China-Australia Free Trade Agreement: New Icing on an Old Cake an Opportunity for Fair Trade?

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MqJBL (2005) Vol 2

China-Australia Free Trade Agreement: New Icing on an Old Cake - an Opportunity for Fair Trade?
Benedict Sheehy* and Jackson Maogoto*

The on-going challenge in economic development and globalization, particularly for developing countries, is the issue of development and equality in society. The issue becomes particularly problematic when confronted in matters of international trade. Often misnamed anti-globalization activists and pro-globalization activists fail to take note of the underlying assumptions that lead them to conflict – namely, the actual costs and benefits to society that result from their particular positions. In essence, both activists are searching for ways to improve the lives of people in the domestic context and to minimize the damage to their society and environment. China’s impressive economic record is threatened to some extent by the increasing inequality in Chinese society and the enormous environmental costs of its economic growth. The Fair Trade movement seeks to address these larger and ultimately more important issues by changing the trade concerns from their narrow, traditional and highly questionable economic rationalist presuppositions to the broader societal implications of increased trade. This paper will address these broader issues, crucial for China’s stability, and offer a model for Fair Trade.
I Introduction
On 18 April 2005 Prime Minister John Howard of Australia and Premier Wen Jiabao of China agreed that Australia and China will attempt to negotiate a Free Trade Agreement (FTA). This agreement does not come out of nowhere, as some type of new idea created ex nihilo. Rather, it finds its context in a complex set of histories – the histories of China, Australia, other free trade agreements, and economics, as part of western intellectual history. Each of these histories inform the negotiators and should alert them to the nature of the problems such agreements face, both in the sense of the expectations of the problems that they hope to resolve through the agreement, the types of problems that agreement can cause, and the more general problems facing all the whole world for generations to come.
China’s history of international trade with non-Asians is less than positive. As a result, China carries a tradition of scepticism toward trade with foreigners of Anglo-European origins. Officials of the Quing dynasty, agitating for further commercial law in China stated:
… [compared to Anglo-Europeans] Chinese regard investment as a difficult matter and dare not compete with foreign traders. Once disputes between Chinese traders and foreign traders arise, foreign consuls usually shield foreign traders. As a result, Chinese merchants either invest in foreign companies, or set up fake foreign companies and employ rascals to be protectors.*
Indeed at least since the 1500s, its contact with foreigners has been rather negative.1 As a result, it may be argued, that one of the achievements of the Communist Party of China has been to restore China’s sense of national pride by asserting effectively its independence of the domination by western influence. Its relatively recent opening of its borders to international commerce, including its accession to the World Trade Organisation (WTO) in 2001, marks a new phase in the history of the China’s relationships with the rest of the world. It is no less a cultural statement than an economic one, and this transition undoubtedly has yet to be revealed impacts on both the people and the economy of China.
The other party to the agreement, Australia’s may well have the oldest international trade tradition in the world. It is thought that trade between the Maccasans in the north with Torres Straight Islanders may be the earliest such trade in evidence. Of course, trading patterns in Australia changed dramatically with the European invasion of the late eighteenth century. The invasion caused international trade to be re-focused on trade with England and its colonies. Despite its location in the southern hemisphere and being close to Asia, Australia has viewed itself as an important outpost of western society, economically and culturally, and it has struggled fiercely to assert its importance in the western hegemony, as demonstrated most recently in its support of the USA invasion of Iraq. As part of the western ideological world Australia has been involved in and indeed reliant on international trade since its founding. Most recently, Australia has entered into an FTA with the USA.
Studies indicate that the China-Australia FTA will have strong positive effects on the economies of both parties. As Yinhua Mai, observes:
Australia and China have become important economic partners in the past ten years. Between 1993 and 2003, the share of China in Australia’s total merchandise trade (imports plus exports) increased from 4 per cent to 10 per cent. Over the same period, the share of Australia in China’s total merchandise trade increased from 1.5 per cent to nearly 2 per cent, making Australia the ninth largest trading partner of China. Investment flows have also grown strongly between the two countries, albeit from a low level.2
The deepening in the economic partnership between Australia and China is due, in the main, to the complementarity in the dynamics of the two economies. The complementarity, which originates from the respective economic endowments and development paths of Australia and China, is revealed in the evolving patterns of bilateral trade and investment flows.3
In terms of complementarity of resources and goods the same author eloquently observes:
