EASTASIAFORUM
The high price of 'free trade' with the United States
It is well known that the many bilateral FTAs signed to date in Asia have not brought significant commercial or domestic reform or benefits.
For one thing, bilateral 'free trade agreements' (which are
preferential in character) are less likely to deliver substantial trade
opening benefits unless the partners to them are a very large part of
global trade, like the United States, Europe and China are for example.
For another, liberalisation under the agreement needs to be
comprehensive and not carve out sensitive sectors. What economic
analysts understand is that even if a country like the United States is
participating in a bilateral preferential agreement there is no
guarantee that overall economic benefits to its partner(s) will be
positive. They could be positive; they could be negative: it all depends
on the nature and circumstances of the agreement. A decade down the
track, the high price that Australia paid for the conclusion of the
Australia–United States Free Trade Agreement (AUSFTA) has become crystal
clear.
In our lead essay this week (see below),
Shiro Armstrong explains how the critics of the controversial agreement
at the time were right. His analysis of the impact of the agreement on
trade flows shows that the agreement diverted trade away from the lowest
cost sources of import supply to Australian consumers. 'Australia and
the United States have reduced their trade by US$53 billion with rest of
the world and are worse off than they would have been without the
agreement'.
Preferential
trade agreements have two main effects: one that is positive and one
that is negative. The positive effect comes from the exposure of
uncompetitive, sheltered home producers to competition from lower cost
partner country suppliers. The problem was that AUSFTA did not remove
any of the significant barriers that protected high cost US agricultural
sectors like sugar, dairy or even beef. The negative effect is that
these agreements divert trade away frommore efficient and competitive
third country suppliers towards partner suppliers who only become
competitive because of the preferential treatment they receive under the
agreement. This discrimination is built into the nature of these
agreements. Optimistically, discrimination against outsiders provides
incentives for other countries to join the game and negotiate
preferential deals of their own that will negate the discrimination they
face — so long as that possibility is open. The question is where the
balance of costs and benefits lies. It's a question, as Armstrong says,
that can be estimated with a fair degree of confidence in advance but
judged with much more certainty after implementation of these
arrangements.
At
the time AUSFTA was being negotiated, a comprehensive study for the
Australian Senate Trade Committee warned that it would bring little or
no benefit. But AUSFTA was rushed ahead and signed within a year —
driven by the political determination of Australia's then prime
minister, John Howard, to do a deal with US president George W. Bush
after agreement to join the Iraq War. The cost of whatever political
gain derived from the deal has not been trivial. And pertinently, only
someone unprepared to face the facts would not now acknowledge the costs
of the agreement in terms of the opportunity to spend income lost
through its implementation on larger defence procurements and political
security. Let's be clear. Australia alone has suffered trade losses the
annual equivalent of the current price of around 18 Japanese, German,
Swedish or French submarines through this deal. This is big money lost.
Vague,
misguided appeals to political and security benefit from arrangements
like this must be tested against the corrosion of national strength and
independence calculated in terms of very substantial trade and income
losses and how they impact on political as well as economic strength.
Recently Australia has concluded bilateral trade arrangements with South
Korea, Japan and China. They promise to be more beneficial than the
'free trade' agreement with the United Statesthough all of them are less
than perfect.
With
difficulties in concluding the Doha Round, the hiatus in trade reform
has shifted emphasis to regional trade initiatives, like the
Trans-Pacific Partnership (TPP) negotiations of which the United States
is the leading proponent and the Regional Comprehensive Economic
Partnership in which ASEAN has taken the lead. There is more likelihood
of benefits from broader arrangements like these, if indeed they do
commit to substantial trade liberalisation. But there is no guarantee:
that will all depend on the nature of these agreements and the
circumstances of their conclusion, especially on whether they are
comprehensive in their coverage and really open to others to join. While
these initiatives can be used to prosecute regional economic and
political cooperation, they are unlikely to bereally beneficial unless
they are also directed to strengthening the global economic system.
The political pressure is now on to conclude the TPP agreement. The TPP might still turn out to be little more than a bunch of tactical bilateral deals that
won't do much to solve the problem of overlapping FTAs in the region —
one of its supposed core goals — and boost regional trade and incomes.
Much depends on Japan and the United States — whether Japan is prepared
to go for the 'zero option' on agricultural trade liberalisation and
whether the United States is prepared to sacrifice its vested
agricultural and other protectionist interests. A deal done simply to
tie a political bow around a 'free trade' arrangement between allies and
friends, new and old, would weaken not strengthen their economies and,
over the years, gnaw away at their regional economic and political
strength.
Peter Drysdale
Editor
9 February 2015
The costs of Australia’s ‘free trade’ agreement with America
8 February 2015
Author: Shiro Armstrong, ANU
The
critics were right. Ten years after the Australia–United States free
trade agreement (AUSFTA) came into force, new analysis of the data shows
that the agreement diverted trade away from the lowest cost sources.
