Free trade agreements are the darling of any economic relationship, but what are their limitations, and how can you maximise the benefits they bring? Earlier this year, the Australian Industry Group (Ai Group) released results from a surveythey conducted among small to large exporters on the benefits of free trade agreements. The survey found that in more than half of all cases, for all countries with which Australia has a bilateral FTA, businesses reported no benefits. Far from saying that FTAs were a waste of time, the survey results indicated that agreements were just the beginning and that businesses need more than signatures to succeed, says Innes Willox, director of International and Government Relations at Ai Group. "What industry is saying is there needs to be more follow-through to help take advantage of opportunities that might arise from an FTA." He confirms that while "industry basically welcomes the concept of free trade because of the potential market access, the FTAs alone guarantee nothing. It doesn’t mean the floodgates open and the market is suddenly wholly accessible," he explains. Parliamentary Secretary for Trade Anthony Byrne sees an FTA as a symbol of a "global commitment to an open international trade and investment system", particularly in the wake of the global financial crisis, when protectionism threatened world trade. Therefore, regional agreements such as the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA), which came into force at the beginning of this year, sends a clear message against protectionism, he says. The breadth of the agreement, covering goods and services, investment, intellectual property, e-commerce, business travel, competition policy and capacity building, provides opportunities for exporters across the board. "One key feature of AANZFTA is that, even if it does not deliver perfect market access right now, over time the barriers will fall for most products," Byrne notes. "FTAs are not panaceas for exporters, but they are steps forward on the road to greater market access and require a bit of faith to work."
"The benefits come over a period of time," agrees Cameron MacMillan, former trade commissioner and current executive director of International Business at global business advisory BDO (QLD). "They are living documents and there are regular negotiation points where our government can go to the American government or the Chilean government or whoever and say 'we'd like a review of the situation'. Prior to the FTA, we never had that opportunity." MacMillan believes FTAs are a great way to understand issues between markets, starting from the negotiation phase. "You never get a better opportunity to put your dirty laundry on the table, so to speak. If you have an issue with a country, it's the most appropriate time to bring it up and negotiate. It takes the relationship to a whole new level," he says. This then paves the way for a priority trade relationship, one that enables Australia to more easily change aspects of the agreement as the economic environment evolves, he says. "The fact that it is a living document means you can go back at agreed intervals and say 'this isn't working for me', whereas prior to that there was no foundation for negotiation, you just fought battle-by-battle and it wasn't a relationship." An FTA "opens up discussion", says MacMillan. "It focuses people on the outstanding issues and endeavours to make the operating environment more transparent."
While negotiation is an important aspect of an FTA, exporters are understandably more interested in the benefits to be gained after the parties have signed the agreement. MacMillan points out that an FTA merely lays the groundwork for open business, so it is unlikely that everyone will see benefits from day one. "FTAs don't do business for people, they just set environments," he says. "It doesn't mean exporters can relax, but it does mean they need to do more research." Willox says exporters need to understand this crucial point about FTAs-while the agreement may open a market, a business still needs to make it work. "There are the issues of making contact, developing business proposals, developing your credibility, marketing," he explains. "It takes a long time to build up credibility, and that would be the case if there was an FTA or not. There are a whole lot of other factors at play. The FTA is not the whole answer." He believes government and industry need to work together to achieve the trade results expected when parties sign an FTA. "Governments are quite rightly proud of having an FTA, they’re not easy things to negotiate, but there’s a feeling that industry is not taking advantage of it," Willox observes. "Industry is a little bit reticent to jump fully into the pool of a new market without some sort of help. FTAs do present opportunities, but it takes a long time." In short, although exporters need to be aware of the access to a market allowed by an FTA, they also need to select the market on its own merits, not just because Australia has an FTA with a party.
