Trade diversion down under

Few Indian observers have commented on the Australia-US Free Trade Agreement. Free Trade Agreements (FTAs) are becoming a dime a dozen, and most yield only marginal changes. So why should we pay particular attention to the newly-signed AUSFTA?

Because it represents a serious blow to the Doha Round of WTO talks, which seeks to reduce rich-country subsidies and quotas for agriculture. This could greatly increase Indian exports of cotton, sugar, and rice. By signing AUSFTA, Australia has stabbed in the back other agricultural exporters like India . AUSFTA represents a victory for US Trade Representative Zoellick’s policy of signing bilateral FTAs, seductively offering lower industrial tariffs and increased American investment in return for the acquiescence of trade partners in American agricultural protectionism. Australia has been seduced. It has now lost its long-standing moral and effective leadership of the Cairns group of agricultural exporters in WTO.

AUSFTA is different from NAFTA, which covers the US , Canada and Mexico . NAFTA covers all agricultural commodities. This has its drawbacks: it means that Mexicans have to compete with highly subsidised American maize. But overall it has helped open up regional agricultural trade. Mexico ’s exports of vegetables and fruit to the US have risen stridently.

By contrast, the new FTAs being promoted by Zoellick do not seek to open up trade in all agricultural areas. AUSFTA retains US quotas on sugar, beef and dairy products, as well as tariffs on 34% of Australia ’s agricultural exports (dropping eventually to 25%). Beef quotas will in theory be phased out after 18 long years, but can be re-imposed if US beef prices drop 6.5% below their average, which means every few years.

So, AUSFTA is not free trade at all but a sell-out to American protectionism. It buttresses rich-country subsidies for agricultural that exceed one billion dollars a day. The subsidy per European cow is $750/ year, more than India ’s per capita income. Australia originally threatened to walk out of AUSFTA talks unless the US sharply reduced trade barriers on sugar and beef. Ultimately, Australia caved in. Sadly, a precedent has been set for similar capitulation in other FTAs being negotiated by Zoellick.

What are the implications for India ? Not good. Other countries may get more out of FTAs than multilateral deals at WTO, but not India . East European countries can join the European Union, which can also sign Euro-Med agreements with North African countries, creating a cozy regional grouping. NAFTA is another cozy geographical grouping, which Zoellick seeks to extend through a Free Trade Area of the Americas . ASEAN countries have formed AFTA. But India does not naturally fall into any geographical or political grouping. It is a member of SAFTA, but this group has little trading potential, and is riven by deep political suspicions.

FTAs are increasingly giving India ’s competitors duty-free entry into rich countries. This is a serious disadvantage for India . The best way out would be multilateral trade liberalisation under WTO: the lower tariffs and quotas are under WTO, the less is the advantage of duty-free entry conferred on India ’s competitors by FTAs. Alas, the success of Zoellick’s strategy suggests that FTAs will proliferate while WTO is neglected. In the worst case, WTO will become moribund. Some critics believe that globalisation through WTO is a monster, but they should regard globalisation through FTAs as even more monstrous and distorted. WTO has so far failed to give developing countries their due in agriculture, but the Doha Round had raised hopes of a remedy. Those hopes will be shattered by the proliferation of FTAs like AUSFTA.

Unlike trade purists like Jagdish Bhagwati, I have not in the past regarded FTAs as a scandalous perversion of free trade. Ultimately, free trade is a political decision. And from a political viewpoint, FTAs are easier to negotiate (especially with political allies and geographical neighbours) than multilateral trade liberalisation at WTO. True, FTAs produce more trade diversion than trade creation. But the political benefits are substantial. Once an FTA has broken political resistance to lowering trade barriers on some items, it becomes politically easier to extend that liberalisation to all countries under WTO. For this reason, I have in the past viewed FTAs favourably, as political catalysts for eventually improving global free trade.

I can no longer cling to this belief, because the FTAs being negotiated by Zoellick and the European Union now undercut rather than strengthen the aims of WTO. Earlier, FTAs and WTO both aimed to liberalise trade in manufactures, so the former could be viewed as aiding the latter in the long run. But today WTO seeks to liberalise agriculture while FTAS seek to entrench agricultural protectionism. Far from help break political resistance to agricultural reform in WTO, the new FTAs are strengthening it.

Although I favour free trade, I have always said that massive global subsidies for agriculture must end before we can consider free agricultural trade. For manufactures, international prices represent efficiency. For agricultural goods, international prices generally represent dumped rates. Rich countries consume agricultural goods at artificially protected rates, and the balance is dumped on world markets at any price it will fetch.

If agricultural subsidies in rich countries are lifted, there will be a boom in world prices of sugar, cotton, rice, and wheat. India is a low-cost producer of all these, and could become a major exporter. This is not understood by many Indians, who think that agricultural trade liberalisation under WTO will threaten our farmers. This is not so. If subsidies are abolished globally, our farmers will become highly competitive and gain mightily from trade.

For years, Australians could see this but Indians could not, thanks to a socialist obsession with self-sufficiency. Now at last people’s eyes are opening in India , and they are seeing how huge can be the gains of trade. Sadly, Australia has given up the struggle at this juncture, and struck a devil’s bargain with US protectionists.

What do you think?