This Chapter considers issues that are not related to specific provisions of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership between the Government of Australia and the Governments of: Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam (the TPP 11), and draws together the themes that have emerged during the inquiry.
Problems associated with the number of bilateral trade agreements in the Asia-Pacific (commonly called ‘the noodle bowl effect’) have resulted in an effort to multilateralise the region’s trade architecture by negotiating a plurilateral trade agreement that harmonises the rules governing trade between Parties. The Trans-Pacific Partnership Agreement between the Government of Australia and the Governments of: Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States of America, and Vietnam (TPP) and the TPP 11 are a result of this process.
AI Group argues that global trade is no longer characterised by the import or export from one country to another of raw materials and finished manufactured products, but rather webs of trade in intermediate products, across different sectors, and often involving numerous countries, business trips and data exchanges.
…60% of global commerce involves intermediate products, and 30% of the total is conducted between affiliates of the same multinational corporation.
This sort of trade raises the importance of trade transaction costs such as border administration, particularly where products must travel through numerous countries before the final good can be sold.
One of the principal advantages for business in the TPP 11 is the regulatory harmonisation it will bring to trade amongst the Parties. AI Group states:
The [TPP 11] will provide Australian companies with a guaranteed set of rules in which to operate throughout the region and protect Australian interests. Perhaps we won’t see the true benefit until an Australian company needs to rely on those rules to protect their interests.
The Export Council of Australia (ECA) described the benefits of regulatory harmonisation as:
… particularly important when it comes to trade that occurs within value chains. In value chains, intermediate goods can move across borders multiple times. Tariffs, and documentation and logistics costs compound. Because value is created across multiple countries, value chains often do not meet the ‘rules of origin’ for eligibility for bilateral FTAs. With 11 parties involved, it is easier for value chains to accumulate enough value added within member countries to satisfy the TPP-11’s rules of origin.
According to AI Group, this demonstrates the true value of multilateral agreements over bilateral agreements. While the multilateral agreements are more complex and take longer to negotiate and implement, the benefits of having a group of economies agree on a single set of rules has a multiplier effect on business.
For the Australian Chamber of Commerce and Industry (ACCI) the most important benefit of the TPP 11 is the consistency of the rules it will impose across a range of trading partners.
The ECA highlighted the benefits of the TPP 11 to small and medium sized businesses in particular:
The TPP-11 … contains a chapter dedicated to helping SMEs access the benefits of the agreement. This includes provisions to help SMEs utilise the agreement, such as mandating websites to provide user-friendly information on the Agreement. It includes measures to make supplying to governments easier, including the Australian Government.
The noodle bowl
The capacity of Australian business, particularly small and medium enterprises (SMEs) to make use of trade agreements, is a significant issue.
The ECA noted that the number of Australian businesses involved in exporting has declined:
Between 2006-07 and 2014-15, the proportion of Australian businesses exporting fell from 9.1% to 7.1%.
Dr Elizabeth Thurbon is concerned that:
Since 2013, the government has pumped vast resources into negotiating trade deals intended to increase foreign market access for Australian firms. Yet at the same time, it has been actively dismantling local industry development initiatives aimed at boosting the innovation and export capacity of Australian firms so that they might actually capitalize on market access wins abroad.
The ECA considers that the TPP 11 contains novel provisions that will raise problems for many businesses. The ECA argues that it is important that the Australian Government commits sufficient resources to help businesses understand how the Agreement will benefit them.
The ECA identified a number of factors necessary for Australian businesses to make use of trade agreements:
Businesses will need to understand a range of different aspects of the Agreement, including:
how they should determine which FTA to use when their trading partners have multiple FTAs with Australia (e.g. Australia—Singapore trade could occur under SAFTA, AANZFTA or the TPP-11)
how to calculate ‘rules of origin’ under the TPP-11 and other agreements, and how to complete a declaration of origin
what the TPP-11 services provisions mean, and the processes required to utilise those provisions
issues around customs classifications and compliance
the mechanisms the TPP-11 provides to resolve disputes.
According to the ECA, Government agencies have deep subject matter expertise, but are usually not adequately staffed to roll out a sustained training program. In addition, agencies have little expertise in providing training and often have difficulty communicating with small and medium enterprises.
ACCI is concerned that the TPP 11 overlays, rather than replaces, existing bilateral agreements, and that this will exacerbate rather than remove the ‘noodle bowl effect’ of having a range of different rules applying to each jurisdiction.
