Australia’s best interests would
be served by the early initiation of fresh round of trade liberalisation
in the WTO. It would also benefit from trade facilitation efforts
to broaden Australia’s export base away from the high-level of dependence
on Asia today, such as through a trade agreement with the United States.
In parallel, there was a spate of actions to reduce trade barriers that was unprecedented for twenty years. The Uruguay Round was the most comprehensive effort to open global markets in that period. Parallel action was taken at the regional level. The European Community initiated deliberate action in its Single Market program to open markets in Europe. The United States negotiated a free trade agreement first with Canada and then extended it to Mexico. A free trade agreement was negotiated between Australia and New Zealand. Negotiations began for a free trade agreement among the ASEAN countries and for a common market, Mercosur, encompassing Argentina, Brazil, Uruguay and Paraguay.
The pace has accelerated. The
APEC economies committed to reduce all trade barriers by 2010 for industrialised
economies and 2020 for others. The rate and scope of liberalisation
in ASEAN has been intensified. Free trade agreements have proliferated
among Latin American economies. And the ambition of creating a grand
Free Trade Area of the Americas which would extend over North and South
America has been endorsed by all governments in the Western Hemisphere,
bar Cuba. There is pressure to begin another round of global liberalisation
under the auspices of the WTO. And the idea of transatlantic free
trade agreement has been raised in Brussels.
What are the lessons of the Asian currency crises? To the IMF it is clear that interference with the market, poor financial systems and barriers to trade and investment were key causes of the crises. They have required commitments to correct these weaknesses as a condition for support to stabilise currencies. Not everyone in the region would agree that this was warranted. The Malaysians own up to no fault in their own actions. Indonesia baulked at the IMF demands. Officials in China consider that closed financial systems sanitised them from the crisis.
Just last month, the US Congress refused to give the Clinton Administration an authority to negotiate trade agreements. The White House especially wanted this to advance the idea of a North and South American free trade area. The view today in Washington is that free trade is dead issue.
We see signs of weariness with trade liberalisation. Books bashing globalisation have achieved a degree of popularity in Europe and the United States. A very peculiar populist campaign by fringe groups against a relatively minor proposal from the OECD to liberalise rules for investment has achieved much more prominence than it deserves. In New Zealand, where the most dramatic liberalisation occurred, the people reacted by turning the political system on its head. Are we entering a post globalisation phase among industrialised countries?
One, there will have to be another WTO world trade round. WTO officials talk about an agenda for future liberalisation which was ‘built-in’ to the results of the Uruguay Round. This applies in several very important areas of world trade, notably agriculture, clothing and textiles and services. Another round will be necessary, the only question is when.
Two, the regional commitments have created political expectations that will be difficult to implement. The APEC trade liberalisation program may produce some modest results, but there is no dynamic for substantial liberalisation among its members. The commitments to a Western hemisphere free trade zone may be similarly difficult. The Mercursor countries are showing a worrying inclination to restrict trade outside the group. The Brussels’ idea of a transatlantic agreement is not likely to get far. Barriers to industrial trade across the Atlantic are negligible. There is scope to remove barriers to services, but it is unlikely that Congress would go along an agreement with the community that did not cover agriculture.
Three, there is some risk of anti-free trade distortions emerging from all these regional trade agreements. Free trade economists have expressed such fears about the North American Free Trade Agreement for some time. On balance, concerns about NAFTA have been overstated. The predicted adverse effects of trade being diverted to partners inside the agreement away from partners outside the agreement fade away when the differences in trade barriers between those inside the agreement and outside it is small. This is generally the case with NAFTA.
But there are problems elsewhere, such as with the ASEAN Free Trade Agreement (AFTA) and Mercosur. While three members of ASEAN have applied the cuts in trade barriers required in the agreement to all trading partners, Malaysia and Thailand, which has the highest trade barriers of all ASEAN countries, have not. There are prospects that AFTA will cause trade diversion in some products, particularly manufactured products. It is greater with Mercosur which recently raised tariffs with trading partners outside the group.
Four, the Asian crises have revealed the need for more market reform. It is clear that poor financial and in some cases monetary policy created weaknesses in the Asian economies which meant they could not cope with the large capital movements when they occurred. A key reason policies were weak was because they generally had to accommodate a desire by governments to interfere in financial and economic decisions, either for nationalist political reasons, or to favour particular interests.
The linkage is clear in the logic of the conditionality of the terms of the IMF packages. There is legitimate grounds for debate about whether or not the IMF should be the agency for structural adjustment. But disagreement about that should not be mistaken for disagreement about what needs to be done. As time passes, and as the Japanese financial crisis grows, the case for change will get stronger and stronger.