Rich in mineral and agricultural resources, Australia has become an increasingly important supplier of energy and material inputs, supporting China’s rapid economic growth and industrialisation. This is illustrated by four examples. First, rapid industrialisation in China has resulted in (and continues to cause) rapid urbanisation, reducing the number of people relying on scarce land resource for their livelihood. This is increasing the proportion of the population relying on commercial food, thus increasing China’s demand for imports of various agricultural products. Second, as China becomes the world’s largest producer of iron and steel, its demand for Australian iron ore has jumped. Third, rapid economic growth has caused China to source increasing amounts of oil and gas from overseas, including Australia. This factor is shaping China’s energy imports as well as its investment pattern in Australia. From the perspective of the Australian mineral and energy suppliers, China will continue to be a significant market. Fourth, China’s demand for advanced farming and mining technology and management will shape bilateral investment in the near future.4
All the benefits of this modelling are on the one hand striking and on the other, obvious. China needs commercial food production, Australia can supply.5 China produces steel; Australia can supply ore and coal. China needs energy, Australia has gas reserves.
The FTA model of international trade, which is based on the same model as the WTO, has a number of benefits, but also a number of drawbacks, the seriousness of which is becoming increasingly obvious. The model these trade agreements work on is based on theories of international trade going back to the economists Adam Smith of the eighteenth century and David Ricardo of the nineteenth century. These early thinkers’ models survive up to the present with only minor modifications, most of which are increasing the subtlety of the model without any fundamental examination of assumptions or alterations. While plausible and indeed reasonable in the context in which they were created, those models today are not only hopelessly outdated and discredited,6 but indeed harmful fictions based on assumptions proved wrong and conditions which no longer exist.
A Trade Theory
Modern trade theory, explaining the motivations, directions and goods traded, is usually traced back to Adam Smith. Smith held that nations traded on the basis of ‘absolute advantage’.7 David Ricardo is credited with refining Smith’s theory with a theory known as ‘comparative advantage’.8 Further advances in trade theory were made by Heckscher-Ohlin who took factor proportions into consideration,9 by Samuelson and Jones whose Specific Factors model took into account the immobility of certain factors,10 and more recently, Krugman’s Standard Model, a much more sophisticated model which considers multiple factors including immobility, the ‘relationship between production possibility frontier and the relative supply curve, the relationship between relative prices and relative demand, determination of world equilibrium, and the effect of terms of trade’.11 Current studies in international trade indicate that a critical component of understanding trade is market access.12
B Free Trade
All of the foregoing trade theory is premised on a particular notion of free-trade. Free trade as advanced by the trade theorists just noted, is the notion that the most beneficial outcomes for the populace will be realized when the supply of goods is permitted to flow freely to meet demand without government intervention via such devices as tariffs, quotas and other non-tariff barriers. Its advocates claim that it offers great promise. Joseph Stiglitz, former chief economist of the World Bank, outlining the arguments for free trade writes:
opening up to international trade has helped many countries grow far more quickly that they would otherwise have done. ... Because of globalization many people in the world now live longer than before and their standard of living is far better.13
Accordingly, free trade view appears justified,14 at least in terms of traditional trade theory. Broader measures used by ecological economists indicate that much trade is in fact an economic negative.15
Nations, according to theory, should engage in free trade for their own advantage to increase their economies. In political practice, however, trade does not follow the theory.16 Krugman and Obstfelt, citing a study by economists Baldwin and Magee,17 observe:
it’s hard to make sense of actual trade policy, if you assume that governments are genuinely trying to maximize national welfare. On the other hand, actual trade policy does make sense if you assume that special interest groups can buy influence.18
In fact, Krugman has concluded that international trade as it is currently structured is not based on economics at all, but on politics.19 Essentially, then, trade is set up for and dominated by special interest groups – large multi-national corporations, and financial interests,20 and for the political purposes of subjugation of other nations.21 At least, this subjugation effort has been the policy of the United States for more than 100 years.22
Free trade advocates reject any view that does not support their radical individualism, and libertarian views, that place private property ahead of all other values. Their view of society is instructive in this regard. Simply put, they believe there is no such thing as ‘society’. Rather, they claim that there are only individuals with individual preferences, and that matters of justice, equality, fairness, are irrelevant personal preferences. In this free trade or ‘market fundamentalist’ view, people need only goods, or actually, money. Such being the case, there is no need for societal investment in environment, or education, or health care or anything else. If the government is removed, more money will be available and the world will be a better place. There is no discussion about distribution of the benefits, goods or costs.
In a nutshell, this narrow free trade view assumes the following:

  • the world has unlimited natural resources;

  • natural resources do not need management and care;

  • human needs can be ignored because economic considerations are paramount;

  • trickle down economics works and so inequality does not need to be addressed;

  • people with wealth and people with power are the only people with legitimate concerns.

