Trade and Prosperity | Briefing | November 2021

November 4, 2021

Trade policy reviews get exciting (but for the wrong reason)

TPRM in the news. Perhaps for the first time ever, the WTO Trade Policy Review Mechanism (TPRM) made the news (at least here in Australia). During a meeting for China’s ‘review’, Australia called out China on its politically motivated and trade disruptive practices affecting Australian exports. The statement of Australia noted how these are undermining agreed trade rules and the multilateral system. Some other economies also made statements on China’s trade policies.

The WTO’s ‘other’ function. The TPRM is one of the lesser known functions of the WTO. Trade policies of members- across the economy- are ‘reviewed’ periodically by the membership for adherence to WTO agreements and progress toward liberalisation goals and market oriented reforms. Taking into account the views of other members and analysis of the policy settings, the WTO Secretariat and member under review prepare a report which is then made publicly available.

Power to transparency. The process is intended to be informative and non-confrontational, providing an objective evaluation of each economy’s trade policies and practices and their impact on the multilateral trading system. The idea is to increase transparency and accountability – of both the ‘good’ and the less good aspects of the trade policy regime – and to encourage alignment with agreed rules. The peer assessment brings legitimacy to the process. The comprehensive and detailed Secretariat reports are a great resource for analysts, like us, for what they both say and don’t say.

The real news. The value of the TPRM was not really mentioned in the news stories. Also missed was the fact that it is still a functioning part of the WTO, while others – a forum for trade negotiations and a body for dispute settlement – are struggling. It is one of the few forums in which major traders, differences or not, still actively and willingly participate. That seems more newsworthy.

Investment ‘diversification’ relies on open settings at home

Investment the ‘ new’ diversification. Earlier this week, Minister for Trade, Tourism and Investment Dan Tehan gave an interview touting Australia’s plans to increase – and diversify – inward foreign investment. Since late last year, there has been significant funding and policy attention to support Australian exporters develop and expand trade across markets. Now the focus appears to have moved toward investment.

Barriers to diversification. There are perceptions that investing in Australia has become more, not less, difficult for foreign sources of capital. It is well known that before the pandemic, the Foreign Investment Review Board (FIRB) rejected multiple key proposed acquisitions in energy infrastructure and agricultural land. While investing during the pandemic was made easier through temporarily reduced screening thresholds, any investment from any investor – even FTA partners – that impacts on national security, is now subject to broad veto powers. This can extend investments in large parts of the economy. These extra obstacles have made it difficult for many Australian companies to access international capital.

Holding back trade.  Ultimately, obstacles to investment limit the capacity of Australian business to develop new industries and expand trade and exports. This year the FIRB rejected a Chinese bid to take a stake in WA rare earths player Northern Minerals, which constrained the company’s funds, impeding its expansion and development plans -policy to protect Australia’s critical minerals in effect put the brakes on development of those minerals. The company was forced to scramble to sell shares locally at 2c each, rather than access the 6.2c per share that the Chinese buyer had offered.

Competition for capital. The current environment is one of increasing global competition for scarce sources of capital. Australian inward FDI was down 48% from all sources in 2021, and 61% from China. Australia’s competitors are now firmly focused on attracting FDI to support economic recovery.

Australia’s economic wellbeing relies on ready access to global capital for employment creation and economic growth. More than this, Australia’s FDI supports strategic partnerships with other nations, drives increased two-way trade, and underpins integrated value chains. It’s fine to seek ‘diverse’ investment, but all investment needs a welcoming destination.

In brief

UK and NZ reach agreement in principle on their bilateral FTA. Both governments reported significant market access gains, including zero-rate tariffs on bilateral goods trade (with some phase in periods).The agreement also includes what appear to be ‘new’ commitments related to climate change, fossil fuel subsidies, trade and gender equality and animal welfare standards.

The UAE renews interest in FTAs. Eight economies have been targeted for ‘fast track ‘ negotiations – South Korea, India, the UK, Turkey, Indonesia, Ethiopia, Israel and Kenya. Talks with Indonesia have already commenced. Negotiations with Korea are likely to commence in the next few months.

ASEAN/Australia elevate economic relationship. Addressing the first ASEAN – Australia Summit on October 27, the Australian Prime Minister Scott Morrison affirmed Australia’s support for ASEAN’s centrality in the Indo-Pacific region. ASEAN and Australian leaders agreed to elevate bilateral ties to a comprehensive strategic partnership.

The US seeks deeper ties with ASEAN through TIFAs. USTR Tai is reported to be exploring expanded trade and investment ties with ASEAN through trade and investment framework agreements. ASEAN and the US recently finalized the US-ASEAN Expanded Economic Engagement (E3) Initiative to ‘promote increased trade, investment, and economic cooperation.’

Surprise! ‘Trump tariffs’ have not reduced the size of the US trade deficit. As pointed out by PPI, barring some unexpected economic shock this November, the 2021 US deficit in manufactured goods will top USD1 trillion. In 2020, it was $900 billion. This was a four-year jump of $252 billion from 2016 (when it was USD650 billion). The deficit was USD317billion in 2000.