Bilateral and regional trade agreements

Research report

This research report was released on 13 December 2010.

Download the report

Government response - see attachment

Key points
Media release
Contents
Supplements

In line with global trends, Australia has recently entered a number of new bilateral and regional trade agreements (BRTAs) and is negotiating several more.
The Australian Government's approach has been to negotiate comprehensive agreements that seek substantial reductions in trade barriers.
- For merchandise trade, recent BRTAs have resulted in some significant bilateral tariff reductions both in Australia and in partner countries.
- For services and investment trade, BRTAs typically limit discrimination between suppliers.
- Australia's agreements have often also included provisions on matters such as intellectual property, competition policy and trade facilitation.
Theoretical and quantitative analysis suggests that tariff preferences in BRTAs, if fully utilised, can significantly increase trade flows between partner countries, although some of this increase is typically offset by trade diversion from other countries.
- The increase in national income from preferential agreements is likely to be modest.
The Commission has received little evidence from business to indicate that bilateral agreements to date have provided substantial commercial benefits.
- This may be because the main factors that influence decisions to do business in other countries lie outside the scope of BRTAs.
Domestic economic reform offers relatively large economic benefits and should not be delayed to retain 'bargaining coin'.
In the international arena, the Australian Government should continue to pursue progress in the Doha Round. Building the case for substantive reductions in trade barriers internationally requires improvements in domestic transparency and policy analysis within each country.
While BRTAs can reduce trade barriers and help meet other objectives, their potential impact is limited and other options often may be more cost-effective.
Current processes for assessing and prioritising BRTAs lack transparency and tend to oversell the likely benefits.
To help ensure that any further BRTAs entered into are in Australia's interests:
- Pre-negotiation modelling should include realistic scenarios and be overseen by an independent body. Alternative liberalisation options should also be considered.
- A full and public assessment of a proposed agreement should be made after negotiations have concluded - covering all of the actual negotiated provisions.
The Government should also develop and publish an overarching trade policy strategy, to better coordinate and track the progress of trade policy initiatives, and to ensure that efforts are devoted to areas of greatest likely return.

Background information

Tom Nankivell (Research Manager) 02 6240 3235

Bilateral and Regional Trade Agreements

The benefits of Australia's bilateral and regional trade agreements have been oversold and the processes for developing them should be improved, a Productivity Commission study released today concluded. The Commission found that while there is the potential for some gains from preferential agreements, unilateral reform and non-discriminatory trade liberalisation offer larger benefits.

The Commission was asked to examine the effects of bilateral and regional trade agreements, including on trade and investment barriers, regional integration and Australia's economy generally.

While tariff preferences in trade agreements can benefit some industries, the Commission found little evidence that Australia's recent bilateral agreements had provided substantial commercial benefits. The main factors that influence decisions to do business in other countries are likely to lie outside the scope of such agreements. The study concluded that while preferential trade agreements could increase national income, the net effect is likely to be modest.

The study also found that some provisions included in Australia's recent preferential trade agreements - including investor-state dispute settlement mechanisms, government procurement requirements, intellectual property protections and provisions affecting areas traditionally the province of domestic policy, such as culture - potentially entail significant costs or risks.

To ensure that options other than trade agreements are properly considered, and that any further agreements entered into are warranted, the study recommended that the Government make changes to its trade policy development processes. Under the Commission's proposals, the Government would undertake an annual Trade Policy Review to better identify priorities, enhance the value of consultation and consider trade policy in a broader context. And where there is an interest in pursuing a trade agreement with particular countries, economic assessments should be based on realistic scenarios with any modelling overseen by an independent body. Final assessments to government should be based on the negotiated text of the agreement.

The Commission also reaffirmed that domestic economic reform offers relatively large economic benefits, and should not be delayed to retain 'bargaining coin' for use in negotiating trade agreements.

Preliminaries
Cover, Copyright, Foreword, Terms of reference, Disclosure of interests, Contents and Abbreviations and explanations
Overview - including key points
Recommendations

Part A - Introduction

Chapter 1 About the study
1.1 The reference
1.2 Conduct of the study
Chapter 2 What are bilateral and regional trade agreements?
2.1 Types of trade agreements
2.2 Australia's bilateral and regional trade agreements
2.3 Other countries' agreements

Part B - BRTAs within the broader policy landscape

Chapter 3 International trade and investment flows
3.1 Global trends
3.2 Australian trends
3.3 Summing up
Chapter 4 The institutional environment for international trade and investment
4.1 The World Trade Organization
4.2 Other multilateral institutions
4.3 Bilateral and regional agreements and institutions
4.4 Domestic policies and programs
Chapter 5 The changing nature and reach of BRTAs
5.1 Growth in preferential trade agreements
5.2 The evolving nature of PTAs
5.3 The scope of specific PTAs in force
5.4 The global reach of trade agreements

Part C - Evaluating the economic impacts of BRTAs

Chapter 6 Effects on barriers to trade and investment
6.1 To what extent do BRTAs reduce barriers for members?
6.2 Broader effects of BRTAs on trade and investment barriers
6.3 Summing up
Chapter 7 Impacts on business and government
7.1 Views of business
7.2 Impacts on government
7.3 Summing up
Chapter 8 Trade and economic effects: merchandise
8.1 Some theory on impacts
8.2 What other studies have said
8.3 Modelling the potential impact of reductions in barriers to merchandise trade
8.4 Broader economic impacts of changes in trade flows
8.5 Observed changes in trade flows
8.6 Summing up
Chapter 9 Trade and economic effects: services and investment
9.1 Services trade
9.2 Investment
9.3 Summing up
Chapter 10 Other possible economic effects of BRTAs
10.1 BRTAs and domestically focused regulation
10.2 Economic integration impacts from BRTAs
10.3 Summing up

Part D - Future approach to BRTAs

Chapter 11 Policy objectives for trade agreements
11.1 What are appropriate policy objectives?
11.2 Reducing barriers in our trading partners
11.3 Reducing our own trade and investment barriers
11.4 Economic cooperation and integration
11.5 Non-trade objectives
11.6 Summing up
Chapter 12 Future approaches to trade liberalisation and the role of BRTAs
12.1 Unilateral reform
12.2 Multilateral reform
12.3 Bilateral and regional agreements
Chapter 13 Design of future BRTAs
13.1 Existing best practice principles
13.2 Sectoral coverage of agreements
13.3 Rules of origin
13.4 Multilateralising provisions
13.5 Providing trade-related assistance to other countries
13.6 Summing up
Chapter 14 Some specific provisions in BRTAs
14.1 Intellectual property
14.2 Investor-state dispute settlement
14.3 Labour standards
14.4 Restrictions on trade in cultural goods and services
14.5 The proposed approach
Chapter 15 Processes for establishing BRTAs
15.1 Current processes
15.2 Concerns with the current process
15.3 Improving the process
15.4 Proposed approach
Appendix A The Associate Commissioner's views
Appendix B Public consultation
References

The Commission has prepared two quantitative supplements.

One provides details of some CGE modelling of the effects of different trade liberalisation scenarios; the other provides details of an econometric analysis of the links between the formation of trade agreements and merchandise trade flows.