In addition, these theories have an exalted view of the market. In particular, it assumes that markets are:

  • the most efficient means of determining all aspects of demand including what is to be produced;

  • the best way to determine quantities of goods and services that should be produced;

  • the best way to determine inputs;

  • able to solve all questions of distribution of both goods and social costs, and

  • that efficiency in transactions is the main concern.

The world in which some of these assumptions may have been valid has disappeared. The following conditions have changed and accordingly, the assumptions must change as well:

  • the natural world has limited resources;

  • the natural world cannot sustain the current production methods or consumption;23

  • human interest in a clean environment is superior to the economic interests of accumulating capital;

  • dramatically increased populations are not willing to accept a few wealthy continuing to increase their wealth and wait for wealth to trickle down.

Populations are willing to cause considerable civil unrest in order to share in the wealth, to live in cleaner, safer environments, and work in decent conditions for reasonable wages.

C Fair Trade
The alternative to Free Trade is Fair Trade. Fair trade advocates do not reject international trade. They acknowledge benefits that may be had from international trade but are concerned about the distribution of the benefits as well as the costs. What fair trade reject is ‘free trade’. As Stiglitz observes, Fair Trade advocates believe: ‘The free market ideology should be replaced with analysis based on economic science, with a more balanced view of the role of government drawn from an understanding of both the market and government failure’.24
The issue of the distribution of the costs and benefits of trade and indeed business in general is what Fair Trade advocates are concerned about. This concern reveals a fundamental flaw in traditional economic analysis. Generally, traditional neo-classical economists focus only on the value created by production and transactions as the money value attached and measured in the market. As a result of not having a money value attached, economists ignore the contribution of non-parties to transactions, such as the government, society, and the environment. The consequence of this structuring is that the benefits are counted and distributed to a very small group, and the costs, especially, the social costs or negative externalities are ignored and distributed widely.25 This distribution of goods and bads, or costs and benefits is quite unfair.26 These costs include environmental damage, work place injury and illness, worker exploitation, harms to family, and more broadly, harm to society.
Thus fair trade examines not only the minutiae of the tariffs and other barriers to trade, but examines also the distribution of the benefits and harms of trade. Fair trade asks why is capital protected but the environment is not? Fair Trade acknowledges the economic conclusion that trade does not follow rational pathways but more often reflects political interests and accordingly, demands that a broader debate including more interests as the basis for trade. That basis is concerned with decent jobs, the protection of the environment, and responsible corporate governance – companies taking responsibility for their workers, environment and products. To date, however, governments have largely ignored Fair Trade concerns and focused on negotiating Free Trade Agreements.
II Free Trade Agreements
Current Free Trade Agreements (FTA’s), including the most recent one between Australia and the USA, have consistently failed to address the distributional realities identified above as has the WTO.27 These FTA’s deal only with the rights of capital and goods. They have ignored the impact of production on the environment, the costs to workers needed to produce the goods, the realities of increasing disparity between incomes and resulting inequities between people in the countries signatory to the agreements.
In defence, FTA advocates indicate that the WTO and other FTA regimes are not suited to deal with environmental matters or matters dealing with human rights. There are various responses which undermine such claims by examining their truth. First, FTA’s have been instrumental in matters not dealing with trade, namely, the development of property rights, and in particular, intellectual property rights regimes in various countries.28 The other reality is as the old saying goes: ‘trade is never just trade’. In other words, FTA’s have been blatantly used as foreign policy instruments.29 In addition, environmental concerns have been included in some trade agreements, albeit with limited success, and certainly could be included in trade agreements. Finally, without some effort to address these realities, it is unlikely that any FTA will gain much popular support. Indeed, citizens in many countries have protested against this FTA model and the WTO, and they continue to cause civil unrest.30
China does not subscribe to the extreme free-trade policy of the United States.31 It recognizes the importance of other factors in making agreements with other countries32 and has entered other agreements, successfully demonstrating the importance of good trade relationships for good political relationships33 and strong political and economic ties.34 It is important to note China’s explicit and broader view of both trade and trade agreements is that trade has potential for achieving more than merely enriching a few.
At this point, we have reviewed briefly theories of international trade and how they have been marshalled for the purposes of trade policy. As well, we have seen that the economic rationality behind free trade is faulty as the governing assumptions are no longer valid. Finally, we have considered the more rational Fair Trade approach. We turn now to examine the other part of the puzzle, namely the challenges faced by the parties to the negotiation.
