Tricks of the trade negotiations

Australian trade officials are having a busy time at the moment.

Firstly, the Trans-Pacific Partnership (TPP) is being discussed in Bali, alongside the APEC Economic Leaders' Meeting.

Secondly, the Regional Comprehensive Economic Partnership (RCEP) has just concluded another negotiating session in Brisbane. 

Thirdly, the new Australian government has specified a high priority for three unresolved bilateral free-trade agreements (China, South Korea and Japan), with the objective of concluding an agreement with China within a year.

Finally, WTO Ministers will meet in Bali in December to discuss the Doha Round. 

Each of these negotiating streams has its strengths and weaknesses.

The so-called free-trade agreements are actually preferential trade agreements (PTAs), where a country gives up the right to deal with the cheapest foreign supplier in order to get favoured access for its own exporters. The main reason for joining in these distortionary arrangements is a simple one: if everyone else is doing it, you have to join in. They result, however, in a 'noodle bowl' of complex overlapping and conflicting agreements.

Both the TPP and the RCEP are also preferential trade agreements, but of a less distorting kind. The more members there are in a PTA, the less the distortion, as there is more opportunity to trade with a low-cost efficient supplier. They represent an opportunity to mitigate the damage of bilateral PTAs, over-laying these diverse agreements with a uniform framework common to all members.

They also offer more opportunities to lower behind-the-border barriers. The TPP, for example, will cover labour regulations, investment procedures, environmental issues, competition policy and intellectual property rights. With this range of 'behind-the-border' issues, the TPP might more accurately be seen as part of an effort to establish Thomas Friedman's Golden Straitjacket — the set of universal rules which will govern international relationships.

The RCEP also looks 'behind the borders', but it focuses on the operational hindrances which slow trade and inhibit multi-country supply chains. It looks at how customs, quarantine and administrative procedures can be made simpler and more uniform. And of course its geographical coverage is quite different: its ASEAN focus makes it much more Asia-oriented than the TPP and progress there would link Australia into the wider regional activities. 

RCEP also restores a notable omission from the TPP negotiations: China. Is China's omission from the TPP negotiations a conscious element of US containment or is it an effort to establish a set of rules that China will later have to accept if it wants the benefits of participation? Perhaps the second is the stronger motivation, although there may be elements of both.

The theoretical first-best would be a comprehensive WTO multilateral agreement. WTO discussions, however, have lost the central dynamic that would motivate negotiators to reach agreement — the overarching understanding that reduced trade barriers benefit all countries. Tit-for-tat bargaining, an unwieldy unanimity formula for the 157 members, and long-held grievances and intransigencies have brought the Doha Round to a dead halt. Perhaps the G20 will be able to breathe life into the multilateral format. At the least, the past gains (including the valuable dispute-settlement procedures) need to be maintained.

The bilateral PTAs can best be seen as a stop-gap response to other countries' PTAs. If these will eventually be subsumed into wider agreements such as the TPP and RCEP (or a multilateral agreement), then no great harm will be done provided we don't lose sight of the long-term objective: a world in which everyone is treated the same. Thus playing special favourites now might just cause problems later.

It may be unhelpful for the negotiators to be given rigid instructions to conclude a deal within a specified timetable, as this can weaken bargaining positions. When the Australia-US free trade agreement was negotiated, those on the other side of the bargaining table knew that Australia had to reach agreement, or admit that our Prime Minister was not as close to the US President as he wanted us to believe. 

The TPP presents some of the same problems. Paul Krugman has identified the key flaw in the Golden Straitjacket: written from an American perspective, these rules might be unhelpful for much of the rest of the world.

How are the Golden Straitjacket rules being written? The likelihood is that the first draft of any behind-the-border rules will be mainly written by the largest participant in the negotiations, and will understandably be tilted towards their own circumstances. The smaller negotiating countries are faced with all the political pressures to be a 'team player' and not to stand in the way of a platinum-standard agreement.

The potential for an unfavourable outcome is greater for behind-the-border issues than it is for agreements to reduce trade barriers. Trade theory says that a negotiating country will benefit from lowering its tariffs even if other countries don't follow suit by lowering their tariffs. Negotiators can be confident they can't make their country worse off. Behind-the-border issues such as intellectual property rights, on the other hand, are generally a trade-off: what one country gains, the other loses. While tariff negotiations are an unambiguous win-win opportunity, other rule-writing is closer to a zero-sum game.