This will raise the issue of how it is to be tackled. It would be far more palatable for the Asian economies to accept the measures as part of a collective endeavour than to be forced to accept the changes because they are conditions specified by the IMF.
The WTO is now also better equipped to support reform of financial sectors. The General Agreement on Trade in Services (GATS) now offers a ready made framework for the global liberalisation of financial services. Finance officials, especially in G7 economies, were initially cool on the WTO because it was not the creature of finance ministries. To a degree this sentiment still lingers. The GATS is now in the mainstream of global liberalisation. Whereas the politics of the IMF and the World Bank have the industrialised countries dictating to the developing, the GATS is a fully multilateral process owned by developed and developing country alike.
A WTO program of global trade reform could deliver the cuts which have been committed to on a regional basis in APEC and in the Americas. Global commitments will also override regional commitments, containing the potential problem of regional trade diversion. AFTA and Mercursor do offer some prospect of trade diversion. Regional agreements overall do not constitute a serious global threat of trade diversion, except perhaps in one respect. If any risk of diversion on a global scale exists today, it might be because services markets in North America and Europe are more attractive to global investors. Commitments to liberalise in those two regions are strong and there is a lack of commitment to build open global markets through the GATS. Services markets in Asia and Latin America are smaller and foreign providers are denied access.
Asia, however, creates the real imperative for a round. It will create an opportunity for Asian economies to reconfirm their global competitiveness and restore their attractiveness to foreign investors. Now that many of Asia’s economies are moving into recession and periods of slower growth, the level of risk for foreign investors on average will be higher. Barriers to trade and investment and unpredictability in the business environment were tolerable while rates of return were sufficiently high to offset those risks.
To remain attractive to investors, Asian economies will have to reduce the scope for government intervention in business decisions and provide greater certainty in the business environment. The APEC economies for example have committed to remove barriers to trade and investment Indonesia and Korea have reduced restrictions on foreign investment. There is pressure on the Thai government to do the same. But restrictions on investment remain common in Asia.
Before too long, Asian Governments
will realise that they will be able to give concrete and binding expression
to open markets and reduce risk through the WTO. It will be this
realisation, linked to the pre-existing requirement to have a Round, which
will make it the centrepiece of global trade liberalisation and free market
reform over the next decade.
It has been striking that whereas in North America and in the European Community, liberalisation of services markets has been a key feature of regional trade liberalisation, it has not been the case in Asia. For at least a decade it has been clear to economists that in today’s global economy, it is not possible to secure the optimum benefit of a market economy unless the services sectors are liberalised as well.
This is clearest in the financial sector. It is common for conditions to be imposed on investment. They are usually linked to the extent to which the enterprise in question will trade inside or outside the domestic economy. The more the business operates in the domestic economy, the greater the requirement to have local partners.
The other area is lack of certainty in the business environment. In most economies, intrusion by the government or interests related to government is common. Business laws are opaque or administered with a high level of discretion to facilitate this.
This weakness in business law came to acquire something of a local patina. It had become common for Asian officials to refer to ‘the Asian Way’. This reflected cultural tradition - it is common in Asia to regard ‘connections’ as more important than rules for doing business - and political practice - rules which required foreign investors to have local partners and scope for exercise of discretion in the award of contracts or licences enabled governments to satisfy political and personal preferences of leaders and governments.
There evidently is some sort of "Asian Way". No one has yet produced a conclusive economic explanation for the Asian economic miracle, as the pattern of growth came to be regarded. Free marketeers ascribed it to the adoption of open market policies. Interventionists ascribed it to successful and selective intervention. In truth, there isn’t one Asian model. Japan, Korea and Singapore were markedly dirigiste, Hong Kong and Taiwan were not. An ADB study financed by Japan implied there was something cultural about success in Asia. There probably was, which would explain why the economists have not put their finger on it.
The trouble with things that can’t be defined is that like patent medicines, they start to acquire a mystical value. The Asian Way came to be described how APEC would achieve trade liberalisation. Not with tightly defined rules, but actions in good faith to implement commitments made in good faith. The very modest results of the APEC processes to date are evidence of the limitations of this approach in the face of entrenched interests. It is notable that in APEC, none of the areas where trade barriers were highest, particularly financial services of agriculture were put on the table. It is not a coincidence that the greatest advocates of "the Asian Way" in APEC have been the governments most unwilling to support aggressive trade liberalisation - Japan, Malaysia and China.
The down side to ‘the Asian way’ is now manifestly clear. Now that the risks for investors are greater since growth has dropped in so many of the Asian economies the cherry picked market systems are no longer adequate to support growth.
