China and free trade's Gordian Knot

The Lowy Interpreter

The Doha Round of multilateral trade negotiations has fizzled out. The spate of preferential trade agreements (PTAs), misleadingly called 'free trade agreements', has created a messy 'noodle bowl' of overlapping and uncoordinated rules. A logical alternative strategy might start with a small group of like-minded countries which agree to an over-arching set of free-trade principles. The Trans-Pacific Partnership embodies this idea. There is, however, a lot more in this partnership package and these extra components need careful analysis.

The TPP began with just four small and disparate economies (New Zealand, Singapore, Brunei, and Chile). In 2009 the US saw this as the suitable vehicle for its international trade agenda, and the grouping has now grown to 10 (adding the US, Australia, Peru, Malaysia, Vietnam, Mexico) with two more (Japan, Canada) contemplating joining. The details are under negotiation, scheduled to be finished this year.

The trade component is clear enough: countries can join only if they are at the 'open' end of the spectrum. For example, New Zealand initially opposed Canada joining, because the Canadian dairy sector is heavily protected.

This format has a lot to be said for it. Rather than the interminable battles to get all the WTO members to agree at Doha, a 'platinum standard' of trade openness would be set by a small group of inaugural members. Countries which were unwilling to meet this standard would have to stay outside the club, missing out on the benefits of integration.

Free international trade is one of the few issues on which economists agree: it is, with few caveats, unambiguously a good thing. PTAs are very much second best: while they encourage bilateral trade, they divert trade from other (perhaps more efficient) suppliers. If TPP's membership is enlarged there is more trade promotion and less trade diversion. Thus the trade element of TPP is unambiguously an advance on the PTA approach. The TPP, however, is not just about trade.

The TPP encompasses intellectual property rights, labour standards, competition policy, investment rules, the environment and the role of state-owned enterprises. These issues might have some trade-related aspects but are quite different from trade liberalisation in that there is no consensus on the optimal standards.

Let's start with intellectual property rights. Of course ideas are valuable and their creators should be rewarded. But how much and in what form? Patents and copyright require a balancing of the creator's monopoly weighed against the loss to society through not having full use of the idea. For example, economists have decried the extension of US copyright to the author's life plus 70 years, a move widely seen as a response to lobbying to keep Mickey Mouse still earning, long after Walt Disney had passed on.

Even within a single country there will be strongly conflicting interests (for example, between Hollywood and Silicon Valley on protection of digital material). Similarly, international standards for child labour are well justified, but to impose advanced-country labour standards on emerging countries, in the guise of protecting workers, undermines the natural comparative advantage that emerging countries have through cheaper wages.

In short, the 'add-ons' to the trade liberalisation agenda are intrinsically different in character. Is TPP the best forum and are these the right set of issues? The TPP seems an ad hoc and accidental forum into which the US has inserted its own priorities.

Will the mix of issues in the TPP suit Australia's interests? It may (after all, Australians generate intellectual property too, although we pay out much more than we receive), if they coincide with America's. But we need to go into these negotiations recognising that our bargaining power to influence the rules is minimal and pointing to America's many instances of protection will do us no good.

Moreover, we have already had one experience of getting into a negotiation from which there was no retreat. The US-Australia Free Trade Agreement predominantly benefited America but failure to reach agreement was not an option as it would have undermined Prime Minister John Howard's claim to be America's best friend.

There are other strategies in play, such as the ASEAN-based idea for a free trade area based on the ASEAN 6 (the East Asia Summit, which could include the US) countries. On past experience, this is a slow track, but at least it focuses on trade issues and in particular the rules needed to foster multi-country supply chains.

There is another worrying aspect of the TPP negotiations. It is widely accepted that China will be unable and unwilling to accept the rules on intellectual property rights and state-owned enterprises. The US discussion downplays this issue, seeing it as just a matter of time before China will change in ways that enable it to meet the TPP's 'platinum standard'. But with China initially excluded, it would be easy to interpret TPP as an element of a China containment strategy, especially as Vietnam (which would seem to have the same issues on intellectual property and state-owned enterprises) has been accepted as an inaugural member.

The China aspect needs urgent clarification. Unless a way can be found to signal that there is a realistic prospect of China joining and that China would be welcome to do so, we need to recognise that this will be seen by China as containment. Is this our intent?

Originally published by The Lowy Institute publication The Interpreter. Reproduced with permission.