About this inquiry

This inquiry will examine the following treaty: 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, associated side letters and proposed Australian notification on tobacco control measures (Auckland, 4 February 2016)



Past Public Hearings

07 Nov 2016: Canberra, ACT
17 Oct 2016: CANBERRA, ACT
07 Oct 2016: MELBOURNE, VIC

3. Free Trade Agreements

3.1
This Chapter examines the historical and strategic aspects of the Trans-Pacific Partnership Agreement (TPP).

Background

3.2
The current international architecture for free trade dates back to the General Agreement on Tariffs and Trade (GATT), which came into effect in 1948.1
3.3
The GATT was initially an agreement between the Western Allies of the Second World War, and was based on a philosophy of countering national protectionism through the imposition of tariffs on imports.2
3.4
The GATT, along with international organisations such as the World Bank and the International Monetary Fund, was part of an international effort to prevent another Great Depression.3
3.5
The purpose of the GATT was to reduce import tariffs on manufactured goods. The arguments used to support such a reduction were:
protection through the imposition of import tariffs had unnecessarily deepened and extended the Great Depression; and
a more integrated international economy would make world war less likely.4
3.6
The remit of the GATT has expanded steadily over time, as has its membership. By the time the GATT became the World Trade Organisation (WTO) in 1995, the agreements it had reached in relation to tariffs applied to sufficient world trade to be considered as applying universally. Consequently, the agreements administered by the WTO are considered multilateral instruments.5
3.7
At present, the WTO administers the following multilateral instruments:
the GATT;
the General Agreement on Trade in Services;
the Agreement on Trade Related Intellectual Property Rights; and
the Agreement on Trade Related Investment.6
3.8
As international trade has become more complex, and the number of member states has grown, it has become increasingly difficult for the WTO to reach a consensus on the reduction of trade barriers, particularly in the areas of agriculture and textiles.7
3.9
The latest efforts to reach agreement at the WTO began in 2001. Called the Doha Development Agenda, it is widely considered unlikely to reach a conclusion.8

Alternatives – Unilateral, Bi-lateral, Plurilateral

3.10
As progress on negotiating WTO agreements has slowed, countries wishing to progress free trade agendas have used a mix of three alternatives:
unilateral reductions in tariffs and other trade barriers;
bi-lateral free trade agreements with other individual countries;
plurilateral free trade agreements involving more than one other country.

Unilateral reductions in trade barriers

3.11
Unilateral reductions in trade barriers occur when a country removes tariffs or non-tariff barriers unilaterally, in the absence of similar actions by other countries.9
3.12
Unilateral reductions are not usually taken in isolation. Rather they generally occur as part of broader economic liberalisation process, such as that undertaken by Australia in the 1980s and 1990s.10
3.13
In Australia, a unilateral reduction in trade barriers has most recently been advocated by the Productivity Commission, in its Research Report: Bi-Lateral and Regional Trade Agreements. Released in 2010, the Productivity Commission recommended:
The Australian Government should examine the potential to further reduce existing Australian barriers to trade and investment through unilateral action as a priority over pursuing liberalisation in the context of bilateral and regional trade agreements. The Government should not delay beneficial domestic trade liberalisation and reform in order to retain ‘negotiating coin’.11
3.14
The Productivity Commission has reiterated this position as recently as 2015.12

Bi-lateral Free Trade Agreements

3.15
Bi-lateral free trade agreements are negotiated between two countries. Such agreements are recognised and specifically permitted by the WTO. The content of bi-lateral free trade agreements build on the multilateral agreements administered by the WTO.13
3.16
The negotiation of bi-lateral free trade agreements has increased significantly in recent decades, particularly in the Asia Pacific region.14
3.17
A number of factors underpin the expansion in bi-lateral free trade agreements:
a loss of confidence in the ability of the WTO to progress trade liberalisation;
a desire to expand coverage beyond the matters dealt with by the WTO agreements, such as investment, intellectual property, and services; and
a desire by the parties to bi-lateral agreements to capitalise as soon as possible on the expansion of their economies.15
3.18
By 2015, there were 48 bi-lateral free trade agreements between Asia–Pacific Economic Cooperation forum (APEC) members and a further 44 involving one APEC member. Australia has entered into nine bi-lateral free trade agreements to date.16
3.19
However, the proliferation of bi-lateral free trade agreements has resulted in the fragmentation of the international trade architecture of the region. This is colloquially referred to as the ‘noodle bowl effect’ because of the number of bilateral agreements criss-crossing the region.17
3.20
The noodle bowl effect reduces the cost efficiency of international trade because it undermines the cohesiveness of trade rules. Each bilateral agreement introduces a different set of provisions that are specific to trade between the two parties only.18
3.21
For Governments, a proliferation of bi-lateral free trade agreements increases the burden of administering free trade as the Government must negotiate and monitor a complex set of bi-lateral agreements.19
3.22
For those involved in international trade, using bi-lateral free trade agreements adds transaction costs to doing business as the number of rules relating to their export and import markets multiply.20
3.23
Evidence from the Australian Chamber of Commerce and Industry (ACCI) indicates that the noodle bowl effect limits the use businesses, especially small and medium sized businesses, make of free trade arrangements:
The Australian Chamber has surveyed our members for the last three years and identified that despite the huge effort being expended in negotiation of preferential agreements, many businesses are either unaware of the agreements, or find them too difficult to use to be of significant benefit.21
3.24
Another problem with bi-lateral agreements is they tend to:
…disadvantage smaller states with smaller markets—for example, but not exclusively, Australia—that simply have, given their size, less negotiating coin to push for strong deals in these bilateral agreements.22
3.25
Finally, bi-lateral free trade agreements distort markets. Trade in particular goods can be diverted from one market to another, and one country’s businesses can gain or lose, regardless of their competitiveness, because of marginally different bi-lateral free trade outcomes between agreements.23

