On Thursday, the Institute is hosting a panel on free trade agreements with me, Jessica Irvine from Fairfax and Luke Nottage, law professor from the University of Sydney. Steve Grenville, former deputy governor of the Reserve Bank of Australia will be chairing. There’s a divergence of views on the panel, so it should be a great event.
For those that can’t make it, I can at least easily summarise my views.
I’m very sceptical of the direction of Australian trade policy. As I have said before, I do not think the upsides are worth the potential downsides.
Let’s first cover the upsides. The upsides of the preferential approach we take are small. For example, the Department of Foreign Affairs and Trade released modelling by the Centre for International Economics in June which showed that the marquee bilateral free trade agreements of the last couple of years (the agreements with Japan, Korea and China) would boost Australian GDP by 0.05% to 0.1%.
Modelling of the final text of the TPP has not been done, although modelling of what the agreement may look like was done by the Peterson Institute. Their first effort at modelling suggested an impact on Australia of 0.2% of GDP. With some changes to the model, this was later increased to 0.6% of GDP, which is chunkier, but let me go through the downsides of current policy and why there is a better path.
Let’s start with what really distresses me: intellectual property. As part of these trade agreements, we sign up to stringent intellectual property protections.
Why is this bad? Two reasons. One, Australia is an intellectual property importer. Any extensions to intellectual property protections result in larger payments overseas to those who own the intellectual property. But the second reason is the real kicker for me. I think a fair reading of the economic literature suggests that more intellectual property protection does not increase innovation, and in fact likely reduces it, as companies divert attention away from creation toward protecting entrenched monopoly privileges. A great summary of that literature can be found in a book by Michele Boldrin and David K. Levine, Against Intellectual Monopoly. Although, for a shorter synopsis, you might want to consider the articles The Economist ran in August.
The only reason to have intellectual property protection is to encourage innovation. If it reduces innovation, then we should run from agreements that increase our obligations. Why? Well, innovation is the most important source of sustained growth in the economy. If increased intellectual protection reduces innovation and growth, it will likely overwhelm the one-shot bumps to GDP that the aforementioned modelling suggests is the upside.
The other part of free trade agreements that makes me uncomfortable is the investor-state dispute settlement (ISDS) procedures. Most of the agreements we have signed lately include provisions that allow foreign companies to take us to a tribunal if they feel aggrieved by government action. Giving rights to foreign companies that domestic ones do not have, the very opposite of levelling the playing field, gives most economists the heebie-jeebies.
However, perhaps these types of agreements can allow countries to attract more investment, and allow governments to commit to behaving themselves. My reading of the, admittedly imperfect, evidence is these provisions do not do that. Rather they can, and have, led to legitimate government decisions to be challenged, and led others to postpone reforms. Exhibit A here is cigarette packaging.
Luke Nottage, on the panel with me, is a supporter of ISDS, and has argued that reforms to the system can deal with these concerns. He is yet to convince me, but he has a terrific knowledge of the topic. The thing I just can’t shake is that these things do not seem to increase investment flows, their raison d'être. I’m sure this will be one of the things we discuss tomorrow.
But I promised a 'better path'. The better path is unilateral liberalisation. The Productivity Commission, in 2010, suggested unilateral tariff liberalisation would increase GDP by around 0.6%, around the same effect as the TPP according to the Peterson modelling. But the model used by the Productivity Commission was closer in spirit to the initial Peterson modelling, which suggested a 0.2% boost. So unilateral liberalisation seems to offer much larger benefits than the preferential approach we have taken, without the bad bits, especially the damaging intellectual property provisions.
Photo courtesy of trademinister.go.au.