Saturday 23 Feb 2019 | 02:57 | SYDNEY
Saturday 23 Feb 2019 | 02:57 | SYDNEY

Lowy poll reveals some dangerous assumptions about the diplomatic benefits of FTAs



16 June 2015 10:27

Sitting 10,000 miles away, it is very hard to see how the euro has been an agent for European harmony.

The Germans rail against the lazy Greeks. The Greeks paint the Germans as a nation hell-bent on punishment, regardless of the cost. Europe is back picking at the scab of World War II, the debt forgiveness afforded to the Germans in its aftermath and whether the Greeks are owed several hundred billion euros in reparations.

If this sorry episode has shown us anything, it's that bad economics can be bad politics. There were few economists who thought the euro was an optimal currency area. The economies were too diverse and fragmented to come under the umbrella of a single monetary policy. Moreover, the euro lacked the fiscal and banking backstops that turned out to be necessary (although it is fair to say that economists did not draw much attention to these omissions at the time).

This message is useful to keep in mind with today's release of the 2015 Lowy Institute Poll. The Poll asked whether the free trade agreements signed with Japan, Korea, and China are good for Australia's relations with those countries. The answer was a deafening 'yes'. 65% of respondents thought the agreements are good for our relationships; 10% thought them bad.

But a different picture emerges when people were asked about the economic benefits of these agreements: 48% think the agreements are good for the Australian economy, versus 30% who think they are bad. A 55-point margin is cut to 18 percentage points.

These numbers tell us there is a significant fraction of the population which thinks the economic benefits of the agreements may be negative, but they are beneficial for our external relationships.

The economic perils of bilateral and regional FTAs are well known, and I'm not talking about the economically illiterate concern that they will cost jobs on net. The real concern is about trade diversion. If you are giving trade preferences to a country, you may simply source your imports from them, rather than the lowest-cost producer. Even if this is a major concern for the free trade agreements we have signed so far, I doubt that there would be a nasty surprise down the road that would mean trade diversion became a source of diplomatic friction between us and our partners. 

However, trade agreements these days are about more than just trade.

Take, for example, the Trans Pacific Partnership (TPP). There are provisions in this agreement that look to me to be bad economics. And the bad economics could easily become a foreign relations headache. Two provisions from the TPP negotiations look particularly concerning: investor-state dispute settlement (ISDS), and intellectual property. 

The ISDS provisions will give foreign companies powers to impose penalties on the Australian Government even if the Australian Government's actions have been found to accord with Australian law by Australian courts. The economic case for placing ourselves, a well governed country that respects the rule of law, at the mercy of these tribunals is wafer thin. Moreover, I can see 'diplomatic incident' written all over these things.

Take, for example, the actions of the Swedish power company Vattenfall. It is demanding compensation from the German Government over a German decision to phase out nuclear power. The twist in the tail is that Vattenfall is wholly owned by the Swedish Government. Suddenly those agreements that were intended to bring European governments closer together look to be pitching them against each another.

The economics behind the intellectual property provisions is also shaky. There are good reasons to suppose that, in many countries, intellectual property protections are already too onerous, and actually stifle innovation. If the US was to impose upon the rest of the world its system, that could be a problem. Moreover, the extra protections and payments we would provide to US intellectual property producers would be a net loss for the Australian economy.

And the shaky economics begets international friction. There are concerns that intellectual property provisions may cost the popular Pharmaceutical Benefits Scheme hundreds of millions a year. Is the Australian Government really going to be happy to fork out that extra cash, year after year, without even once letting off a whiff of discontent?

For the sake of the US alliance, our leaders may feel obligated to sign on to the TPP despite these concerns. According to the Lowy Poll, this reflects preferences many Australians share. However, I think it is misguided. For the sake of the alliance, the pollies probably should contemplate the euro debacle and put the pen back in the drawer.

Photo courtesy of DFAT/Minister for Trade and Investment.

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