Business has shown itself to be more than ready to take advantage of these opportunities, leading to production networks which add value to products along multi-economy global supply chains. It is very hard to assess the origin of products in this new environment. There would be no need to do so, without the ever-more tangled rules of origin in so-called Free Trade Areas, which divert economic activity from the most efficient directions.
In his speech, Dr Emerson reaffirmed the most effective way for any economy to seize potential gains from engaging in this 21st century model of international commerce is unilateral action to eliminate remaining policy obstacles, such as residual tariff barriers, on a non-discriminatory basis. The bulk of the gains from such unilateral reform will accrue to Australia; therefore, as Minister for Trade, he intends to:
‘… dispense with the bargaining chip approach to the remaining Australian tariffs.’
Emerson also noted that:
‘The principle of non-discrimination is the foundation stone of the World Trade Organization’s global trading rules…. Discriminatory trade agreements can divert trade away from more efficient, excluded producers to less efficient parties to the agreements. Like currency wars, trade diversion amounts to no more than a redistribution of jobs and prosperity instead of the creation of more jobs and prosperity. Worse, trade diversion is inherently job-destroying and income-destroying from a global perspective.’
And later, he emphasised that:
‘… non-discriminatory trade agreements offer better long-run returns for Australia — they are more likely to result in trade creation instead of diverting trade from other countries that, in the absence of tariffs, would be lower-cost producers.’
Significantly, Emerson states that previous GATT/WTO negotiations had led to significant non-discriminatory liberalisation; therefore Australia would be pressing for the conclusion of the Doha Round. Emerson noted that the APEC process had:
‘… helped establish the confidence necessary for economies to undertake unilateral trade policy reforms — a confidence in the knowledge that tariff reductions made sense from a domestic reform perspective and that regional partners were doing the same.’
It was this confidence which, in the 1980s, led Australia to implement a non-discriminatory lowering of average applied tariffs during the last quarter of a century; from more than 25 per cent to around 5 per cent, which in turn helped to modernise Australia’s economy and laid the foundation for continued growth.
Australia may consider future bilateral trade deals which would lead to significant liberalisation. But Emerson ruled out concluding any more deals which did not deal with remaining obstacles to trade in sensitive products and criticised the former Government for accepting a trade deal with the United States for political reasons, even though it did not lead to any significant new market access.
In the future, Australia would not embark on new negotiations based on overly optimistic modeling of the best-possible outcome. The real outcome of negotiations would be assessed before signing up to any new deal. Looking ahead, the government will not be interested in
‘… collecting trophies for the national mantelpiece, empty vessels engraved with the words ‘free trade agreement’ if they are nothing of the sort and of token value to our country.’
This renewed preference for unilateral and non-discriminatory ‘opening to the outside world’ is consistent with findings of the newly released report from Australia’s Productivity Commission on bilateral and regional trading agreements (BRTAs), which noted that the benefits of these preferential trade agreements had been oversold.
The report noted that preferential trade agreements did bind many tariffs at zero, but sensitive products were often exempted or liberalised after lengthy phase-in periods. Therefore, the effects on the Australian economy have been quite modest. The business sector had:
‘…provided little evidence that Australia’s BRTAs have generated significant commercial benefits.’
That is hardly surprising. Preferential trade agreements are based on an business model of the last century, when international commerce was dominated by bilateral trade in commodities and finished manufactures.
The Productivity Commission noted that recent preferential trade agreements sought to cover more than trade in goods, but have not proved particularly effective. For example, provisions on trade in services:
‘…do not necessarily lead to significant reductions to services barriers in partner countries. In a number of areas, the main impediments to effective competition by Australian services providers in partners’ services markets are related to regulatory and institutional issues that lie outside the scope of BRTAs.’
On investment:
‘…provisions in Australia’s BRTAs have bound current arrangements and provided protections against future policy changes rather than reducing existing investment barriers.’
The report said that facilitating trade by means such as improved customs procedures, harmonisation or mutual respect or regulations or standards did not need to be negotiated.
All governments interested in promoting trade and investment want to reduce transaction costs in these practical ways. The constraint on progress is the capacity to design and implement appropriate policies. APEC working groups have proved effective in terms of identifying ways to reduce the cost and risks of international commerce and helping to build the capacity to implement them. The reforms and cooperative arrangements encouraged by the APEC process are already saving billions of dollars per year. These policy improvements yield greatest benefit if they are applied to all trading partners so there is no merit in linking such reforms to negotiations for preferential reductions of traditional border barriers.
Unfortunately, these realities, the findings of the Productivity Commission and the Australian government’s call for a return to best practice trade policy will not easily stop the proliferation of preferential trade agreements. Such agreements undermine the multilateral system which continues to underpin the bulk of world trade and economic growth. At the same time, other governments will take note of Australia’s new approach and look for the most effective ways to pursue their real multilateral interests, rather than without thought launching more and more bilateral and preferential negotiations which, at best, produce modest economic gains for participants, but damage other economies.
Andrew Elek is a Research Associate in the Crawford School of Economics and Government at the Australian National University. He was the inaugural Chair of APEC Senior Officials in 1989.