We can go unilateral on trade

19 Jan 2017 |

As Donald Trump takes office, debate over the Trans-Pacific Partnership has flared. While Australian leaders exchange barbs over trade, we should recognise that we have more options than to simply accept or reject the TPP.

Without the United States ratifying the TPP, it will not come into force. TPP signatories are understandably continuing efforts to ratify the agreement, given the TPP’s importance to trade in the Asia-Pacific. Trump’s opposition is clear, though there are glimmers of hope from other parts of the incoming administration.

But we should not put all our eggs in the trade agreement basket. We should also consider the benefits that arise from genuine economic reform.

In trade deals, the economic benefit comes from what a nation brings to the negotiating table, not what it takes from it. We should not be fixated on what our exporters get; instead we should think about what our nation gets.

In trade agreements, including the TPP, Australia generally commits to removing our remaining barriers. But we don’t need to wait for the TPP for us to reduce our barriers. We can implement our offer today, not just for TPP nations but for the entire world.

So-called free trade agreements never seek “free trade”. They seek preferential trade: trade on terms described in each agreement. Because agreements are negotiated separately, they actually make trade more complex.

Preferential deals offer discriminatory terms to the agreement parties, so they require detailed arrangements that describe the rules, adding costs to business and increasing the administrative burden for governments.

The outcomes of these deals are not analysed during their negotiation. When the Productivity Commission analysed the performance of past agreements, it found they rarely delivered on their promise.

If the deals genuinely sought free trade they would be simple documents stating that the parties agree there shall be no restrictions on trade, investment or movement of people between the two countries. Full stop. That’s it. This could be negotiated in days, not years.

These deals take so long because national leaders agree to a “free trade” deal but negotiators retain protections. They will only trade it in a zero-sum game in which one side “wins” concessions from the other.

But there is another path, one that does not require any “deals”.

As Malcolm Turnbull and Bill Shorten appeal to the reform legacy of Bob Hawke and Paul Keating, remember the reforms of this earlier era were unilateral. They made economic sense and did not require us to negotiate with other nations.

Since 1991, Australia has experienced uninterrupted annual economic growth. In that time the number of people employed in Australia has grown from 8 million to 12 million.

Unemployment for most of this time has been below 7 per cent. And average wages have increased from $500 per week to $1200.

Economic performance and comparative advantage, not trade agreements, provide jobs and build wealth. New leaders in Britain and the US are placing competitive pressure on Australia without any “deals”. The planned company tax cuts in both countries will change the investment landscape.

Australia needs to ensure our cost of doing business is competitive. These costs include taxes, employment regulations, red tape, energy prices, tariffs, investment regimes and restrictions on the movement of people. These costs sometimes pay for social benefits and are kept in place by lobbying. These costs have a greater impact on the economy than do trade deals.

This is a task for the Prime Minister and the Treasurer more than the Trade Minister. It requires understanding and addressing the rising tide of protectionism, preferably with bipartisan support.

Unilateral efforts can steer clear of contentious issues such as product rules of origin, investor-state dispute settlement, movement of people, labour laws and the environment.

They may cause pain as adjustments hurt businesses and workers in sectors that previously benefited from protectionism. Over time growing industries will provide opportunities for dislocated people, and training should be provided. Nationally the rewards of improved competitiveness and productivity will be greater than the localised price.

Under a unilateral approach all nations are treated equally, in contrast to the discrimination between countries by world leaders who speak of free trade.

This year, the 200th anniversary of David Ricardo’s theory of comparative advantage, Australia should rediscover the spirit of the 1980s and 1990s, when we embraced unilateral reforms in trade, workplace relations and competition policy. Those policies drove job creation and raised living standards over the previous 25 years, and can do so for the next 25 – with enough political will.

This article was first published in the Australian Financial Review on January 19, 2017.

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