Australia has to stand up behind rules-based trade

Editor's note:

This op-ed was originally published by The Australian Financial Review.

Australia has been a major beneficiary of the open rules-based global trading system that emerged after the Second World War. 

U.S. leadership was vital to establishing, enforcing, and expanding this global web of trade rules that today are embodied in the World Trade Organisation (WTO) and free trade agreements (FTA). Successive U.S. presidents since World War II have understood that trade barriers harm economic growth and fuel geopolitical tensions, and hence hewed to this broad strategy.

Now, for the first time since the early 1930s, the United States has a president who openly rejects longstanding tenets about trade and his nation’s leadership role.

On trade, Donald Trump believes that someone wins and someone loses—and that America has been doing most of the losing, with the impact falling disproportionately on his working-class supporters. He rejects the economic reality that trade is win-win: that the main gains from trade come from liberalizing one’s own market, and that prosperous countries generate demand for U.S. exports. And while trade is part of the story behind U.S. job losses in manufacturing, economists agree that technology and productivity gains have had the most impact.

While President Trump’s antics are unnecessarily jeopardizing the trading system, it would be a mistake for Australians to believe he is the only problem.

Some of Trump’s trade threats may be negotiating bluster. He hasn’t yet abandoned NAFTA or KORUS, the FTA with South Korea. But now some of his threats are materializing, and the main target is China—Australia’s largest trading partner.

The recent U.S. National Defense Strategy labeled China a strategic competitor that coerces other countries using “predatory economics.” The administration has slapped tariffs on imported solar panels, mostly from China (and on washing machines, from Korea). Tariffs targeting imports of steel and aluminium are likely by April. China will almost certainly retaliate. A full-blown trade war is not inevitable, but the risks to the global trade system—and the stakes for Australia—are certainly rising.

While President Trump’s antics are unnecessarily jeopardizing the trading system, it would be a mistake for Australians to believe he is the only problem. Protectionist sentiment was rising around the world even before Trump’s election. In the U.S., opposition to free trade is stronger among Democrats than Republicans, and Australia’s Labor opposition is ambivalent about TPP and other free trade agreements, even with Australia’s three largest export markets. The WTO remains largely gridlocked owing to its greatly expanded membership and fissures between developed and developing economies.

Moreover, the Trump administration is not alone in America in pointing the finger at China’s trade practices. Trump may be wrong-headed about a range of trade issues, but many on both sides of Congress, in the wider U.S. foreign and trade policy community and increasingly among U.S. businesses share the view that China does not play by the rules, that efforts to integrate China into the trading system as a “responsible stakeholder” have fallen short, and that the time for talking through trade differences has passed.

Greater risks

In contrast with the U.S., Australia’s commodity-intensive economic relationship is less exposed to China’s state-sponsored theft of commercial intellectual property, support for state-owned enterprises in overseas markets, moves to block internet access, and other trade and investment restrictions. This may change over time as Australia seeks to transition its economy into smart manufacturing, fintech and services.

How the U.S. responds to China’s trade practices will shape the future of the world trading system—whether it continues to be based around a (revitalized) WTO or splinters into more regionally focused trading blocs centered around the U.S., the EU, and China in Asia. While China is Australia’s largest trading partner, a China-centric regional economy that moves away from liberal trade rules would not serve Australia’s interests.

In this difficult environment, Australia will have to work harder and take greater risks to protect its interests and support the rules-based trade system.

Continuing to make progress where possible negotiating new rules at the WTO while also pursuing high-quality bilateral and regional free trade agreements will be essential.

In particular, extending trade rules into growing areas of economic activity that are not covered by the WTO—such as digital trade and state-owned enterprises—will be important. This is one reason the government has been right, along with Japan, to press ahead and conclude the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) agreement.

Another is that CPTPP can play a role in the region in developing rules that discipline the types of Chinese actions that are most harmful. At Davos, Trump said he may be open to joining the CPTPP; Australia and its partners should continue to encourage U.S. participation, and work to bring other like-minded countries into the agreement.

This isn’t enough, however. Australia needs to face up to the reality that while China’s trade practices do not always affect it directly, their cumulative indirect effect poses a severe danger to the integrity of the global trade system and the world economy, and therefore to Australia’s long-term interests.

Too often Australia has ducked for cover rather than join other countries in taking WTO action against improper trade practices, and working with partners to use the WTO’s dispute resolution mechanism to address systemic challenges from some of China trade restrictions should be a priority. It is troubling then that when trade ministers from the EU, Japan, and the U.S. met recently in Buenos Aires and committed to working within the WTO and elsewhere to fight market-distorting trade practices, Australia was not at the table.

As a medium-sized economy, Australia’s voice carries limited sway in Beijing—or in Washington, for that matter. But it has a history of effective advocacy and coalition-building within the WTO, and its best hope of shaping the future rules governing trade—and nudging the Trump administration away from harmful unilateral trade actions—is to step up and work more closely with like-minded countries, even when it sometimes means irritating China.

Disclosure: The Australian Department of Foreign Affairs and Trade and the Australian Department of Industry, Innovation, and Science provide financial support to Brookings. The government of Australia had no involvement in the underlying analysis or drafting of this post.