According to ACCI, the impact on businesses is increased red tape. ACCI advises that:
It is important to understand that each agreement includes compliance terms which need to be satisfied in order to take advantage of the agreement. In the case of goods trade, this is the tariff regime where rules of origin must be satisfied. Zero preferential tariffs are different to the abolition of tariffs. Any tariff, even 0, requires the importers to satisfy the compliance rules and so red tape is retained.
ACCI argues that the TPP 11 actually increases the prospect of a business making a mistake in relation to rules of origin, because the TPP 11 allows self-certification, rather than using recognised certifiers like Governments or their representative agencies.
ACCI recommends that the Government withdraw from existing bilateral trade agreements with TPP 11 countries to provide consistency to Australian business.
The Committee considers that there might be some advantages to Australian businesses if the trade agreement architecture were simplified by Australia withdrawing from older bilateral trade agreements with TPP 11 Parties. However, such a simplification should only be undertaken if no Australian business would be disadvantaged.
The Committee therefore recommends that the Australian Government review Australia’s bilateral trade agreements with TPP 11 Parties with a view to withdrawing from those which are no longer beneficial to Australian businesses.
The Committee recommends that the Australian Government review Australia’s bilateral trade agreements with TPP 11 Parties with a view to withdrawing from those which are no longer beneficial to Australian businesses.
The accuracy, scope and level of importance attributed to modelling trade agreements is a perennial issue.
During this inquiry, the Committee collected a great deal of evidence on the various sets of modelling applied to the TPP 11.
The claims and disagreements about modelling amongst participants to the inquiry are related to the interpretation of the TPP 11 each participant wishes to apply.
The effect is that participants appear to make a number of contradictory claims about what the modelling reveals.
Examining what each model is intended to demonstrate shows both the limitations of modelling, and the limitations of the interpretations of the modelling outcomes.
Computable general equilibrium model
The type of modelling generally used to model the outcomes of trade agreements is the computable general equilibrium model. A number of modelling studies that show benefits from the TPP 11 for Australia use this model.
The Mineral Council of Australia’s (MCA’s) submission analyses nine sets of computable general equilibrium modelling that estimate the TPP 11 impact on Australia’s GDP by 2030.
The GDP benefits range from a 1.2 per cent increase (modelled by Kenichi Kawasaki at the Institute for Policy Studies, Tokyo), to a negligible increase (modelled by Carlo Dade and Dan Ciurick of the Canada West Foundation).
Some computable general equilibrium modelling of the TPP 11 indicates that Australia will do better out of the TPP 11 than under the original TPP. This is because Australia is party to the Australia-United States Free Trade Agreement (AUSFTA), while many other TPP 11 countries do not have free trade agreements with the United States.
This means that Australia retains preferential access to the United States market despite the United States withdrawing from the TPP.
The modelling cited by the Australian Government, the Petri and Plummer modelling, is in the middle of the range for GDP outcomes.
Petri and Plummer’s modelling indicates that by 2030, the TPP 11 will improve Australia’s economic outcomes to the following extent:
real national income by A$15.4 billion, or 0.5 per cent;
real GDP by A$18 billion, or 0.5 per cent; and
exports by A$29.6 billion, or 4 per cent.
Petri and Plummer’s modelling indicates that Australia has the least to gain of TPP 11 countries in terms of real national income improvements by 2030.
Many participants point out that the modelling done on the TPP and TPP 11 using the computable general equilibrium model show no significant benefits to Australia. The NSW Retired Teachers’ Association, for example, stated:
There are no definitive economic benefits for Australia. The World Bank analysis found that in 15 years the Agreement would have boosted the economy by 0.7%, or 0.05% per year. The Peterson Institute for International Economics suggests the eventual gain would be 0.5%, or less than half of one tenth of a per cent per year.
United Nations Global Policy Model
Of the ten sets of modelling that has been conducted, only one set did not follow the computational general equilibrium modelling approach, that of Capaldo and Izurieta, of Tufts University. This is the model that the Australian Council of Trade Unions (ACTU) focusses on, which indicated Australia could lose 39,000 jobs as a result of the TPP 11.
Employment and income
The debate about modelling employment and income is complicated because of the way the different models treat these issues.
The MCA points out that one of the core assumptions of the Capaldo and Izurieta model is that trade agreements will cause employers to cut wages, which in turn will reduce expenditure.
