Chapter 10 - Bilateral or multilateral agreements?
This chapter is a prelude to the discussion in Chapter
11 on the modelling and merit of a free trade agreement (FTA) between Australia
and China. It
looks at the economic and political arguments for and against signing an FTA,
as opposed to negotiating an agreement within the World Trade Organization's
(WTO) multilateral framework.
What is a free trade agreement?
is generally an agreement between two countries designed to eliminate all
restrictions on bilateral trade in goods and services. It commits both
governments to policies of non-intervention in trade between the two nations.
were originally allowed under the 1947 General Agreement on Tariffs and Trade
(GATT) as a mechanism to facilitate greater economic cooperation between the
recovering Western European economies. They have been an increasingly popular
form of economic and diplomatic engagement. Since the WTO was
established in 1995, there have been roughly 300 FTAs proposed. The Australian government
has been an enthusiastic advocate of FTAs, recently establishing a website to
'help Australian businesses understand and take advantage of our FTAs'.
nature, FTAs are preferential in that they exclude all nations bar the
signatories. They conflict with the WTO's 'Most Favoured Nation' (MFN)
principle. The MFN principle means that every time a country lowers a trade
barrier, it must do so for all its trading partners. In other words, each WTO
member treats all the other members equally as 'most-favoured' trading
However, while FTAs are inconsistent with the MFN
principle and are negotiated outside the multilateral framework, they are
allowed under Article XXIV of the 1947 Agreement. This article states that the purpose
of an agreement such as an FTA 'should be to facilitate trade between the
constituent territories and not to raise barriers to the trade of other
contracting parties with such territories'.
This means that the WTO accepts the creation of a
free-trade area (such as an FTA) provided it is not more restrictive on the
signatories than under previous arrangements. In addition, a free-trade area
must not lead to higher restrictions on trade with third parties.
generally consistent with the WTO's 'national treatment' principle. This
principle states that all foreign goods must be treated equally once they have
entered the domestic market. The
same applies to foreign services and foreign trademarks, copyrights and
patents. As discussed below, a significant example of this principle is the
enforcement of intellectual property rights.
The benefits of FTAs
FTAs provide direct economic benefits for signatory
nations. Particularly for small, developed nations like Australia,
FTAs offer potentially unlimited access to major world markets and cheaper
imports for domestic consumers and producers. They are recognised as an
increasingly important part of bilateral relations, not only in terms of mutual
economic benefit, but also by providing a long-term basis for peaceful diplomatic
FTAs continue with the process of trade liberalisation
in the absence of multilateral agreements. They have become the preferred means
for liberalising trade in the fast-growing services sectors, given that WTO
negotiations on services can only proceed at the speed of the slowest
participant. The Australian
Minister for Trade, the Hon. Mark
Vaile, has argued that Australia
is 'not prepared to move at the pace of the slowest common denominator. We
can't afford to...and there are many other countries that take a similar
attitude'. The WTO itself has
acknowledged that without the constraint of the MFN principle, some regional
free trade arrangements have paved the way for subsequent multilateral
Dr Ashton Calvert, the then Secretary of the Department
of Foreign Affairs and Trade, told an audience in August 2004 that Australia
continues to push for an outcome in the WTO to address core problems relating
to agricultural subsidies and market access.
But we also know that in its current state the multilateral
system is not able to satisfy—within a reasonable time-frame—all our ambitions
or needs as a liberal and efficient trading nation.
Throughout the Asia–Pacific and beyond, countries, such as
Australia—with a forward-looking agenda and who want to push ahead in building
deeper economic and commercial relationships and mature policy linkages—are
explained that Australia
was seeking to maximise gains to the country by pursuing 'complementary
opportunities at all levels—multilaterally through the WTO, bilaterally through
free trade agreements, and at the regional level in APEC'. In his view, Australia
does not choose free trade agreements with an economic partner or a region at
the expense of the multilateral trading system. He insisted that 'FTAs serve as
a complementary vehicle for pursuing trade liberalisation within the WTO's
global trade rules'.
