10 September 2021
CROSS BORDER TRADE PLUS FTA’S & THE WTOGlen Robinson shares his thoughts on the complex world of cross border trade, free trade agreements and the World Trade Organisation.
INTRODUCTIONThe export and import of goods and services is a relatively low risk means of international trade and the acquisition of goods & services which are not available from your home market. There would be very few countries which do not engage in the trade and the International Trade Centre [https://www.intracen.org] provide statistical information on over 220 countries which are involved with over 5300 product lines.
One of the features of the cross-border trade is the widespread use of Free Trade Agreements [FTAs] of which take several forms, and these are discussed in this article. Another feature of the international trade is the World Trade Organisation [WTO], an organisation formed in 1995 as a successor to the General Agreement on Tariffs and Trade [GATT] to regulate trade and resolve disputes between exporters and importers.
Consequently, this article covers 3 aspects of international trade, viz the trading volumes, the various agreements between traders which reduces the uncertainty within the transactions, and the role and influence of the WTO.
EXPORTS & IMPORTSExport and importing have served the international community well over the decades, as it has allowed countries to concentrate on specific commodities and develop expertise and utilise the advantages their geographic location or skill set of their sector and then trade those with their counterparts in other locations to acquire the products or services which they have developed. It makes it unnecessary for each country to produce every item.
Australia has a well-earned international reputation as being an exporter, as the exports in 2020 represented 1.5% of the world exports, making its ranking as being 21 from the total of 230 exporting countries. [https://www.trademap.org/Country_SelProductCountry]
However, the biggest export product is Mineral Products including Gold which amounts to 70% of the total exports, and this outperforms the next significant export product Animal Products at 5.7% of exports. On a per capita basis the ranking drops from 21 to 29, which almost certainly indicates that it is not comparative to the other exporting countries in so far as total export dollars per capita are concerned. The largest customers have been China which has imported 28.5% of the exports and USA and Japan each take 11.7% and 6 % respectively. [https://www.trademap.org/_SelProductCountry]
In 2020, Australia imported $202B making it number 23rd global trade destination. The most recent imports  are Refined Petroleum [$16.8B] Cars [$15.8 B], Crude Petroleum [$7.9 B, and the most important suppliers are China [$52.7B], USA [$24.9B], Japan [$14.9B] and Germany [$10.4B very closely followed by Thailand at $10B.
These statistics could indicate the country is extremely vulnerable, in that the export products are Mineral Products which can be manipulated by a buyer, and the buyers are very concentrated, and also can be subject to the changes which are almost certainly going to follow the restructuring of the geopolitical situation. This is further shown when in the last 5 years, there has been considerable restructuring of the trading market and Australia has been disadvantaged in the changes which have occurred.
While the nature of Australia exports has materially changed over the last 3 decades it is highly likely that further changes will accrue over the coming decades, primarily as a result of material changes in the attitude of both suppliers and customers, but also due to geopolitical realignments. Australian business will need to be cognisant of the changes in order to take full advantage of them, but just as importantly, to avoid being sidelined by them.
The two functions which would assist in protecting Australia’s commercial and importantly, the trading interests are
Move to add value to the Mineral Products rather than exporting the raw materials. It is expected this is not a change which can be made quickly, and an education process to the buyers will be necessary, but it may well have considerable advantage to Australia
Move to fragment the market, once again this is not easy, but many of the impediments will be removed or reduced as the products on offer are “finished products” and not raw materials.
Considerable work will be necessary in the marketplace to achieve these two changes but the benefits to Australia are considerable, and importantly will go a long way to protect the market.
FREE TRADE AGREEMENTS [FTA]An FTA is a generalised term indicating an agreement between 2 or more parties on trade. Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange. The concept of free trade is the opposite of trade protectionism or economic isolationism [refer Wikipedia]
In this document the term FTA is used to also cover the following
BTA Bilateral Trade Agreement; a trading arrangement between 2 parties
RTA, Regional Trade Agreement; a trading arrangement between more than 2 parties
BRTA, Bilateral and Regional Trade Agreement; a combination of BTA & RTA
Other terms may be used eg Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA), which is an FTA but the participants wished to convey that it had wider meanings and implications.
