Too many trade-offs on the bilateral low road

Bilateral treaties have advantages over complex multilateral talks, but Australia's politicians would be better pursuing the time-consuming and onerous alternative.

Lowy Interpreter

Shadow Foreign Minister Julie Bishop's outline of the Coalition's international policies emphasised the importance of trade in general and free trade agreements in particular. She singled out for special mention those countries which have gained advantage by signing bilateral treaties ahead of us: the US with South Korea, and New Zealand with China. The Labor government has also been ready to use FTAs.

In a world where so many countries (including Australia) have signed up to FTAs and are trying to do more of them, this priority is understandable. If everyone is doing it, we also have to.

FTAs are, however, very much a second-best option. These so-called FTAs are actually preferential trade agreements that favour the bilateral partner at the expense of other countries excluded from the agreement. If we sign them, we miss out on better trade opportunities elsewhere.

Given the abysmal failure of the Doha Round, it's easy to understand why alternatives to multilateral trade diplomacy seem attractive. But the result is the messy 'noodle bowl' of PTAs, each with its own operational clauses and rules of origin. The Productivity Commission accepts that PTAs "have resulted in some significant bilateral tariff reductions both in Australia and in partner countries". Yet the Commission also observed that it "has received little evidence from business to indicate that bilateral agreements to date have provided substantial commercial benefits. Their potential impact is limited and other options often may be more cost-effective".

Two alternative channels are relevant for Australia: the Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership.

Neither of these will fix the immediate issue of unwelcome PTAs, and they are themselves PTAs. But they might be a better way forward in the longer term, since each has broad international scope. They would overlay narrower PTAs, diluting their harm.

The focus of the RCEP, which currently takes in 16 nations, is on lessening trade blockages from whatever source (often administrative or bureaucratic). The goal is deep integration, with supply chains tying global trade together. The TPP, now being negotiated by 12 Pacific countries, is focused on establishing a set of behind-the-border rules (part of Thomas Friedman's 'golden straitjacket') that will not only facilitate trade access, but sort out the inevitable conflicting interests on issues such as intellectual property rights, foreign investment disputes, competition policy and labour regulations.

It will be in Australia's interests to have both TPP and RCEP succeed, even if it is time-consuming and onerous.

As the largest player in the trade game, the US feels that its rules are best. Friedman understood that his golden straitjacket would be imposed on all global players, although he saw this as a benign US influence. We can already see examples where other players don't see it this way. Even Australia doesn't, as we are resisting the investment dispute resolution that Philip Morris is using to oppose Australia's cigarette-packaging laws.

What are the best messages politicians of all sides can give? First, that they are interested in promoting international trade, which means hard decisions on uncompetitive domestic industries. As for PTAs, our politicians might remind the foreign parties which have signed up to earlier agreements that discriminate against us that it is in their own interests for them to sign a PTA with us, since it would allow them to trade with the cheapest and best partner rather than being stuck with their current range of second-best trade partners.

Within the TPP and RCEP talks, our negotiators need firm political backing to resolutely address Friedman's misapprehension that US rules will suit everyone. Coming out of the arm-wrestle of American domestic politics and pressures of vested interest, US rules on such issues as intellectual property and investment disputes will not always result in the golden straitjacket being a comfortable fit for foreign parties to the TPP.

Lastly, politicians need to be careful not to tie their own prestige to the timely conclusion of an agreement. Trade negotiations are bargaining games. As soon as the other side knows that the negotiators are under political pressure to conclude a deal, their bargaining position is weakened. It looks like this might have happened with the Australia-US Free Trade Agreement. US negotiators knew that then Prime Minister Howard's reputation as a close friend of George W Bush would be undercut if we were not able to conclude an agreement. It is a common assessment, even by industry, that we should have done better.

Politicians need to encourage our negotiators to be bold, ambitious and tireless in seeking beneficial global trading rules, and there may even be times when the negotiators need a kick-along. But politicians putting their own prestige on the line for concluding a trade agreement will ensure a sub-optimal outcome.

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

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