This Chapter considers the issue of the proliferation of trade agreements, particularly multiple agreements with the same partner.
The perceived benefits of these arrangements are discussed before considering the complexity of multiple agreements and the challenges this may present for businesses. The Committee then examines the assistance available for businesses to address these issues and finally looks at the possibility of using side letters to retain the benefits of PAFTA within the TPP-11 or a future trade agreement.
Multiple trade agreements
Australia currently has multiple free trade agreements (FTAs) with five countries: Chile, Malaysia, New Zealand, Thailand and Singapore. According to the Department of Foreign Affairs and Trade (DFAT), when the TPP-11 enters into force on 30 December 2018 it will increase Australia’s FTA arrangements with New Zealand to three, Singapore to three and Japan to two. Bilateral FTA negotiations with Japan took place alongside TPP and Regional Comprehensive Economic Partnership (RCEP) negotiations. DFAT further notes that every Australian FTA partner also provides access opportunities under the WTO approach.
Submitters to the inquiry acknowledge that the preference is for multilateral trade agreements. Nevertheless they recognise that the difficulties encountered attempting to negotiate such agreements has hampered the progress of trade liberalisation and that alternatives must be found. The National Farmers’ Federation (NFF) told the Committee that, although preferring one set of trade rules, they accept the need for multiple FTAs to ensure market access for their members:
Considering that [one set of trade rules] has been impossible to achieve except to the extent that we already have under the World Trade Organization agreement, the FTAs that the Australian government’s been able to negotiate have significantly improved the market access that Australian agricultural exporters have been able to achieve, and the fact that additional FTAs have built on both the outcomes of existing FTAs and the multilateral outcomes–WTO outcomes–we think is far more preferable than not being able to achieve a single set of rules.
The Winemakers’ Federation of Australia (WFA) likewise endorses the necessity of negotiating multiple trade agreements to secure market access:
Unfortunately, for a number of well documented reasons the [World Trade Organization (WTO)] has been hamstrung in the pursuit of multilateral reform. However, our reliance on exports mean that [Winemakers’ Federation of Australia (WFA)] is a strong supporter of free trade. In the absence of an effective negotiating platform for multilateral negotiations through the WTO, Free Trade Agreements provide an effective mechanism to liberalise trade.
In the case of Peru, Australia and Peru have negotiated the bilateral Peru Australia Free Trade Agreement (PAFTA) and are both parties to the plurilateral Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP 11). The plurilateral Pacific Alliance Free Trade Agreement is also currently under negotiation between Australia, Chile, Mexico and Peru.
DFAT defended the need for multiple agreements with the same trading partner, explaining that often better market access can be obtained through a bilateral rather than a regional or plurilateral agreement. In the case of Peru this was confirmed by the Australia Peru Chamber of Commerce Inc.:
PAFTA gives access to Australian businesses to sensitive agricultural Peruvian products as dairy, grains and sugar, something that didn’t happen in the CPTPP as understandably Peru was not able to give access to those products in a multilateral arena.
The Export Council of Australia (ECA) sees distinct advantages to bilateral trade agreements:
Firstly, bilateral communications move more quickly than plurilateral ones … Secondly, bilateral FTAs are generally broader: they provide more favourable preferential tariffs or additional market access to services. This is for some products and services in particular, but by no means all of them. They also cover a broader range of areas, such as trade facilitation, digital trade, standards alignment and mobile phone arrangements … They really go beyond traditional trade agreements to much more closely align the economies. Thirdly, bilateral FTAs provide a framework and impetus for bilateral cooperation, regular reviews, updates and things like that, and they can be updated much more quickly and easily. Lastly, bilateral FTAs are an insurance policy in the event that a partner were to withdraw from a plurilateral agreement.
Submitters stressed the benefits provided by multiple trade agreements with the same partner, reiterating the argument that multiple agreements often provide better market access. The Minerals Council of Australia (MCA) provided two examples:
For example, the FTA that Australia is currently finalising with Indonesia goes much further than the ASEAN-Australia-New Zealand FTA on issues such as investment and reducing behind-the-border issues related to the trade in services. Similarly, the TPP-11 offers greater tariff reductions for Australian agriculture exports to Japan compared to the Japan-Australia Economic Partnership Agreement.
The National Farmers’ Federation (NFF) also noted the improvements obtained for Australian agricultural products under the TPP-11 compared to the Japan-Australia Economic Partnership Agreement, as did the red meat and livestock industry.
