The Age, Melbourne
Australia left holding trade’s billion-dollar baby
By Martin Feil
10 January 2006
THE United States-Australia free trade agreement has now been operating for a year. Australian exports to the US appear to be down and American exports to Australia appear to be up. The net result is another billion dollars of deficit in the current account between the two countries. Some people are saying that we have been sold a pup and others are saying that it is too early to tell.
The numbers provided by The Australian Financial Review last week relate only to physical goods imported and exported for the first 10 months of 2005. Reaching conclusions on this basis is a bit like being asked who is winning after the first hour of a Test match.
A great difficulty with understanding the agreement is that it embraces an enormous trade in both goods and services. It also involves concessions on US investment in Australia and provides the opportunity to debate the Pharmaceutical Benefits Scheme and our quarantine rules. Finally, it impacts on local content for our performing arts. The agreement is a thousand pages long and the devil is certainly in the detail of such things as the unique rules of origin that apply to determine that goods are the manufacture of the participating countries.
The tariff reductions in the agreement are of virtually no consequence. They will create some cost reductions for a few importers and exporters and will generally not be passed on to the consumer. That has always been the way with tariff reductions. They get appropriated by either one party or another in the supply chain or cancelled out by long-term exchange rate movements. The cheering of the obvious winners from the agreement should be discounted. The Australian economy is supposed to be the winner.
A billion-dollar increase in 2005 in the merchandise deficit with the US doesn’t really matter in the context of a deficit of more than a hundred-billion dollars in the past 10 years. It is, by far, the largest deficit Australia has with any country.
The real and outstanding issues are the non-tariff barriers in the US that remain untouched (particularly quota restrictions) and the agreement’s concessions on non-tariff barriers, intellectual property and intangibles that Australia has made.
I am very frightened of the idea that a free trade agreement is really about the ultimate integration of two economies. I don’t want Australia to become the Mexico of the Pacific. We need to guard our sovereignty, our national character and our standard of living. Any ultimate integration of the economies will not be on equal terms.
We have been very naive in the past in our reliance on tariff barriers and our indifference to non-tariff barriers and the vital importance of capital, services and asset and intellectual property ownership. These things are the real assets and tools of the US, the European Union and Japan. With them they can use the rest of the world to manufacture everything.
The first birthday of the free trade agreement is, for me, an opportunity to remember what we were promised and what we contributed to the deal. These mutual promises, enshrined after two years of lobbying and debate, were announced by one of the strident midwives, our Department of Foreign Affairs and Trade, as follows:
The benefits for Australia:
■ Improved access for agricultural products including dairy, lamb, beef, fruit, vegetables and seafood.
■ Improved access for light commercial vehicles and automotive parts.
■ Full access to the US Government Federal Procurement Market, which is worth $US200 billion ($A265 billion) a year.
■ Removal over time of tariffs on most imports.
■ Gradually increasing quotas for imports of most agricultural products over periods ranging from 10 to 18 years.
The benefits for the USA:
■ Increased protection for US intellectual property, including trademarks, patents, logos, copyrights and the registration of therapeutic substances.
■ Agreement to pursue quarantine solutions on products of specific trade interest to the US.
■ Immediate removal of tariffs on all imports of US origin as defined in the agreement.
■ The opportunity to participate in discussions on the treatment of pharmaceuticals in the pharmaceutical benefits system.
■ Substantial reductions in local content requirements for the performing arts.
In essence, the agreement has already delivered to the US virtually all that remains of our tariff barriers on manufactured goods. In return, we have been given partial concessions immediately that don’t seem to have delivered any increase in exports. We also have a time payment system in place that will provide increasing access to some agricultural markets that are very attractive.
Over time, the test will be whether this actually occurs or some other creative non-tariff barrier replaces the present quotas. We can hardly complain to the World Trade Organisation if this happens. It is not a party to bilateral trade agreements.
Finally, there was never a chance that we would be able to compete, on an equal footing, with American companies
for US government procurement simply because the agreement said that we could. This is the height of business innocence.
We have been distracted by the idea of access to the largest consumer market in the world. Our politicians certainly made this point and their economic modellers dutifully included a spurious measurement of the resulting dollars in their model of the overall dollar benefits to Australian gross domestic product.
This is not to say that we won’t get some scraps from the US government table but it will have little to do with the free trade agreement.
I want to wait and see. I have a jaundiced view of the prospects, but I am prepared to let the numbers and the future do the talking. We have to remember what was promised. We need to forget about the idea that this is only the beginning of the integration of our economies.
Martin Feil is a tax and industry policy consultant and a former director of the Industries Assistance Commission.