Furthermore, he noted that numerous countries were keen
to have a free trade agreement with China
and that, to make competitive gains, Australia
needed to be aware of what these countries were doing in the Chinese market. He
competes directly with some of the countries involved in FTA discussions with China
in areas such as dairy, forestry, citrus, table grapes, wine, copper, coal,
gold and motor vehicles and parts.
surmised that an FTA with China
would improve Australia's
standing as 'a serious player in the international trade arena' and would place
Australia in a
favourable position for its economic future:
There is no question that concluding a high-quality FTA between Australia
and China would
be an important part of Australia's
international trade profile.
In addition to the impetus they can provide for trade
liberalisation, FTAs also tend to be more ambitious than the WTO's multilateral
agreements. They frequently cover issues of investment protection, government
procurement and competition policy. The recent Australia–United States FTA was
negotiated on the understanding that no major sector should be excluded from
tariff elimination. Similarly, it
was agreed that the negotiations on the Australia–China FTA will cover all
sectors and will address the issue of investment flows. Multilateral negotiations, on the
other hand, are often restricted to a particular produce or sector. Even
regional trade agreements tend to have significant exemptions. For example, China's
negotiations with the Association of South East Asian Nations (ASEAN) exempted
Mr Andrew Stoler, the Executive Director of the
Institute for International Business, Economics and Law at the University of
Adelaide, has argued that trade in services is one area where the WTO
negotiations have faltered. He stated:
Notwithstanding the fact that the services negotiations started
at the beginning of 2000—nearly two years before the Doha Declaration was
agreed—there are still only 48 initial offers on the table and their quality is
poor. Some have even said that the average level of commitment reflected in the
Doha offers implies a regression
from the current level of commitments. As services are now by far the most
significant part of the modern global economy, a lack of progress in the GATS
negotiations not only bodes ill for the overall WTO negotiations but it also
casts a shadow on the prospect that services liberalisation can make a
significant contribution to global economic development in the years to come.
In accepting the WTO system's limited scope and glacial
pace, among other complications, Mr Stoler
In the meantime, the system itself will be responsible for
dynamics that make the negotiation of additional Free Trade Agreements
attractive complements to the WTO and we shouldn't worry about that.
The pitfalls of FTAs
These arguments, and the growing use of the provisions
in Article XXIV of the GATT, have been criticised on both economic and
strategic grounds. Most obviously, the lesser volume of trade in a bilateral
agreement than in a multilateral agreement makes the economic gains from FTAs
commensurately smaller. Trade Minister Vaile
has recognised that FTAs are a second-best option: 'There is no question...that
if we could tomorrow get a much better result out of the multilateral system,
it would certainly be the best outcome'.
The more pointed argument against FTAs is their
discriminatory impact. Many economists emphasise that while FTAs may increase
market access for signatories, they limit the access of third parties. A 2003
Productivity Commission study found that 12 of 18 FTAs surveyed 'diverted more
trade from non-members than they have created among members'.
There is also an 'internal' discriminatory aspect to
FTAs. The agreements are often negotiated and structured through the influence
of powerful vested interests, which may lead to resentment among industries
with less political clout.
Another common criticism of FTAs is their complexity. A
particular difficulty has been negotiating the 'rules of origin'. These rules
ensure that only the products made and value-added in the signatory nations are
accorded preferential treatment. The WTO makes these rules a responsibility of
the individual member nation. This means there is enormous variation among FTAs
in the pattern of these rules, which often makes the negotiation process
particularly difficult. Australia
is currently renegotiating the rules of origin under the Closer Economic
Relations (CER) agreement with New Zealand
to conform to the rules of origin established under the US FTA.
FTAs also complicate the broader international trading
environment. Dr David Robertson,
a former Commissioner of the Australian Productivity Commission, refers to the
'hubs' and 'spokes' of current trading arrangements. The 'hubs' are the
powerful trading nations, such as the United
States and Japan,
which negotiate FTAs with small and medium sized countries (the 'spokes'). The
powerful trading nations have the negotiating power to set the scope, rules and
tariff reduction schedules of the agreement. Less powerful nations are left to
accept the terms. Moreover, the powerful few are in the position to negotiate a
more favourable FTA with another 'spoke'.
