What’s the point?

The Aus­tralian gov­ern­ment is report­ed­ly con­sid­er­ing a ‘free trade agree­ment’ with the Gulf States. There’s no announce­ment from the Gov­ern­ment that I can see to back this AFP “story”:http://story.news.yahoo.com/news?tmpl=story&cid=1518&ncid=1518&e=10&u=/afp/20040809/bs_afp/australia_gulf_trade_040809071129, but the idea has been float­ed before by the Trade Minister’s office. I can’t see a coher­ent pol­i­cy behind this ‘cher­ry pick­ing’ approach to pref­er­en­tial trade agree­ments. They are sup­port­ed by busi­ness groups who are look­ing for a com­pet­i­tive advan­tage in an export market:the Aus­tralia-Arab Cham­ber of Com­merce in this case. But the advan­tage dis­ap­pears pret­ty quick­ly if com­peti­tors reach a sim­i­lar deal—as they often do. What doesn’t dis­ap­pear is the addi­tion­al logis­tics cost of man­ag­ing yet anoth­er set of com­pli­cance require­ments in order to access the pref­er­ence. I had an Op-ed arti­cle in the Aus­tralian Finan­cial Review last week on this top­ic. Here’s the full text:



    The pro­pos­al of a Free Trade Agree­ment (FTA) with Malaysia
    sounds like a wel­come coup, giv­en the irri­tat­ed tone of our
    bilat­er­al rela­tions in the past 20 years. But as the num­ber of
    our region­al FTAs grows, we need urgent­ly to revis­it our
    oppor­tunist approach to them before the costs begin to out­weigh
    the ben­e­fits.
    Aus­tralia has become the most promi­nent nego­tia­tor of
    bilat­er­al agree­ments in the Asia-Pacif­ic region after rely­ing
    almost exclu­sive­ly on mul­ti­lat­er­al agree­ments — the WTO—for
    fifty years. The economies with which we’ve ini­ti­at­ed talks or
    closed deals in only the past 18 months have a com­bined size of
    $12 tril­lion1, strad­dling both the indus­tri­al­ized and devel­op­ing
    world.
    What’s sur­pris­ing is that this change in strat­e­gy has been so
    ad-hoc. As sug­gest­ed by the sub-title of the rel­e­vant chap­ter in
    the Government’s 2004 trade state­ment (‘Pur­su­ing every
    opportunity&’), we are doing lit­tle more than ‘pick­ing cher­ries’
    as the oppor­tu­ni­ties arise. Although we’re in the mid­dle of a
    sec­u­lar change in way we man­age trade rela­tions, the gov­ern­ment
    has almost been at pains to avoid artic­u­lat­ing a change in
    pol­i­cy.
    Per­haps that’s because they know that an FTA-dri­ven region­al
    trade pol­i­cy, which is what we seem to have at present, won’t
    work; or at best will under-per­form. A tan­gle of bilat­er­al FTAs
    won’t offer a coher­ent plat­form for region-wide trade rela­tions
    because they are by nature dis­crim­i­na­to­ry, based on
    cre­at­ing exclu­sive ele­ments in bilat­er­al trade that, added up,
    are inher­ent­ly cost­ly.
    An exam­ple helps to illus­trate this point. Ear­li­er this year,
    at the end of our recent nego­ti­a­tions of a Free Trade Agree­ment
    with Thai­land, I was work­ing on behalf of Aus­tralian clients,
    some of whose exports will final­ly get duty-free treat­ment in the
    Thai mar­ket only after 20 years and dur­ing all that time will be
    under threat of ‘safe­guard’ action by Thai­land that could,
    tem­porar­i­ly, put the shut­ters up again.
    Aus­tralian nego­tia­tors were unable to get a bet­ter deal on
    access. But at the last minute, under intense indus­try pres­sure,
    they extract­ed a ‘rever­sion’ clause from the Thai.  Under that
    pro­vi­sion, if my client’s for­eign com­peti­tors also ben­e­fit from a
    bilat­er­al free-trade agree­ment in the future on bet­ter terms than
    our deal then we’ll have a guar­an­teed right to seek rene­go­ti­a­tion
    of the access arrange­ments.
    In the last hours of the talks, the dan­ger that com­peti­tors
