ChAFTA Watch: The principles for assessing “Good” Free Trade Agreements.

There is oodles of debate in the media about whether ChAFTA is a dud deal or in the national interest.

To assist the debate the Glass Pyramid has released “fresh from the oven” some fundamental principles for assessing Free Trade Agreements.

Principles for assessing Free Trade Agreements.

1. Each country should have a limited and equal right to invest in the other – this includes acquisition of assets and IOUs issued by the public or private sector.

2.  While balanced levels of reciprocal investment are preferred, no further investment is allowed by a country in the other if its level of investment exceeds that of the other country by more than 20%. That means that if China buys $100B of Australian assets or IOUs (from our banking systems or govt bonds) Australia is limited to buying no more than $120B in Chinese assets until the level of Chinese investment in Australia increases.

3.  The movement of goods and services between the two countries should be largely free without tariff or quota.

The key principles are 1 and 2 which concern the level of investment.  Investment is a critical issue in FTAs but too often is ignored or the implications not appreciated.

Principles 1 and 2 have the benefit of limiting both mercantalism (where a country manipulates its exchange rate downwards by exporting capital) and its ugly twin sister “CAD dependency syndrome” (where a country – usually a liberal democratic country – fools itself that accepting the ‘cheap’ capital exports from an exchange rate manipulator is a sustainable model for a healthy and balanced economy)

Needless to say ChAFTA fails to observe any of these principles for the following reasons:

  • China intends to maintain major restrictions or complete prohibitions on Australian investment in China.  The areas Australians are free to invest in are quite limited.
  • Mr Robb has agreed that China will be subject to few restrictions when investing in Australia.  There are some soft restrictions with regard to agricultural land but as we have seen already they will prove little barrier to rapid investment by China.
  • China intends to maintain a range of tariffs and quotas on a large range of Australian exports.
  • Mr Robb has agreed that Chinese investors in Australia will have greater freedom to fly in workers to operate their investments than Australian investors will have in China.  Does anyone seriously suggest that China will allow Australian businesses in China to fly in workers (apart from executives) from Australia and elsewhere to work in those investments?

When these principle are applied to the ChAFTA the conclusion is clear – It is a red hot dud.

It is quite correct to say that if any attempt to “fix” ChAFTA is made the Chinese government are likely to “walk away”.  China has no interest in signing anything that even vaguely resembles a Free Trade Agreement that complies with the fundamental principles set out above.

They were just waiting (10 years) for some Australian politician, desperate to be seen to be doing something, to come along and sell out the nation.

The price of the limited concessions that Mr Robb has obtained from the Chinese is simply too high.

Oh it is worth pointing out that almost all FTA’s signed by Australia breach the above fundamental principles either in theory or in practice.  Which is why they should not be called FTA agreements at all and instead be called “capital Inflow facilitation agreements”

For more on this exciting topic

Categories: Macrobusiness

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