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Economic diplomacy: FTAs, shrinking China, and ecommerce

Cabinet papers from the Howard government offer a glimpse into Australia’s first steps toward bilateral trade deals.

The shift from multilateral to bilateral deals is possibly the biggest shift in trade policy in the past 25 years (Photo: Fancycrave/ Unsplash)
The shift from multilateral to bilateral deals is possibly the biggest shift in trade policy in the past 25 years (Photo: Fancycrave/ Unsplash)
Published 31 Jan 2019   Follow @Greg__Earl

Bilateral trade’s birthday

Australia’s tentative first steps into the world of the bilateral trade deals – which now tend to dominate the trade agenda – are revealed in the first cabinet papers from the Howard government, released on 1 January.

The Coalition had talked up the idea of a free trade agreement (FTA) with the United States during the 1996 election campaign to distinguish itself from the incumbent Labor government’s Asia Pacific focus, particularly via the Asia Pacific Economic Cooperation (APEC) group. The Coalition had also backed the need for annual trade outcomes statements.

So, on 14 October that year, cabinet endorsed then trade minister Tim Fisher coming back with options for Australia to explore both regional and “free-trade” (ie: bilateral) trade arrangements.

Australia’s shift from being a multilateralist opponent of bilateral FTAs to supporting so-called “high quality” deals was arguably the biggest shift in trade policy in the past quarter century and this cabinet document shows how it was done cautiously.

In certain circumstances, regional approaches may offer quicker market access gains, stronger rule making, and improved trade facilitation than can be achieved multilaterally. But they can distort trade an investment flows and often confront business with competing rules.

The document goes on to say:

Where Australia has enough negotiating coin or can bring to bear high level political influence, there is promising potential for bilateral efforts to open markets. Bilateral market access efforts can be effective against non-tariff barriers, with sustained pressure.

While Fisher says he will come back to cabinet with bilateral deal ideas, the Treasury Department says such a shift will come at the cost to overall Australian economic welfare and Finance warns against trade negotiations that favour individual sectors. The Department of Industry supports the new bilateral approach as does the Department of Prime Minister and Cabinet, although it also emphasises the global liberalising role of APEC.

China in reverse

From the bans on telecommunications company Huawei to the cancellation of the flagship Belt and Road Initiative rail project in Malaysia, China’s 40-year economic renaissance is suddenly under pressure from many angles.

But new long-term projections from Capital Economics have gone further and questioned one of the fundamental tenets of the strategic outlook (and Australia’s Foreign Policy White Paper): that China’s share of the global economy will get steadily bigger towards mid-century.

Instead, the firm says China’s share of world gross domestic product (at purchasing power parity prices) is set to decline two percentage points from 19% today to 17% in 2040.

It’s only one forecaster’s projection but has grabbed the attention some economists, most notably the Financial Times’ Martin Wolf, who is certainly no China bear. He says in response:

China may well fail to replicate the success of other east Asian high-growth economies, in becoming a high-income country in short order.

While the US-led efforts to rein in China’s high-tech superiority ambitions have long been gestating, this sort of revisionist economic growth outlook may only add more impetus to the showdown now underway.

What’s interesting about the Capital projections is that while China is now larger than the rest of developing Asia (minus Japan), by 2040 it will be overtaken by Asia’s other emerging economies powered mainly by India, Indonesia, and Vietnam.

China would still be the world’s largest economy but not quite the projected outsized player that has possibly underpinned its more aggressive actions in recent years.    

Multilateralism survives

The agreement by almost half the world’s countries to pursue a new agreement on ecommerce trade has suggested that the rise of bilateral trade deals and the isolation of China (raised above) are not remorseless trends.

It is significant that China has remained inside the tent on this digital economy initiative despite not being an early participant in the process or being part of the Trans-Pacific Partnership.

Australia, along with Japan and Singapore, (all once staunch multilateralists) hosted the gathering at the otherwise lifeless World Economic Forum which led to 76 countries starting modified World Trade Organisation (WTO) negotiations on ecommerce, with the aim of achieving an agreement with the participation of as many members as possible.

It is significant that China has remained inside the tent on this digital economy initiative despite not being an early participant in the process or being part of the Trans-Pacific Partnership, which has pioneered some principles for the new broader ecommerce negotiations.

It’s a contrast to the fractious bilateral trade negotiations between China and the US now underway in Washington, even though China won’t get its way entirely in the modified WTO process. And once again India, in contrast to China, has chosen not to participate in this sort of initiative despite being a significant information services player.

With the Trump Administration relentlessly undermining the WTO, this might provide a vehicle for defending the value of a core piece of global financial architecture.

ASEAN in the middle

The latest annual survey of international policy sentiment across Southeast Asia by the ISEAS-Yusof Ishak Institute underlines what quicksand this region is for neighbours (like Australia) or strategic rivals (like the US and China) seeking simple answers.

  • Despite promising to complete the Regional Comprehensive Economic Partnership for the past several years, 47% of those surveyed say they don’t know whether it will be signed this year.
  • On a US-China trade war, 32% think it will be broadly positive for their countries, 40% don’t know and 28% think it will be negative.
  • On China’s Belt and Road Initiative, 65% think it will benefit the region and provide needed infrastructure. But 70% also think their country should be cautious about getting into unsustainable debt from China.
  • On influence, 73% say China has the most regional economic power with ASEAN itself (11%) ranked higher than the US (8%).  But only 45% say China has the most strategic power followed by the US at 35% and ASEAN at 21%.
  • And 61% of these 1000 opinion shapers caught in the middle of the Indo-Pacific construct debate say they still don’t really understand what it is about.

There is not much mention of Australia in this survey of sentiment in our closest neighbours despite the resources devoted to the ASEAN-Australia Summit in Sydney last year. Australia simply appears as the third choice (21%) for overseas study and the fifth choice (11%) for overseas tourism.

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