This imbalance was apparent in the negotiation of the
recent Australia–US FTA (AUSFTA). The Americans modelled the AUSFTA on the less
liberalising North American Free Trade Agreement, signed in 1993. Key
Australian exports, such as sugar, failed to gain unlimited access to the
American market. The US
was also reluctant to negotiate on 'beyond the border' issues, including
standards for industrial goods, food and the environment. The contrast is with Australia's
wide-ranging FTA with a similarly sized nation in Singapore.
Given all these shortcomings, and in the absence of
multilateral progress, many economists claim that the best FTA is one which
protection unilaterally. Professor Ross
Garnaut, for example, has argued that Australia's
experience of the past two decades shows that 'by far the main benefits of
reducing trade barriers are received by the liberalising country'. This prospect is unlikely, however,
given the influence of sectional interests.
Moreover, market access has been keenly contested in international trade, and
there are no guarantees that Australia's
trading partners would reciprocate.
Even strident critics of FTAs accept the need for
pragmatism over principle. Professor Garnaut
has himself conceded that the best response of third nations that are excluded
from FTAs may be to sign FTAs themselves:
...even if China and Australia recognise that the proliferation of
FTAs is unfortunate for the multilateral system and their own trade interests,
there may still be an argument for their seeking a bilateral agreement.
Contemporary policy has to take into account the contemporary reality...
Within the contemporary reality, Australia, most importantly in
the USFTA, now systematically discriminates against supplies from China, its
most rapidly growing trading partner, and in January 2005 its largest
merchandise trading partner and second largest export market...The imminent
completion of the China-ASEAN FTA is set soon to expand discrimination against
Australia across the whole range of agricultural and manufactured products.
It can be expected that the persistence of this discrimination
on both sides of the relationship would gradually corrode the current excellent
trade relations between China
A standard FTA between Australia and China, if it were
comprehensive in coverage and liberalised market access as much or as little as
the two countries' other bilateral agreements, would end the discrimination
that each country has introduced against the other in recent FTAs, and with it
the costs of trade diversion away from Sino–Australian trade.
There have also been strategic concerns about the
discriminatory nature of FTAs. Signing a trade agreement with one nation may be
seen as a sign of neglect by other nations.
In a submission to the Senate Select Committee on the Free Trade Agreement
and the United States,
Lloyd argued that negotiations on the
agreement 'should be accompanied by diplomatic initiatives'. Professor
Lloyd claimed that the Australian government
had a responsibility to:
...assure our Asian trading partners that this proposed agreement
does not represent a downgrading of our relations with these economies and,
furthermore, that we stand ready to negotiate parallel trading RTAs [regional
trade agreements] with these countries.
argued that 'particular diplomatic effort' must be accorded to nations such as Malaysia
with whom Australia's
relations have been strained. However, he does acknowledge that 'several of our
Asian trading partners are pursuing a similar strategy of multiple RTAs [which]
indicates that these countries should not logically object to us on grounds of
and the China–ASEAN FTA
A case in point is the recent signing of the
China–ASEAN FTA in traded goods. The agreement is part of a plan to work
towards an ASEAN–China Free Trade Area within ten years. The Secretary–General of ASEAN, His
Excellency Ong Keng Yong, has argued that:
The establishment of ACFTA by 2010 looks set to enhance economic
cooperation and integration between ASEAN and China.
The market and purchasing power are very much enlarged by the FTA. Preliminary
estimates suggest that the ASEAN-China FTA would raise ASEAN's exports to China
by 48% and China's
export to ASEAN, by 51%. At the same time, the combined GDP of ASEAN would
expand by at least US$1 billion while that of China,
by some US$2.3 billion (note: assuming a 6 per cent annual growth rate in ASEAN
and 7 per cent in China).
argued that 'as a general principle, Australia welcomes initiatives that improve regional economic growth
and liberalise trade'. Similarly, Mr Steven MacMillan, a consultant for ITS Global which runs China Business
Focus, told the committee that a China–ASEAN FTA
would not limit Australia’s capacity to
negotiate or require Australia to negotiate an FTA
with China more quickly. He
also disputed that the benefits of lowering barriers to Australian goods into China’s markets would be
lost as a result of China's FTA with ASEAN.
