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Economists challenge Australia’s trade policy

 Economists challenge Australia’s trade policy
Published 24 Aug 2016 

By Bill Carmichael, former chairman of the Industries Assistance Commission, with the assistance of  economists named in the text below.

A debate has raged for a decade about what we have gained from Free Trade Agreements (FTAs). We are now able to assess their contribution to future prosperity.

The Productivity Commission developed an analytical framework to assess the economy-wide effects of the bilateral agreement with the US (AUSFTA) in 2010, but at that stage not enough time had passed to enable a reliable, evidence-based, assessment of the agreement's impact.

Shiro Armstrong, a respected ANU economist, has since used the analytical framework developed by the Productivity Commission, and the decade of performance data available since AUSFTA came into force, to conclude that 'the data shows that...Australia and the United States...are worse off than they would have been without the agreement.'

He has suggested that 'the agreement was responsible for reducing — or diverting — $53.1 billion of trade with the rest of the world'.

So the AUSFTA, so far from the picture painted by DFAT, has involved a substantial cost to Australia.

Along with other economists including the University of Adelaide's Paul Kerin and Richard Pomfret, Flinders University's Dick Blandy, and  the ANU's Glenn Withers, Greg Cutbush, Malcolm Bosworth and Martin Richardson, I believe a different approach is required. [fold]

While we cannot now change how we negotiated the agreements with the US, Japan, Korea and China, we can ensure that it does not reflect how we approach future negotiations.

The governance model that should guide trade policy is based on Australia's conduct in the Uruguay Round of trade negotiations.

The negotiations in the Uruguay Round took place at a time when Hawke and Keating were liberalising our own barriers unilaterally, to secure the efficiency gains involved. These reductions were subsequently offered, and accepted, in Uruguay negotiations as our market-opening contribution to global trade reform. As a consequence, we secured all the gains available from trade negotiations – the major gains in efficiency from reducing the barriers protecting our less competitive industries, as well as those available from access to external markets.

That produced the win-win outcome we should be seeking from all trade agreements. It made a substantial contribution to the prosperity we have since enjoyed.

The opportunity to improve the performance of the economy in this way was missed in all FTAs concluded last year. In those negotiations our agenda was simply a market-access wish-list; negotiations were conducted in secret ; the outcome for domestic efficiency was determined solely by the market-access arrangements negotiators happened to agree on, rather than a central objective in deciding which domestic barriers to reduce ; and success was measured by whether the outcomes improved access to external markets.

When we fail to structure our market-opening offers to improve allocative efficiency, by reducing the barriers protecting our less competitive industries, we forgo the major gains available from negotiations. These efficiency gains strengthen the economy not by enabling us to 'produce more' (that is, not by doing more of what we are already doing) but because we move from things we do less well to those we do better.

There is no conflict between the need for secrecy during negotiations and a process that provides transparency and a negotiating agenda that secures the efficiency gains available. Both requirements can be met by following the model established in the Uruguay Round.

That would involve the Productivity Commission providing a basis for Australia's market opening offers, by conducting a public inquiry and report to government before future negotiations get under way. Its report would be released only when negotiations are complete.

This would preserve secrecy during negotiations while providing for parliamentary and public scrutiny of the outcome before ratification. It would reflect the transparency arrangements that prepared the way for the reforms of the 1980s and 1990s.

Most importantly, the modest change we suggest would allow the community into the debate about trade policy.

It deserves a place in any policy framework to facilitate the long transition from the resources boom to an uncertain future.

Photo James Morgan/Getty

A longer version of this article was published in The Australian 

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