Thursday, July 31, 2008

Free Trade Agreements that are anti-trade

That's what we are in for after the collapse of Doha

The symbolism is appalling. Just when the world most needed a breakthrough on climate change, its seven-year battle to get one on trade at the Doha talks broke down.

And then just hours later Australia signed its own one-on-one Free Trade Agreement with Chile.

What's wrong with separate one-on-one side deals of the kind that became ubiquitous under the previous government?

We're going to see a lot more of them. Without a worldwide trade agreement the only way to break down trade barriers will be through a patchwork of one-on-one and regional agreements.

What's wrong with such “free trade agreements” is that they often anti-trade.

Don't take my word for it...

Researchers at the Productivity Commission have found that separate side deals more often hurt trade than help it.

A few years back the Commission examined the effects of 18 of the world's major Free Trade Agreements - or “preferential trade agreements” as it more accurately called them – and found that 12 had actually been anti-trade.

It's because while free-trade agreements such as the one between Australia and the US confine allow each special access to each others' market and so increase that trade, they cut back other trade. One way this happens is through “rules of origin”. Under the agreement the US will only allow Australian goods into its country on preferential terms if they are “substantially” Australian. That means that Australian goods that could once freely include imported content are made to restrict it in order to get preferential access to the US.

Complicated? You bet. The US-Australia Free Trade Agreement includes a “yarn-forward” rule that requires the yarn that is used to make fabric that is preferentially traded between Australia and the US to be “formed” within one of the two. Australia is no longer free to source its yarn from the cheapest supplier – unless it wants to miss out on “free” access to the US.

And when the growing patchwork of individual free-trade agreements begin to overlap the complications multiply.

That's why Kevin Rudd has described what we are left with as an absolute tragedy.

Australia's Trade Minister Simon Crean who has been working 18-hour days in Geneva in an attempt to ensure there is a global trade agreement described what a world would be like without one a few months ago.

“It would be a world built around preferential trade blocs, further favouring large powerful nations at the expense of smaller ones. Small countries would be locked out of deals with major trading partners and left to languish,” he said.

“It would be a world where the benefits of trade are not shared widely, where trade is heavily distorted, and where the economic performance even of major trading nations is constrained by reduced opportunities to exchange goods and services.”

It's what's in store, and once it takes hold it will be very hard to undo.


Richard Adams, Philippa Dee, Jyothi Gali and Greg McGuire,
The Trade and Investment Effects of Preferential Trading Arrangements - Old and New Evidence, Productivity Commission Staff Working Paper, July 2003.

Paul Gretton, Jyothi Gali, The Restrictiveness of Rules of Origin in Preferential Trade Agreements, Productivity Commission, Paper presented at the 34th Conference of Economists 2005 University of Melbourne

Productivity Commission,
Trade & Assistance Review 2003-04