The high cost of free trade

Sydney Morning Herald

The high cost of free trade

7 January 2006

Business with the United States looks one-sided a year after the controversial deal was done, write Mark Metherell and Matt Wade.

WHEN the free trade agreement with the United States kicked in a year ago, Bill Rush saw his big chance. His company, Australian Defence Apparel, makes ceramic plates to be worn over bulletproof vests to protect troops against armour-piercing fire.

The Australian-owned company has beaten German and Israeli competition to supply the British Army and London Metropolitan Police with its plates. The prospect of a $40 million-plus sale to the US Army beckoned.

But Rush was soon to find that "free" trade with the US isn’t what it seems. While Australia has removed barriers to the US supplying the Australian Defence Force, the US Army used a legislative ban on foreigners supplying clothing or fabric to block purchase of the Australian product.

This was despite Pentagon support for the deal and the company’s claim that a ceramic plate is neither clothing nor fabric.

It is early days, but so far the much-hailed free trade agreement has proved another story for Australia at large. The pact that the Government forecast would give a $6 billion lift to the Australian economy over 10 years has produced a trade reversal for the junior partner.

Figures for the first 10 months of last year reveal that Australia’s exports to the world’s economic giant have slipped while US sales to Australia have boomed, widening the trade gap by an estimated $1 billion to top $10 billion.

And pharmaceuticals and sugar, which threatened to stymie the pact initially, have resurfaced as issues of potential conflict.

The acting Prime Minister, Mark Vaile, who is also responsible for trade, this week left open the possibility of bowing to likely US demands to scrap the penalties for US drug companies using so-called "evergreening" ploys. These are used to extend drug patents as a means of frustrating the entry of cheaper generic drugs into Australia. His caveat was that Australia would only consider backtracking on the amendments forced through by the former Labor leader Mark Latham if the US could produce evidence that they were detrimental. It would in no way be allowed to harm the Pharmaceutical Benefits Scheme.

PBS cost-cutting measures since the deal - particularly a mandatory price cut on new generic medicines which will slash pharmaceutical profits by $1.4 billion over the next four years - are expected to harden the Americans’ stance.

Vaile’s comments on drugs stirred the Australian sugar industry to demand a rethink of Washington’s refusal to allow sugar onto the negotiating table.

Ian Ballantyne, the general manager of Canegrowers, says his group is not seeking a PBS-sugar trade-off but if the trade agreement were to be renegotiated, it was reasonable that the US sugar industry be put in play.

No one is expecting the White House to dump its extraordinary protection of sugar growers - making it likely that the drug-sugar issues will continue to sour regard for the trade deal.

Exports of Australian goods to the US fell from $9.4 billion in the year to October 2004 to $9.24 billion in the year to last October, the most recent figures from the Bureau of Statistics show.

The figures suggest Australia’s share of the giant American import market has dwindled at a time when US imports from across the world have been growing strongly. Imports to Australia from the US rose in the year to October, although China recently replaced the US as the biggest source of Australian imports.

An Australian National University economist, Professor Ross Garnaut, said there was evidence the agreement had encouraged trade diversion away from low-cost Asian products to US goods. "But there is no evidence of any expansion of Australian exports."

Garnaut, a trade specialist who was critical of the deal before it was signed, said this highlighted the shortcomings of the agreement. "After a year of the FTA we can form some evaluation of the various forecasts that were made in advance. I don’t think anyone would pretend now that there was any credibility to the forecasts of benefits that were trumpeted by the Government at the time."

While the agreement was in its "early days", the evidence so far was "all in favour of the sceptics and all against the boosters of the FTA", Garnaut said.

Chris Richardson, of Access Economics, said it could take more than a decade for any economic benefits to flow from the trade deal and even then they were likely to be modest.

"I’m happy to believe it will grow into a net positive over time, but not a big one," he said.

The Government has said it will provide additional resources to encourage Australian businesses to export to the US.

Australian officials have blamed various factors for the unimpressive first year, including a diversion of oil and gas exports to Asia, a drop in vehicle part exports to the US, the drought and even currency changes. But the last reason does not seem to square with reality: the value of the Australian dollar has fallen about 6 per cent, to 73 US cents, over the year, which should make Australian products cheaper in the US and US imports more expensive here.

But Vaile remains positive about the agreement, saying it has given Australian businesses new trade opportunities. "Austrade reports a marked increase in Australian companies looking to break into the US, with the number of export deals they assisted in the US growing by more than 60 per cent compared to the same period in 2004," he said.

Australian businesses would benefit from additional tariff cuts and quota increases introduced this week, he says.

Dr Andrew Stoeckel, of the Centre for International Economics, which did economic modelling on the trade deal for the Government, said it was difficult to assess the impact of the deal because there were so many variables at work in the international economy. "But it’s not obvious that there is any negative criticism - I haven’t heard of any negatives."

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