Who’s Afraid of More Free Trade

1 May 2015
Who’s Afraid of More Free Trade - Featured image

There were few bright spots for the Coalition government in 2014, but trade was definitely one of them. Where the Gillard-Rudd governments had made overtures to Asia, spouting rhetoric about the ‘Asian Century’, Minister for Trade and Investment Andrew Robb turned it into something concrete. In a period of a few months, Robb secured trade deals with South Korea, Japan, and China, countries responsible for around 20 per cent of global GDP.

These three deals point towards broader multilateral deals, namely the Trans Pacific Partnership (TPP) Agreement comprising twelve nations. Even more significantly, a Free Trade Area of the Asia Pacific (FTAAP) was endorsed, in principle, at the most recent APEC Leaders’ meeting in Beijing in 2014.

The potential economic gains from current and future agreements should not be underestimated. TPP countries represent about 37 per cent of the world’s GDP. Growth is slowing in East Asia’s mature economies.

Tepid global growth is the primary cause, but sclerotic services sectors (major contributors to GDP in advanced economies), restrictions on investment, and impediments to competition in domestic markets are the key drags. Australia is no exception.

A trade agreement between the world’s more dynamic economies is the catalyst for economic reforms that will promote global—and Australian—growth. TPP and the other trade agreements therefore represent a significant opportunity for Australia by integrating our economy more closely with the world’s increasingly linked supply chains.

But free trade has always had its opponents. TPP has inspired similar opposition that has been predictable and steadfast, coming from three main groups: environmental campaigners, organised labour, and the public health lobby.

Environmental campaign groups are as critical of the agreements as they are of open markets generally. The reasons are simple: more trade equals more consumption and more economic growth, and groups such as Greenpeace have previously spoken of the need to ‘suppress’ economic growth.

Environmentalists have subsequently lobbied to have greater provisions for environmental protection in trade agreements.

There have previously been a number of efforts to use the World Trade Organization (WTO) as a tool to stymie trade on environmental grounds. These have been largely unsuccessful. Incorporating environmental provisions into new trade agreements has therefore been their priority.

Trade unions—particularly in manufacturing—oppose more open trade simply because open markets mean more competition. Fewer manufacturing jobs mean lower union membership. This was particularly the case in the 1980s and 1990s.

But the fact is that tariffs on manufactured goods are already low. Less competitive firms have already been weeded out; manufacturing today is no longer as labour intensive. So why the opposition now? The answer is two-fold: higher levels of foreign investment and the services sector.

Most gains from new agreements such as TPP will be in liberalising investment and services. Services is the sector in which most Australians work. This includes financial, legal and other professional services such as construction, health, education and telecommunications, amongst others.

More liberal investment rules will lead to a greater presence of foreign firms and management. This will create a more competitive business environment in which operators may be less swayed by union thuggery.

Greater competition in Australia’s relatively small economy will require large incumbent firms to rein in costs—particularly labour costs that have been pushed up over time by cosy union-management arrangements. And greater competition is a clear consequence of a more liberalised investment landscape: the number of US affiliates in Australia increased significantly following the signing of the Australia-US agreement.

Related to this new investment landscape is the changing nature of the Australian economy, which is now dominated by services, namely construction, health and education services. Australia’s traditional manufacturing base has gone. The construction, health and education services—public services—are now the union base.

Think, then, of more liberalised investment in services where the traditional agreements between unions and construction companies working on infrastructure projects would never emerge. Is it any surprise then that the CFMEU went so far as to call for public services to be removed from the TPP in their entirety?

Similarly the public health lobby has been a long-time opponent of free trade agreements. Much of their opposition has revolved around intellectual property (IP) rules in relation to pharmaceutical patents.

A trade agreement, they argue, that adequately enforces IP rules will prevent generic medicines from entering the market sooner, driving up the costs of medicines and depriving the poor of life-saving treatments.

While this argument is presented as a health policy debate, their real argument runs more along these lines: private companies that invest private resources and expertise into developing new treatments should have their work co-opted by a government that should curtail their ability to profit.

These opposition movements are nothing new. Many of the same arguments permeated the debate around the Australia-US Free Trade Agreement (AUSFTA) almost a decade ago. Critics claimed the landmark 2004 AUSFTA would decimate the Australian economy. Instead, bilateral investment between the countries tripled in the seven years following the agreement.

But the new rallying cry for these three groups is the inclusion of ‘investor-state dispute settlement’ (ISDS) into new trade agreements. In a nutshell, this rule gives overseas investors the ability to go into arbitration if a government changes the rules contained in a trade agreement in such a way that the investment is undermined.

Say, hypothetically, an Australian company invested in mining operations in Indonesia based on investment conditions, and entered into a new Australia-Indonesia trade agreement. The Indonesian government then changed those rules further down the track, forcing the Australian company to divest part of its investment to an Indonesian state owned enterprise.

Under normal circumstances this would be considered part of the risk of doing business in Indonesia, and that risk would be priced accordingly. ISDS gives the investor an appeal mechanism, which directs the investor and the host country to an independent international tribunal.

Activists broadly claim ISDS is more sinister, and that it gives the companies the ‘right’ to sue governments if they enact legislation in the name of labour, the environment or public health. This is simply not the case.

Australia has created a procedure in its free trade agreement (FTA) with South Korea which addresses this point. The FTA provides the same right in the ISDS provisions to regulate in the public interest which is specified in Article

of the General Agreement on Tariffs and Trade (GATT), the predecessor to the WTO.

What these interest groups are proposing is that certain policy areas—which are unsurprisingly related to their own special interests— be ‘carved out’ of ISDS or trade agreements altogether. This is of particular concern because it attempts to use trade policy to pursue nontrade policy objectives.

Trade is a two-way relationship. Think of Australian wines being hit with Australian-style plain packaging laws in overseas markets for public health reasons (Indonesia and Thailand have both raised this possibility). Or exports of Australian fossil fuels being rendered uncompetitive in overseas markets by a border tax on carbon. Or Australian property investors being undone by construction-site thuggery in another country.

The Australian business community has, for the most part, been asleep at the wheel on trade. Australia has historically pushed for more open markets in order to shore up exports. This has led to complacency around trade. But there is little left to liberalise in goods; most of the economic gains have been made. Liberalisation in services and investment are likely to deliver gains for the region into the future, especially since services make up more than two-thirds of the Australian economy.

By the same token, outward investment by Australian companies is likely to become more important to the Australian economy. Australia is a mature economy; the size of the Australian market is limited in terms of organic growth. Several major Australian companies rely on outward investment for growth, and this is particularly important for Australian shareholders. Growing businesses will be reliant upon overseas investment.

This underlines why lobbying from vocal minority interests on non-trade issues is so dangerous to future trade agreements. Bringing health, the environment and labour into trade policy will complicate remaining negotiations and potentially undermine them completely—which is no doubt the goal of those lobbyists.

Support the IPA

If you liked what you read, consider supporting the IPA. We are entirely funded by individual supporters like you. You can become an IPA member and/or make a tax-deductible donation.