The principal point of Free Trade Agreements is to secure trade liberalisation. While the traditional debate about FTAs is the danger that they can divert rather than create trade, the record to date suggests there has been little diversion and that FTAs and regional agreements have been effective in encouraging wider trade liberalisation. A practical advantage of FTAs is that they are quicker and easier to negotiate than multilateral agreements because fewer parties are at the table. Parties can secure advantages that are harder to win in bigger forums. The disadvantages are twofold. If FTAs are not set up within the right framework of policies, they can diminish rather than enhance economic welfare. The second disadvantage is that they are not good vehicles for liberalising trade in sectors on which parties outside the agreement have a major influence.
FTAs as drivers for liberalisation
While multilateral agreements under the GATT and WTO have been the leading arrangements bringing greater trade liberalisation in the world economy, narrower agreements like the European Union and the Canada-US bilateral FTA have also been significant. For Australia, the Closer Economic Relations agreements with New Zealand have made important contributions in allowing Australia and New Zealand to become, in substance, a single economy. While trade liberalisation is usually a negotiated process under which each party makes “concessions” in opening up their markets, greater access to the market for the second country is only the first gain for the first country. The second gain is the benefit to the domestic economy of reducing protection. It is similar to gains from unilateral liberalisation.
How liberalisation occurs
Bilateral trade liberalisation can be thought of as bringing changes to the participants in two ways: through diverting goods and services from countries that become disadvantaged in relative terms from the liberalisation, and by displacing higher cost goods and services. Liberalisation that displaces goods with cheaper goods is clearly
An Australia–USA Free Trade Agreement: Issues and Implications 19
Chapter 3 FTAs — advantages and disadvantages
preferable and it is the likelihood of some trade diversion that has brought objections to bilateral and regional free trade agreements as opposed to multilateral agreements. Traditionally, trade benefits have been most apparent in FTAs where countries have vastly different economic structures. Comparative advantage in different areas of production allows both partner countries to gain as a result of specialisation. A refinement of this analysis (the so-called Heckscher-Ohlin model) shows how trade raises the prices of the cheaper good in each of the trading partners while lowering the prices of the scarcer (imported) good to more than offset this. This view of trade gains has been at the heart of the process over a long period – text books often described it as Australia sending primary products to England and receiving manufactures in return. More recently, the gains stemming from the European Union and from the Australia New Zealand Closer Economic Relations Trade Agreement (ANZCERTA) have highlighted different forms of gains, or, perhaps more accurately, a different view of the same gains. There the gains were realised by countries with structurally much more in common than the traditional trade-gain theories highlighted. The gains came from intra-industry trade – the trading partners appeared to be buying and selling goods that they already made in their home countries. Two factors account for the gains from this intra-industry trade following liberalisations between countries with similar economic profiles: ❙ ❙ increased competitive pressures on suppliers that were previously less heavily challenged in their home markets; a variation of the traditional comparative advantage gains that takes advantage of the increased...