Free trade agreements are a Trojan horse

By Leith van Onselen in Australian Economy

January 13, 2020 | 5 comments

The Australia Institute’s (TAI) chief economist, Richard Denniss, has lambasted the Coalition’s unwavering push to sign as many ‘free trade agreements’ (FTAs) as possible, claiming that undermine Australia’s sovereignty:

While Morrison’s new talking points suggest there should be no higher power than the Australian people, his government is in the middle of negotiating free trade agreements with Indonesia and Hong Kong – agreements that include provisions for foreign investors to sue the Australian government if our Parliament changes laws in ways the investors do not like.

So-called investor state dispute settlement (ISDS) clauses give foreign trade dispute tribunals — otherwise known as “unaccountable internationalist bureaucracies” — the power to compel Australian governments to compensate foreign companies that feel aggrieved by decisions of the Australian Parliament. Such powers are not even available to Australian companies.

Companies, Australian and foreign owned, already have the right to seek compensation “on just terms” via the High Court of Australia, if they believe their property has been appropriated by Commonwealth. So why would Morrison subjugate the pre-eminence of our High Court and our Parliament to a tribunal of international bureaucrats?…

What if a foreign oil company were to sue the Australian government for introducing fuel efficiency standards for our passenger vehicles? What if a foreign company sued us for reining in the power of the social media giants? Should the Australian Parliament and constitution provide the last word on such questions? Or a faceless trade bureaucrat in Geneva? Conservatives used to have a clear answer to such questions of sovereignty.

So-called free trade agreements don’t create “free trade” between nations, they simply spell out all the restrictions on trade that both countries are happy to retain.

While Richard Denniss’ critique of ISDS is spot on, he has only scratched the surface of the problems inherent in FTAs.

Australia’s FTAs have been largely negotiated in secret from the public, but opened to corporations and industry groups who are free to lobby for their interests.

The problems are most pressing in non-trade areas like intellectual property, ISDS and labour market access, where the interests of corporations are most detached from ordinary citizens.

Basic trade theory tells us that FTAs generally result in “trade diversion” – effectively a situation whereby the importing country shifts its buying from a more efficient, lower cost country whose goods are subject to a tariff towards the less efficient and higher cost FTA partner whose goods are not subject to a tariff – a situation that can be welfare destroying.

FTAs also contain complex rules of origin (ROO), which can raise administrative costs for businesses (including complying with paperwork requirements) and custom services in administering and auditing the ROO, thereby undermining any small benefits. Both these pitfalls are explained in more detail here.

These hidden costs were confirmed by research from HSBC and the Australian Chamber of Commerce and Industry, which found that Australia’s FTAs have been drafted poorly and are so complex that they are next to useless in a commercial sense. As such, there has been a poor take-up rate by Australian businesses exporting to partner countries.

Several FTAs have also given Australian corporations greater access to cheap migrant workers, thus undermining Australian wages and working conditions.

In response to the above pitfalls, the Productivity Commission (PC) has frequently derided the efficiency losses associated with FTAs, as well as the hidden protections embedded in some deals (e.g. extending patents and copyright protection).

The Crawford School of Public Policy at the ANU conducted a study of the Australia-US FTA (AUSFTA) and found that a decade after signing, the agreement has diverted more trade than it has created.

The ANU’s Peter Drysdale estimated that “Australia alone has suffered trade losses [from AUSFTA] the annual equivalent of the current price of around 18 Japanese, German, Swedish or French submarines through this deal”.

There also seems to be a growing acceptance that the FTAs negotiated by successive Coalition governments have been over-hyped but under-delivered.

In addition to the concerns above regarding the AUSFTA, Peter Martin noted that a study commissioned by the Government “on the new Japan, Korea and China agreements found that taken together they will boost our exports 0.5 to 1.5 per cent, while boosting our imports 2.5 per cent, which means they will send our trade balance backwards”.

There is currently no rigorous process in place to ensure that Australia’s maximises the benefits from FTAs and minimises their costs. On this front, the PC has been scathing, claiming that Australia’s trade negotiations have been “characterised by a lack of transparent and robust analysis, a vacuum consequently filled at times by misleading claims”, and has called on the “final text of an agreement to be rigorously analysed before signing”.

In short, the Coalition has embarked on a series of spurious FTAs for political rather than economic reasons, without rigorous assessment, and without due regard for longer-term consequences.

At a minimum, it must follow the PC’s recommendations and implement better processes towards FTA negotiations going forward.

Don’t hold your breath.

Leith Van Onselen

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.