Free Trade Agreements & Australia. November 2016

 

 

Free Trade Agreements
Globalisation & Free Trade Agreements – What a mess!
(ssc.wise.edu)

History  In recent times Australian Government Ministers and media have commented upon problems and benefits with Australia’s Free Trade Agreements (FTA). There appears to have been little clarification on the pros and cons of these far reaching agreements. This essay seeks to throw light on some of the issues and how they may affect Australia.

In the age of modern empire (16th to 19th centuries) world trade was constrained  by the Mercantilist theory by which governments regulated the empire’s economy such that state power was augmented at the expense of rival maritime powers. The policy reduced imports from rival nations and maximised exports which, in part, fuelled the Industrial Revolution. The effect was to remove subject peoples and colonists from foreign products; this policy was a trigger for the American War of Independence.

Prior to the Second World War, European and American industry imported raw materials from colonies and exported manufactured goods to tied markets round the globe – it was a closed trading loop.

Due to the two ‘World Wars’ in the first fifty years of the 20th century, global trade was severely disrupted. The European empires and Mercantilist trade vanished and trading patterns were ad hoc. The mid-century post-war reconstruction boom generated unprecedented factory growth across the Western world that generated high labour costs and this has sown the seeds of serious labour pains in the industrialised West in the closing years of the 20th century and the opening years of the 21st century.

From mid-20th century, Western world companies commenced a slide towards low-cost labour in Asia and South America causing closure of many Western world factories. This resulted in an inexorable under-employment or job losses that is now bedevilling the working class of the Industrialised world. The flood of cheap imports to the West from industrialising Third World countries has skewed world trade, created trading surpluses, particularly in China. This situation has contributed to low global inflation, deflation, low interest rates and under employment This global situation has contributed to the rise of European Right Wing parties: the popularity  of Mr Trump, the Brexit vote and the phenomena of Bernie Saunders (Democrat,USA) and Jeremy Corben  (Labour, UK).

Free Trade Agreements  Economic theory suggests free trade agreements are the best way to proceed to raise global living standards, particularly in the Third World.  However, not all in the Industrial West benefit. In effect, the practice is producing interconnected global trading blocks with reduced tariffs and quotas. With increasing complexity of trading blocks, the process might spawn the rise of mercantilist groups by another name. Negotiations by nations are complex as each participant endeavours to maximise trade benefits. Currently the advantages of free trade  over mercantilism are:

  • nations benefit from a greater source of goods at lowest prices
  • mercantilism restricts imports resulting in high prices
  • the free trade system makes the nation, not necessarily  the individual, more prosperous
  • mercantilism forces nations to fight over resources – under free trade goods and services are peacefully traded. Since globalisation is not a homogenous process, rival free-trade blocks could have designs on the same resources.

World Economy  The world economy has been moving towards an interconnected globalisation. In today’s world no national economy is completely immune to the health or sickness of other national economies:

  • Globalisation ensures a majority of people benefit through new investment, but high labour costs in outdated industries can create unemployment. The Brexit ‘leave’ vote was lead by those who were ‘left behind’. Mr Trump’s support is, in part, from the disaffected working class.
  • Globalisation can produce lopsided unstable capitalism. There is, within Western World, unease that infrastructure and industrial projects  will proceed in Third World countries where labour costs and tax rates are low.
  • Since Britain’s Brexit vote in June to leave the EU, five industrialised European nations anti-establishment parties are clamouring to erect trade barriers (tariffs) and close borders to immigrants.
  • Increasing globalisation has established that the real incomes of 66% of households in advanced economies have fallen between 2005 and 2014. The few gains have gone to the ‘salaried gentry’. (McKinsey Global Investments)
  • There is growing belief that globalisation benefits elites but much less so for the broader population in advanced economies.
  • China’s integration into global trade, by joining the the WTO, has caused lasting damage to workers in the Industrialised Economies.
  • China’s global penetration of low cost goods has risen from 2% (1991) to 20% (2013).
  • Of the six million American job losses in recent years, 29% are directly related to the import of Chinese goods.
  • With globalisation and increasing free trade, there is clear evidence in the Advanced Economies that wage inequality is growing with growing risk for low and mid-skilled workers.
  • Advocates for free trade admit gains come from greater manufacturing and productivity efficiency not from additional jobs. However, imports are cheaper.
Imports and Exports
Hidden Agendas.  Cheaper Imports – Fewer Jobs
(behindtheline.com)

American Trade Agreements  As a backdrop to Australian trade agreements, the American experience is reviewed. Since 1985, fifteen separate free-trade agreements with twenty countries involved the export of high-value products. Note that these were one-to-one trade agreements not an international consortium master-minded by an American panjandrum. Employees benefited as wage premiums of up to 18% were paid compared to those in non-export industries who were unable to compete with cheaper imports.