Plurilateral free trade agreements

3.26
Plurilateral free trade agreements involve more than two countries. Like bi-lateral free trade agreements, they are specifically permitted by the WTO.
3.27
The problems associated with bi-lateral free trade agreements in the Asia-Pacific have resulted in an effort to re-multilateralise the region’s trade architecture by negotiating a plurilateral free trade agreement that harmonises the rules governing trade between parties:
… rather than have a lot of individual agreements with differing standards and often incommensurate provisions within them, try to bring everything together under a single regional legal architecture.24
3.28
The TPP is the first of these to be negotiated. The Regional Comprehensive Economic Partnership (RCEP) is another plurilateral Asia-Pacific free trade agreement under negotiation. The relationship between the RCEP and the TPP will be discussed below.
3.29
Another advantage of a plurilateral agreement is the beneficial outcomes for smaller economies such as Australia. Jeffrey Wilson used agriculture as an example of the benefits to Australia of a multi-lateral agreement:
One issue that bears mentioning with respect to the multilateralism aspect is that bilateral free trade agreements have often underperformed in terms of gaining market access for Australian agricultural producers... This is something we have seen in the case of Australian dairy exports to China, where Australia lost market share relative to New Zealand as a result of the New Zealand-China FTA of several years ago. So, while Australia was, from a regulatory point of view, at the exact same position, by New Zealand getting more favourable market access the market share shifted to New Zealand, because their products could enter in greater volume and at lower price. With bilateral agreements you often end up, to some extent, chasing your tail to neutralise the positional gains of others.25

The TPP as a strategic instrument

3.30
One of the most important aspects of free trade agreements, and the TPP in particular, is that, above their role in reducing trade barriers, they are strategic instruments. Strategic issues have always underpinned free trade agreements. As discussed above, the first international free trade agreement, the GATT, was negotiated in part to prevent international instability through economic depression or war.
3.31
The strategic role of the TPP has not been widely canvassed in the Australian community, but was discussed at some length by inquiry participants.
3.32
As discussed, the TPP is one of two plurilateral free trade agreements under consideration in the Asia-Pacific region. The other is the RCEP, which is based on the Association of South East Asian Nations (ASEAN) members. Australia is involved in the RCEP negotiations, which are still under way.
3.33
According to Jeffrey Wilson, the TPP and RCEP:
… have also, I would also point out, been considered to be a proxy for US-China rivalry for leadership in Asia, with the TPP being US led, RCEP being China led. The timing on RCEP coming in the wake of a big US political commitment to push TPP has been interpreted by many analysts—and I do not think this is particularly unfairly, nor would Chinese sources deny it—as an attempt to run the RCEP in competition with the TPP. The countries in these two agreements, fundamentally, see them as different ways forward and, to some extent, competing paths.26
3.34
Dr Elizabeth Thurbon pointed out that:
It is reasonable to conclude that in some segments of the Australian policymaking community, [plurilateral trade agreements] are valued more for their assumed geo-strategic (read: security) payoffs than their economic benefits. For example, some view the TPP as a tool for managing and shaping the direction of China’s rapid rise.27
3.35
According to Dr Thurbon, using strategic outcomes to dictate Australia’s position on free trade agreements could:
weaken bargaining outcomes through a desire to complete negotiations;
result in the approval of outcomes that would not otherwise be accepted; and
introduce new and undesirable distortions in trade policy.28
3.36
The Committee will examine the quality of outcomes in the TPP in greater detail from Chapter 6 of this report.

