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Too early to tell on FTAs

The Age, Melbourne

Too early to tell on FTAs

14 January 2006

Waiting, waiting. It will take time to realise the benefits of our free trade deals with Thailand and the US.

It might take a while, but even just having a free trade deal delivers long-term benefits, writes Tim Harcourt.

When asked in the 1960s what the impact of the French Revolution had been, Chinese Premier Zhou Enlai famously said: "It’s too early to tell."

It’s a bit like that with free trade agreements. Some commentators have been quick to applaud or condemn the free trade agreements that Australia started with Thailand and the US at the start of last year. Their analysis has been based on limited information. Others say it is probably best to exercise some caution and not to place too much emphasis on short-term trade data. After all, our experience with other pacts (such as the Closer Economic Relations deal with New Zealand signed more than 20 years ago) shows these things take time.

For example, the Australia-New Zealand CER - Australia’s oldest bilateral trade agreement - was signed at the beginning of 1983. While there’s general agreement that it’s been a great success in integrating our respective economies, it wasn’t perceived that way in mid-1983. Similarly, the North American Free Trade Agreement (NAFTA) has been lauded in Mexico now as a real benefit to Mexico’s economic development but the year after NAFTA was signed, Mexico experienced a "Tequila crisis", with a sharp devaluation of the exchange rate and related capital outflow. Since then, Mexico’s performance has been relatively successful.

Even before last year’s agreements with Thailand and the US, Australia struck an agreement with Singapore in July 2003. There’s very limited trade data now available under the free trade agreement regimes, so how do we accurately assess the contribution these free trade agreements will make to Australia?

The composition of our exports in each market can play a big role in explaining short-term developments. For example, Australia has a strong commodity export base and has been enjoying high commodity price growth with our terms of trade at a 30-year high. In export markets where Australia is a major supplier of commodities, we can expect to see this reflected in the trade figures. By contrast, in markets where Australia’s exports are mainly in advanced manufacturing and professional services, the export data won’t reflect the benefit of the commodity price boom boosting resource export values.

The commodity-price-related resources boom is driving large export values to countries such as China and Japan, while imports of capital (including capital equipment needed by our exporters) drive Australia’s trade with countries such as the US. This will occur regardless of whether there is a free trade agreement with that country or not and will have a more significant short-term effect on our trade figures than trade agreements. Variations in monthly or even quarterly trade is influenced more by the composition of exports, commodity prices, exchange rates and other external variables than free trade agreements, which tend to have a medium-term impact.

There are also other considerations.

Free trade agreements are not just about exports. You can’t say that because, say, Australia increased exports to Thailand, that Australia is the winner and, by implication, Thailand the loser. Trade agreements are about expanding the economies of both countries by expanding exports and imports simultaneously (and similarly the imports and exports of our trading partners).

As well as expanding trade, there is also investment, government procurement, standards and associated regulations involved in free trade agreements. The agreements are about global integration, about helping two economies get closer and lifting overall economic competitiveness and living standards in each economy. Hence, the use of the term "closer economic relations" to describe our agreement with New Zealand. Trade integration is necessary but not sufficient when free trade agreements are forged.

And third, free trade agreements help in the psychology of exporting. Historically, Australia has had a poor export culture, with low levels of export intention. A free trade agreement may help raise awareness of trade opportunities. For example, about 19 per cent of all exporting small and medium-sized enterprises exported to the US in August 2004. By

May last year that had risen to 25 per cent.

Finally, free trade agreements result in greater publicity about trade and what it means for Australia. When the US free trade agreement was being negotiated, 49 per cent of households interviewed by Newspoll mentioned the free trade agreement as the trade issue they knew about.

It’s early days for the most recent free trade agreements, but there is some evidence that just having such agreements in place will result in more Australian businesses taking up trade opportunities. After all, it is said then British Prime Minister Winston Churchill won World War II just by talking about it. If trade follows this pattern, in the long term, the Australian community will benefit and so will our trading partners.

Tim Harcourt is chief economist of the Australian Trade Commission.