In 1998, the United States and China signed a trade pact whereby American export tariffs were reduced from 24% to 9% while import quotas were abolished. Subsequently there were huge job losses in the American industrial heartland, but millions of Americans benefited from cheaper products. Bernie Saunders, a Democrat Presidential aspirant, noted that trade deals are a disaster for American workers.

Trans Pacific Partnership (TPP) Twelve countries have been co-opted and others are being cajoled to join. Negotiations have continued over five years. It was hoped to sign a binding document in 2016 but Partners have delayed until 2017. The TPP was the initiative of President Obama to counter the growing economic might of China. The current membership represents approximately 40% of global GDP and is summarised in the table along with some critical  economic indicators. The Philippines, South Korea, Thailand and Taiwan have expressed an interest in joining. China is specifically excluded as its financial controls and social issues are not considered acceptable. (geopolitical futures.com, 8 August, 2016)

TABLE 1 Trans Pacific Partnership. Members Economic Indicators.

CountryPopulation (m)
GDP (tr) & RankingBudget as % of GDPAverage Wage $'000Unemployment %
United States32418,561----1-3.258.74.9
Australia241,256----13-2.350.25.6
New Zealand5 179-----53-27.737.85.7
Canada361,532----10 -2.643.27.0
Chile18 234-----45 -2.513.47.1
Peru32 180-----52 -2.16.16.5
Mexico1241,063----15-3.09.03.7
Brunei0.4 10---134-16.036.66.9
Malaysia31 302-----38-3.49.83.5
Singapore6 296-----40+0.752.92.1
Vietnam94 200-----48-6.42.12.1
Japan1264,730-----3-5.032.53.0
The table provides an insight into market potential, economic health and probable wage transfer from industrialised to developing economies. (World Bank, International Monetary Fund, The Economist)

Clouds on the horizon are an antagonistic American Congress that is required to enact the TPP into law, while both Trump and Clinton are opposed to this trade deal. Malaysia, Canada and New Zealand have delayed ratification until 2017.

The Roosevelt Institute has poured cold water on the proposed Partnership (DrJ Stiglitz, Columbia University):

  • middle incomes will be suppressed
  • tariffs are already low (average 2.7%) so a strong American dollar will swamp benefits
  • the World Bank opinion is that the proposed Partnership will have zero effect on the American economy
  • the inequality jeopardising the American middle class is a defining challenge to social instability.

The Australia-China Trade Agreement  Before commenting on the TPP, a smidgin of history. This agreement came into force in June 2014. It is a contentious document as revealed on ABC News, October 2015.  (abc.net.au/news) Benefits are summarised as:

  • Benefits
  • Australians will enjoy cheap Chinese Imports, a 5% tariff will apply.
  • Within 2-4 years, Chinese tariffs of between 3-10% will be eliminated on imports of coal and aluminium.
  • Within 9 years, Chinese tariffs of up to 30% will be eliminated on dairy and animal goods.
  • Australian aged-care homes and some hospitals can be established.
  • Improved access to legal and financial partnerships will be expedited.
  • The Foreign Investment review Board will scrutinise all investments by Chinese State owned companies.
  • Problems
  • There is excessive leeway for years and tariff adjustments.
  • No tariff reduction for sugar, rice, wool, cotton, wheat, maize, canola.
  • Customs duties will apply on beef and milk powder if quotas are exceeded.
  • For Chinese investment projects exceeding $150 million temporary workers will be permitted.
  • Under ISDS legislation, the Australian government can be sued if Chinese interests are damaged by subsequent legislation.
  • Acquisition/investment limits  have been raised from $252 million to $1,094 million – excluded are investments in media, telecoms and defence.

 

Hidden Agendas
TPP The Role of Corporate Objectives?
(herinst.org)

Trans Pacific Partnership  (TPP)  The Prime Minister spoke briefly, in glowing terms, on the benefits accruing to Australia from its membership of the TPP. (ABC rn, 7 November 2016) There is growing unease in Australia and among other participants on the conditions of and fall-out from the TPP once it is possibly ratified in early 2017. This concern is a realisation that the trade initiative may be  politically designed to corral Pacific rim nations to further the corporate interests (hidden agendas) of United States industry. (The Drum, June 2015) The twelve nations involved, but not all irrevocably committed, account for 40% of global GDP. (geopolitical futures.com) For Australia, this Partnership does appear to be a lifeline for its economic growth and stability since 70% of its trade passes through the east Asian region. The long-term growth projections based on the TPP for participating countries have been assembled by the World Bank. (June 2016), Table below:

TABLE 2 Modelling Projection under Trans Pacific Partnership to 2030

CountryGDP Growth %Exports %
United States
0.48.0
Australia0.85.0
New Zealand2.912.0
Canada1.66.0
Chile1.35.0
Peru2.39.0
Mexico1.83.0
Brunei4.47.0
Malaysia7.719.0
Singapore2.86.0
Vietnam9.830.0
Japan2.723.0
Modelling Projection of Trans Pacific Partnership to 2030.
World Bank, 10 June 2016
Australia and Mexico appear to have similar disappointing growth projections.