Specifically in the case of Peru, submitters maintain that market access has been significantly improved through PAFTA compared to TPP-11. DFAT summarised the improved market access benefits provided by PAFTA:
If you look at what we were able to achieve in PAFTA versus the TPP-11, there were 1,405 tariff lines where there was better market access treatment in PAFTA compared with TPP-11. The majority of those products were industrial products, including machinery; paper and paperboard; retail medicines; plastics; and wood products.
The NFF explained that for agricultural products the improvements may appear incremental but have ongoing, lasting benefits:
The critical thing we got in PAFTA which we didn’t get in TPP-11 was removal of the price bands… only the US has been able to achieve that competitive footing in Peru as well. Our competitive position puts us on another level altogether in getting products into Peru. There are the amazing outcomes–sugar: initially 30,000 tonnes but increasing to 90,000 tonnes over a period of 18 years–but … all of these incremental increases increase the competitiveness of our agricultural exports, increase opportunities to achieve maximum farmgate profits or returns or returns and increase the flexibility that farmers have to move their product to the most profitable markets.
Submitters maintain that multiple trade agreements with the same partner provide Australian businesses and exporters with choices. DFAT explained that providing choice for Australian businesses is one of the drivers of the negotiating process:
When we negotiate these treaties we negotiate them so that traders can make a choice of which agreement they want to use. The agreements are designed so that a trader can choose: ‘I want to use the rule of origin in this particular agreement,’ or, ‘I want to use a different rule of origin in another agreement.’ They have the choice, and they need to make that choice based on the market access that is available and the rule of origin and how they would meet that rule of origin.
The Business Council of Australia (BCA) argue that choice provides ‘additional flexibility’ to Australian traders:
Should they wish to avail themselves of the benefits available under PAFTA, they will be able to do so by identifying the applicable preferential rates of tariff and requirements for meeting rules-of-origin (ROO).
The NFF also highlights the flexibility provided to agricultural producers by multiple agreements:
The NFF does not believe multiple trade agreements, including multiple agreements with the same trade partner, present any significant difficulties for Australian agricultural exporters. This view is based on the flexibility agricultural exporters have to choose the trade agreement that provides them with the best trade conditions and market access.
The red meat and livestock industry also note the advantage for their members of selecting which agreement best suits their needs:
With TPP-11 sitting alongside PAFTA, Australian beef exporters servicing Peru will have the choice of using the tariff schedule under either agreement.
Submitters are concerned that the increasing complexity created by the proliferation of trade agreements, particularly with the same partner, is deterring Australian businesses from taking full advantage of the opportunities provided by these agreements. The Australian Chamber of Commerce and Industry (ACCI) have reiterated these concerns to the Committee over many years and quote external research and analysis to support their argument:
The Australian Chamber of Commerce and Industry has repeatedly warned of the aggregate complexity associated with negotiation of multiple agreements that cover the same market. Our call has been supported and economically analysed by the Productivity Commission, along with academics from the ANU who agree that the increasing complexity of overlapping trade agreements is detrimental to our trade liberalising efforts.
ACCI represents more than 80 state chambers of commerce and national industry associations who in turn represent over 300,000 businesses across Australia. ACCI draws on evidence from member surveys to support their arguments on the aggregate complexity of trade are backed up by our member surveys which ‘confirm that, in general, businesses do not understand trade agreements, nor how to access their benefits’.
This assessment is supported by submitters from a range of sectors. The Australian Fair Trade and Investment Network (AFTINET) highlight that the resources required to decipher multiple agreements can discourage the use of trade agreements:
For exporters, differences in the terms of market access or rules of origin can be confusing in practice. It takes time and effort to research different agreements and calculate which rules apply most favourably to particular products. Research has shown that this leads to underutilisation of agreements and reduces their claimed economic benefits.
The Australian Council of Trade Unions (ACTU) argue that implementing three trade agreements with Peru is ‘clearly unsustainable and does not add to the wealth of the nation’. They too link the complexity of a proliferation of agreements with underutilisation, observing that ‘[R]esearch has shown that fewer than one in 5 Australian exporters use FTAs, due to the sheer complexity of the agreement’.
Referring specifically to Peru, the ACTU supported the ACCI findings:
These overlapping agreements between the same partners present problems for both exporters and other organisations in trying to understand and utilise the agreements. We also note that some business groups, like ACCI, have also recognised this complexity in the number of trade agreements, particularly multiple agreements with the same partner. In our view, PAFTA adds unnecessarily to the confusing noodle bowl of overlapping agreements and should not be ratified.