Each FTA has specific conditions which are of interest to the participating countries, however, the aims of an agreement could include: -
Reduction or elimination of tariffs on qualified goods or services. For example, a country which normally charges a tariff of percentage of the value of the incoming product will eliminate or reduce that tariff for products which originated by the partner
Intellectual Property Protection: protection and enforcement of partner-owned intellectual property rights in the FTA partner country.
Product Standards: the ability for exporters to participate in the development of product standards in the FTA partner country.
Selling to the government: the ability for a partner company to bid on certain government procurements in the FTA partner country.
Service companies: the ability for service suppliers to supply their services in the FTA partner country.
The concept of a country imposing a tariff on a good or service and then entering into an FTA with another country so that those goods or services enter tariff free seems counterproductive, as originally the incoming goods are more expensive to the local market due to the imposed tariff and any administrative requirements. One of the “benefits” of an FTA often quoted is the incoming goods are cheaper to the end user as the tariff imposed by the government is reduced or eliminated.
However, there is some hesitancy in identifying an end user which endorses FTAs as being of significant benefit to either the exporter or the importer. There are both benefits and some drawbacks with them, and the following publications indicate the position
The Results of A Survey On The Views Which Asia Focussed Business People Hold On The Business Environment Of Asia. This survey was undertaken in 2011 and targeted to Asia based Australian executives, and in relation to the Thailand-Australia Free Trade Agreement [TAFTA] which had commenced in Jan 2005, they were asked “How has the Free Trade Agreement affected your commercial relationships?” The responses were interesting NEGATIVE 4% NO EFFECT 72%; POSITIVE 23% but not a ringing endorsement.
But interestingly, the responses to the question “do you believe that your country should continue to develop FTAs?” were YES 80% , DO NOT KNOW 13%, NO 7%
“Australia-Thailand Trade: An Analysis Of Competitiveness And The Effects Of The Bilateral FTA” [https://www.pwc.com.au/trade/free-trade-agreement-survey.html ] By M. A. B Siddique, Business School, University of Western Australia, and Rahul Sen and Sadhana Srivastava, Auckland University of Technology. DISCUSSION PAPER 15.21 This is an extremely academic analysis of the Thailand Australia trade over the period 1990-2011 with special emphasis on the trade competitiveness of these two nations and the role of the TAFTA which came into force in January 2005.
The findings of this analysis suggests that the composition of bilateral trade has changed significantly since the 1990s. The changes reflect shifts in the production structure which economy, which are indicative of long-term economic structural changes. The Thai Australian trade relationship had undergone further adjustments since the establishment of TAFTA, however the changes in trade patterns are not necessarily due to TAFTA, but rather, part of a long-term trend. The analysis finds a significant positive impact of the TAFTA only on Australian exports to Thailand not vice versa. The strongest trade link between the two countries have been the export of automotive vehicles from Thailand to Australia.
Free Trade Agreement Utilisation Study, [https://www.pwc.com.au/trade/free-trade-agreement-survey.html ] This was conducted by PwC on behalf of DFAT in 2018, targeting specifically the markets of PRC, South Korea, and Japan. The results are quite interesting, while the existence of FTA’s is reasonably well known particularly for the 3 north Asian countries, there are significant impediments to an all-encompassing use. The study is quite an extensive one and the results are mixed. While most business leaders are aware of the existence of FTA’s, not all companies use them, and for a variety of reasons.
Bilateral & Regional Trade Agreements Productivity Commission Research Report Nov 2010 [https://www.pc.gov.au/inquiries/completed/trade-agreements/report/trade-agreements-report.pdf] It is interesting that this 350-page evaluation of FTAs was not upbeat in endorsing them. This direct quote is quite deflating
Unilateral reform is the most direct means for reducing Australia’s trade and investment barriers. Pursuit of the BRTA’s can create incentives to delay unilateral reforms as well as entailing administrative and compliance cost [P200]
These 2 studies of targeted actual business executives working in Asian markets, and the 3rd is an extremely detailed analytical study of a changing market, together with the Productivity Commissions research report, all show a significant ambivalence to the use and benefits of FTAs. While these results cannot be claimed to be all encompassing of all FTAs, they are sufficiently authoritative to serve as warnings about the use and credibility of FTAs. It is interesting that we could not find a credible positive article on FTAs from an actual user.
