I have spent years outlining the problems of free trade agreements (FTAs), which I learned while working as the Australian Treasury’s trade analyst and informally participating in discussions for the Australian-US FTA (AUSFTA).
The first pitfall is that Australia’s FTAs were mostly negotiated in secret from the public, but opened to corporations and industry groups to lobby for their interests.
The issues were most acute in non-trade areas such as intellectual property, Investor-State Dispute Settlement (ISDS), and labour market access, where companies’ interests are most distant from citizens.
Second, basic trade theory states that FTAs generally result in “trade diversion”—whereby the importing country shifts its purchasing from a more efficient, lower-cost country whose goods are subject to a tariff to a less efficient and higher-cost FTA partner whose goods are not subject to a tariff—a situation that can be welfare-destroying.
Third, FTAs typically include complex rules of origin (ROO), which can increase administrative expenses for businesses (including paperwork compliance) and customs services in administering and auditing the ROO. These costs negate any minor trade gains. Both of these issues are described in greater detail here.
These hidden expenses were validated by a study conducted by HSBC and the Australian Chamber of Commerce and Industry, which discovered that Australia’s FTAs were poorly worded and are so complex that they are almost useless in terms of commercial value. As a result, Australian enterprises exporting to partner countries have not taken advantage of the opportunity.
The Crawford School of Public Policy at the Australian National University undertook a study of AUSFTA and discovered that a decade later, the pact diverted more trade than it generated.
The Australian National University’s Peter Drysdale calculated that “Australia alone has suffered trade losses [from AUSFTA] the annual equivalent of the current price of around 18 Japanese, German, Swedish or French submarines through this deal”.
Fourth, some FTAs have increased Australian firms’ access to cheap foreign workers, weakening Australian wages and working conditions.
In reaction to the aforementioned hazards, the Productivity Commission (PC) has regularly criticised the efficiency losses associated with FTAs, as well as the hidden protections built into some agreements (e.g., extending patents and copyright protection).
The PC claimed that Australia’s trade negotiations have been “characterised by a lack of transparent and robust analysis, a vacuum consequently filled at times by misleading claims”, and has called on the “final text of an agreement to be rigorously analysed before signing”.
ABC chief business correspondent Ian Verrender published an article over the weekend explaining how FTAs have been detrimental to Australia:
Free trade agreements were all the rage up until 2020. Mostly, however, they were about everything other than trade.
And, while bureaucrats expounded upon their benefits, they always came attached with strings and legal conditions that were incredibly costly…
Free trade agreements should be all about abolishing rules and barriers to trade. Often, they do exactly the opposite. They include clauses that restrict trade or, at least, deliver an advantage to one party.
One of the worst aspects of our 2005 free trade deal with America was on copyright, which extended the rights of American Intellectual Property to 70 years.
But even that paled into insignificance when it came to concessions over patents on medicines…
Verrender also explained how China and the US ignored their respective FTAs with Australia and imposed tariffs and other trade restrictions:
Donald Trump may have dabbled with tariffs in his first term but he wasn’t the first to launch an all-out trade assault.
That distinction goes to China…
Everything from timber to grains, wine and seafood was hit with tariffs. The only product exempted was iron ore as China desperately relied upon Australian supplies to feed its steel mills…
The bottom line is that FTAs are not worth the paper they are written on. They generally result in worse outcomes for Australians and should be torn up.
