Those following the proposed Discriminatory Trade Agreement (‘DTA’ – some of you call them FTAs) between the USA and South Korea may be interested in my submission to the Australian government regarding the proposed negotiation of a DTA between Australia and South Korea. You can find it here http://www.dfat.gov.au/geo/rok/fta/submissions/index.html or here http://www.law.usyd.edu.au/scil/pdf/2009/KoreaFTASubmission.pdf .
The current and the previous Australian governments have consistently maintained, first, that their principal trade strategy is multilateral liberalization through the WTO and, secondly, that it is not inconsistent with Australia’s support for the multilateral system to be simultaneously negotiating ‘good’ DTAs. Australian government spokespersons have frequently used the term “good FTA” to refer to DTAs which achieve comprehensive (but discriminatory) liberalization across all products and services. This has been the justification for negotiating Australia’s DTAs with NZ, with Singapore, with Thailand, with the USA and with Chile.
Now that Australia has concluded a DTA with ASEAN - NZ and has launched DTA negotiations with China, the Gulf Cooperation Council, Japan, Korea, Malaysia and the Trans Pacific Partnership countries, it is worth having a fresh look at Australia’s argument that there is no inconsistency between supporting the multilateral trading system under the WTO and negotiating DTAs.
It is true that making a DTA comprehensive, in the sense that it exempts very few products or sectors from the elimination of import barriers, reduces the chance that the DTA would NOT result in welfare gains for the countries that are parties to the DTA.
However, in distinguishing between good and bad DTAs, another factor is very important. This arises from the assessment of whether the DTA is welfare enhancing or diminishing for the world as a whole (not just for the parties to the DTA). A DTA will be welfare diminishing for the world as a whole if the welfare enhancing effects of trade creation are outweighed by the welfare diminishing effects of trade diversion. A couple of factors are relevant to that assessment of whether DTAs will be welfare diminishing for the world as a whole:
1 if the DTAs are concluded between countries which have low MFN import barriers so that the margin of preference is small then the size of any trade diversion losses will be small;
2 if after entering into the DTAs the parties to them subsequently reduce their MFN import barriers through multilateral commitments so as to reduce the margins of preference, then the size of any existing trade diversion losses will be diminished over time.
A further factor is relevant. The assessment of whether one or more DTAs is welfare enhancing or welfare diminishing for the world will also be affected by whether the DTA or DTAs make it less likely that multilateral liberalization can be agreed upon. We do need to consider not only the comparison between having the DTA and not having the DTA with all else staying the same but also the comparison between having the multilateral liberalization without the DTA and having DTA without having the multilateral liberalization.
One of the critical determinants of whether multilateral liberalization is likely is whether exporters are motivated by the proposed multilateral agreement to support politicians who wish to lead their countries into the proposed multilateral agreement. The more substantial is the export access gained through any DTA, the greater is the extent to which the DTA diminishes the incentive for exporters to lobby in favour of achieving multilateral liberalization.
In Australia’s previous DTAs, it might be (almost) true that:
- The degree of comprehensiveness of the liberalization was sufficient to avoid the possibility that the DTA was welfare diminishing for Australia and its particular DTA partner;
- The height of MFN import barriers was mostly not high enough for the preferences to cause significant trade diversion; and
- All of the parties with whom Australia had negotiated the DTAs were supporters of making liberalization through the WTO comprehensive and dispersion reducing so as to ensure that the WTO process did reduce the trade diversion arising from all existing DTAs.
For all of Australia’s DTAs except for the DTA with the USA, it is probably also true that the DTAs had a trivial effect on diminishing the incentive for Australian exporters to support multilateral liberalization.
The opening of DTA negotiations between Australia and South Korea should make us rethink the question of when negotiating DTAs is consistent with a commitment to the multilateral system. As detailed in my submission to the Australian Department of Foreign Affairs and Trade, some relevant factors are:
- That South Korea has obstructed the achievement of comprehensive and dispersion reducing liberalization in the Doha Round by positioning itself in one group of developed protectionist countries, the G10, and in one group of developing protectionist countries, the G33 (note the details in my DFAT submission about the difference between the deal that Australia would be signing on to under the draft Doha texts and the concessional deal that South Korea would be signing on to under those draft texts).
- That a DTA with South Korea would reward South Korea for playing an obstructive role in the Doha round;
- That negotiating a DTA with South Korea will make it even harder for future Korean governments to garner sufficient political support from exporters to offset the opposition to trade liberalization that they receive from import competing producers
- That negotiating a DTA with South Korea will make it even more difficult than it already is to achieve multilateral tariff reductions so as to diminish the diversion effects of existing Discriminatory Trade Agreements.
In addition, we might note that a DTA between Australia and South Korea may not be comprehensive. Even the feasibility study for the DTA was premised on the DTA not including liberalization of barriers to imports of rice.
Everything I have said above about the negotiation of a DTA between South Korea and Australia is also true of the proposed DTA between South Korea and the USA – except that in the case of the South Korea –USA DTA, the impact on diminishing incentives for Korea exporters to support a government liberalizing multilaterally is much, much larger. We ought also to note that the principal reason for their being political support in Australia for an Australia- South Korea DTA is that without such a DTA, Australian exporters (in particular, beef exporters) would be at a disadvantage to US exporters. Wouldn't it make more sense for both Australia and the US to abstain from negotiating DTAs with South Korea and instead to seek to have South Korea join them in supporting comprehensive dispersion reducing multilateral trade liberalization in the Doha Round.
For a long time, the USA criticized the Europeans for undermining the multilateral system by negotiating so many special deals. The USA’s regional arrangements with the Caribbean countries and the NAFTA could be argued not to undermine the general MFN principle of the WTO system. Beyond that though we have to ask the question:
Has the US (like Australia in negotiating a DTA with South Korea) crossed a line beyond which it is no longer possible to argue that the negotiation of its DTAs is consistent with a commitment to a non-discriminatory multilateral trading system?
