Trade Policy and Economic Opportunity

April 18, 2016International Tradeby East Asia Forum

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Don't let economic opportunity slip when conducting trade policy.

The goal of trade policy is not limited to increasing export opportunities. Nor is it just about improving trade balances. Rather trade policy is about taking opportunities to improve the economy’s productive base. When assessing a nation’s experience with bilateral trade agreements, this test should be applied.

In each bilateral agreement Australia has completed to date, projections of the potential gains for Australia, based on unimpeded access to all markets of the other country involved, were released prior to negotiations.

These studies did not, and could not; project what was actually achieved in the ensuing negotiations. The quite modest outcomes for Australia from those negotiations meant the projected gains conveyed nothing about what was eventually achieved. Yet the projections were still quoted to support the agreements after they were signed, as though they reflected actual outcomes.

This approach to accounting for the outcome of trade agreements has meant that Australia has missed opportunities for productivity gains. So how, given Australia’s recent experiences, can trade policy and negotiations be better conducted in future?

Australia cannot change how it negotiated its agreements with the United States, Japan, South Korea and China. However, policymakers can refine their approach to future negotiations. Australia’s trade policy should be guided by a model based on its conduct in the Uruguay Round of trade negotiations. The Uruguay Round confirmed that the domestic decisions needed to secure gains from unilateral liberalisation and those required to secure the full gains available from negotiations have converged.

The negotiations in the Uruguay Round took place at a time when former Prime ministers Bob Hawke and Paul Keating were reducing Australia’s barriers to trade unilaterally. Their productivity-enhancing reforms were subsequently offered and accepted in the Uruguay negotiations as Australia’s contribution to global trade reform. Consequently, Australia secured all the gains available from trade negotiations: the major gains in productivity from reducing the barriers protecting less competitive industries, as well as securing greater access to external markets.

This was the kind of win–win outcome negotiators should seek from all trade agreements. It made a substantial contribution to the prosperity Australia has since enjoyed.

The opportunity to improve economic performance in this way was missed in all three free trade agreements concluded in 2014. In those negotiations, conducted in secret, Australia’s agenda was simply a market access wish list. The outcome for domestic efficiency was determined by the market access arrangements negotiators happened to agree on, rather than a central objective in deciding which domestic barriers to reduce. In addition, success was measured by whether the outcomes improved access to external markets.

The agreement with the United States demonstrates the consequences of this approach for domestic efficiency. Australia gained no worthwhile access for beef — an export in which it is world-competitive — for the next 18 years. However, it did secure immediate and unrestricted access to the US market for Australian cars — one of the country’s least competitive industries. If countries approach negotiations in ways that avoid adjustment for protected domestic industries, there will be less scope to develop export industries based on real competitive strengths.

There is no conflict between the need for secrecy during negotiations and a process that provides transparency and a negotiating agenda that secures the productivity gains available. Both requirements can be met by following the model established by Australia in the Uruguay Round.

In future trade negotiations, the Productivity Commission — Australia’s independent policy review institution — could provide a basis for market-opening offers by conducting a public inquiry and reporting to government before negotiations get underway. This report would be released only when negotiations are complete.

This process would preserve secrecy during negotiations while providing a basis for market-opening offers. Parliamentary and public scrutiny of the outcomes of negotiations could take place before ratification. This would reflect the transparency arrangements that paved the way for Australia’s reforms of the 1980s and 1990s.

It may be time for Australia to move responsibility for trade policy away from the Department of Foreign Affairs and Trade (DFAT). In view of the policy impasse that now exists, Australia should consider instead placing ministerial responsibility for trade policy with the treasurer, who is responsible for the Productivity Commission and all other areas of microeconomic policy.

There are no grounds for suggesting that DFAT is anything other than competent in dealing with issues intrinsic to foreign affairs. However, trade policy is not one of those issues.

Of course, most people have only a passing interest in debates about trade policy. The approach currently undertaken by Australian negotiators enjoys popular acceptance because the competing approach I have outlined is counter-intuitive. Responsibility for introducing and communicating the need for change rests squarely with the political leadership.

A change of this kind will require preparedness by leadership to embrace — and explain to the public — what is at issue for the economy and community. It is time to allow the community to enter the trade policy debate and, in doing so; make the most of future agreements.

Trade policy lessons from Australia is republished with permission from East Asia Forum

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