Benefits for goods exporters
The most direct benefit enjoyed by businesses under an FTA is the reduction or elimination of tariffs. Further to that, under AANZFTA in particular, changes to the rules of origin may well be the most empowering aspect for goods exporters, enabling Australian businesses to work supply chains around South East Asia. "It means the small guys get to play. They may not be big in themselves, but they might control a key element. They can get bigger people to play around with them because they now have these access channels," explains Rod Morehouse, senior trade commissioner to ASEAN. "We stay in the top in skill set; we don't get locked lower down in the skill set where we're not terribly competitive. And then there's the servicing of that; the financing, the management, the marketing, the packaging, the design of it can all be up to us." Other benefits will come from commonalities, which Morehouse believes will develop over time. This means Australian exporters will only need to meet one set of specifications to reach a market of 600 million people. "They are already looking at standards, labelling, quarantine, copyrighting, and they are looking at trying to harmonise," he says. "One side is tariffs, but the other side is the specification and regulatory side."
Benefits for service exporters
Service exporters can also take advantage of FTAs through greater recognition of education and competency standards, and the ability to travel and work more freely in other markets. "The government has negotiated us to a point where you can have more flexible operating arrangements in countries. That's going to make operating in the environment so much easier," says MacMillan. And, as Morehouse remarked, the rules of origin changes under AANZFTA will allow service exporters such as those in the finance, management, marketing and design sectors to have a hand in supply chains that they may not have been able to access previously.
Benefits for investors
"Investment has always been a feature of FTAs. Most of them have tried to set up a framework that allows for a more transparent, less risky environment," says MacMillan. Benefits include guarantees about investments, from adequate and timely compensation in the event of nationalisation of an asset, to legal protection. For exporters that plan to set up operations in a country, any change in taxation laws under an FTA will be of interest. However, don't take this part for granted as not all FTAs address this issue. The Australia-Chile FTA, for example, did not include a tax treaty until more than a year after it came into force. Exporters need to review a market and look at what the FTA does in terms of tax, but understand there's may be more to tax than just the bilateral tax treaty, which may or may not suit the business.
In addition to economic benefits, there are also clear political benefits to FTAs, which begs the question: How much of an FTA is for political, rather than economic, gain? Willox admits that the process is tinged with politics. "It is an achievement of government to have an FTA. It is politically advantageous to put that notch on the belt. No government wants to be seen as protectionist," he explains. MacMillan is more pragmatic and believes that government motivations are pure. "I don't think anyone enters into an FTA lightly. There's so much work, it is so resource-intense to negotiate an FTA, so I think they're based on merit," he says. "It's more about the process and the outcome than photo opportunity after the signing."
The future of free
At the moment, Australia has six FTAs, five with countries-Chile, New Zealand, Singapore, Thailand, and USA-and one with a region, ASEAN. We are currently at the negotiation stage with China, Japan, Korea and Malaysia, and three multilateral parties: the Gulf Cooperation Council, Pacific nations, and the Asia-Pacific Economic Cooperation (APEC) countries. Feasibility studies have been completed for India and Indonesia, and Minister for Trade Simon Crean hints that his department will look into European and African nations in the near future. In addition to these is the global one, the Doha Round (see The Doha Roundabout), on which the Federal Government places particular importance. "Doha is the priority, especially in 2010, with the instructions from G20 world leaders to conclude this year," says Crean. But it is in the collective power of bilateral, multilateral and global FTAs where Australia will benefit most, he believes. "What is crucial is the quality of FTAs and what they set out to achieve. These are processes that complement each other, and they are all aimed at achieving trade liberalisation and greater regional economic integration." Willox believes Australia leads the way in this regard. "We’re at the vanguard of negotiations and we’re setting the tone for other agreements," he says. "All the new FTAs being negotiated are signs the global economy is flattening out. Australia has to stand fast and not fall prey to behind-the-border barriers and backdoor protectionism. These agreements are good if everyone else is playing, and it sees a levelling out of the playing field. That’s where the advantage is."