Global gobbledygook: what is an FTA?

Dramatic titles aside, the importance of trade cannot be overstated for trading nations such as Australia and New Zealand, with the ability to capitalise on opportunities critical to many sectors’ future growth. Keen observers of international trade and its myriad of geo-socio-political implications tend to get excited about the many opportunities developments in international trade offer. However, these same observers often take the constantly confounding world of global trade policy as received wisdom, not realising that the mere thought of a tariff schedule sends most people to sleep, and the thickets of acronyms are about as intelligible as an Egyptian hieroglyph.

In March this year, Australia and New Zealand signed a historic free trade agreement (FTA), the Comprehensive and Progressive Agreement for Trans Pacific Partnership (CPTPP), a name which simply rolls off the tongue. Following the signing of this historic FTA, we thought it would be useful to provide a quick 101 on what exactly an FTA is, how they became so common, and what different flavours they come in, to help some of our clients better understand how they might benefit.

Full disclosure: the term ‘free trade agreement’ is something of a misnomer. While the term ‘FTA’ has caught on, very rarely do agreements actually allow free trade in goods and services; that is, treating the goods and services from one country the same as the goods and services from one’s own country. They could more correctly be called ‘freer trade agreements’, but it doesn’t sound as catchy.

An FTA is essentially an agreement between at least two countries in which they agree to mutually reduce or eliminate trade barriers such as tariffs and import quotas, on goods and services between themselves. The range of goods and/or services covered under these agreements can vary widely.

FTAs make trade between countries simpler and reduce the costs to businesses of trading across the border. Trade barriers such as import tariffs and customs regulations can be costly and complex to comply with, eroding margins on goods and services which makes a company less competitive. By reducing or removing these costs, companies become more competitive, demand for their product can increase and trade volumes rise. Increased competition can lower costs to consumers, and theoretically, everyone wins.

FTAs generally cover trade in goods (such as a pair of shoes or an apple), and services (such as financial services or education). Sometimes, an agreement can be just one or the other, or varying levels of both (excluding a particular sector such as agriculture, or car manufacturing for example).

The complexity of negotiating an agreement encompassing the totality of our trade with other nations can be mind-boggling. In the case of the CPTPP, the Australian goods tariff schedule runs to a whopping 445 pages. These negotiations can understandably take many years, or for the CPTPP, nearly a decade.

Once negotiations have gone as far as they can, the final deal is signed, and then ratified by parliament in Australia and New Zealand. Following ratification, the agreement finally comes into effect, known as ‘entry into force’ (EIF) in trade parlance.

Tariffs might immediately be eliminated, or gradually reduced over a period of years. For example, tariffs on a product might sit at 10 per cent at EIF, reducing in equal increments of two per cent over the next five years before being eliminated.

The devil, as always, is in the detail. While the CPTPP eliminates over 98 per cent of tariffs, it’s that <2 per cent of tariffs that are the most controversial. These are generally the hardest to negotiate and apply to the most sensitive sectors of a country’s economy. Countries will often negotiate ‘carve-outs’ from the agreement to protect domestic industries. For big agricultural exporters like Australia and New Zealand, this usually includes our access for certain agricultural sectors in other countries such as sugar, meat and dairy products for example.

With changes in market access and reductions in tariffs, exporting businesses will want to consider any new comparative advantage the agreement opens up, as their products and services may now enjoy lower tariffs versus their competitors. A previously unattractive market may now afford a company a competitive advantage. The counterfactual is also true: that a reduction in domestic tariffs also enables greater foreign competition in the domestic Australian and New Zealand markets, although admittedly, Australia and New Zealand generally have very low or non-existent tariffs anyway.

In some sectors, tariffs are not always the most important consideration: other elements such as Non-Tariff Barriers (NTBs) to trade, sometimes called Non-Tariff Measures (NTM’s) commonly present more of an obstacle to exports than simple tariffs levied by the importing country. In reality these NTBs are restrictions imposed by a country, such as prohibitions, quotas or complex compliance conditions or market specific requirements, that add cost or complexity to the importation of goods and services. Countries often use these NTBs to protect their domestic markets from competition, a form of protectionism. Reduced competition can often result in higher prices for consumers and lower levels of innovation. As an example, NTBs are very common in the agricultural sector, with governments often relying on rigorous and costly treatment (sanitary and phyto-sanitary) and inspection regimes to limit or prevent the trade of certain products into their market. These trade-limiting measures can be a constant frustration for certain sectors.

The death of Doha and the rise of the FTA

Global trade is founded on a set of common principles, and largely mediated by the World Trade Organisation (WTO), a body set up to promote international commerce and oversee the rules of trade amongst its members.

Over the course of many years, and under WTO auspices, a series of global discussions to liberalise trade took place, the latest of which was the Doha round. Beginning in 2001, Doha ended without an agreement after 14 years of talks, although in reality the talks had been on life-support since a failed ministerial meeting in 2008. The obstacles that proved insurmountable related to tensions between developing and developed countries, and agricultural issues including market access and subsidies.

Following the failed multilateral approach to trade liberalisation, developed countries in particular decided instead to pursue bilateral and regional trade deals, the TPP and subsequently the CPTPP being the most prominent. The proliferation of FTAs since the failure of Doha can clearly be seen in both Australia and New Zealand, which have negotiated a veritable raft of deals with trading partners, including bilateral FTAs with China, Malaysia and Korea since 2008, and importantly the just concluded CPTPP with nine other Asia-Pacific countries.

With recent media focused on the wave of rising global protectionism, the need for sensible, considered advice enabling Aussie and Kiwi businesses to best position themselves for the future has never been greater.

If you have a business that is currently exporting or considering trading internationally, you may wish to consider Findex’s suite of export focused services to see how we can help your business prepare for the future. Our range of services include Export Strategy planning, Australian Trusted Trader registration, Export Grant applications, Supply Chain Optimisation, Due Diligence and Customs Duty refunds for importers, to name a few.

For a friendly chat and to explore how we can help, please contact me directly, or through your local adviser.

Sam Lawrence

Senior Manager, Global Trade and Customs