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We lose more than we gain in moving away from multilateral trade

The global multilateral trade regime is being challenged by a plethora of regional trade deals. Image sourced from www.shutterstock.com

We lose more than we gain in moving away from multilateral trade

If you struggle to understand the domestic impact of current trade negotiations such as the Trans-Pacific Partnership (TPP) and China Free Trade Agreement (ChAFTA), it is not you; it is them.

The multilateral system is under challenge from a surge of bilateral and regional trade deals that are raising concerns about transparency, efficacy, national interest, development pathways and human rights.

This is why many in the Australian policy commentators and academics have urged the Turnbull Government to release a formal trade policy.

All nations, including Australia, claim they want an open, predictable, non-discriminatory, and rule-based multilateral trading system centred on the World Trade Organization (WTO). Yet the universal consensus is that the trade system is in deep trouble. Important global trade negotiations stall while regional preferential trade agreements proliferate, often likened to noodle bowls or spaghetti. The WTO website lists 276 Regional Trade Agreements currently in force, and the figure is rising.

The DNA of trade is changing, with most trade experts urging reforms to the WTO to adapt to the new world of global value chains, integrated global standards, and transnational investment flows. With global manufacturing, goods are now “made in the world” rather than in a single country.

Economists are urging liberalisation of trade in services - but as we enter into a service and knowledge-driven economy, these negotiations has proven particularly slow and difficult.

One reason is the economic fundamentals of trade are changing. While trade growth grew by 3.1% in 2014 and 4% in 2015, it grew more slowly than global production and remains significantly lower than long-term average growth rates. Many economists are conflicted about the economic benefit derived from FTAs in particular.

Another reason is that the geo-politics of trade is changing. As the WTO reaches its 20th anniversary, many member countries are worried about a clash among blocs - such as the BRICS (Brazil, Russia, India, China, South Africa) versus the OECD (Organisation of Economic Cooperation and Development) nations. The TPP leaves out China by design, which is why so many foreign policy experts are wary.

This all means that as economic diplomacy has achieved a certain primacy for Australia in 2014–15, trade has become an increasingly sophisticated and difficult negotiating area.

Australia has pursued the TPP and bilateral free trade agreements with Korea, Japan and China with vigour and considerable success. These deals do not always have the social support required, due to concerns they will be “Trojan Horse” deals allowing undue influence in user-based intellectual property regimes, labour and technology transfer. In particular, Investor State Dispute Settlement (ISDS) clauses allowing international corporations to limit nation-state sovereignty in public health, have caused a great deal of public concern.

Trade deals now often deal with regulatory compatibility between nations (harmonisation or mutual recognition) rather than tariff preferences. This includes areas like product standards, that more directly affect consumers. DFAT vigorously contests these concerns.

Department of Foreign Affairs and Trade (DFAT) Secretary Peter Varghese suggests we should focus on the “meta challenge of Australian foreign policy” - namely, “How do we maximise economic opportunity and minimise strategic risk as the Indo-Pacific region becomes more powerful?”

We must think more deeply about whether it is possible to spread risk and be nimble while still strengthening the multilateral system, and while engaged in the complex game of modern trade negotiations.

Trade Minister Andrew Robb needs to make the case for trade liberalisation in clearer terms. Rather than a “trust us” approach which dismisses “fear-mongers”, we need a public conversation about the possible winners and losers, along with an explanation as to why the agreement is in the nation’s best interest. An alien looking at Australia’s trade debates in 2015 might not recognise us as committed to trade liberalisation.

What are some of the long-term consequences of the trend towards bilateral and plurilateral trade agreements? Are they building blocks or stumbling blocks? The best-case scenario is that they are complementary. Advocates argue that these agreements maintain the strong momentum and habits of cooperation during a slow period in which the WTO inches forward the Trade in Services Agreement.

The worst-case scenario is that the WTO authority is diminished. We may see delays in large trade issues that are best tackled in multilateral forums, such as trade facilitation, financial liberalisation, telecommunication liberalisation, and farming subsidies. The public could turn against the trade agenda and withdraw their support for an area of foreign policy that was broadly approved.

Harvard University political scientist, Robert Putnam reminds us that diplomacy is always a two-level game: the domestic coordination and public support can be as hard as or harder than the global negotiations, as President Barack Obama is finding over the TPP. Australia should pay more attention to civil society concerns about our participation in trade deals.

My own conclusion is that, acknowledging the limited options Australia has at its disposal, we lose more than we gain in moving away from the multilateral trade system. What is clear is that the public debate on this issue is less rich and less urgent that it needs to be.

Our ultimate success in trade comes not from trade agreements, but from a domestic economy that puts a premium on productivity and competitiveness, while reducing inequality. Trade liberalisation that encourages development and interdependence is still a noble diplomatic pursuit, but must also promote the rule of law in our region.

This piece is based on the essay, Rules-based trade as a pivotal power, in the CEDA policy perspective, Global networks: transforming how Australia does business, released on November 9.