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Perspectives: Has the time come to retire the Free Trade Agreement?

The United Kingdom announced a bilateral free trade agreement with Australia this week. This comes at a time when such FTAs have slipped down the agenda of both the United States and the European Union. The reaction of the British public to the announcement illustrates the reasons why FTAs have become unfashionable.

The last time London hosted the other G7 leaders – plus at that time Russia’s Vladimir Putin – one of the main announcements was the launch of EU-US negotiations for the Transatlantic Trade and Investment Partnership better known as TTIP. This was widely understood to sit alongside the parallel negotiations involving the US on the Trans Pacific Partnership – TPP – as an attempt to constrain China through building strong alliances.

Eight years on, G7 leaders are still discussing China. But the chosen means of addressing those issues no longer seem to include free trade agreements.

While at this week‘s EU-US summit they have established a Transatlantic Trade and Technology Council and agreed to end the long-running Boeing Airbus subsidies dispute, there is no serious talk of going further than that.

Huge domestic campaigns against TTIP in the EU and TPP in the US raised multiple points of controversy. On top of we have witnessed a turn against trade liberalisation in general. Where free trade agreements are still discussed, these are scarcely priorities.

The UK is however an exception.

During the extended domestic controversies over Brexit the ability to negotiate new trade deals became one of the strongest cards for those pushing a clean break with the EU. The announcement of a deal in principle with Australia this week can be seen in that light.

Yet the questions now being asked about this agreement, from the economic impact to the other conditions attached to tariff free trade, follow the path previously seen in the EU and US.

Diminishing economic returns of FTAs

The UK government’s official impact assessment for the Australia trade deal suggested that there may be a long-term Gross Domestic Product boost of 0.02% as a result. However this was an optimistic projection with 50% of actionable ‘non-tariff’ measures on goods reduced. A more pessimistic projection suggested 0.01% if 25% of actionable non-tariff barriers to trade were addressed.

It is hard to imagine that even the pessimistic assumption will be met once we know the full details of the agreement. This mean the economic impact of the FTA will be negligible. A small ‘positive’ would be likely, but not one likely to be in any way noticeable. Such a small economic improvement compared to the time spent and hype accompanying successful negotiations seems disproportionate.

This has been typical of recent trade agreements globally. Import duties in developed countries are already so low on most products that further reductions cannot have the impact they had in the post World War II years when tariffs as high as 20% on industrial products seriously depressed trade.

Perhaps worse, in the eyes of many in the general public, the winners of trade deals in recent years have either been China or large corporations. Benefits to the individual worker or consumer have not been obvious. Governments have been unable to change this perception and are increasingly being influenced to change their own views on free trade.

Defining ‘fair trade’ an increasing problem

In the EU and US free trade has often been associated in the public mind with gains for other countries. This has led to demands for FTAs to incorporate tough conditions to access the EU or US market to ensure ‘fair’ competition in numerous areas including labour, environment, intellectual property and subsidies. As a result these agreements have become more unwieldy and difficult to negotiate, as demands clash.

The UK seemed to be an exception, but it turns out is not immune to this sentiment. Even ahead of the Australia announcement farming organisations had been warning that they could not reasonably compete with agriculture produced according the lower standards whether in animal welfare, environment, or antibiotic usage. The extent to which this is protectionism or justified concern can be debated, but there is no doubt that such a concern resonates with the public.

Deals that are harder to negotiate and less likely to be acceptable once completed are hardly an attractive prospect to governments. This is particularly the case if the economic benefit is limited to a fraction of a percent of GDP. It is scarcely surprising that the incoming US administration has thus far shown little interest in FTAs, or that the EU FTA agenda is probably thinner than it used to be.

New approaches to trade policy needed

Before we seek the resuscitation of The Free Trade Agreement it might be worth examining if its time has simply come to a natural end.

FTAs have helped deepen trade relations and reduce tariffs further following the establishment of the World Trade Organization in the mid 1990s. This is to the point where for developed countries actual tariffs paid at the border are generally low, while consumer choice is wide.

That success however was never satisfactorily replicated the reduction of regulatory barriers whether in services or goods.

Regulations are the modern ‘trade barriers’, particularly for smaller businesses. In theory these issues do not need FTAs to be addressed.

Arguably trying to complete ongoing WTO ‘plurilateral’ agreement negotiations regarding services domestic regulations or e-commerce should receive a higher focus. One could consider New Zealand’s approach of ‘concerted open plurilaterals’, agreements such as the Digital Economy Partnership Agreement with Chile and Singapore. These are designed for expansion. Other countries could show interest in joining or start other negotiations, though being wary of establishing competing rules.

More concerning is the suggestion that the US and EU are both moving in the direction of ‘managed trade’ with more regulatory barriers. Both are in particular talking of managing the supply chain for priority supplies, a potentially slippery slope to greater trade intervention.

Countries that remain committed to open markets like the United Kingdom and New Zealand need to consider how best to counter the trend. We have already seen that the limited gains available from FTAs are unlikely to change the argument.

Free Trade Agreements may be a dated instrument, but the issues they have covered so remain relevant, as is the quest for economic gains through trade. Perhaps it is now time to plan a gentle retirement alongside a search for new tools that can deliver results as FTAs once did.

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David Henig runs the column ‘Perspectives’ on the politics of global trade for Borderlex. He is also a UK director at the think tank ECIPE.

Views expressed by columnists at Borderlex are strictly their own.

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