Abbott Deserves Only Praise For Embracing Free Trade

The economics of trade can be a little counter-intuitive.

This is no more so than for its central lesson, which is this: the benefits of tariff liberalisation primarily accrue to the countries that lower their own tariffs, not their trading partners.

Or, putting it another way, even if we lived in a world where every single country had high barriers to trade and refused to budge them, it would still be in our interest to lower our own.

So while the China-Australia free trade agreement (FTA) is a big deal, it’s not a big deal for the reasons most reports have suggested.

Take the provision in the FTA which phases out Chinese tariffs on Australian dairy for infant formula over a four-year period.

The Age is predicting that this formula market will be “enormously lucrative” for Australian businesses. The Australian Dairy Industry Council is chalking the agreement up as a win.

But the winners here are really Chinese consumers.

Access to quality infant formula is a serious problem in China. In 2008, there was aninternational scandal when it was discovered the largest budget infant formula firm had been adding industrial chemicals to fake protein content.

More than 50,000 children were reported to have become sick from the formula. Four died.

Now, understandably, Chinese parents don’t want to buy domestically produced formula. The demand for formula imports is so high that Hong Kong and Macau have placed limits on the amount of formula Chinese tourists can bring home with them.

So while it might be true that opening up the Chinese formula market will be lucrative for Australian firms, this seems to miss the point. The real winners are surely the Chinese people who have been genuinely suffering from their government’s dairy protectionism.

A lot of trade discussions are like this – focused on the benefits to firms and workers when it ought to look at how consumers fare.

Of course, most people are both workers and consumers, and are interested in both the supply and demand parts of the economic equation.

But as Adam Smith wrote, “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.”

Hopefully we all love our jobs, but no doubt what we most love about our jobs is the fact that we get paid to do them, and that money is available to spend on the things we want or need.

So a few happy Australian dairy firms is nothing compared to the millions of Chinese families who will benefit from the FTA.

It is this producers’ bias that has led us to a world where the cause of free trade is being driven by two-party trade agreements.

For while it might be easy to demonstrate that – on an academic level – a country will be better off if it lowered its own trade barriers unilaterally, few politicians have the sort of political nous and conceptual clarity to present such a case to the public.

Governments have worked out that the politics of trade liberalisation is easier if it is done on a piecemeal and bilateral level – emphasising what it has managed to get other countries.

This isn’t necessarily a bad thing. Anything that makes beneficial change more politically palatable should be welcomed.

But the fact that trade liberalisation benefits the liberaliser first and foremost suggests that the economics of FTAs are very different from the way they are presented.

Have a look at the official Australian announcement of the deal. It is completely dominated by reforms China will have to make to allow market access to Australian firms. There is very little mention of what we have to do.

The deal involves Australia reducing tariffs on clothes, cars, components and electronics from China. We also will be relaxing our foreign investment guidelines. Tony Abbott said on Monday that some aspects of the deal would require legislation to be passed.

Politics being what it is, using self-interested producers eager to open up foreign markets to agitate for the reduction of protectionism at home isn’t a bad way to build a political coalition for change.

Earlier this year in The Drum, I argued that the bilateral trade negotiation process holds back the cause of domestic reform. It can perversely encourage countries to hold back unilateral changes as a bargaining chip.

But here’s the thing. The Abbott Government has been criticised for being too eager to sign these agreements. Bill Shorten says that Labor is pro-free trade but thinks the government is “more focused on booking a venue for the signing ceremony than examining the fine print or getting a better deal”.

Yet if we view FTAs as primarily a tool for shifting domestic policy, then what sort of deal are we holding out to get? Playing the tough negotiator would be counter-productive – harming ourselves by delaying our own reform program. It is in the interest of the Australian economy to conclude these agreements as quickly as practicable.

And that’s why it is in the realm of free trade agreements that the Coalition has been most clearly successful.

For all the Gillard government talked about the ‘Asian century’, it has been the Abbott Government that has given us free trade agreements with Korea, Japan, and China.