The US’s antipathy towards free trade could leave Australia in the lurch
6 Jul 2023|

Speeches by top trade officials last month highlight the rift that has opened up between the US and Australia on trade policy, and the implications for national security. The US is turning its back on globalisation and the principles of free trade that underwrite it, while Australia continues to see trade and open markets as the source of its prosperity.

Describing globalisation as ‘unsustainable’, US Trade Representative Katherine Tai argued that the rules set out by the World Trade Organization and bilateral free-trade agreements have benefited only the biggest corporations and the wealthy:

Trusting markets to allocate capital efficiently, we designed trade rules to liberalize as much as possible, under the theory that we were facilitating the creation of a free global marketplace. We thought a rising tide would lift all boats, believing that this approach could lead to a gradual improvement in labour standards and environmental protection as countries grew wealthier from increased trade flows.

We did not include guardrails to ensure that it would be the case. The system itself, then, created an incentive for countries to compete by maintaining lower standards, or by lowering their standards even further, as companies sought to minimize costs in pursuit of maximizing efficiency. This is the race to the bottom, where exploitation is rewarded and high standards are abandoned in order to compete and survive …

The traditional trade policy approach historically focused on providing benefits for our biggest companies, on the theory that those benefits would necessarily trickle down to our workers, small businesses and communities. But over time, what we have seen is that these benefits do not trickle very far down.

Australian Trade Minister Don Farrell’s address to the National Press Club, by contrast, included a strong defence of the existing trade framework:

[W]e’re committed to free, fair and open trade, where the rules of the game are known and respected …

On balance, trade is a force for good. It is a key lever of the Australian economy. Its benefits flow to all aspects of everyday life. More trade means more well-paying jobs, more national income, and more opportunities for business and workers.

In an evolving and often challenging global environment, trade helps enable the economic strength and resilience that is central to our national power, alongside defence and diplomacy.

Farrell underlined the importance of restoring the WTO’s ability to resolve trade disputes, which has been stymied by the US’s refusal to approve new judges to its appeals panel. ‘We need organisations like the WTO to be functional. WTO rules underpin the global trading system, a system that is absolutely fundamental to Australia’s prosperity and security. A system vital to our region’s economic progress and stability,’ he said.

The importance of agreed international rules, including those covering freedom of navigation and overflight, has also been emphasised by Australia’s defence minister, Richard Marles. ‘Trade is a much bigger proportion of our economy and our national wealth [than for other countries] … and what that means is our national security is … defined by the maintenance of the rules of the road and by the collective security of the region,’ he told the Sydney Morning Herald after the AUKUS announcement in March.

US officials, by contrast, believe that the ‘rules-based order’ has been a chimera. In an important speech on economic policy in April, US National Security Adviser Jake Sullivan said:

Much of the international economic policy of the last few decades had relied upon the premise that economic integration would make nations more responsible and open, and that the global order would be more peaceful and cooperative—that bringing countries into the rules-based order would incentivize them to adhere to its rules.

It didn’t turn out that way.

Sullivan argued that the decades of liberalisation had allowed the build-up of ‘perilous’ supply-chain vulnerabilities that could be exploited.

The value of bilateral and regional trade agreements is a point of particularly sharp difference. The Australian government recently concluded trade agreements with India and the UK and is closing in on a potentially important deal with the EU. The ASEAN–Australia–New Zealand trade agreement has also been upgraded, with new chapters on government procurement, small business and sustainable development. This continues the approach of the previous government, which signed agreements with principal trade partners, including China, as well as regional free-trade agreements.

‘Those agreements mean that Australians can choose from more products at better prices,’ Farrell says.

However, in a break with the economic policy that has governed the US since Ronald Reagan’s administration in the 1980s, Tai says it is a mistake to prioritise consumers in both trade and competition policy:

Our trade policy places workers at its centre to reflect the reality that the consumer who enjoys the low prices of imported goods is also a worker who must withstand the downward pressures that come from competing with workers in other parts of the world toiling under exploitative conditions.

Similarly, prioritizing and pursuing the consumer welfare standard in competition policy has led to consolidation and unchecked dominance in our domestic market, which has stifled competition and diminished economic liberty for our citizens and workers.

Explaining the administration’s rejection of both bilateral and regional trade agreements, Tai said:

[I]f we look at what those agreements did, we see the ways in which they contributed to the very problems we are now trying to address.

The industrial supply chain rules in our traditional free trade agreements were based on that same premise of efficiency and low cost.

Because of it, they allow significant content to come from countries that are not even parties to the agreement—free riders, who have not signed up to any of the other obligations in the agreement, such as labour and environmental standards. That means these rules benefit the very countries that have used unfair competition to become production hubs.

The difference in approach partly reflects the fact that the US is an economic superpower that believes it should be able to dictate the terms of its international engagement. Australia, by contrast, ranks 12th among world economies and depends on international institutions and agreements to secure its markets.

Australia has arguably profited more from globalisation than almost any other country, because of the appetite it unleashed for Australian resources. In recent years, Australia’s terms of trade—export prices compared with import prices—have been at the highest level in the nation’s history.

Australia has seen a more dramatic decline in its manufacturing, which has slid from 11% to just 5% of GDP over the past two decades. In the US, the drop has only been from 13% to 11%. The growth of resources, as well as services exports such as education and tourism, has delivered a boost to prosperity that could not be won from internationally uncompetitive manufacturing in Australia. The US, on the other hand, struggles with the notion that its manufacturing could be anything but the world’s best.

The risk for Australia is that the rules of trade cease to hold and that international trade becomes a more hostile environment in which might makes right. Australia has already experienced the negligible sway of written agreements in international trade with China’s defiance of both the WTO and the China–Australia Free Trade Agreement in its campaign of economic coercion. The US approach also foreshadows a rise in protectionism and trade barriers.

There is also a risk for the US that its reluctance to enter trade agreements will leave nations, particularly in Asia, leaning more towards China.