The issue of trade
diversion is probably more of a concern in areas where the barriers are very
high—Australia’s certainly are not and China’s are decreasingly so—but that
does not negate the benefits available from further liberalisation. In other
words, the group’s view would be that these things should go on and that Australia should continue to seek those
liberalisations that are available in the FTA context.
A more closely integrated economic community in East
and South East Asia means that Australia,
whose economic and commercial interests are centred in this region, will have
to manage these developments carefully. In their submission to the committee,
Mr Reg Little and Mr James
Given current trends, it is becoming imperative to base an
important portion of Australia's
strategic planning on the contingency that China
in particular, and East Asia in general, will re-emerge
at the centre of global trading, first rivalling and later overshadowing Anglo–American
power. In such circumstances it is apparent that Australian policy cannot
afford to be ill–informed about powerful, deep-rooted cultural qualities,
largely suppressed and disguised over much of the past century, that direct
behaviour among its most powerful neighbours.
This imperative will increase in importance if there is further
movement towards an Asian trade and financial grouping to match European and
American regional groupings. Australia will need not only to be closely in tune
with developments in China but also with other key members of any such grouping
so as to ensure that it can lobby effectively to optimize its negotiating
In addressing the China–ASEAN FTA, they were of the
view that the arrangement is 'likely to be little more than a stepping stone to
closer China-led regional cooperation, designed to protect against a repeat of
the 1997 Asian financial crisis and against regional groupings in Europe and
the Americas'. They stated:
It is hard to see how Australia
can protect and advance its interests except by displaying a preparedness to
respond constructively to developments of this nature. It is likely to best
optimize its negotiating position if it is playing a pro-active, strategic role
that is built on an astute understanding of regional interactions and regional
sensitivities about the influence of non-regional and alien cultural norms.
The committee believes there is an important economic
and strategic role for FTAs. Although multilateral liberalisation is the
preferred option, FTAs are a means to end the discriminatory practices that
both nations may suffer as a result of the agreements that they both sign with
third countries. Australia,
through the US FTA, systematically discriminates against supplies from China:
the ASEAN FTA, expands discriminatory trade practices against Australia.
Given the number of FTAs that China
has already signed, there is a significant opportunity cost to Australia
from not signing an agreement with China.
The committee notes, therefore, that the prima facie case for an Australia–China
FTA is to remove the existing costs of trade diversion. Moreover, given the
size and centrality of China's
economy in the region and its compatibility with Australia's
economy, an Australia–China FTA will also be trade creating. The following
chapter looks closely at these benefits.
The progress of multilateral negotiations
The committee also emphasises that an Australia–China FTA
must be pursued concurrently with opportunities for multilateral trade
liberalisation through the WTO. The Sixth WTO Ministerial Conference is
scheduled to take place in Hong Kong from 13 to 18 December 2005. It will be the third Ministerial
Conference under the current 'Doha Round' of multilateral trade negotiations.
The focus of the Doha Round is to assist developing
countries by cutting agricultural protection. The Australian government has
strongly supported this agenda.
However, the most recent Ministerial Conference in Cancun,
Mexico, in September 2003
failed to achieve consensus on cutting protection for farm products. Some
developed nations—notably the European Union (EU)—insisted that progress on
reducing agricultural tariffs and subsidies should be conditional on addressing
issues': investment, competition, transparency in government procurement and
trade facilitation. Certain developing nations opposed the inclusion of the Singapore
issues, believing they were irrelevant to their interests. This impasse contributed to the
failure of the Cancun negotiations.
At the time of writing, the Director–General of the WTO,
Lamy, warned that without a better proposal
from the EU on market access for agriculture, it may be necessary to postpone
the Hong Kong Ministerial Conference.
Trade Minister Vaile argued:
has put forward a plan to cut agricultural subsidies by 60 per cent. It goes
well beyond any previous US
offer. In contrast, the EU has put forward a disappointing offer. It has
offered to cut tariffs by 20 to 50 per cent, which is just not enough...I don't
believe the [WTO] meeting should be postponed, even if the EU does not put
forward a better proposal.
It is estimated that Australia
could benefit by as much as $7 billion a year from the successful completion of
the Doha Round.
The committee recommends that the Australian government
continue its support for the Doha Round of multilateral trade negotiations,
most immediately through the Sixth WTO Ministerial Conference in Hong Kong.
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