This is the text of a piece I contributed to the Australian Financial Review earlier this week. bq. There are obvious commercial advantages for Australia in being only the second developed country to reach a free-trade agreement with the USA. We may also be the first to reach a free-trade agreementwith China if current talks between Canberra and Beijing succeed. bq. But does this bilateral trade strategy contribute to the decline of the WTOZs global trading system? Or is it possible to use our unique links with both the USA and China to help preserve the non-discriminatory multilateral system from damage and, possibly, to improve the returns we will get from bilateral agreements? The proposed US-Australia free trade agreement appears mostly to meet the high standard that the two sides sought despite the omission of sugar, long implementation periods and remaining questions about the detail. It eventually eliminates most barriers to bilateral exchange, more closely integrating the two economies, without harm to our multilateral WTO obligations. A healthy WTO is essential for an economy such as ours, which has only a 1 percent share of world trade and depends on commodities for 40% of exports. The most basic reason is that prices for commodities, and therefore our terms of trade, are formed by access to demand in global markets, not bilateral or even regional trade. The WTO is, however, only limping along. The collapse of the Cancun Ministerial meeting last September confirmed that the old formulas for managing the global system no longer work. The USA and Europe fumbled their attempts to lead governments to a consensus on serious trade conflicts—some of their own making ” and new directions. The governments of the giant developing economies of China, Brazil and India, however, turned out to have been poor understudies for the leadership roles. The attention of these governments ” who must eventually assume more responsibility for the multilateral system ” has turned to bilateral negotiations. China is negotiating regional agreements with the ten members of ASEAN and with Korea; India has begun to negotiate a trade pact that is planned to encompass all of South Asia; Brazil has retained its dominance of Latin America despite US attempts to redraw the regional trade map.
Australia, uniquely among ZwesternZ economies, has an opportunity to establish bilateral agreements with both the industrial and the developing country leaders. In addition to this weeksZ agreement that joins us, formally, to the US region work has started on a framework for a future free-trade negotiation between Australia and China—possibly the first that China will undertake with any developed economy. This suggests two ways to reconcile our bilateral and multilateral objectives, enhancing the benefits from both. First, we can strike a high-quality bilateral deal with China. China is pursuing a regional trade strategy but has no experience in the design of a WTO-compliant economic integration deal of the kind that we have completed with the USA. ItZs possible that China wants to negotiate with Australia to acquire the technology for future bilateral negotiations. If so, we can build a relationship to our own bilateral advantage as a Zfirst moverZ with China, while setting a high standard for ChinaZs future regional agreements.
Second, we can work on multiplying the trade-creating benefits of our regional agreements while reducing the economic costs due to trade-diversion. ItZs probable that neither the USA nor China considers a high-quality bilateral agreement with Australia to be an end in itself. Both might see agreements with Australia as a first step in a broader strategy to open regional markets more deeply than under current WTO rules. The benefit for Australia of encouraging such broadening is that the more diverse this region and the bigger its membership, the greater our own trade benefits and the smaller the hidden costs of trade-diversion. We should be actively planning to extend to our other trading partners ” e.g the other members of ASEAN, Korea and, eventually, Japan ”the same arrangements that we have agreed with New Zealand, Singapore, Thailand and the USA and that we hope to put in place with China. That ambitious agenda might sound familiar. It’s really no more than re-visiting the 1994 “APEC” agenda but this time as part of a more pragmatic reciprocal, rather ‘unilateral’, program of trade liberalization. Our ability to work with both the industrialized and developing economies has led to creative solutions in the past—such as the Cairns Group. Now, with interests that bridge the multilateral and the regional systems we can take steps to help the WTO recover its balance. by ensuring that its basic guarantees survive these changes in the location of economic power and the direction of world trade.
Peter Gallagher is a leading Australian consultant on trade and public policy.[bio].
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