Bilateral trade deals simply a political plaything

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The Drum 15th April, 2014

Bilateral free trade agreements are political confidence tricks.

Far from encouraging trade liberalisation, the trade negotiation process holds it back.

Bilateral agreements make international trade seem like a game that countries win or lose. They encourage countries to hold back on domestic reform, seeing tariffs as bargaining chips for future negotiations. And worst of all, they bury the interests of consumers in the morass of international diplomacy.

The Abbott Government is currently signing bilateral trade agreements across Asia. They've finalised one with Japan, another one with South Korea, and they're trying to get one with the really big fish - China.

These are described as free trade deals but they're really more like mutual long-term tariff reduction pacts. When the Japanese agreement is in full force in 2029, Japanese consumers will still be paying a 19.5 per cent tariff on imported Australian frozen beef, and 23.5 per cent on fresh beef.

Twenty-three per cent is nobody's definition of "free". Beef tariffs are bad for Japan and Australia alike.

In 1817 David Ricardo demonstrated conclusively that free trade is mutually beneficial to all involved. Two centuries later Ricardo's law of comparative advantage is still what both left and right-leaning economics professors teach their students.

The textbook Principles of Economics, written by the Harvard professor and former Bush advisor, Greg Mankiw, tells students that "the best policy, from the standpoint of economic efficiency, would be to allow trade without a tariff".

Economics, by the Nobel-winning Paul Krugman, agrees: "The vast majority of economists would say that international trade is a good thing from the point of view of the nation as a whole."

But here's the thing. The biggest benefit we get from free trade deals isn't that other countries lower their tariff barriers. It's that we lower our own.

Lower tariffs in Australia means cheaper consumer goods and a higher standard of living. Protectionism only favours a few well-connected industries, and does so at the expense of everyone else.

In other words, the chief benefit of trade deals is that they provide an excuse to liberalise domestic trade barriers at home, while placating Australian producers with promises of new markets abroad.

This makes the incredibly complex bilateral trade agreements a much less appealing proposition.

Why not lower tariff barriers unilaterally? In a 2010 report into trade agreements, the Productivity Commission recommended that we do exactly that.

Indeed, the greatest trade liberalisation in Australian history was unilateral - the surprise 1973 decision by the Whitlam government to cut tariffs by 25 per cent across the board.

But the diplomatic focus on trade agreements makes it unlikely we would do this sort of autonomous liberalisation again.

Modern trade agreements are still, to a very large extent, shaped by memory of the Great Depression.

One of the first and most damaging responses of policymakers to that economic calamity was to immediately raise trade barriers. But protectionism only made the slump worse.

As a consequence, when policymakers were rebuilding the international economic system after World War II, they wanted to set up formal institutions that would bring about long-term tariff reductions around the world, and try to guarantee such mistakes were never made again.

One of the big issues at the 1944 Bretton Woods conference (which set up the International Monetary Fund and the World Bank) and the 1947 Geneva conference (which set up the General Agreement of Tariff and Trade, the precursor of the World Trade Organisation) was the preferential trade deals the United Kingdom had set up with the rest of the Commonwealth in the middle of the depression - a policy called imperial preference.

The solution was multilateral trade agreements through the GATT. These rounds ended imperial preference and ate away at the barriers that had built up around the world.

But in the 21st century multilateral trade deals have become bogged down. The Doha round, which is trying to get a trade deal between 159 countries at once, has been going since 2001 and looks unlikely to conclude anytime soon (despite modest progress in Bali last December).

As multilateralism has become dysfunctional, individual countries have filled in the gap by forging individual agreements with each other. Regional trade deals are also being developed.

But the irony here is that those individual and regional agreements are the same sort of preferential trade deals that multilateral trade liberalisation was designed to wipe away.

And they're being instituted for largely the same reason.

Imperial preference was less an economic policy than a political one. It was seen by politicians in London as symbolising the strength of the British empire in adversity.

Likewise, today's trade agreements are more about forging diplomatic relationships than benefiting consumers.

This may be why politicians and the press gallery get excited by trade deals but economists and consumers less so.

Perversely, the rise of bilateral trade agreements creates an incentive to keep trade barriers high. The Abbott Government has provided a classic illustration of this dynamic.

The Coalition went into the 2013 federal election promising to tighten controls on foreign investment, for instance lowering the threshold for Foreign Investment Review Board scrutiny of agricultural land deals to deals worth $15 million.

Now that promise is apparently being used as a bargaining chip in the negotiations over the Australia-China trade agreement deal, to be dealt away in return for liberalisations in China.

In part this is because Australia is a relatively open economy already. There are not that many tariffs to bargain with.

But mostly it's because free trade agreements have little to do with the virtues of free trade. They're about politics and diplomacy, not economics.

This article was originally published on ABC's The Drum, available at: http://www.abc.net.au/news/2014-04-15/berg-bilateral-trade-deals-simply-a-political-plaything/5390546

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