of the government to permit an independent assessment of the alleged benefits of the deal.
However, the commission argues that these mistakes will exacerbate hostility to free trade and make the task of supporting the economy in the face of an international wave of protectionism much harder. It makes some recommendations about how governments could improve community support for free trade:
First, only proceed with trade agreements that have genuine net benefits. This, of course, entails working out what the benefits and costs of an agreement are. “It is important that the benefits and costs of a proposed agreement are assessed upfront, and compared with the net benefits of other options for achieving similar reductions in trade and investment barriers. Australia’s approach to the assessment of PTAs [preferential trade agreements, what the PC more accurately calls “free trade agreements”] could be much improved. Current processes fail to assess the impacts of prospective agreements adequately…”
Second, improve consultation. The commission criticises the Department of Foreign Affairs and Trade, which has been highly secretive on trade negotiations, allowing large corporations to see the draft text but keeping civil society groups and the public in the dark. The paper says, pointedly:
“[E]ngaging with parties capable of offering critical assessment of proposals, not just parties seeking an advantage or protecting a constituency, would improve the process. Once a draft agreement is completed, exposing it to public scrutiny before it is signed into law would also help meet community expectations for a more inclusive consultation approach. Giving interested parties the opportunity to evaluate and comment on an agreement draft would build a better understanding of the role of trade in the economy as well as a better appreciation of the choices and their respective pros and cons. This would help to combat perceptions that secrecy during negotiations leads to sub-optimal outcomes for some members of the community and to build support for open markets.”
Third, trade policies need “companion policies” that ameliorate the negative impacts of trade.
“Even though the nation overall is better off from trade liberalisation, not everyone, or every community is a winner … The adjustment burden associated with past liberalisation was often concentrated on particular groups (while the benefits were spread more diffusely). Lower skilled and older workers employed in sectors where competition with imports intensified tended to be harder hit. Furthermore, those who lost employment were often concentrated within industries and, sometimes, geographic areas, with limited alternative prospects. History shows that these workers typically had a difficult time regaining employment. And, when adjustment costs extend to the local community, they can instil a feeling of being left behind.”
But, the commission says, the adjustment policies often offered by governments are rarely, if ever, properly assessed (something that was explored in a recent paper) and often directed at companies or geographical areas, rather than at the workers themselves, who would directly benefit from training or re-skilling.
And the commission thinks better engagement with the community is important. But it avoids the now-cliched “all we need is better selling of policies” argument. One of the most common responses from advocates of neoliberalism about the impacts of free trade and globalisation — especially inequality — is to argue that it is technology that is driving these deeply unpopular impacts, not globalisation per se, so critics should stop attacking neoliberalism. But the PC says this doesn’t matter to people.
“[G]overnments should better engage with the community around the case for free trade and strengthen policies to respond to the human cost of technological change. Adjustment today is more driven by technology than liberalising markets. But debating the difference is not helpful. Sharing better the benefits from persisting with open markets would help to build community confidence in trade and foreign investment policies.”
That is, it is policies to reduce inequality and spread the benefits of globalisation (and do so effectively, unlike a lot of “transition programs”) are what will make a difference, not arcane arguments from economists that people are wrong about free trade.
From the high priests of economic rationalism in Australia, it’s intriguing stuff — but unlikely to penetrate the skulls of this government’s ministers.