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&#8217), 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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