Will an EU-US free trade agreement be the last straw for Australian manufacturing?

28 January 2014

Forget worrying about how Australian manufacturers can compete with low cost countries that have bigger economies of scale. A more pervasive threat has emerged that could jeopardise manufacturing’s future in this country - the proposed Transatlantic Trade & Investment Partnership between the US and the EU. If these economic giants succeed in negotiating their trade and investment agreement, Australia will be a clear loser with declining trade volumes, falling incomes and higher unemployment.

The EU-US trade relationship is already the biggest in the world worth €2 billion in goods and services traded each day. 

The Transatlantic Trade & Investment Partnership or TTIP is to be a comprehensive, high-standard trade and investment agreement that will reduce tariffs and tackle behind the border non-tariff barriers.  These include differences in technical regulations, standards and certification which cost companies in time and money (for example: when a car is approved as safe in the EU, it currently still has to undergo a new safety check in the US).

An estimated 80% of the TTIP’s benefits would come from reducing regulatory bureaucracy, as well as from opening up services and public procurement markets.

It will be the biggest bilateral trade and investment agreement in history if it comes into force, worth as much as $149 billion to the US economy and $119 billion to the EU.

However, for countries outside the agreement the outlook is not so rosy.  Locked out of the benefits, they will face the same tariffs and non-tariff barriers when exporting to, or investing in, the US or EU. 

It’s quite possible the TTIP will divert trade and investment flows away from non-member countries to member countries. So, while trade and investment between the US and EU will grow, flows from non-member countries to the EU and US will decline.

Australia is predicted to be a clear loser from the TTIP.  A study by Bertelsmann Stiftung, a European think tank, concluded that per capita income in Australia would fall by as much as 7.4% if tariffs between the US and EU were eliminated and ‘deep’ trade and investment liberalisation occurred.

Unemployment would also rise in Australia with as many as 52,000 jobs lost. 

Trade in advanced manufactured goods between the EU and US is expected to flourish under the TTIP, the big winners being those involved in the transatlantic automobile market.  This is according to a joint study by the British Embassy in Washington, the Bertelsmann Foundation and the Atlantic Council.

If Australia is to lose out of the TTIP, will the economic impacts be offset by Australia entering other bilateral and regional free trade agreements?

Economic modelling prior to Australia’s entry into free trade agreements with Singapore, Thailand, the USA, Chile, ASEAN, New Zealand and Malaysia all indicated Australia would reap significant benefits from entering those agreements. 

However, a 2010 Productivity Commission report, ‘Bilateral and Regional Trade Agreements’, found little evidence these agreements had delivered substantial benefits to business and that decisions to do business in other countries may be influenced by factors outside trade agreements.

The Productivity Commission subsequently recommended the Australian Government only pursue bilateral and regional trade agreements where they are likely to:

  • afford significant net economic benefits; and
  • be more cost-effective than other options for reducing trade and investment barriers, including alternative forms of bilateral and regional action.

In this context the Federal Government is currently negotiating bilateral free trade agreements with China, the Gulf Cooperation Council, India, Japan and Indonesia as well as three regional free trade agreements – Pacific Agreement on Closer Economic Relations (PACER) Plus, the Regional Comprehensive Economic Partnership and the Trans-Pacific Partnership (TPP). 

Will any of these agreements afford Australia “significant economic benefits” and be “more cost-effective than other options for reducing trade and investment barriers”.  On past history it would seem unlikely.

Several discernible trends are emerging across the globe with regard to trade and investment agreements. 

First, there is the rise of mega regional trade and investment agreements, such as the TTIP and TPP, as well as increasing numbers of bilateral free trade agreements. 

Are these agreements filling the gap left by the failure of the Doha negotiations in the WTO to reach agreement on the multi-lateral system?  Or are they distorting trade to the detriment of countries outside of such agreements and to the global economy overall?

Second, there is increasing protectionism in free trade agreements themselves. For example, recently leaked draft intellectual property and environmental protection chapters of the TPP revealed the US is seeking to increase intellectual property protection beyond that in international agreements and conventions.

Further, each free trade agreement gives rise to a new set of trade rules for businesses to comply with in order to obtain the benefits under those agreements.  Inconsistencies between such rules are of themselves barriers to trade.

The issue emerging for Australia now is, how should it respond if mega regional trade and investment agreements replace the multi-lateral system to the detriment of global trade and investment?

With our open economy and reliance on investment and trade, Australia will need to be nimble and become better at building more expansive relationships with our regional neighbours.

If the TTIP gets going, markets in the EU and US may disappear out of reach, particularly for Australia’s manufacturers. And, unfortunately, the free trade agreements Australia is currently negotiating are unlikely to offset the adverse impact of the TTIP on manufacturing.

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