Reports favouring the TPP from the Australian perspective have been issued by the Department of Foreign Affairs and Trade (16 July 2016 ) and the Parliamentary Joint Standing Committee on Treaties (2016). Summarised, their conclusions are:

  • there is a great potential to drive job-creating growth across the Australian economy
  • there is new market access for Australian exporters and investors
  • there will be transparency of regulations of the twelve participating nations, hidden agendas excepted
  • there will be certainty for business, cost reductions and consolidation of supply chains
  • tariff elimination
  • Australian competitiveness will be enhanced which will promote Australia as an investment destination.

Government agencies, being politically controlled, have painted a soft rosy glow on the advantages of the TPP. Disadvantages of the TPP have been expressed in unequivocal terms. Dr M Rimmer, ANU College of Law, states “Australian consumers have been deluded. The intellectual property chapter of the TPP is a monster. The proposals in regard to copyright law, trademark law, patent law and data protection would hit Australian consumers hard.”

Getup (getup.org.au), the Australian political commentator, noted in 2016:

  • the TPP represent a ‘closed door’ deal driven by big business, pharmaceuticals and tobacco
  • foreign companies will be able to sue the Australian government for loss of earnings under the Investor-State Disputes Settlements (ISDS) scheme
  • significantly, the proposal deals extensively with investment not trade.

The Drum (29 June 2015) noted: ‘preferential trade deals, not free trade, add to the complexity of international trade. In this, the Productivity Commission and the Australian Chamber of Commerce agree. It is the opinion of the World Bank that the TPP will have zero effect on the American economy.’

The last round of the TPP talks were concluded in New Zealand during August 2016 with 98% of the deal agreed to. Sticking points are monopolies demanded by the pharmaceutical companies requiring twelve years exclusivity on their products, while other members require only a five year period. This issue has significant ramifications for Australian health costs. The next TPP meeting is scheduled for November in the Philippines.

Apples upsetting the Cart  Recently, four potential Partners and/or angry citizens have had second thoughts or condemned the TPP document:

  • New Zealand. The New Zealand Herald (July 2016) reported wide-spread opposition to pharmaceutical and sovereignty issues, It was reported over 170,000 citizens were involved in the rallies.
  • Canada. The Council of Canadians (November 2016) has held a number of protest rallies that has delayed a Government decision on the TPP until January 2017.
  • Malaysia. Officials have announced that the Government has delayed a formal decision until sometime in 2017.
  • Australia. In May 2014, unions, church groups and community organisations endorsed a letter prepared by the Australian Fair Trade Network to Trade Minister Robb warning of draconian and unfair clauses dealing with public health costs, ISDS provisions, workers rights, environmental protection, copyright provisions and Australian media content. Currently, cyber space across Australia is clogged with damming reports on a poor outcome for Australia if the Trans Pacific Partnership is ratified. The latest word from the Government, risking repetition, was on the 7th November (ABC rn) when the Prime Minister extolled the virtues of the TPP but none of its iniquities.

What to think. What to do.  There are very clear messages of concern coming from across the globe; the Australian government is publicly studiously ignoring them. There are two factors to the TPP. Firstly, it is a political construct to counter the growing might of China and secondly, it is perceived  by the Australian government as a life-line for the nation’s future prosperity.

The attached tables can generate some uncomfortable deductions. From Table 1 the average wage ratio to GDP is instructive. Results are United States 316, Japan 145, Canada 35 and Australia 25. Australia’s productivity has been a concern; this data supports that contention. Table 2 provides an uncomfortable World Bank projection to 2030 of Australia’s growth compared to other members of the TPP.  Australia’s GDP growth % and exports % are among the lowest among the industrialised cohort. Australia’s salvation has to to lie with high-tech exports on the back of its existing exports.

For Australia, there will be further job losses as GDP increases with the development of high-tech industries in the years to come. Is the TPP, with associated noxious clauses but associated with 40% of world trade, the real issue or is there an advantage in developing comfortable individual trading agreements with many nations?

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