Freya Zemek | International Trade and Economy Fellow
If December has been anything to go by, ‘tis the season for trade deals. But is the holiday spirit here to stay, and does Australia stand to benefit?
As 2019 draws to a close, the future of the international trade order is anything but certain.
Global markets breathed a sigh of relief after reports that the US and China had reached a phase-one trade agreement that would reduce some existing US tariffs on Chinese goods, in exchange for some structural economic reforms and agricultural purchases by China. The protracted trade war has been a drag on global business investment, and as MYEFO showed, even Australia’s tariff exemptions could not entirely immunise its economy against the fallout.
And in the throes of an impeachment inquiry, trade is perhaps the last bastion of partisanship in Washington DC. President Trump reached a deal with House Democrats to fast-track a vote on the renegotiated North American Free Trade Agreement (NAFTA) between the US, Mexico and Canada.
In Southeast Asia, fifteen countries including Australia are on track to sign the Regional Comprehensive Economic Partnership, or RCEP, in 2020 – a significant step towards unlocking trade and investment opportunities in a combined market worth US$27.3 trillion, all within a rules-based framework.
Considering these three developments in isolation, one could easily be left with a rosy impression of the international trade outlook. But the trends they signify are not necessarily ones that will serve Australia’s interests well.
India’s decision to pull out of RCEP, while unsurprising given the historically protectionist tendencies of the South Asian giant, is concerning because it coincides with increasingly nationalist impulses by President Modi’s administration. While Australian Prime Minister Scott Morrison is due to talk bilateral trade during a scheduled visit to India in January, this is a sub-optimal outcome for Australia because of its bargaining power with India – Australia’s fourth largest export market and a growing source of FDI – is diminished at the negotiating table without the strength of a coalition of regional middle powers behind it.
The tendency to return to bilateralism is a troubling trend for Australia. Not because it lacks deep expertise in trade negotiation, but because such a system favours the largest and most diversified economies with the greatest leverage.
Recent developments that have taken some of the sting out of the World Trade Organization’s tail are a case in point. The Trump administration’s well known antipathy towards global multilateral institutions and frequent calls to reform the WTO came home to roost on December 10 with the expiry of two out of the remaining three judges’ terms on the WTO Appellate Body, which handles trade disputes between countries.
Instead, the USTR has signalled its intention to set up a robust dispute resolution system between the US and China as part of the phase-one trade deal, one that is explicitly outside the WTO framework. With no sign that the US will end its current practice of blocking reappointments to the Appellate Body, this effectively neuters a critical arm of the WTO at the very time when ‘beggar thy neighbour’ trade practices are on the rise.
This is not to say that the WTO is entirely flawless; indeed, the need for reform is broadly accepted by trade experts. And if middle powers with open economies like Australia are to get the most out of the system, it is appropriate that we should press for reform of existing institutions like the WTO, and play a role in shaping the outcomes of the reform process. Reforms like that proposed by Prime Minister Scott Morrison in a speech during his US state visit, suggesting that China should reclassify itself as a ‘newly-developed country’, are constructive because they help restore the WTO’s credibility, and in turn compel better compliance with the rules of the road it sets out.
So with the world’s economic powerhouses eschewing multilateral regimes and institutions in favour of bilateral deals and a ‘might makes right’ approach to global trade, will the dawn of 2020 mark the twilight of the rules-based order?
Regardless of the wins for free trade in recent weeks, no country should be under any illusions that having a free trade agreement in place is sufficient to avoid trade being weaponised against them.
Indeed, despite progress on USMCA, it is not clear that this will be enough for Canada to avoid the same fate as France, which faces retaliatory US tariffs for imposing a digital services tax that implicitly targets US tech giants. For trade-exposed countries like Australia, its interests are best served by a fully-functioning, cooperative and rules-based free trade architecture. The first year of the new decade need not be the year that this framework disintegrates, but it will require everyone to lean in to the reform process and clearly articulate the benefits to every economy of keeping multilateral trade alive.
Freya Zemek is the International Trade and Economy Fellow for Young Australians in International Affairs. The views expressed in this article are the author’s own, and do not necessarily reflect those of the Australian Government