You still hear it said that the core business of the GATT, and it successor the WTO, was reducing barriers at the border to trade. This was the logic of the mechanisms of control created in the GATT, but it was never been the economic logic of the system. The aim of the GATT was to improve economic welfare of members. The method was to reduce the gap between domestic prices and world prices. The logic was to capture the benefits of comparative advantage. A subsidy, which is a measure applied domestically, can as effectively support a local producer against a foreign producer as a tariff. The GATT always recognised this, although initial controls on subsidies were weak. The GATT also ruled that domestic measures which countermanded the rights of access of importers secured under the GATT’s tariff rules were not permitted.
The agreements in the Uruguay Round demonstrated comprehensively that the WTO system is aimed at getting markets to function efficiently. WTO rules now significantly restrain what domestic measures governments may use. Subsidies may not be paid if they exceed five percent of the value of production. The economic importance of the right to establish is now recognised in the General Agreement on Trade in Services (GATS). To deliver some services, the foreign provider needs the right to invest.
If the point of the GATT is to prevent governments from discriminating against foreign goods and services, in a world economy where trade barriers on low on goods and coming down on services, why not also restrict barriers on investment by foreigners?
There was an effort to introduce restrictions on investment where it related to trade in the Uruguay Round. A so-called Agreement on Trade-related Investment Measures was the result. It contained no new obligations. It merely highlighted existing restraints in the GATT on efforts to use investment conditions to influence the pattern of trade.
Barriers to investment by foreigners
have become part of regional agreements. They are part of the EC Single
Market agreements, NAFTA and the free trade agreement between Chile and
Canada. The OECD has prepared an agreement to liberalise controls on investment,
but its utility for use outside OECD members will be significantly diminished
by its provenance.
The Asian currency crisis underlines
what foreign owned businesses in Asia have known for years. Controls
on investment have become a bigger restraint on the capacity of foreigners
to do business than trade barriers. There is a strong logic for investment
to be moved to centre stage in the next WTO round. It will extend
across Latin America what is accepted already in some countries.
It will create a framework for Asian economies to follow.
The interest in improving competition law and thereby the certainty of the environment for business needs to be treated much more cautiously as a subject for global regulation. The purpose of competition law is to ensure that companies do not engage in anti-competitive practices. This is not something that is susceptible to international regulation or enforcement. GATT constrained regulatory barriers imposed by governments. Competition policy constrains anti-competitive practices by businesses. It may be practicable to aspire to set out some general principles that member governments of the WTO might apply in their domestic competition policies. But any suggestion that the WTO system with its international arbitration should be used to enforce universal adoption of common competition policies should be strictly avoided.
Nothing succeeds like success. The success of Asia and of Latin America now is clearly the result of partial use of market mechanisms. Getting it right and doing it better will depend on more effective use of these mechanisms, not less. At one point President Suharto of Indonesia announced that Indonesia would have to learn to get by on lower growth rates. The World Bank has predicted for years that Indonesia needed annual growth of seven percent just to create employment for school leavers. No one yet has devised a model which will yield that growth by greater intrusion in the market. Appreciation of this simple fact will inexorably lead policy makers in the region in just one direction.
This has important effects on Australia’s exposure to the world economy. It is becoming less and less true that Australia is a commodity economy. While levels of debt remain high, the export base which finances capital inflow is widely based and durable. No downturn in one market or region will dramatically damage the balance of trade.
Few countries have a such spread of exports across all sectors, across such a wide range of products and to so many countries as Australia. If there is a weakness in Australia’s trade mix, it is the high dependence in exports on Asian economies. Over half of Australia’s trade is to Asian economies - Japan and Korea, the three Chinas and ASEAN.
Despite the regional concentration, Australia has very distinct global trade interests. It is still a major trader in primary commodities and the world prices in these markets are determined by global economic conditions. As the share of exports earned by manufacturers increases, as it most likely will, the export base, and therefore the interest in global market conditions, is likely to widen. Manufactured exports now are dominated by elaborately transformed manufactures, rather than processed metals, and other primary products. While growth of exports to these products has been strong into Asian markets, in the long run, export growth into North America and Europe, the world’s largest markets for manufactured products, will expand as Australian manufacturers acquire greater economy of scale.
Most of the key current impediments to global trade and investment represent significant problems for Australia. The most heavily protected sectors in global trade are agriculture, clothing and textiles and financial services.
Liberalisation of these sectors would yield significant benefits to Australia. Australia is one of the world’s most competitive producers of agricultural products and is the largest producer of wool, the global market for which is heavily constrained by global barriers to trade in textiles and garments. Australia’s financial services industry is competitive and restrictions on foreign investment are emerging as major impediments to business opportunities for Australian companies in the Asian region.
