China FTA a win for the govt, but not the economy
A free trade agreement with China is unlikely to yield
significant economic benefits, and we’d be better off simply
liberalising our economy.
Who wins and who loses from the “ChAFTA”, as it’s formally
and clumsily known? Has China got the better end of the deal? Or did
Australia succeed in winning unprecedented access to the vast Chinese
market? Which sectors will benefit?
They’re the wrong questions, driven by a misunderstanding of the benefits and costs of bilateral free trade agreements.
Judging by today’s Essential Report, voters think bilateral
free trade agreements are a good thing, though they’re not really sure
why. The conclusion of an agreement is thus a political win for the
government (which desperately needs one). But the media doesn’t appear
to be much better informed, lauding the ChAFTA as a win for Australia
and explaining how much extra access we will get to China.
What precisely China will get in return, however, is a
matter shrouded in mystery. We know that remaining tariffs on Chinese
manufactured goods will be progressively removed. We know reporting
thresholds for Chinese investment will rise. But in the absence of the
text of the agreement — awaiting finalisation and translation,
allegedly — all we can go on is the information provided by that paragon
of trade agreement transparency, the Department of Foreign Affairs and
Trade, which has helpfully provided a series of fact sheets on each area
of the agreement. So, for example, at the very bottom of the “fact sheet” on agriculture, we’re told:
“Consistent with all of
Australia’s FTAs, Australia will eliminate remaining tariffs on
agricultural and processed food imports from China. To allow adjustment
by domestic industry, the elimination of some of these tariffs, in
particular on a range of canned fruit products and peanuts, will be
phased in over a period of years.”
Otherwise, DFAT is mainly interested in explaining what
Australia will get from the deal. It’s a bit hard to blame the media for
overselling the deal when specific details aren’t provided.
Then again, you might wonder why we even have any
tariffs at all on Chinese products (as with agricultural and processed
food imports, tariffs on manufactured products will be removed over four
years). Or why until now we subjected Chinese investment to restrictive
regulations. Such measures mean, in effect, Australians pay an
additional consumption tax on Chinese imports, and Australian businesses
have less access to investment capital. Why has Australia waited until
China gave us access to its markets in order to remove policies that
harm us?
This is one of the central complaints of the Productivity Commission about bilateral and regional free trade agreements,
which it studied in 2010, looking at a series of agreements negotiated
by both sides of politics. The biggest benefits from such agreements
come from us removing restrictions in our own economy, not access to
other markets. Thus:
“…contrary to mercantilist notions that focus on export promotion
and market access and often cloud debates about trade policy, the main
benefits that arise from trade liberalisation result from a country
purchasing its inputs and final goods from the lowest cost sources of
supply, and exposing its industries to greater import competition by
reducing its own trade barriers. This creates a competitive environment
that drives productivity and a more efficient utilisation of resources
within the economy … the modelling conducted as part of this study
suggests that much of the future economic gains available to Australia
from tariff reductions could be achieved through unilateral reform.”
So the question about whether China or Australia “won” from
the FTA doesn’t make any sense. Negotiating a bilateral FTA is like two
people punching themselves in the face and insisting they won’t stop it
until the other does.
“Did anyone
do a full modelling of the benefits and costs of an agreement with
China over the last decade? Not under the Howard government that began
negotiations, not under the Rudd and Gillard governments that continued
them, and not under the Abbott government that concluded them.”
Indeed, as the Productivity Commission says, using access to
Australian markets, or lower tariffs, as “bargaining coin” in FTA
negotiations simply delays the economic benefits that liberalisation
provides to Australia. This is a critical and underappreciated point.
The Department of Foreign Affairs and Trade is actively harming
the national interest and undermining economic growth by seeking to use
liberalisation as a bargaining chip in trade negotiations. Australians
would benefit from simply getting rid of these sort of negotiations (and
the expensive DFAT bureaucrats and travel needed for them) altogether
and liberalising areas where we’re still punching ourselves in the face.
How about which sector did best? Is it dairy? What about
legal services or financial services? The question makes a little more
sense than which country “won”: FTAs “could have a significant impact on
aggregate trade flows between partner countries,” the Productivity
Commission says — so, yes, particular export sectors could benefit from
the agreement with China — “although some of the estimated increases in
those trade flows are likely to be offset by trade diversion from other
countries”. Oh — so we might sell more stuff to China, but at the
expense of selling less stuff in other markets. That’s not so useful.
This is why the Productivity Commission basically doesn’t
rate FTAs particularly highly: “improvements in national income from
bilateral preferential agreements are likely to be modest”, it
concluded. It specifically criticised the most famous FTA, that
concluded by the Howard government with the United States, for its
draconian Intellectual Property provisions (and US data
shows that the AUSFTA coincided with a big rise in Australia’s trade
deficits with the US). The Productivity Commission also noted the
“investor-state dispute settlement provisions in some BRTAs for which
there appear to be few benefits and considerable risks” to Australia.
And, yes, there’s an ISDS provision in the ChAFTA.
For such reasons, the Productivity Commission recommended
that “[b]efore entering negotiations with any particular prospective
partner, it should undertake a transparent analysis of the potential
impacts of the options for advancing trade policy objectives with the
partner. All quantitative analysis and modelling should be overseen by
an independent body.”
Did that happen for the ChAFTA? Did anyone do a full
modelling of the benefits and costs of an agreement with China over the
last decade? Not under the Howard government that began negotiations,
not under the Rudd and Gillard governments that continued them, and not
under the Abbott government that concluded them. Yesterday, Trade
Minister Andrew Robb — who has diligently and successfully pursued the
government’s ambitions to sign a number of FTAs as rapidly as
possible — said they there hadn’t been “time” to do any modelling.
Let’s hope ChAFTA yields at least the “modest” benefits that the PC says can come from FTAs.
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