Is Free Trade Worth It?

Ben Eltham
New Matilda

Australia is currently negotiating a big new trade agreement with the US and other nations on the Pacific. There’s an ocean of money involved and the deal is proving controversial, writes Ben Eltham.

Last week in Melbourne saw some rather important international negotiations taking place.

They concerned the Trans-Pacific Partnership, or TPP. It’s currently being negotiated between the US, Australia and a number of Asia-Pacific nations including New Zealand, Peru, Chile and Vietnam. Mexico, Canada and Japan have also expressed interest, which would increase the weight of the trade bloc significantly. The government thinks the TPP could account for annual trade totalling US$17 trillion in 2010 terms. That’s a lot of money in anyone’s perspective.

The TPP is part of US President Barack Obama’s big-picture attempt to shift American trade and foreign policy priorities toward the Pacific and Asia. This effort was announced at last year’s Honolulu conference of APEC.

As Clyde Prestowitz in The American Prospect observes, “the TPP is anchored in the same orthodox free-trade philosophy that has inspired every US trade negotiation and agreement since the end of World War II.” That means it will attempt to liberalise flows of international capital, strengthen intellectual property rules, and make it easier for US companies to invest in foreign locales.

The TPP might be thought to be a fairly dull negotiation, given that the US already has free-trade agreements with many of the countries in the partnership, including Australia. But the TPP is more than just a trade agreement. As the federal government’s web page on the treaty explains, the TPP “will also deal with behind-the-border impediments to trade and investment.”

And that’s why it’s proving controversial. Should they agree to it, the TPP will force signatory countries to change their domestic policies to conform to the treaty provisions. As Australia has seen with the US-Australia Free Trade Agreement, that can mean flow-on changes to Australian law in areas such as copyright and intellectual property.

Another big issue is drug prices. Pharmaceutical buying for hospitals in Australia is effectively nationalised, because the Pharmaceuticals Benefits Scheme is so big, it can set the price of the drugs it buys. Australian law also regulates pharmacy pricing for the consumer, setting the wholesale and retail prices at the local chemist.

In contrast, the highly privatised US system sees ferocious competition between various sectors of the health industry. The result is sky-high drug prices and poorer health outcomes. US pharmaceutical companies would love to charge higher prices to the PBS, and would be more than willing to take Australia to an international trade court to try and achieve that, if they could, through a mechanism known as the “Investor-State Dispute Settlement” clauses in the treaty.

But Trade Minister Craig Emerson has apparently ruled out any agreement that could weaken the PBS. “The Australian government has been clear from the outset of negotiations that it will not countenance any outcome which undermines the integrity of the pharmaceutical benefits scheme,” he said last week. Emerson added at a door stop last week that “we do not and will not support investor state dispute settlement provisions.”

It’s the potential for legal challenges to the carbon tax that really has the government spooked. If the ISDS provisions were signed up to, Australia might be liable to challenge from other businesses in other countries to aspects of our carbon pricing regime, which would impose costs on overseas businesses operating in Australia that they won’t face in countries lacking a carbon price. Plainly, that’s the last thing Julia Gillard’s government wants to worry about.

Even more questionable are TPP clauses that would prevent countries from regulating international flows of capital, particularly the so-called “hot money” that sloshes around the world daily, and that can rapidly destabilise small economies. Malaysia, for instance, was one of the few countries in Asia to survive the economic catastrophe of 1998, in large part because it imposed such controls. But the TPP would seek to ensure that stocks, bonds, derivatives and currency trades would move “freely and without delay” between the member countries. Some in the Malaysian media are already concerned about this.

Multi-lateral trade negotiations have had a patchy record lately. The World Trade Organisation’s Doha round of talks has been going nowhere for years, bogged down in labyrinthine negotiations over freeing up agricultural and manufacturing barriers and reducing subsidies to protected industries. Pascal Lamy, a veteran EU bureaucrat currently in charge of the WTO, told Bloomberg that no deal can be expected this year. “The political energy tank is empty,” Lamy said.

The stalled progress of international trade talks is in large part because of the wide differences between rich and developing countries over what trade liberalisation should achieve. For rich countries like the US, access to export markets for multi-national corporations in which the US still enjoys a clear competitive advantage is the key. Hence, the US is always keen to increase intellectual property regulations to ensure the protection of creative monopolies through things like copyrights and patents.

Developing countries, on the other hand, often have far less open economies and are keen to protect their industrial manufacturing base. Chinese growth is still very reliant on manufacturing exports to Europe and the US, and for this reason the Chinese yuan has been pegged at an artificially low exchange rate to the US dollar for many years. The US trade deficit to China has become a highly politicised issue, but there appears little the US can do about it while China remains the holder of trillions of dollars worth of US Treasury bonds. Chinese foreign currency reserves function, in effect, as one of the main sources of funding for the US Treasury.

For a small open economy like Australia’s, the gains from free-trade talks are likely to be marginal at best. Australia has already lowered most of the trade barriers protecting our domestic economy, and the high Australian dollar is completing the work of hollowing out the manufacturing sector. Australia can enjoy some benefits from better access to markets for our agricultural exports, which are much more lightly subsidised than those of many other countries. It’s also true that Australia has also benefited from foreign direct investment from the US, so it’s not a complete bust. And lower tariffs and the high dollar have obviously benefited consumers, as the millions of happy shoppers on eBay can attest.

But the mining boom is working against all Australian exporters, by jacking up the price of the Aussie dollar. While Australian exports to the US have increased in the years following the US-Australia Free Trade Agreement, US exports to Australia have increased far more quickly. As a result, the trade deficit has widened.

The TPP is also part of a broader US geo-strategic shift towards Asia, a shift in focus with military as well as economic overtones. This means it also has implications of Australia’s relationship with China; Australia and China are of course still negotiating a free trade agreement of our own. The potential for the TPP to be seen by Beijing as a further attempt by the US to constrain the growth of China as a great power is just one of the potential geopolitical risks involved.

In the end, the TPP highlights the many inconsistencies and special interests that dominate our approach to trade, which tends to be approached in a relentlessly neoliberal paradigm. While international trade is generally a good thing for most economies, some types of international trade can be damaging, and some treaty clauses can be deeply undemocratic.

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