Why embracing free trade may be more complicated than it looks

freetrade.jpg

If headlines are to be believed, the new Coalition government is set to “embrace free trade” in its first term in office.

In announcing his new Ministry last week, Tony Abbott has made significant changes to the Trade portfolio. Trade responsibilities have now been combined with foreign investment, for the first time uniting the two major branches of foreign economic policy. In an equally dramatic move, the Liberals’ Andrew Robb has been appointed the new Minister for Trade and Investment. This is the first time since 1956 that a Coalition government has not placed a Nationals member in the trade post.

The ostensible rationale is to put free trade and foreign investment at the centre of the Coalition’s economic agenda. The Coalition has promised a rapid trade push to spur exports, foreign investment and employment, and Andrew Robb has been designated Australia’s “ambassador for jobs”.

High on the new Minister’s agenda will be the advancement of Australia’s free trade agreements (FTAs) with partners in Asia. Tony Abbott has indicated Robb’s first task will be to conclude a series of deals that were marked by a “disappointing lack of progress under the former government”. The Chinese, Japanese and South Korean FTA negotiations will be immediately prioritised.

But what are the prospects the new Minister can deliver on this promise? The difficulties facing Australia’s current FTAs suggest the task will be a considerable challenge.

Australia’s bilateral free trade agreements in the Asia-Pacific

The Australian government has proved highly capable at launching FTA negotiations. Consistent with a global trend towards ‘trade bilateralism’, Australia has opened bilateral trade talks with twelve countries since the year 2000. All but one of these initiatives have been in the Asia-Pacific region, and include important partners such as the US, China and Japan.

 

 

However, its record in completing these deals is decidedly lacking. Only five have so far been finalised, the majority of which are with small (and relatively less important) partners such as Singapore, Thailand and Chile. Conversely, FTA talks with major trade partners – in particular China, Japan, Korea – have been running for many years with no concrete outputs. As these three Northeast Asian countries accounted for 57% of merchandise exports in 2012, finalising these deals would be of major significance to Australian exporters.

However, the prospects for concluding any of these deals in a speedy and impactful way are low. The previous ALP government indicated it would only sign FTAs which were “comprehensive”, and genuinely reduce barriers to trade in areas of interest to Australia, such as the agriculture and services sectors. Unfortunately, comprehensive deals are proving difficult to strike in Asia.

FTA negotiations with Japan are a case in point. Japan maintains some of the highest rates of agricultural protection in the world, with a complex quota system and an 800 per cent tariff on rice imports. One of Australia’s main FTAs goals has been to negotiate reductions in these forms of protection, particularly for the beef industry. However, the Japanese government remains wedded to protectionism due to domestic political pressure from rural constituencies, and has consistently resisted Australian requests to liberalise agricultural trade.

Negotiations with South Korea have also proven difficult. Despite claims from (then Foreign Minister) Kevin Rudd in 2009 that the talks were “near to conclusion”, the FTA remains incomplete in 2013. Australia is unwilling to agree to Korea’s demand for investor-state dispute settlement provisions, following its legal dispute over plain packaging with tobacco giant Philip Morris. In the meantime, Australian beef exporters stand to lose out, as the recently signed US-Korea FTA will give American competitors a tariff advantage that the industry has claimed will cost $1.4 billion over the next fifteen years.

Australia’s FTA negotiations with China have been even more fraught. Launched in 2005, the talks have now been through 19 rounds but are yet to even precisely define the scope of market access provisions. The sticking points are numerous, and include Chinese sensitivities about agriculture and service imports, and Australia’s reluctance to raise thresholds for Chinese investments assessed by the Foreign Investment Review Board. Negotiations with China have become so tortuous that Craig Emerson, the now-former Trade Minister, took the unprecedented step of saying that a comprehensive FTA was “just beyond both countries” in April this year.

The ‘trade-off’ dilemma in Australian FTA policy

How might the new government go about sorting out this complex mess of stalled talks? The Coalition arguably faces a dilemma in choosing between two FTA strategies, neither of which are particularly attractive.

The ‘pragmatic’ option would be to abandon the goal of signing “comprehensive” FTAs entirely. This could involve prioritising the interests of a few key sectors, rather than insisting on across-the-board liberalisation from partners. Indeed, former Ambassador to China Geoff Raby has recently argued Australia should drop its demands in the sugar, wool and banking sectors, in order to focus only on access for beef, lamb, dairy, and horticultural products into China.

Lowering expectations would reduce the costs of an FTA for trade partners, smoothing the way to quickly concluding the deals. However, it is also a diabolical trade-off, which involves sacrificing the interests of certain sectors for those of others. Whether government should even be “picking and choosing” between export industries in the first place is also an open question.

The “purist” option would be to maintain its current stance on comprehensive liberalisation and abandon bilateral FTAs entirely. Trade policy efforts could instead emphasise multilateral initiatives in the region. Australia is already involved in negotiations for two regional trade deals – the Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP). Given these are complex multilateral deals, it is less likely that the sectoral interests of certain countries will block negotiation entirely.

Nonetheless, Australia is a relatively small player in both the TPP and RCEP, and may not be able to press effectively for its key interests in agriculture and services. The prospects for these agreements are also hard to gauge. RCEP is a relatively new proposal whose details remain unclear, while China is yet to officially join the TPP. Betting the trade farm of these nascent regional deals would be a high risk strategy.

Thus, the Coalition government now faces the policy dilemma of either lowering its expectations from FTAs, or risking not signing any FTAs at all. How the new Trade Minister will respond to this trade-off between FTA purity and pragmatism remains to be seen, but “embracing free trade” will prove more challenging than initially thought.

Jeffrey Wilson does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

The Conversation

This article was originally published at The Conversation. Read the original article.