Some regional trading arrangements carry risk for Australian exporters. The ASEAN free trade agreement (AFTA) clearly offers the prospect of discrimination against Australian exports to some ASEAN countries, notably Malaysia and Thailand. This likely to be marked in manufacturing sectors like automobiles, processed food and electronic and electrical equipment.
The North American Free Trade Agreement (NAFTA) has created some problems in agricultural trade for Australia, creating preference in the US market for some Mexican agricultural exports. Mercosur, the South American common market has had little effect on Australia because Australia’s trade with the countries concerned is small.
The idea of free trade arrangement between the US and the European Union raises some questions about whether an arrangement for more open services markets between those two economies might disadvantage Australia. Australia has clear access to the US and the EC, although the later has linked access to reciprocal market access. A trans-Atlantic arrangement is unlikely however.
Discussions between officials form regional trade areas are becoming commonplace and are often erroneously referred to efforts to ‘merge’ free trade areas. Australia and New Zealand have a dialogue with officials from AFTA countries and Mercosur countries. Latin Americans talk about linking Mercosur with NAFTA and Mercosur with another free trade area among central American economies. None of this amounts to much. Discussions between AFTA and Australia and New Zealand for example have focused on trade facilitation issues, such as industrial standards. Two of the most important areas where Australian business wants improved access - processed food and automotive parts - are not even included in AFTA. The prospects of reducing these trade barriers by discussion of common ground between AFTA and ANZCERTA ( the Australia New Zealand Closer Economic Relations and Trade Agreement) are low.
The broader regional commitments in APEC and the Free Trade in the Americas (FTAA) proposals have a strategic significance here. They provide broad commitments for open markets across those large regions which ought in principle to constrain adoption of preferential arrangements to reduce barriers among countries. For example, the commitment to reduce all barriers by the ASEAN countries in APEC is not consistent with the aim of reducing barriers among only the ASEAN countries in AFTA. So far the ASEAN countries argue there is no inconsistency because they remain committed to the APEC goal which means that, in time, the AFTA commitments lose their preferential value.
For Australia, and everyone else, the most effective measure would be early initiation of another round of global trade liberalisation in the WTO. This is the only vehicle through which barriers to trade in agriculture, clothing and textiles and financial services can be systematically tackled. Because of the patterns of trade, liberalisation can only be tackled on a global basis. As well, it would be in Australia’s interest for investment to be a priority issue in that trade round.
A global round would also be an effective vehicle for the members of APEC and the FTAA to realise their commitments. It also creates an opportunity to secure binding commitments that would diminish the inclinations to trade diversion at a regional level that are being revealed in some of the regional agreements, particularly AFTA and Mercosur.
For Australia, liberalisation in a global round would deal with the problem of barriers which currently impede growth in trade and investment. The issue of overexposure to Asia is a different problem. The pattern of recession over the last twenty years shows that excessive dependence on the economic performance of any one region is a risk. It would be desirable if Australian trade with Europe and the United States was bigger. Business makes trade, not government. All the government can sensibly do is point in directions. What can the Australian government do to point Australian business in the direction of Europe or North America?
The US Administration indicated in 1997 that it was interested in a free trade agreement with Australia. Such an agreement would not be likely to give Australian exporters significantly greater access to the US market, although if Mexico secured greater access for some agricultural products, so might Australia. But negotiation of such an agreement would have underlined to exporters in Australia that that the US market was available and to US investors that there was value in the Australian market. This would have positive benefit in promoting trade and investment with the United States. The US will be the leading global economy over the next decade.
Similar logic should apply to the EC. In fact there were negotiations with the EC for an economic agreement, but it was not promoted by the government as having trade significance. It was probably a political effort to demonstrate that relations could be built after a decade of conflict over agricultural trade. Negotiations over the agreement broke down over the insistence of the EC that clauses linking trade with non-economic issues, particularly human rights, had to be included. This was not a substantive issue and the breakdown demonstrated the relatively low importance of such an agreement between Australia and the EC.
Agricultural trade with the US is more important than with the EC, the US Administration is a strategic ally in efforts to liberalise world food markets, the US is a major economic player in the Asian Pacific region, and it is a market of high value in the future for exports and as a source of investment. The Australian Government appears to have sought to build promotional trade relationships through some form of inter-governmental association with ASEAN, Mercosur and the EC, but not with the United States. Given that there is national consensus that the strategic relationship with the United States is at the core of Australia’s international relations, this suggests that there is dysfunction in Australian trade and foreign policy.
In view of the cost potential costs
of the extent of dependence today on Asian export markets, it would appear
that it is time to correct this.
Alan Oxley is the Director of International Trade Strategies Pty Ltd, Melbourne and Chairman of the Australian Study Centre based at Monash University in Melbourne.
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APEC Study Centre