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Free Trade in a Fragmenting World

13 Oct 2023
By Dr Craig Emerson
WTO public forum. Source: World Trade Organization /

As the world’s two superpowers jostle for supremacy, and much of the world reverts to protectionism, middle powers have an opportunity to pursue new pathways to freer trade. Australia is uniquely positioned to lead in this area and would do the world a service by doing so.

The principles and norms of free trade emerged largely after World War II as part of a process of global integration intended to prevent further world wars. The assumption was that countries which depended on each other economically would be less likely to consider invading each other.

The United States championed this idea, along with the establishment of the institutions enshrining it. In an exceptional half-century, countries large and small have benefited from the vast opening of economic borders, together with the strong coupling of diverse nations brought about by this opening.

A new protectionism

But the protectionism that gave rise to the erection of trade barriers in the first place—premised on the notion that local producers needed to be protected from foreign competitors to ensure the survival of domestic industries—has since returned, initiating a new process of global decoupling. This started with Donald Trump’s declaration, as president of the United States, of a trade war on China. America would be made great again, according to President Trump, by onshoring the jobs and industries that had been sent offshore as part of the post-war era of trade liberalisation. More than that, tariffs were to be imposed not only on Chinese products but also on imports of products from other countries, such as European steel and aluminium, on national security grounds.

The new protectionist dogma inverted the original promise of free trade, making the case not that a reliance on trading partners for vital materials and products would help prevent war but, instead, that the US had endangered its own sovereignty and security by relying on trading partners with which it might end up in conflict.

In a rare case of US bipartisanship, the protectionist baton was handed without a fumble to the Biden Administration. It has kept most of the China tariffs while establishing an Inflation Reduction Act with the primary purpose to subsidise domestic carbon-reducing technologies to the obvious detriment of trading partners.

The anti-trade policies of the US are in clear contravention of existing World Trade Organization (WTO) rules to which they have agreed. But the WTO’s dispute-settling mechanism is no longer functioning—because the US has vetoed the appointment of new judges to the Appellate Body responsible for dispute settlement—so the consequences are nil.

With the emergence of the US-China trade war, some countries have shown an inclination to align themselves with one or the other superpower for strategic and economic purposes. Others have remained neutral, choosing to watch on from the sidelines as the world’s two biggest economies stare each other down.

What should Australia do in these circumstances?

Open plurilaterals

The theory of comparative advantage lies at the heart of free trade. In the production of a given good or service, one party inevitably has an advantage compared with another. This comparative advantage might arise because one party can make use of cheaper labour, more-advanced technologies or more-abundant natural resources than the other. The other party will also have a comparative advantage in the production of a different good or service.

These parallel comparative advantages are what enable mutually beneficial trade. Each party stands to gain from focusing its efforts on producing the goods or services in which it has a comparative advantage while importing those in which it has a comparative disadvantage.

Even if some countries opt for protectionism, Australia can continue benefiting from free trade with others. Comparative advantages and disadvantages remain despite the process of decoupling initiated by the US-China contest. Countries that understand this have every reason to continue trading together and to pursue new avenues to reduce barriers to trade.

Australia should partner with such countries in order to continue the process of trade liberalisation initiated in the last century. Australia has a strong reputation on the global stage and is a trusted trading and diplomatic partner. It could take initiative in pushing for the establishment of plurilateral agreements with like-minded countries. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is an example of a plurilateral agreement including neither the US nor China, emerging after President Trump withdrew the US from a proposed Trans-Pacific Partnership in 2017. The 11 parties to the original agreement remaining after the US withdrew chose to continue negotiations and ratify a new agreement to lower both tariff and non-tariff barriers to trade.

The WTO has processes for launching plurilateral negotiations. And the Asia-Pacific Economic Cooperation (APEC) forum is another place in which Australia, as its founder, could initiate plurilateral negotiations.

These should be open plurilateral agreements, agreed first among a set of countries with an interest in specific areas of trade liberalisation while remaining open to the accession of other parties in the future. Since its ratification, the UK has applied successfully to join the CPTPP. Keeping future plurilaterals open would serve as an incentive to any country willing to step outside of the vortex of superpower rivalry and pursue liberalisation over protectionism.

Trade simplification

Aside from avoiding a reversion to protectionism, what frontiers remain for trade liberalisation?

APEC’s Bogor Declaration of 1994 set a goal of free and open trade between all participating economies by 2020, and tariffs have since dropped from an average of 17 percent in 1989 to just over five percent today. While there is still further progress to be made here, tariff reductions within APEC no longer offer the same economic potential they did in the 1990s. The door to competition has already been opened; it cannot simply be reopened.

Trade simplification may be the next frontier. The vast majority of global trade today is still conducted on a paper-based system established in the nineteenth century. These processes are in desperate need of digitisation, which would not only radically increase efficiency but would also help reduce the incidence of fraud in global trade.

Parties willing to participate in the digitisation of trade processes could agree to do so by committing to ambitious timelines and implementing measures to ensure maximal alignment of technologies. Advanced economies could support emerging economies in the development and implementation of such technologies, ensuring the economic benefits of trade simplification are distributed widely.

The WTO Trade Facilitation Agreement (TFA), which was agreed in 2014 and came into force in 2017 after being ratified by two-thirds of WTO members, is designed to achieve these sorts of reforms. It could be accelerated with plurilateral agreements signed by a subset of parties and targeted at simplifying trade in specific areas.

Duplicative processes between countries—and within them—slow down trade and increase its cost. Australia’s Simplified Trade System Taskforce, whose goal is to establish a Single Trade Window in accordance with commitments contained in the TFA, found that Australian trade involves 29 different government agencies, 200 regulations, and 145 ICT systems. That is a huge amount of complexity and redundancy, especially considering those counts measure only the Australian-side of the import-export equation, and it also represents a huge opportunity for improvement.

Why should one country’s export customs data not be transferred directly across borders to become another’s import customs data? Digital technologies are more than capable of making this possible. A fully integrated, digitised, multijurisdictional trade system is certainly achievable. But such a system could not be established immediately—certainly not at scale. Plurilateral commitments entered into by a handful of countries could realise this ambition in an incremental way, with a gradual increase in the number of participating parties being brought into the system. This is just one example of a potential pathway to freer trade for the willing.

Geographic and diplomatic conditions combine to make Australia a nexus between the West and the Asia-Pacific region. Australia is uniquely positioned to open new directions for free trade in a fragmenting world.

Dr Craig Emerson is an eminent economist with 35 years of experience in public policy, politics and public service. He is managing director of Emerson Economics, director of the APEC Study Centre at RMIT University, visiting fellow at the ANU and adjunct professor at Victoria University’s College of Business.

This article is published under a Creative Commons Licence and may be republished with attribution.