Multilateral trade arrangements may be harder but they are the only fair way

The proposal of a Free Trade Agreement (FTA) with Malaysia sounds like a welcome coup, given the irritated tone of our bilateral relations in the past 20 years. But as the number of our regional FTAs grows, we need urgently to revisit our opportunist approach to them before the costs begin to outweigh the benefits.

Australia has become the most prominent negotiator of bilateral agreements in the Asia-Pacific region after relying almost exclusively on multilateral agreements - the WTO - for 50 years. The economies with which we’ve initiated talks or closed deals in only the past 18 months have a combined size of $12 trillion, straddling both the industrialised and developing world.

What’s surprising is that this change in strategy has been so ad hoc. As suggested by the sub-title of the relevant chapter in the Government’s 2004 trade statement, "Pursuing every opportunity", we are doing little more than "picking cherries" as the opportunities arise. Although we’re in the middle of a secular change in the way we manage trade relations, the government has almost been at pains to avoid articulating a change in policy.

Perhaps that’s because they know that an FTA-driven regional trade policy, which is what we seem to have at present, won’t work; or at best will under-perform. A tangle of bilateral FTAs won’t offer a coherent platform for region-wide trade relations because they are by nature discriminatory, based on creating exclusive elements in bilateral trade that, added up, are inherently costly.

An example helps to illustrate this point. Earlier this year, at the end of our recent negotiations of a Free Trade Agreement with Thailand, I was working on behalf of Australian clients, some of whose exports will finally get duty-free treatment in the Thai market only after 20 years and during all that time will be under threat of "safeguard" action by Thailand that could, temporarily, put the shutters up again.

Australian negotiators were unable to get a better deal on access. But at the last minute, under intense industry pressure, they extracted a "reversion" clause from the Thais. Under that provision, if my client’s foreign competitors also benefit from a bilateral free-trade agreement in the future on better terms than our deal then we’ll have a guaranteed right to seek renegotiation of the access arrangements.

In the last hours of the talks, the danger that competitors might in future get a better deal on a discriminatory basis loomed larger than the modest access improvements themselves. It’s the differences between FTAs - either the FTAs between third countries and our bilateral trade partners or even among our own FTAs with different countries - that are the touchstone of value in an FTA as far as exporters and importers are concerned because a difference represents a competitive advantage.

Every difference, however, also potentially adds to the complexity of the trading system and, as a result, to the product development, marketing and compliance costs firms face in exploiting the agreements.

It should be a principal goal of trade policy in our region to support the regional growth of globalised production chains involving the contribution of value-added from different places to a final product. Processing trade is one of the fastest-growing forms of exchange in east Asia accounting for up to half of China’s imports and exports. But rules of origin that guard discriminatory advantages in bilateral FTAs often mean that a firm can’t rely on a preference in any market if it uses intermediate products imported from a third country in its exports. Preferential rules of origin can stop globalisation in its tracks.

Differences in approach to standards and compliance between bilateral FTAs require costly new management systems for both agricultural and manufacturing businesses. For services businesses the differences can perpetuate fractures caused by discriminatory approaches to the recognition of qualifications, accreditation and investment regulation.

In summary, creating classic FTAs one by one is an unsatisfactory basis for a regional trade strategy because your advantage in a discriminatory FTA is often my disadvantage. Any attempt to liberalise trade around the Asia-Pacific region on the basis of bilateral FTAs would be more likely to redistribute profits than to grow trade volumes.

The rapid growth in the number of FTAs points to a secular change in the trading system. Our response to it must be more sophisticated than our current approach of taking advantage of bilateral opportunities as they are offered.

It won’t be easy to get around the limitations of the bilateral FTAs without weakening the incentive to break down "recalcitrant" trade barriers. But there are few countries better equipped by experience, good regional relations and a strong economic record than Australia to take a lead. We cannot do it alone: it has to be a region-wide project, probably based on an agreement to homologate current discriminatory agreements and to make a template for future deals. 

Such approaches will be hard to agree and difficult to enforce. Homologation of current agreements and a "cookie cutter" approach to future reciprocal agreements, probably on a plurilateral basis, will inevitably cut back the competitive advantage that a discriminatory approach offers and generate resistance. But there is a very big prize for success in such a project.