    might in future get a bet­ter deal on a dis­crim­i­na­to­ry basis
    loomed larg­er than the mod­est access improve­ments them­selves.
    It’s the dif­fer­ences betweenFTAs — either the
    FTAs between third coun­tries and our bilat­er­al trade part­ners or
    even among our own FTAs with dif­fer­ent coun­tries — that are the
    touch­stone of val­ue in an FTA as far as exporters and importers
    are con­cerned because a dif­fer­ence rep­re­sents a com­pet­i­tive
    advan­tage.
    Every dif­fer­ence, how­ev­er, also poten­tial­ly adds to the
    com­plex­i­ty of the trad­ing sys­tem and, as a result, to the prod­uct
    devel­op­ment, mar­ket­ing and com­pli­ance costs firms face in
    exploit­ing the agree­ments.
    It should be a prin­ci­pal goal of trade pol­i­cy in our region to
    sup­port the region­al growth of glob­al­ized pro­duc­tion chains
    involv­ing the con­tri­bu­tion of val­ue-added from dif­fer­ent places
    to a final prod­uct. Pro­cess­ing trade is one of the fastest
    grow­ing forms of exchange in East Asia account­ing for up to half
    of China’s imports and exports. But rules of ori­gin that guard
    dis­crim­i­na­to­ry advan­tages in bilat­er­al FTAs often mean that a
    firm can’t rely on a pref­er­ence in any mar­ket if it uses
    inter­me­di­ate prod­ucts import­ed from a third coun­try in its
    exports. Pref­er­en­tial rules of ori­gin can stop glob­al­iza­tion in
    its tracks.
    Dif­fer­ences in approach to stan­dards and com­pli­ance between
    bilat­er­al FTAs require cost­ly new man­age­ment sys­tems for both
    agri­cul­tur­al and man­u­fac­tur­ing busi­ness­es. For ser­vices
    busi­ness­es the dif­fer­ences can per­pet­u­ate frac­tures caused by
    dis­crim­i­na­to­ry approach­es to the recog­ni­tion of qual­i­fi­ca­tions,
    accred­i­ta­tion and invest­ment reg­u­la­tion.
    In sum­ma­ry, cre­at­ing clas­sic FTAs one by one is an
    unsat­is­fac­to­ry basis for a region­al trade strat­e­gy because
    your advan­tage in a dis­crim­i­na­to­ry FTA is often
    mydis­ad­van­tage. Any attempt to lib­er­al­ize trade around
    the Asia-Pacif­ic region on the basis of bilat­er­al FTAs would be
    more like­ly to redis­trib­ute prof­its than to grow trade
    vol­umes.
    The rapid growth in the num­ber of FTAs points to a sec­u­lar
    change in the trad­ing sys­tem. Our response to it must be more
    sophis­ti­cat­ed than our cur­rent approach of tak­ing advan­tage of
    bilat­er­al oppor­tu­ni­ties as they are offered.
    It won’t be easy to get around the lim­i­ta­tions of the
    bilat­er­al FTAs with­out weak­en­ing the incen­tive to break down
    ‘recal­ci­trant’ trade bar­ri­ers. But there are few coun­tries bet­ter
    equipped by expe­ri­ence, good region­al rela­tions and a strong
    eco­nom­ic record than Aus­tralia to take a lead. We can­not do it
    alone: it has to be a region-wide project, prob­a­bly based on an
    agree­ment to homolo­gate cur­rent dis­crim­i­na­to­ry agree­ments and to
    make a tem­plate for future deals.
    Such approach­es will be hard to agree and dif­fi­cult to
    enforce. Homolo­ga­tion of cur­rent agree­ments and a ‘cook­ie cut­ter’
    approach to future rec­i­p­ro­cal agree­ments, prob­a­bly on a
    pluri­lat­er­al basis, will inevitably cut back the com­pet­i­tive
    advan­tage that a dis­crim­i­na­to­ry approach offers and gen­er­ate
    resis­tance. But there is a very big prize for suc­cess in such a
    project.


    1 USA,
    Chi­na, Thai­land, Sin­ga­pore, Malaysia have a com­bined GNI of
    $12,683,067 mil­lion accord­ing to the World Banks’ Glob­al
    Devel­op­ment Indi­ca­tors, 2004

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