III Challenges Facing China (and Australia)
Both China and Australia face challenges in terms of environment and to a lesser degree, inequality. China’s economic growth is impressive by any standard. Its growth of nearly 10% per year for the last 25 years places it among the outstanding economic success stories of the world. This achievement is particularly significant because of the overall size of the economy and the number of people involved. This growth, however, has had both good and bad consequences.
In terms of good, the amount of capital in the country has obviously increased. Further, China has succeeded in bringing millions of people out of poverty. In terms of bad, this growth has come at high environmental costs, with China’s environment showing high levels of degradation. It has become increasingly evident that the growth has not benefited all people. Indeed, the growth model has created increasing inequality among the people of China.35 The promise of ‘trickle down’ economics, where all people will benefit from economic growth, has proved untrue in China as it has elsewhere.36 Indeed, this clash between the interests of average peasant farmer, and the boom of industrial activity with its negative environmental consequences lay behind the recent uprising of 20,000 peasants in Huaxi on April 10, 2005 which was successful against a force of 3,000 armed police.37
The FTA between Australia and China raises a multitude of issues; however, this paper has a modest aim of addressing two of the issues: the environment and inequality. These two are part of a myriad of urgent issues prevalent in the current environment in which economic and trade concerns dominate to the virtual exclusion of other significant issues. The current economic climate is exploitative because it encourages reckless harm to the environment and is heedless to the lives of the majority of working people. It encourages the squandering of environmental resources and also encourages substandard working conditions and poor wages on workers in manufacturing factories in developing nations. Trade policies in this climate are specific implementations of the economics above all view. To mitigate the effects of these exploitative economic policies, there has been a call to utilize trade to address some of the issues; however, it has been oft said that trade policy is a blunt and uncertain tool for environmental management because it influences a wide array of concerns including political policies, economic policies, economic livelihoods, types and methods of production, distributions, and commerce generally.
A Environment
China’s environment is in poor condition. China’s environment crisis dates back many decades to the 1950s and 1960s when central planners largely ignored the environment. Small wonder then that, as scholar P Smith puts it: ‘Years of reliance on large scale industries, commonplace in communist planned economies, have resulted in widespread water and air pollution’.38 Indeed, the impact of China’s economic development on the environment has been described as ‘China’s environmental suicide’.39
In the early 1970s China joined the United Nations and became involved in international institutions, including participation in the historic United Nations Conference on the Human Environment held in Stockholm in 1972. It marked a new era of taking environmental issues seriously. However, notwithstanding the government’s increasing awareness and recognition of environmental issues, environmental problems still continued to pose a serious threat. One Chinese scholar wrote: ‘There could be a deadly threat to the survival of the Chinese nation if immediate action is not taken to halt pollution’.40
In 1979, the Chinese government implemented its first comprehensive environmental protection law which established basic environmental protection objectives, responsibilities and policies.41 The environment increasingly became a concern in the 1980s.42 China introduced environmental standards which are designed to ‘encourage the proper use of resources, to maintain the ecological balance, ensure the health of human beings and protect public property’.43 Despite these initiatives, however, China’s environmental degradation is as breath-taking as its economic growth.
There is no doubt that China’s environment has suffered dramatically as a result of China’s meteoric economic growth.44 Put succinctly by journalist Jiang Yu and posted by the Professional Association for China’s Environment, the issue is:
Over the past 25 years, China has enjoyed an average annual growth rate of 8.7 per cent. With this rapid economic growth, materials and energy consumption per unit gross domestic product (GDP) in China has been far higher than that of developed nations.
He continues:
This not only detracts from the remarkable growth rate, but also places China at a competitive disadvantage with oil imports witnessing a sharp increase, water resources depleting, and mineral resources over-exploited. Despite the tremendous efforts put into environmental protection, the overall situation has not improved significantly and the recent controversy over the results of the Huaihe River clean-up are testimony to the worries on the part of both the general public and environmental professionals.45
The environmental issues of concern extend to air pollution and life in China’s cities. Various studies of the connection between economics and environment in China have been undertaken, and the recognition exists not only that a direct and dramatic connection between the two exist, but that in part because of the size and complexity of the matter a wide variety of approaches needs to be taken,46 including special consideration of the ability of state owned enterprises to avoid strict compliance with environmental regulation.47

B Inequality

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