The ACTU submission in turn argues that most of the computable general equilibrium model assumes full employment and a constant income distribution in all TPP countries.
According to the Department of Foreign Affairs and Trade (DFAT):
There were no employment aspects on the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP-11) modelled in the 2017 Peterson Institute for International Economics study.
In other words, the computable general equilibrium model is not designed to model employment outcomes at all.
However, the computable general equilibrium model can model real national income.
Evidence from past trade agreements
Dr Elizabeth Thurbon points out that the outcomes modelled for previous trade agreements have not proven to be accurate:
What the evidence does show is that preferential trade agreements can have welfare-reducing outcomes. The Australia-US Free Trade Agreement stands as a clear example of a welfare-reducing deal. As ANU economist Dr Shiro Armstrong has shown, since its entry into force in 2005, that deal has had a trade-distorting effect, diverting trade away from lower cost sources and leaving both Australia and the US worse off than they would have been without it.
Real world evidence of the impact of previous trade agreements may be helpful in determining what benefits Australia can expect from the TPP 11. Unfortunately, the evidence of the economic impact of previously negotiated trade agreements is also subject to a range of claims that are not directly comparable.
The MCA points to studies conducted by the Centre for International Economics, which showed that from 1998/99 – 2013/14, trade related employment in Australia increased by 15 per cent.
The Centre for International Economics study also indicated that trade liberalisation had increased real national income by 5.1 per cent between 1986 and 2016.
Further, the MCA argues that the outcome of the Tufts University modelling conflicts with real world experience, in which Australia has experienced economic growth as a result of tariff reductions and improvements in free trade.
The Electrical Trades Union (ETU) argues that the levels of job growth in Australia predicted for free trade agreements have not materialised. As an example, the Union cites the predictions of jobs growth in the agricultural sector as a result of China-Australia Free Trade Agreement (ChAFTA), pointing out that between November 2015 and May 2017, agricultural employment in Australia actually shrank by 31,400 jobs.
AI Group cite modelling from 2014 which indicate that the advantages of trade facilitation changes are considerably greater in terms of export gains compared to GDP gains. The evidence cited by AI Group points to GDP increases in Australia as a result of trade facilitation changes by 2020 (from 2014) of 1.29 per cent, while export gains amount to 8 per cent.
Problems with modelling
In summary, the debate about modelling has been heated but has not been very illuminating.
The problem lies in how modelling works. Modellers take a series of assumptions about an economy based on previous evidence, and cast that forward to produce expected outcomes in a limited range of fields. Models that do not predict employment outcomes cannot be made to do so, just as models that make assumptions about wages outcome will not provide useful data on income.
Modelling a complex agreement like the TPP 11 in a real world environment imposes necessary limitations on the accuracy of the predictions.
The Committee believes that modelling is only useful as a tool, amongst others, to inform decision making.
What modelling misses
To demonstrate the limitations on modelling, there is a range of potential impacts of trade agreements that modelling does not cover. One of these is the health impacts of trade agreements; another is the impact trade agreements have on women.
Health Impact Assessment
The Public Health Association of Australia (PHAA) has recommended that free trade agreements to which Australia is party undergo health impact assessments before signing.
According to the PHAA, a health impact assessment has a number of benefits:
Health Impact Assessment (HIA) is a systematic process that considers the potential health effects of a proposed policy, plan or project, and offers recommendations to mitigate health harms and improve benefits.
The World Health Organisation (WHO) explicitly calls for the use of Health Impact Assessment to better integrate health into policy decisions, particularly those that impact the social, economic and environmental determinants of health.
Impact on women
ActionAid Australia points out that trade agreements may impact women in ways that are not measured by basic modelling.
ActionAid argues that for many women in lower income countries, free trade and integration into global supply chains has exacerbated gender inequalities.
While organisations like the World Bank and the World Trade Organization (WTO) suggest that free trade can ‘add significant momentum to our efforts to end poverty,’ their failure to recognise the gender-specific impacts of trade liberalisation is a particular concern for ActionAid Australia given its potential to significantly impede progress on women’s empowerment and gender equality globally.
The Organisation for Economic Cooperation and Development (OECD) evidence suggests that the possible differential effects and impacts on men and women resulting from trade openness and related trade agreements might exacerbate existing inequalities.
Noting the limitations on modelling, many participants in the inquiry, such as the ACCI, support the use of independent economic modelling of trade agreements in Australia, arguing that such modelling will show the significant benefits such agreements will produce.