  • 1
    World Trade Organisation (WTO), ‘The GATT Years: From Havana to Marrakesh,’ <https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact4_e.htm> accessed 9 November 2016.
  • 2
    WTO, ‘The GATT Years: From Havana to Marrakesh,’ <https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact4_e.htm> accessed 9 November 2016.
  • 3
    WTO, ‘The GATT Years: From Havana to Marrakesh,’ <https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact4_e.htm> accessed 9 November 2016.
  • 4
    Concise Encyclopaedia of Economics, ‘International Trade Agreements,’ <http://www.econlib.org/library/Enc/InternationalTradeAgreements.html> accessed 9 November 2016.
  • 5
    Concise Encyclopaedia of Economics, ‘International Trade Agreements,’ <http://www.econlib.org/library/Enc/InternationalTradeAgreements.html> accessed 9 November 2016.
  • 6
    Concise Encyclopaedia of Economics, ‘International Trade Agreements,’ <http://www.econlib.org/library/Enc/InternationalTradeAgreements.html> accessed 9 November 2016.
  • 7
    Concise Encyclopaedia of Economics, ‘International Trade Agreements,’ <http://www.econlib.org/library/Enc/InternationalTradeAgreements.html> accessed 9 November 2016.
  • 8
    Concise Encyclopaedia of Economics, ‘International Trade Agreements,’ <http://www.econlib.org/library/Enc/InternationalTradeAgreements.html> accessed 9 November 2016.
  • 9
    Concise Encyclopaedia of Economics, ‘International Trade Agreements,’ <http://www.econlib.org/library/Enc/InternationalTradeAgreements.html> accessed 9 November 2016.
  • 10
    Concise Encyclopaedia of Economics, ‘International Trade Agreements,’ <http://www.econlib.org/library/Enc/InternationalTradeAgreements.html> accessed 9 November 2016.
  • 11
    Productivity Commission, Research Report: Bi-Lateral and Regional Trade Agreements, 2010, p XXXIX.
  • 12
    Mr Peter Harris, Chairman, Productivity Commission, Joint Select Committee on Trade and Investment Growth Committee Hansard, Canberra, 21 July 2015, p. 30.
  • 13
    Dr J Wilson, ‘Can the Trans-Pacific Partnership multi-lateralise the ‘noodle bowl’ of Asia-Pacific trade agreements?’, Perth USAsia Centre, March 2016, p. 2.
  • 14
    Dr Wilson, ‘Can the Trans-Pacific Partnership multi-lateralise the ‘noodle bowl’ of Asia-Pacific trade agreements?’, p. 2.
  • 15
    Dr Wilson, ‘Can the Trans-Pacific Partnership multi-lateralise the ‘noodle bowl’ of Asia-Pacific trade agreements?’, p. 2.
  • 16
    Department of Foreign Affairs and Trade (DFAT), ‘Free Trade Agreements,’ <http://dfat.gov.au/trade/agreements/Pages/status-of-fta-negotiations.aspx> accessed 9 November 2016
  • 17
    Dr Jeffrey Wilson, Committee Hansard, Perth, 5 October 2016, p. 3.
  • 18
    Dr Wilson, ‘Can the Trans-Pacific Partnership multi-lateralise the ‘noodle bowl’ of Asia-Pacific trade agreements?’, p. 3.
  • 19
    Dr Wilson, ‘Can the Trans-Pacific Partnership multi-lateralise the ‘noodle bowl’ of Asia-Pacific trade agreements?’, p. 3.
  • 20
    Dr Wilson, ‘Can the Trans-Pacific Partnership multi-lateralise the ‘noodle bowl’ of Asia-Pacific trade agreements?’, p. 3.
  • 21
    Senate Standing Committee on Foreign Affairs and Trade, Inquiry into the proposed Trans-Pacific Partnership Agreement, Submission 16, p. 11.
  • 22
    Dr Wilson, Committee Hansard, Perth, 5 October 2016, p. 2.
  • 23
    Dr Wilson, ‘Can the Trans-Pacific Partnership multi-lateralise the ‘noodle bowl’ of Asia-Pacific trade agreements?’, p. 3.
  • 24
    Dr Wilson, Committee Hansard, Perth, 5 October 2016, p. 2.
  • 25
    Dr Wilson, Committee Hansard, Perth, 5 October 2016, p. 3.
  • 26
    Dr Wilson, Committee Hansard, Perth, 5 October 2016, p. 7.
  • 27
    Dr Elizabeth Thurbon, Submission 100, p. 4.
  • 28
    Dr Elizabeth Thurbon, Submission 100, p. 4.

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