Global, not Asian, focus is the key to growth

Australia’s success in the Asian Century should come from unilateral domestic reforms of trade policy, not preferential deals.

Asians love fireworks. So it was hoped the government’s Asian White Paper (WP) would be a cracker. Instead we got a fizzer, long on vague aspirations but short on good ideas.

Australia’s growing trade links with Asia are good. But so are our links with non-Asia. We should not be focusing policy attention in any particular direction, especially as the basis of reform. Our interests are to continue as a global player. Regional economic integration should be based on commercialism, and not be at the expense of global integration nor of policies that “place regional economic integration at the centre of decision-making processes”.

Remember the Asian financial crisis in the late 1990s. Our openness to the whole world enabled us to weather that storm as Australian exporters faced with declining regional competitiveness as the dollar appreciated against Asian currencies thankfully turned to non-Asian markets e.g. North America.

This global openness also undoubtedly contributed to Australia’s resilience to the GFC. When the next regional or global crisis occurs, or relative competitive positions change, Australian traders will hopefully again be able to respond accordingly. It is imperative that our businesses can quickly change markets globally as economic conditions change.

The WP’s national objective that “Australia’s trade links with Asia will be at least one-third of GDP by 2025” lacks sense.

Good trade policy is the opposite of that espoused in the WP, namely opening our market on a non-discriminatory (MFN) basis. That approach underpinned the Hawke-Keating unilateral trade-related economic reforms in the 1980s and 1990s which turned around our economic performance. MFN liberalisation is also the core of the WTO, which has stagnated as members, including Australia, rapidly embrace preferentialism.

Alarmingly, the WP drives yet another nail into the Hawke/Keating approach by endorsing discriminatory reform via preferential trade agreements (PTAs). The WP refers to the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) as a “high-quality, truly liberalising agreement”. Where is the evidence for this?

It also endorses the ultimate goal of regional integration to be an APEC free-trade area, which the Trans-Pacific Partnership (TPP) and the Regional Economic Cooperation Agreement (RECA) could become. This would depart from the non-discriminatory foundation on which Australia formed APEC. Worse still, the TPP is being negotiated under US influence in a way to ensure China will not join.

The WP’s prescription for Australia to become “more open and integrated with Asia through comprehensive regional agreements” shifts the responsibility for decision making away from our domestic institutions towards a non-transparent bargaining process with other countries which the record shows will not deliver genuine liberalisation.

Instead, it will slow our domestic reform by generating new excuses to do nothing e.g. to retain tariffs as “bargaining coin” in PTAs. The government’s willingness to surrender our domestic policy to foreigners is evident in the WP stating that tariffs will only be reduced on a non-MFN basis as part of negotiating future PTAs.

This ignores the Productivity Commission’s (PC) policy advice in 2010 that PTAs do not work as advertised and are oversold. It urged Australia to revive unilateral (MFN) reforms since these provide larger, more certain gains.

Instead, the WP has endorsed the “competitive liberalisation” model of the US, using PTAs as the basis of reform without any credible policy evaluation. It also calls for more PTAs, including possibly joining the Pacific Alliance. The inefficiencies of creating such a “noodle bowl” of overlapping PTAs with multiple memberships are obvious.

Sadly, the WP seems unaware that PTAs undermine the WTO’s effectiveness. With the WP further supporting PTAs, it is not credible for the WP to claim as it does that the “WTO is the government’s preferred vehicle for pursuing trade liberalisation”.

The mockery of WTO principles is extended by the WP’s enthusiasm for Australia and the US co-chairing efforts to form an International Services Agreement. As the US will insist this be non-MFN, Australia should “walk away” from the whole idea.

Australia will handle the 21st Century (in Asia and elsewhere) if it focuses its trade policy on unilateral domestic reforms. Unfortunately, the WP advocates a trade policy that takes us as far away from that strategy as is imaginable.

This article first appeared in the Australian Financial Review.

The US-Malaysia FTA – A cautious approach necessary

The Malaysian government must take a cautious approach when negotiating the USMFTA. Furthermore, the government must consult all relevant parties, especially Parliament and the workers before making any decisions.