THE WORLD TRADE ORGANISATION [WTO]The WTO is a 164-member international organization which was created to oversee and administer multilateral trade rules, serve as a forum for trade liberalization negotiations, and to resolve trade disputes. The WTO was established in 1995, and it succeeded the General Agreement on Tariffs and Trade (GATT 1947)
The organisation is run by its members in which all major decisions are made by the membership as a whole or by its ambassadors and delegates. The secretary employs over 600 staff, and its experts include lawyers, statisticians, and communication specialists. Its main function is to ensure the trade flows smoothly, predictably, and freely as possible. The office is in Geneva, Sweden and currently 98% of global trade is among WTO members
The WTO Activities
The WTO agreements are lengthy and complex because they are legal documents covering a wide range of activities. The major activities are as follows: – Trade Negotiations; Implementation and Monitoring Dispute Settlement; Supporting Development and Building Trade Capacity; and Outreach.
The process for dispute settlement is quite transparent and the path is clear, as it starts with a complaint by a member when it is considered that their rights are being infringed in relation to the WTO Rules. It is possible the matter can be settled at the “consultation stage”, but if no settlement is reached, the matter enters the “Dispute Settlement” phase and proceeds along that path until a resolution is reached.
The Dispute Settlement (DS) mechanism provides an enforceable means for members to resolve disputes. It is considered that the multilateral trading system consider the DS mechanism an important success, and an enforceable DS process was a priority negotiating objective.
Administering Trade Rules
The WTO administers the global rules and principles negotiated and signed by its members. The main purpose of the rules is “to ensure that trade flows as smoothly, predictably, and freely as possible.” WTO rules and agreements are essentially contracts which bind governments to keep their trade policies within agreed limits.
There is a growing trend to erect trade barriers which include tariffs, quotas, and a growing range of nontariff measures, such as product standards, food safety measures, subsidies, and discriminatory domestic regulations. The fundamental principle of the WTO is the elimination of discriminatory treatment in international trade relations.
Transparency is another key principle of the WTO, which aims to reduce information asymmetry in markets, ensure trust, and, therefore, foster greater stability in the global trading system. Transparency commitments are incorporated into individual WTO agreements. Active participation in various WTO committees also aims to ensure that agreements are monitored and that members are held accountable for their actions. For example, members are required to publish their trade practices and policies and notify new or amended regulations to WTO
The trade rules are complex, as is the system of dispute resolution, but the system seems to work even though it appears cumbersome and slow moving.
SUMMARYThe Cross Border Trade can be a complex activity until experience and confidence is gained, but even so there are many organisations which avoid it for many, often obscure, reasons. Notwithstanding the occasional difficulties which may be encountered from time to time, the benefits can be considerable. It can be seen that many companies, both large and small, take advantage of international global trade, and do so successfully. The FTAs in its various forms, and the WTO are there as added protection, even though they may not be visible on a daily basis.
The Free Trade Agreements, in the many available forms, can be a very useful cost reduction benefit, but its application requires a very good understanding of the requirements and procedures.
The World Trade Organisation is a very professional, and active organisation which protects the global rules of trade between nations, and ensures that trade flows as smoothly, predictably, and freely as possible. It has a well established and well conducted investigative and dispute settlement process, which ensures that the rights of the members are protected
AuthorGlen Robinson is a co-founder and director of Asean Focus Group with Peter Church which was formed in 1990 to provide advice and assistance to those organisations which wished to take a commercial presence primarily in ASEAN, but also other Asian countries. Several years ago, the company entered a joint venture with Venture Group, and both now trade as AFG Venture Group.
Glen is a director of the Australia Thailand Business Council and a Councillor of the Australia Institute of International Affairs NSW.