EVERYBODY trades. People do not build their own houses, milk their own cows, construct their own televisions and also make their own movies. Instead, people specialise at something they are good at (building houses or milking cows or making televisions or movies) and exchanging this for money. That money is then used to buy the other things in life that are wanted.
In an ideal world, trade in goods and services between people, regions and countries would be totally unrestricted, with everyone specialising in what they do best and trading with others for everything else. Ever since Adam Smith’s Wealth of Nations was published 238 years ago, it has been well known that this contributes most to prosperity.
The reason free trade agreements are needed is because the world is not ideal. Some people choose to do things that they are not necessarily the best at, and then convince governments to protect them from more efficient producers and suppliers elsewhere. Trade agreements are aimed at unwinding this protection.
The reason for bilateral free trade agreements is because there are not enough multilateral agreements. Two decades ago a bilateral agreement would have been dismissed as anachronistic given the success of the multilateral treaty establishing the World Trade Organisation. But subsequent negotiations, known as the Doha Round, have failed to make much progress.
Thus while the free trade agreement with Japan is to be welcomed, along with the agreement with Korea and the likely agreement with China, it would be a lot better if there was an international agreement in which those three countries, along with many others, were participants.
And it would be even better if Australia just dropped its restrictions on imports altogether. The popular notion that free trade requires reciprocal agreements is wrong. The best option for Australia’s economy would be to unilaterally remove all tariffs, import levies, duties and other import costs without waiting for corresponding action by our trading partners.
It does not matter that other countries subsidise their industries to make goods cheaper than ours. Indeed, we should welcome imports that are subsidised by the taxpayers of another country. It is the equivalent of foreign aid.
Hong Kong and Singapore, both island nations with no mining or agriculture industries, have benefited immensely from freely buying and selling with the world without bothering with free trade agreements. Trade negotiations amount to countries arguing that if you don't stop making your citizens poorer, then we'll just make ours poorer to spite you!
Unilateral free trade would also give us leverage with other countries to do the same. It would be much harder for China, or any other country for that matter, to deny us market access if we have already opened up our markets to them.
There is no shortage of entrepreneurs willing to invest their own money in new ventures that would compensate for any loss of jobs, helped by the fact that imported inputs would be cheaper.
One of the problems with bilateral free trade agreements is that they discriminate against countries that are not included. Thus, while the price of Japanese-made cars in Australia will drop with the removal of the tariff, cars from other countries with which we do not have a free trade agreement will not. As a key input into the cost of business and government, the impact of lower prices for cars flows right through the economy.
The same applies in Japan. Consumers there will benefit from lower beef prices as duties on Australian beef are lowered, but they would benefit more if beef could be imported from other countries on the same terms. Australian beef producers would need to remain internationally competitive in that case, but most of them are well capable of doing that.
Complaints by our rice, sugar and dairy industries that they will not benefit from the free trade agreement with Japan are a little amusing. For starters they are wrong, because their cost of inputs from Japan (including electrical goods and vehicles) will fall.
And as anyone who tries to import sugar-derived ethanol from Brazil quickly discovers, the sugar industry is no fan of free trade. Its record of running to the government for protection and handouts is second to none.
Equally, the rice industry clings to a socialised marketing system that prevents entrepreneurial growers and third party marketers from seeking their own customers. It thinks the Australian government should convince the Japanese and Chinese to set aside their “cultural sensitivities” on rice, but doggedly clings to its own collectivist sensitivities.
As it happens, the Japanese government is in the process of winding back its support for small rice farmers. There are no signs the NSW government and rice farmers are likely to change their thinking.
For its party, the dairy industry has reinforced its lack of competitiveness against US producers by refusing to accept the productivity product Posilac out of fear the Japanese will discriminate against Australian cheese, despite its use in the US and that country’s cheese being accepted in Japan. Some people are their own worst enemies.
But these complaints do highlight another of the deficiencies of bilateral free trade agreements – they only benefit those that are included. Trade in everything else is subject to the same old barriers. Indeed, there is considerable potential for these barriers to get worse because they are off the political agenda and vulnerable to special interest lobbying.
Furthermore, any competitive advantage afforded to exporters by bilateral free trade agreements only last until another country negotiates a similar agreement. Inevitably, other beef exporting countries will seek to negotiate the same tariff reductions as Australia, and Japan will recognise that there is no particular reason to favour Australia.
Similarly, the Australian government will ultimately realise that removing the tariffs on all cars, not just those made in Japan, is also in our best interests. Which reinforces the point I made earlier - we only hurt ourselves when we restrict free trade.
The best that can be said about these free trade agreements is that they are a step in the right direction. If the 12 nation Trans Pacific Partnership removes even more barriers to trade, it will be a bigger step. But it should never be forgotten that anything short of complete free trade means we miss out on some of the prosperity that comes from specialisation. It’s not as if we haven’t known for a long time.
David Leyonhjelm is an agribusiness consultant and will become Liberal Democrats’ senator for NSW in July. He may be contacted at firstname.lastname@example.org