The ultimate goal is free trade

Everybody trades. People do not build their own houses, milk their own cows, construct their own televisions and also make their own movies. Instead, people specialise at something they are good at (building houses or milking cows or making televisions or movies) and exchanging this for money. That money is then used to buy the other things in life that are wanted.

In an ideal world, trade in goods and services between people, regions and countries would be totally unrestricted, with everyone specialising in what they do best and trading with others for everything else. Ever since Adam Smith's Wealth of Nations was published 238 years ago, it has been well known that this contributes most to prosperity.

The reason free trade agreements are needed is because the world is not ideal. Some people choose to do things that they are not necessarily the best at, and then convince governments to protect them from more efficient producers and suppliers elsewhere. Trade agreements are aimed at unwinding this protection.

The reason for bilateral free trade agreements is because there are not enough multilateral agreements. Two decades ago a bilateral agreement would have been dismissed as anachronistic given the success of the multilateral treaty establishing the World Trade Organisation. But subsequent negotiations, known as the Doha Round, have failed to make much progress.

Thus while the free trade agreement with Japan is to be welcomed, along with the agreement with Korea and the likely agreement with China, it would be a lot better if there was an international agreement in which those three countries, along with many others, were participants.

And it would be even better if Australia just dropped its restrictions on imports altogether. The popular notion that free trade requires reciprocal agreements is wrong. The best option for Australia's economy would be to unilaterally remove all tariffs, import levies, duties and other import costs without waiting for corresponding action by our trading partners.

It does not matter that other countries subsidise their industries to make goods cheaper than ours. Indeed, we should welcome imports that are subsidised by the taxpayers of another country. It is the equivalent of foreign aid.

Hong Kong and Singapore, both island nations with no mining or agriculture industries, have benefited immensely from freely buying and selling with the world without bothering with free trade agreements. Trade negotiations amount to countries arguing that if you don't stop making your citizens poorer, then we'll just make ours poorer to spite you!

Unilateral free trade would also give us leverage with other countries to do the same. It would be much harder for China, or any other country for that matter, to deny us market access if we have already opened up our markets to them.

There is no shortage of entrepreneurs willing to invest their own money in new ventures that would compensate for any loss of jobs, helped by the fact that imported inputs would be cheaper.

One of the problems with bilateral free trade agreements is that they discriminate against countries that are not included. Thus, while the price of Japanese-made cars in Australia will drop with the removal of the tariff, cars from other countries with which we do not have a free trade agreement will not. As a key input into the cost of business and government, the impact of lower prices for cars flows right through the economy.

The same applies in Japan. Consumers there will benefit from lower beef prices as duties on Australian beef are lowered, but they would benefit more if beef could be imported from other countries on the same terms. Australian beef producers would need to remain internationally competitive in that case, but most of them are well capable of doing that.