The Malaysian government is undertaking a series of bilateral negotiations with the United States (U.S.) to conclude what would be a preferential free trade agreement (FTA) with the world’s only superpower. From the U.S. perspective, the U.S. – Malaysia FTA (USMFTA) makes good business sense, as Malaysia is the 10th largest trading partner of the United States and its largest trading partner in ASEAN. The FTA would facilitate further U.S. trade and investment in Malaysia. From the Malaysian government’s perspective, the USMFTA is key in ensuring continued foreign direct investment (FDI), especially from the U.S. and to keep pace with other ASEAN members. The main challenge Malaysia faces is that its comparative advantage as an FDI destination has eroded over the years.

In negotiating the USMFTA and weighing the options between attracting FDI and achieving development goals, the Malaysian government must note one important point. An FTA between a developed and developing country exacerbates existing inequalities between and within the two countries as the FTA “levels the playing field” among unequal partners. The developing country tends to suffer disproportionately. The U.S. economy dwarfs the Malaysian economy, as do U.S. corporations. As an analogy, the Fortune 500 is filled with U.S. multinationals while Petronas is the only Malaysian multinational that has been consistently placed in the Fortune 500. These inequalities are likely to worsen, as FTAs seldom include protection for the losers.

Malaysia must be cognisant of the impact that U.S. FTAs has caused on its partners. In Mexico, 2 million farmers have lost their jobs due to the North American Free Trade Agreement (NAFTA) as subsidised agriculture products from the U.S. flooded the Mexican markets. Similarly, the U.S. Peru FTA has allowed subsidised U.S. agricultural products to flood the Andean Common Market through Peru, causing further hardship in a country where over half of its 27 million citizens live below US$1 a day.

The U.S. – Jordan FTA and the Central American Free Trade Agreement (CAFTA) have made Jordan and the Central American economies locations for producing labour – intensive goods for the U.S. market. Singapore, a close ally of the U.S. saw its trade deficit with the U.S. increase by 200%, a rise of US$2.9 billion in the first year upon signing the FTA. The same effect occurred to Australia too as its trade deficit increased by US$1.7 billion in the first year of its FTA with the U.S.

U.S. trade surplus with Singapore tripled after the first year of the FTA reaching US$4.3 billion. The U.S. experienced phenomenal export growth in certain sectors. Exports in IT equipment grew by 62%, exports in machinery and parts by 24%, accompanied by 86% increase in minerals and fuels, 99% jump in furniture and 84% hike in vehicle and parts. U.S. exports to Chile grew by 33.5% from US$1 billion to US$3.6 billion. U.S. trade surplus with Australia grew by 31.7% and exports to Australia increased by 11.7% in the first quarter of 2005. The CAFTA is expected to reduce the U.S. trade deficit with the region by US$756 million. U.S. farm exports to the region are expected to expand by US$1.5 billion a year while U.S. manufacture exports to the region are expected to increase by US$1 billion.

The U.S. is very keen on the USMFTA. The U.S government, the U.S. Chamber of Commerce – the world largest business federation with over 3 million members, and its partner, the American – Malaysian Chamber of Commerce (AMCHAM) has continually affirmed the need for the USMFTA. The U.S. Chamber of Commerce and AMCHAM know exactly what they want. They have made a 98 page public submission on the USMFTA to the U.S. government. They influence the United States Trade Representative (USTR) to pursue certain key issues that are in direct contention with development objectives and policies that the Malaysian government declares it will not trade away.

The Malaysia government must stand firm. Take for example the protection of workers. Workers will likely suffer the most should the government not include specific reference to implementing International Labour Organisation (ILO) Core Labour Standards in the USMFTA. It would be wise for the Malaysian government to discuss the USMFTA with the Malaysian Trade Union Congress (MTUC), the legitimate representative of the worker movements in Malaysia, to ensure that Malaysian and guest workers in Malaysia benefit from the USMFTA.

In Thailand, South Korea, Central and South America, thousands of citizens have been demonstrating against the FTAs with the U.S. These citizens are against FTAs as they see the FTAs as only meeting the interests of corporate America. The Malaysian government therefore must rally public support including that of the worker movements in favour of the USMFTA, as this will be in the interest of the nation. To achieve this, the Malaysian government should “show the numbers” on how Malaysia and Malaysians will benefit from the USMFTA.

Business groupings such as the Federation of Malaysian Manufactures (FMM) and Government Linked Companies (GLCs) must come out in support of the USMFTA and demonstrate how they will benefit and thrive through with it. The Malaysian government ultimately must also explain its strategy to the Malaysian public on how the so called “spaghetti” of FTAs that Malaysia is getting involved in will benefit Malaysia in the long run.

This article first published by MIER.