ACCI recommends that an independent body, such as the Productivity Commission should undertake independent modelling of trade agreements.
Dr Elizabeth Thurbon argues that in the absence of a comprehensive, independent analysis of the TPP 11 it is impossible for Australians and their elected representatives to weigh the relative merits of the deal and to make an informed decision as to whether to support it.
In its report on the TPP, the Committee recommended that the Australian Government consider implementing a process through which independent modelling and analysis of a proposed trade agreement is undertaken by the Productivity Commission, or equivalent organisation, and provided to the Committee alongside the National Interest Analysis (NIA) to improve assessment of the agreement.
In its Response, the Government did not accept the Recommendation.
The Committee believes that, notwithstanding the accepted limitations on modelling, there are significant benefits, especially in the public perception of the benefits of trade agreements, to be had from the Australian Government commissioning modelling to be included in the NIA for trade agreements.
The Committee recommends that the Australian Government consider implementing a process through which independent modelling and analysis of a proposed trade agreement is undertaken by the Productivity Commission, or equivalent organisation, and provided to the Committee alongside the NIA to improve assessment of the agreement.
A number of submitters are concerned about the level of transparency in the negotiation process for the TPP 11. Mr Fred Schilling states:
Certain multinational corporations were privy to the TPP during its negotiation but not the voting public; what appalling behaviour. There are far more smarts out here in voter land than the politicians want to know.
Some participants are concerned about the binding effects extensive international treaties have on future government action, given that they are negotiated without transparency. Unions WA points out:
…while a government might legitimately want to make a long term commitment to certain trade arrangements, it is not legitimate to enter agreements that will ‘tie the hands of its opponents’ e.g. future elected governments.
According to the ETU, the complexity of bilateral and regional trade agreements and the potential for provisions to impose net costs on the community presents a compelling case for the negotiated text of an agreement to be comprehensively analysed before signing and again at each and every review.
The ACTU states that:
The secrecy of the detail of TPP negotiations meant that occasional unauthorised leaking of text documents has been the only way stakeholders have gained access to documents that should have been the subject of open debate in parliament and in the community throughout negotiations.
The ACTU submission points out that the European Union has recognised community demand for negotiation papers and final texts to be exposed to public debate.
On the other hand, a number of organisations expressed satisfaction with the degree of consultation undertaken by the Australian Government. For example, the National Farmers’ Federation (NFF) states:
The NFF and its commodity members have had very cooperative engagement with Australian Government officials in the stages of the agreement’s negotiations, before and following each negotiating engagement, and after the release of the agreements text and schedules.
Public concerns about the transparency of trade agreement negotiations is an aspect of the most significant problem facing the ongoing acceptance of trade agreements: the belief that protectionism may provide a better outcome for people.
Dr Elizabeth Thurbon points out that:
In its 2017 Foreign Policy White Paper, the Australian Government identified a key threat to our nation’s future prosperity: the fracturing global consensus for a rules-based international economic order.
To help repair this fracture and restore faith in international economic rules, Australian policymakers must understand the causes of public opposition to preferential trade deals like the TPP 11.
The Business Council of Australia (BCA) highlights the importance of trade agreements in a global environment in which protectionism is on the rise.
The BCA is concerned by recent developments in the international trading environment, including the potential imposition of punitive tariffs by the US and China on each other’s trade.
The tariff penalties being threatened by the US and China cover more than 50 per cent of their bilateral trade, and could, if imposed, have a significant impact on Australia’s exports and consequently employment. A trade war, if it eventuated, could have wide-ranging repercussions for global trade and the economy.
Against these developments, the TPP 11 provides an important, positive example of international cooperation promoting rules-based trade and investment liberalisation.
Ratification would be an important contribution towards stabilising the current environment, reinjecting momentum into cooperative trade liberalisation and rules-based approaches on a global basis.
The ECA also emphasises the importance of trade liberalisation:
The ECA sees multilateral trade liberalisation through the World Trade Organisation (WTO) as the best outcome for Australia.
The Committee agrees with these assessments. A rules based international order and trade liberalisation is worth pursuing and worth promoting.
The Committee supports the TPP 11 and recommends that binding treaty action be taken.
The Committee supports the Comprehensive and Progressive Agreement for Trans-Pacific Partnership between the Government of Australia and the Governments of: Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam and recommends that binding treaty action be taken.
Hon. Stuart Robert MP
20 August 2018