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Done like a dinner on free trade deal

The Australian, Canberra

Michael Costello: Done like a dinner on free trade deal

6 January 2006

TO laugh or to cry? That is the question. Do you laugh at the increasingly ludicrous attempts by defenders of the US-Australia Free Trade Agreement to explain away the results of the FTA’s operation since it came into effect on January 1 last year? They demonstrate that, as forecast, the FTA is a winner for the US and a dud for Australia. Or do you cry for fear that those same defenders will fail the most basic test of human intelligence by refusing to learn from mistakes irrespective of the empirical evidence?

The facts are these. According to US Census Bureau figures, the first 10 months of the FTA saw Australian merchandise exports to the US falling 4 per cent. The much-vaunted access increase for our farm sector yielded little, even in dairy, where great expectations were created. The results look grim.

So what is the explanation from FTA defenders?

First, that you have to give the agreement time to settle in. Problem: US exports grew by 4 per cent in the same period as ours declined by 4 per cent, leading to a billion-dollar increase in our trade deficit with the US over the comparable period in 2004. Clearly the US did not need a settling-in period.

Second, FTA defenders argue that a strengthening Australian dollar over that period made our exports less competitive and US imports more competitive. Problem: the exact opposite is the case. The average value of the Australian dollar to the US dollar in January 2005 was US.7744; in October 2005 it was US.7487, a significant weakening that made Australian exports more competitive, not less.

Third, Austrade is reported as believing that the FTA has had a significant head-turning effect in both countries. Problem: it may have turned heads but the evidence shows that those heads unfortunately turned away from Australian exports, not to them.

Fourth, the Howard Government insists that the last-minute amendment to the FTA on pharmaceuticals forced on it by Labor was in substance meaningless. In the words of Trade Minister and Acting Prime Minister Mark Vaile it was "nothing more than populist politics by Labor".

Now US negotiators want to dump the Labor amendment. Problem: if the amendment is a meaningless provision duplicating existing law, why is the US so keen to get rid of it? Surely US concern might give a hint to even our Government that the amendment is having the required effect of stopping big US drug companies ripping us off.

Fifth, sugar. The Government insisted all through the negotiations that improved access for our sugar producers was essential and vilified those who suggested it was considering an FTA that did not include sugar. Sure enough, the Government caved in totally. Sugar was excluded. Vaile says lamely that "we’ll continue to put forward that as an ambition of ours, to get sugar included in the bilateral agreement". Problem: Too late. Vaile and the Department of Foreign Affairs and Trade were seriously considering pulling out of the negotiations, not least over sugar. But John Howard blinked and did the deal the Government had said Australia would not do.

It is surprising to hear Vaile raising even modest hopes on sugar when he knows that there’s no hope whatsoever. This is cruel and inhumane treatment of loyal National Party supporters.

So much for the pathetic defences. What are the lessons to be learned?

Let’s start with general principle. Bilateral trade agreements of this kind are by definition not free trade agreements. They are properly described in World Trade Organisation parlance as "preferential trade agreements". They are not, as their defenders argue, a second best alternative to multilateral free trade but are, by their very nature, hostile to genuine free trade.

As for this specific FTA, the US negotiators did us like a dinner, and like all good negotiators continue to keep up the pressure in the entirely reasonable hope that the Government will crumble again.

This isn’t because of poor Australian negotiating skills; our officials remain at the forefront of trade negotiation work. Nor was it just because of a Prime Minister ready to concede anything for the sake of a deal, even a bad deal - and this was - that makes us cosier with the US.

No, the lesson is more than that and it is not one particular to Australia. When a big economy negotiates deals of this kind with smaller economies, the smaller economy always loses. If you doubt this, you might like to read the seminal trade economics work, Global Trade and Conflicting National Interests, by Ralph Gomory and William Baumol (2001). Read it and weep.

Labor had no choice but to support the FTA because then leader Mark Latham had so weakened Labor’s political standing on the US alliance. Even if the Government has learned nothing from this episode, let’s hope Labor will reject out of hand any future FTAs with large economies such as Japan and China. Labor should be able to argue convincingly that, having been done over by the Americans, we have no desire to let it be done to us again.