In contrast, many submitters denied that the proliferation of multiple trade agreements, even with the same partner, is causing difficulties for Australian businesses and exporters. The BCA point out that these agreements do not ‘impose complexity on Australian traders’ as individual businesses can continue to trade under existing arrangements and suggests that the ‘claims about the complexity of over-lapping agreements are exaggerated’.
It was confirmed in DFAT’s evidence to the Committee that in respect of the labour market testing required under PAFTA for contractual service providers seeking access for temporary foreign labour, this requirement could be avoided by using the matching provisions available under the CPTPP, for which no labour market testing is required. This is an example of the choice created by multiple overlapping agreements.
The NFF also considered the level of complexity overstated and reported that the issue of multiple FTAs has not caused concern for their members:
The fact that farmers can choose the FTA under which they get the best access and the fact that there are multiple FTAs have not caused any significant issues for agricultural exporters.
Asked if the proliferation of trade agreements with one partner made it difficult for small business enterprises (SMEs) to choose the one that would best suit their requirements, the ECA maintained that it would not add to the complexity:
I don’t think it’s tremendously more complex. The majority of the complexity comes with using an FTA at all. On using one FTA versus many FTAs, the additional complexity of many FTAs is a lot less than the threshold complexity of using an FTA.
The MCA also refute the claims:
There has also been some criticism about the so-called ‘noodle bowl’ effect of a large number of FTAs creating confusion for Australian exporters. However, the MCA disagrees with claims that additional FTAs makes it more complex and imposes additional red-tape and costs on Australian exporters.
With regard to the choice between PAFTA and TPP-11, the red meat and livestock industry suggest that for Australian beef exporters it ‘will not be complex—as the benefits of utilising PAFTA are obvious’.
Assistance for Australian businesses
The Committee heard that there is considerable assistance available for those businesses seeking to access FTAs. DFAT explained the range of assistance that it provides including extensive outreach through FTA roadshows, the establishment of an FTA Portal, and regular consultation with businesses. The FTA Portal was singled out by witnesses as being particularly useful. DFAT told the Committee that the Portal has ‘attracted over 210,000 unique users since its launch in 2015 and is attracting 2,600 users each week’.
The MCA has received positive feedback from a number of its members claiming that the Portal is an ‘effective and simple to use mechanism’. The NFF reports a similar experience of the Portal:
… [our commodity group members] have told me that the FTA portal has been brilliant in terms of them being able to easily access information on the different conditions under different FTAs and for them to then help their exporters to decide which FTA is most preferable for them to export under.
The ECA promote the use of DFAT’s ‘excellent’ FTA Portal to their clients and explained that, in their opinion, it is simple and effective. However, the ECA cautioned that FTAs were only a small segment of the export process and not the focus of its training:
… when we work with either businesses that are new to exporting or new people within an exporting business, we would spend quite a lot of the time on the documentation side of things, and that’s Australian Customs requirements, agriculture department requirements, requirements to get products into other countries and certificates of origin, and FTAs would only be a subset of that … It is a very complex process.
Submitters concerned by the effect of the proliferation of trade agreements with Peru in particular proposed that the gains for Australian businesses gained through PAFTA could perhaps be secured in a side letter either to the TPP-11 or to the future Pacific Alliance FTA. The ACCI noted the use of side letters in the TPP-11 negotiated on a bilateral basis between parties and suggested a similar arrangement for Australia and Peru:
… we would also encourage the terms of the existing PAFTA be taken forward and included in a prospective Pacific Alliance agreement. In the event that Columbia and Chile do not accept these terms and the conditions of the CPTPP (which Peru and Mexico have already done), then again we would think that a bilateral side letter between Peru and Australia could be used to capture the additional benefits offered by PAFTA. This will result in PAFTA being redundant.
The Committee explored this idea during the public hearing. Mr Bryan Clark the Director of International Trade and Affairs at the ACCI expanded on their proposal, noting that other trade agreements have been renegotiated and amended from time to time, and asking if side letters may provide a viable option to address the concerns over PAFTA and TPP-11:
Where we have looked at it in the past, it’s certainly apparent that countries can offer terms which are greater than those which are in their agreements to parties either bilaterally or collectively within those regional agreements. With the advent of the CPTPP … it contains a number of side letters, and that mechanism has been used in other agreements as well. We’ve wondered whether we really need another bilateral agreement. Could we bring these terms inside that using that mechanism?
The ACCI acknowledged that it could be difficult to implement such an option but that it would be worth ‘having those discussions with Peru’.
