By Daniel Archibald | CFA
5 short years ago, Australia had just entered into a free trade agreement with its largest trade partner, China. The UK was enjoying unlimited access to the European continent, and the US was engaged with much of the Pacific in forming the largest free trade agreement in the world, the Trans Pacific Partnership (TPP). By the end of the 2020, most of this international goodwill and trade liberalisation had been significantly diminished.
Whilst the advantages of globalisation has led to an enormous creation of wealth and prosperity for the world's citizens, the recent push towards isolationism has highlighted the concerns of some regarding building ties with neighbours. A major one is the disruption to local industry. Every country has it natural, competitive advantages that allow it to produce more for lower costs. Globalisation encourages industries to reorganise themselves to take advantage of increased potential productivity, but this can lead to two detrimental outcomes:
- Disgruntled nationals who do not wish to move to more competitive industries (due to retraining frictions, cultural issues, etc)
- Loss of potentially important industries within a nation's borders
This last one was of heightened concern during the Covid-19 outbreak and closing of borders, with some essential services being restricted due to lack of domestic production.
Even with these disadvantages (which can be managed), the benefits of globalisation likely outweigh its costs considerably. And the primary mechanism for increased globalisation is bilateral and multilateral free trade agreements. Australia currently has bilateral (1-on-1) trade agreements with 12 countries/jurisdictions including New Zealand (1983), the US (2005), Japan (2015) and China (2015). It also has 3 multilateral agreements in place with South-East Asian nations and New Zealand (AANZFTA 2010), Pacific rim nations (CPTPP) and Oceania nations (PACER Plus 2020). As can be seen, most of these agreements focus on relationships with Australia's closest neighbours.
The Regional Comprehensive Economic Partnership (RCEP), which includes Australia and 15 Asia Pacific nations (including China but not India for now) was signed in 2020 and, when in force, will be the largest free trade agreement in the world. Australia is also working on some other major free trade agreements. These include bilateral arrangements with the likes of the UK (post-Brexit), the EU and India as well as a multilateral agreement with the nations comprising the Gulf states.
With the Brexit process finally completed, and a new administration in the White House, it is likely that recent detour away from a more open global community will come to an end. And while there will likely be some frictions with any free trade agreement, increased opportunities should benefit all.