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Multilateral, regional, bilateral: which agreement is best?

What is the best trade option for Australia’s future? AAP/Alex Ibanez

One of the first acts of Tony Abbott’s government was to declare it intended to “embrace free trade” in its first term in office. Calling the trade minister Australia’s “ambassador for jobs”, the Coalition has staked its economic and foreign policy credibility on the promise to finalise a series of free trade deals that made limited progress under former Labor governments.

But Australia already has a lot of trade on its plate. It’s a participant in the ongoing Doha round of World Trade Organisation (WTO) talks, and a party to the Trans-Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership (RCEP) negotiations in Asia.

It has also open bilateral trade negotiations with five of its most important economic partners – China, Japan, Korea, Indonesia, and India.

This is a very crowded trade policy agenda, characterised by complex, overlapping - and sometimes competitive - initiatives. Given limited bureaucratic and diplomatic resources, it would be both difficult and inadvisable to spread efforts evenly across the range of proposals.

So, where should Australia’s priorities lie?

There are multiple ways for governments to advance free trade; trade liberalisation can be negotiated via multilateral, bilateral or regional mechanisms. Each strategy carries a mix of benefits and costs.

Multilateralism and the WTO

Historically, multilateralism has been the dominant approach, embodied in the World Trade Organisation. The WTO currently has 159 members, who exchange tariff preferences in line with the non-discriminatory “most-favoured-nation” principle.

The product scope of the WTO has gradually expanded since 1948 through a series of negotiating rounds; the current one is known as the Doha “development round”, which commenced in 2001.

Multilateralism is the “policy purist” approach to trade liberalisation. Since Russia’s accession to the WTO in 2012, practically all significant economies have become members, creating a single integrated system of global trade rules.

But size has also proven to be one of the WTO’s major weaknesses. Having many members makes consensus difficult to forge, and recent years have seen the formation of a complex array of “coalitions” with competing, and often-incompatible, agendas.

Disagreement among these coalitions - particularly over the sensitive issue of agriculture - is one of the main reasons the Doha round is currently deadlocked after 12 years of talks.

Bilateral free trade agreements

With the WTO in deadlock, attention has turned to bilateral free trade agreements (FTAs). Practically unheard of before the mid-1990s, these agreements have expanded exponentially during the last decade as governments sought to deepen trade ties with key economic partners.

Bilateral FTAs typically involve states swapping trade concessions with each other, but some also address so-called trade-related measures such as investment, intellectual property, and biosecurity.

The primary appeal of bilateral FTAs is their ease; with only two parties, deals can be negotiated efficiently. But as the quick-and-easy option, they often fall short of promoting genuine free trade.

Important but sensitive trade issues (agriculture, for instance, and services) are often excluded from bilateral FTAs, and very few deal with trade-related measures substantially.

They also pose the vexing “spaghetti bowl problem” of creating a complex set of overlapping and inconsistent rules that erode the integrity of the global trade system.

Keeping it on the ‘hood

Regional free trade agreements are the third option. Midway between multilateralism and bilateralism, they involve a group of countries within a geographic region negotiating a free trade area.

Trade regionalism picked up during the 1990s, through the formation of the Mercosur bloc (1991), the ASEAN free trade area (1992) and the NAFTA agreement (1994).

Australia is party in two regional trade agreements currently under negotiation in Asia: the US-led TPP and the ASEAN-centred RCEP.

Regional free trade agreements are sometimes considered a trade sweet spot – easier than multilateralism, but more substantial than bilateral deals. Indeed, regionalism advocates have also described them as a building block where multilateral deals can later be built.

Still, they face their own challenges. Power asymmetries within regions are often highly pronounced, leading to deals that favour the largest member at the expense of smaller partners. They also pose the risk of “balkanising” the global trading system by dividing the world economy into competing trade blocs.

Australia’s trade policy choices?

Ideally, multilateralism is the best strategy to genuinely liberalise trade. But the Doha round of the WTO has stalled, and a small economy such as Australia arguably lacks the heft to meaningfully advance talks on its own.

In this context, policymakers have increasingly looked to other avenues to promote the national trade agenda.

Bilateral FTAs became popular during the early 2000s. The Howard government launched FTA talks with eight trade partners, three of which were completed during its term.

The Rudd/Gillard government took a tougher stance, only signing FTAs that were comprehensive and genuinely reduced barriers to trade in areas of interest to Australia. This stance proved problematic, and apart from two minor deals with Malaysia and Chile, the Labor Party was unable to finalise a major FTA during its term.

The Abbott government has signalled a renewed emphasis on bilateral agreements, promising to reinvigorate talks with Japan and Korea and finalise an FTA with China within 12 months.

But achieving this will involve significantly watering down Australia’s market access requests, and may put the government in the unenviable position of having to choose which of its agricultural sectors to prioritise and which to leave out.

So it’s unlikely that bilateral FTAs will deliver substantial benefits to the Australian economy as a whole.

In this context, a regional approach such as the TPP is appealing. Easier to negotiate than a WTO agreement, but still large enough to make a significant impact, the TPP arguably offers the best hope for Australia to advance trade liberalisation.

The fact that the TPP intends to be a “high-quality agreement” addressing services, investment, and other regulatory barriers has also raised hopes it will improve on the chequered record of bilateral FTAs in the region.

But betting the trade farm on the TPP would be a highly risky strategy for the Australian government. Negotiations are still in the early stages and, as a small player, Australia may not be able to effectively press for its core trade interests, especially in agriculture.

A further complication is that China is not yet a party to the talks, and is promoting the far-less ambitious RCEP agreement in competition with the TPP.

None of Australia’s trade policy options are clearly preferable to the others. Difficult decisions about prioritisation will need to be made if the new government is to fully embrace free trade.

This is the second piece in our series on the Trans-Pacific Partnership.

Read the other pieces:

When trade agreements threaten sovereignty: Australia beware

The Trans-Pacific Partnership and Australia’s right to know

Trade pact would make internet services more expensive

IP trade negotiations a prescription for harm

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