Australia and the United States have reduced their trade by US$53
billion with rest of the world and are worse off than they would have
been without the agreement.
When
the Howard government was putting the agreement in place, there were
serious concerns about whether it would distort trade and impose costs
on the Australian community rather than expand and lower the costs of
trade. Even key officials who negotiated the deal had doubts about
whether what they could negotiate in the time they had under political
pressure would serve the national interest.
The
lead up to the agreement was accompanied by heated debate in Australia.
AUSFTA marked a departure from the primacy of unilateral and
multilateral trade and investment liberalisation in Australia’s foreign
economic policy strategy. The government turned to a strategy of
preferential liberalisation. Under the arrangement, US goods, services
and investment were to be given preferred treatment and better access to
Australian markets than those of all other countries.
Preferential
treatment can divert trade to the Australian market away from the most
efficient and competitive suppliers towards suppliers who would only
become competitive due to the special treatment they receive under the
regime. This discrimination is part of the design of these agreements
and is meant to give incentives for other countries to join the game and
negotiate preferential deals of their own to negate the discrimination
they face. Preferential agreements can also create efficient trade but
only if the lowest cost suppliers are included under the arrangement.
The
question is where the balance of costs and benefits lies. It’s a
question that can be estimated with a fair degree of confidence in
advance but judged with much more certainty after implementation of
these arrangements. Do these agreements divert more trade than they
create? Do they make us better off, economically speaking, or worse off?
Australia’s foray into preferential trade deals led to a review by the Productivity Commission of Bilateral and Regional Trade Agreements
in 2010. This report did not include analysis of AUSFTA, due to
insufficient data at the time the report was written, but it was
critical of preferential deals more generally and, along with the
overwhelming majority of research analysis, found very little evidence
of significant gains from preferential deals beyond benefits to a few
privileged sectors. Most studies of AUSFTA prior to the agreement
estimated that it would have little or no impact on the Australian
economy. While it was negotiating the agreement, the Department of
Foreign Affairs and Trade commissioned a study by the Centre for
International Economics that showed significant gains from concluding
AUSFTA. The results were driven by the assumption of a reduction in the
equity risk premium in Australia and there is no evidence that shows
this came to pass. This is the study that Ross Garnaut famously said did
not pass the laugh test.
Enough
time has now passed and there is enough data to update the Productivity
Commission’s model to estimate the effect of AUSFTA on trade. The
agreement was responsible for reducing — or diverting — $53.1 billion of
trade with the rest of the world by 2012. Imports to Australia and the
United States from the rest of the world fell by $37.5 billion and
exports to the rest of the world from the two countries fell by $15.6
billion over eight years to 2012.
Beyond
the $53 billion of trade that has been diverted, there is no evidence
that the agreement has been associated with an increase in trade between
the two countries, or the creation of efficient low cost trade. The
trade diversion from other partners suggests that Australia–US trade
would have fallen even further without AUSFTA.
The
Australia–US agreement did not prevent the share of US trade in
Australia from falling. It could not defy gravity with the rapid growth
of Asian economies, their competitiveness and their proximity to
Australia delivering lower cost and higher quality goods to the
Australian market, but it did provide a modest counterweight.
Some
dismissed the possibility of there being any trade diversion from
AUSFTA since Australian trade to East Asia continued to grow strongly
after AUSFTA came into force in 2005. That interpretation fails to
comprehend the appropriate benchmark, or counterfactual, needed to
assess what the effects of the agreement have been. Trade between
Australia and East Asian economies would have grown more — to the tune
of $53 billion for both the United States and Australia — than it
actually did if AUSFTA had not been put in place.
AUSFTA
was negotiated and signed within a year — a feat unmatched in trade
negotiations today — driven by the political determination of
Australia’s prime minister, John Howard, to do a deal with America’s
president, George W. Bush, after the second invasion of Iraq. One of the
conclusions from the Productivity Commission’s review of FTAs was that
their economic benefits are usually overstated and that they are often
more political than economic in their motivation. The cost of whatever
political gain derived from the deal has not been trivial.
Australia’s historic trade liberalisation efforts
produced clear welfare gains, and the winners and losers from these
reforms were determined by market forces and competition. Trade
agreements that introduce distortions and discriminatory treatment mean
that winners and losers are largely determined by preferences and
privileges assigned through negotiated treaties.
The US agreement carries important lessons for Australia in its future trade and foreign policy strategy.
The conclusions of the Productivity Commission’s review apply to
AUSFTA. Deals that are struck in haste for primarily political reasons
carry risk of substantial economic damage. The question then is whether
the economic costs of such policies are worth whatever the political
gain, and indeed, how the balance of properly calculated political gains
and costs might look.
Shiro
Armstrong is Co-Director of the Australia-Japan Research Centre at the
Crawford School of Public Policy, ANU and Editor of the East Asia Forum.
Further details of the model and results can be found in the paper on the author’s homepage.