Asked to elaborate on what information could possibly be included in the side letters Mr Clark suggested that the mechanism could be used for a variety of purposes:
If we consider the CPTPP side letters, they cover a range of topics depending on which country is involved. Australia is not a signatory to all of the side letters. There are a number of bilaterals that are in there. Australia has a number of its own. Some of them include some labour issues. There are a range of things included in the side letters. It would seem to us that the side letters offer a very wide range of opportunities for what you could include.
Where the benefits can be defined that are substantial between the Peru agreement bilateral and the CPTPP–those considerations you would bring back into the CPTPP side letter or, alternately, take forward into the negotiations for the Pacific Alliance.
AFTINET supported the proposal for side letters to be negotiated including the favourable market access provisions secured in PAFTA. AFTINET also noted the previous use of side letters, particularly with regard to the exclusion of investor-state dispute settlement (ISDS) clauses:
Australia and New Zealand have side letters in every agreement that they have that contains ISDS. Austrlaia and New Zealand have a side letter which says that Australia and New Zealand will not apply ISDS provisions to each other. That exists in the ASEAN-Australia-New Zealand FTA, and it exists in the TPP-11 as well. New Zealand has negotiated in … a total of four side letters with other government in the TPP-11 that those governments and New Zealand will not apply ISDS to each other.
Concern was raised over the delay that such a procedure may cause to the ratification and implementation of PAFTA:
In terms of the avenue for achieving the market access outcomes, we are agnostic, as long as they are achieved and put in place as quickly as possible. My understanding of trade negotiations is that that would be difficult, and, if that also requires reopening PAFTA and the TPP, I know that that can be a very difficult process and would likely lead to delay in terms of Australian farmers being able to access the better market access conditions under PAFTA. If that were the case … we would prefer not to delay ratification of PAFTA.
The Committee asked DFAT if it was a realistic option to replace the gains secured under PAFTA with side letters in either the TPP-11 or a future plurilateral trade agreement with Peru. The Department cautioned that, although side letters are used regularly in such agreements, such a mechanism is limited and ‘cannot materially change the obligations that the parties have agreed to’.
DFAT explained that the first consideration would be whether or not Peru was willing to agree to that course of action. Given the difference between the nature of a bilateral or a plurilateral agreement, concessions or conditions granted to Australia alone would have to be considered for 11 other countries. Mr Jory explained:
Peru was negotiating with us in the TPP-11 and they did not extend those market access benefits to us. If you look at the example of universities and degree recognition, Peru has only ever granted that recognition in bilateral agreements. They’ve done it for the United States and they’ve done it for the European Union. They did not recognise Canadian degrees in the TPP-11, they did not recognise New Zealand degrees in the TPP-11, they did not recognise Singaporean degrees in the TPP-11 and they did not recognise our degrees in the TPP-11, but they were willing to do that in a bilateral context.
Mr Jory advised the Committee that the interaction between different sections of the agreement could also present difficulties, particularly tariffs and rules of origin:
If you are looking to take the tariff outcomes and the quota outcomes and put those into the TPP, the problem that we would foresee with that approach would be that it’s not just the tariff outcomes. When we negotiate a market access package, we negotiate a rule of origin to go with that particular tariff and they have to work together … when we negotiate PAFTA, it’s a different agreement to TPP. It’s a bilateral agreement between two countries … If you took those tariff outcomes and put them into the TPP, you would want new rules of origin to go with those tariff outcomes because the rules of origin in the TPP, for a lot of products, are about creating a good in the region. The test for the rule of origin is whether this good was made amongst the 11 parties, as opposed to it being made amongst two parties. In some cases that wouldn’t make a difference, but in some cases it would mean that other exporters would be able to gain access to Australian preferences, because the test is: was this good made amongst 11 countries?
DFAT pointed out that the TPP-11 negotiations have closed and that reopening those talks to consider new rules of origin attached to the particular tariffs involved would require the agreement of other TPP parties. In DFAT’s view this would inevitably lead to considerable delay in achieving and implementing the gains available in PAFTA, as Mr Jory expalined:
It is difficult to understate the degree of difficulty and complexity of bringing a market access package of the sort as we’ve just described that would be embedded in a bilateral set of rules of origin and bring that into an agreement that is based on regional rules of origin. Basically, that group of members have to look at that as a new negotiation. So it is difficult to understate the degree of technical and, to be fair and balanced about it, political complexity that would be entailed in a project of that nature.