Monthly Archives: June 2015

Companies pursuing tax breaks often end up with contrived, complicated and opaque corporate structures that bog them down and bear only passing relation to how they actually operate.
It is increasingly the same in international trade.
With the conclusion of a preferential trade deal with China earlier this week, Australia is now signatory to 16 bilateral and plurilateral trade agreements, almost all of them negotiated in the last 15 years.
It is part of a regional trend.
Across the Asia Pacific, there has been a frenzy of deal making. At the turn of the century there were 51 preferential trade deals in the region. By earlier this year, their number had swollen to 215, with a further 60 under consideration.
The quality and comprehensiveness of these deals vary widely, and each is weighed down by rules and annexes that can run to thousands of pages setting out rules and exclusions.
Even the Korea-Australia Free Trade Agreement signed late last year, considered to be one of the higher-quality deals around, runs to 1700 pages and covers more than 4000 product-specific rules.
These deals come with sales pitches that typically claim they will deliver staggering riches.
For example, the Centre for International Economics – on commission from the Department of Foreign Affairs and Trade – has calculated that the triumvirate of Australia’s bilateral deals with Japan, China and Korea will, collectively, boost Australia’s exports by 11.7 per cent (almost $17 billion) by 2035 and create an additional 178,000 jobs.
Such gains, if realised, should not be sneezed at.
But there are reasons to be more than a little sceptical about these claims. Aside from the challenges of anticipating what the economy will be like in 20 years’ time (how many in 1995 would have imagined that a business based on sharing photos and pithy one-liners would grow into one of the world’s biggest companies), there is the question of how much trade that might go elsewhere will end up channelled to these three markets because of these trade deals.
But perhaps the biggest question of all is how much businesses will avail themselves of the opportunities contained in these agreements, and at what cost.
Tariffs may be cut to zero, but that means nothing unless businesses take advantage. And by pursuing the opportunity in one market, attention invariably shifts from others. Then there is the competition for domestic producers from cheaper imports, and the associated benefits that are likely to accrue to consumers.
Experience both in Australia and internationally shows that, despite all the hype, businesses are poor at taking advantage of preferential trade agreements.
An Economist Intelligence Unit study found that, across east Asia, less than third of eligible firms used concessions provided by trade deals, and a survey of Australian companies by the Australian Chamber of Commerce and Industry in late 2013 found that in almost all instances their understanding of Australia’s trade agreements was low – more than half said they didn’t understand them at all, and a further fifth used them but did not comprehend them.
A lot of this is due to complexity.
To take advantage of preferential agreements, exporters have to negotiate a thicket of rules about where components are made, how products are assembled, variable tariff rates and other technical details.
Working out how to take advantage of a trade agreement can be a huge undertaking for a company, particularly if it is small or operates in multiple markets.
Ultimately, if it is too hard and costly to use, businesses will just avoid using the concessions provided in trade deals.
ACCI warned in a submission to a parliamentary inquiry, “Australia may have the best trade agreements in the world, but they are wasted if the Australian Government does not follow through and ensure that…businesses know how to use them”.
Ultimately, the complicated web of preferential trade deals may hinder as much as help trade.
An exporter may find that in shaping their products and operations to take advantage of opportunities in one market, they fall foul of regulations in another.
The sum total may be a nest of complex and cross-cutting rules that are incompatible with one another and stymie attempts at setting uniform international standards.
But to try to assess bilateral trade deals in economic or commercial terms is to miss the point.
These are primarily political documents, a de facto form of diplomacy and strategic positioning.
It cannot be a coincidence that, after a decade of wrangling, the Australia-China FTA was concluded late last year in the shadow of the US-led Trans-Pacific Partnership Agreement, which has been seen as part of efforts by Washington to ‘ring-fence’ Beijing as the rivalry between the two powers intensifies.
Unfortunately, these political games have real consequences for international trade, distorting the flow of goods and services and skewing the commercial playing field.
For evidence, you only need to look at the genesis of the Australia-Korea FTA. Business groups backed the deal for fear that competitors in the US, Europe, Canada and New Zealand were stealing a march in the battle for market share because their governments had already struck FTAs with the Koreans.
The beggar thy neighbour logic of preferential trade agreements creates a world in which governments must endlessly chase trade deals for fear of being left at a disadvantage, all the while creating rules and incentives that create inefficiencies and clog up commerce.
But in this game of double-jeopardy, it is one thing to know what is going on, another altogether to do something about it.