Ten years on from the Australia-US Free Trade Agreement, Australia is entering another round of negotiations towards the new and controversial Trans-Pacific Partnership. This is the first article in the Free Trade Scorecard series, in which we review Australian trade policy over the years and where we stand today on the brink of a number of significant new trade deals.
Is Australia enhancing its economic and geo-political interests by negotiating free trade agreements (FTAs) or is it simply mindlessly engaging in world trade policy? While many commentators believe the latter to be true, Australia’s approach is more thoughtful and calculating than it is given credit for in popular media and the academic community.
Australia is engaged in several bilateral and regional negotiations. The most notable are the mega-regional processes led by the US and China – the Trans Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership (RCEP), respectively. This is the most desirable way forward both economically and politically.
Australia would not be better served by focusing its trade policy on the region or adopting a Sino-focused policy. The choice of TPP or Asia and the US or China is a false dichotomy; the implications of “choosing” are too complicated to predict with any certainty. The choice is rather how and on what terms to participate in the different fora.
Australia and its place in the world
As a starting point, it must be remembered that Australia’s choices are limited. Australia is not the prize, nor is it in a position of power in any forum. It is a middle power increasingly dependent on world trade and investment, especially exports of agricultural products.
Recent events such as the global financial crisis (and its ongoing effects) and the high value of the dollar have challenged Australia’s economy and significantly increased the importance of securing stable export markets. Australia is in no position to dictate trade terms. Instead, this nation must seek gains within the framework established by the larger players.
Of course, the optimal solution would be for Australia to seek these market opportunities through the World Trade Organisation (WTO). But Jagdish Bhagwati’s call to eliminate the “termites (FTAs) in the trading system” is long outdated. Focusing exclusively on the multilateral negotiations would be to ignore reality to the detriment of Australia.
The Doha Round is all but technically dead. FTAs are steadily eroding the state of equal opportunity for Australian exporters. Like it or not, the real game is being played outside the WTO.
While a return to multilateralism is likely at some point in the future, the timing is uncertain and the outcomes will be based on the templates established in recent FTAs. If Australia wishes to influence the future of the WTO it must participate in the FTAs of today.
A multi-pronged trade strategy
Most modern FTAs not only focus on tariffs but also on eliminating other forms of barriers to trade. The mega-regional providing the most innovations and rule-making - not only in terms of trade barriers but also “fair” trade - is the TPP.
To the US, the value of the TPP will be in its ability to expand the coverage, scope and depth of FTAs to include rules on a variety of areas including state-owned enterprises, environment and regulatory coherence of standards. I propose the ultimate aim is to garner consensus in order to make it easier to bring these innovations and rules into the multilateral system. It is in Australia’s interests to play a role in developing such norms.
Until Japan joined the negotiations in 2013, the potential economic gains to the US from the TPP were miniscule. The US already has FTAs in place with most negotiating partners and the economics of the TPP were quite simply unimportant.
The economic insignificance of the agreement to the US can be contrasted to the potential gains to Australia. The TPP could offer Australia incremental but increased access to the US and Canadian agricultural markets. Australia will also likely see increased export opportunities to Japan.
Even though Australia did not gain much market access for agricultural products in its recent FTA with Japan – which has attracted considerable criticism – Australian exporters should temper their disappointment with the knowledge that further gains should come from the TPP. The Australia-Japan FTA must be viewed not as a standalone agreement but as a mere entrée providing initial morsels in anticipation of the main course to follow.
In this regard, Australia will gain when Japan and the US offer reciprocal concessions. The strategy, therefore, appears to be to wait for the US to pay for more substantial gains.
We can do more than one deal at once
It is important to note that while China was initially sceptical of (if not hostile to) the TPP, it has softened its views. There is no evidence to suggest it is seeking to punish TPP members. In fact, Australia-China FTA negotiations have pushed on throughout the TPP negotiations and Australia is included in the RCEP negotiations.
Australia does not have to choose China or Asia over any other negotiating partner. New Zealand, Malaysia, Brunei, Vietnam and Singapore are similarly negotiating both the TPP and RCEP.
Turning to the RCEP, there is little reason to believe this agreement will offer any innovations on rule-making. it is also doubtful that it will produce significant market access opportunities. What the RCEP does offer is strategic engagement and geopolitical value in the region most important to Australia’s trading and diplomatic future.
Australia is not solely focusing on mega-regional trade agreements. Of late, Australia’s bilateral focus is squarely on the near-abroad - recent FTAs include ASEAN-NZ (2009), Malaysia (2012), Korea and Japan (both 2014). Negotiations with China remain ongoing but may conclude soon, while talks with India and Indonesia are at an embryonic stage.
All of these countries are negotiating multiple agreements with several countries. In the process, they have been or continue to erode Australia’s position and export market. Australian FTAs are for the most part not about rules formation – they are standard agreements with market access at the core.
The end game
Australia has behaved reasonably and thoughtfully in formulating and executing its trade strategy. Its main aim is clearly to secure market access. Deeper regional economic engagement is not just desirable but necessary for Australia to maintain (and potentially increase) its export markets.
Australia’s recent negotiations are in line with this objective. To date, Australia has secured preferential access to three of its biggest trading partners – the US, Japan and Korea. Upon completion of the Australia–China FTA all its significant export markets will be covered.
These agreements provide Australia with significant preferences over competitor countries to all important export markets. No other country, with the exception of Canada, will have better or more complete coverage of its important markets.
At the same time, Australia has to understand the potential significance of being involved in regional negotiations of geo-political interests as well as the importance of innovations and rule-making being negotiated into the TPP. This is not to say that Australia agrees with or would advocate for the American agenda on innovations and rules. However, being involved will at a minimum allow Australia’s position to be considered, debated and potentially be included in the final form.
Australia must continue to stake out its best position now and into the future in order to protect export opportunities and influence future WTO negotiations. The only way of achieving this is to engage in all forms of arrangements.
It could be that Australia is simply pursuing “mindless engagement” without a clear sense of the key economic objectives, but the evidence does not point in that direction. Australia is benefiting strategically and economically by engaging in all types of trade negotiations.
This article draws on research prepared for the 2014 Workshop “Ten Years since the Australia-US Free Trade Agreement: Where to for Australia’s Trade Policy?”, sponsored by the Academy of the Social Sciences in Australia and Faculty of Arts and Social Sciences, UNSW Australia.