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Rural Industries Research & Development Corporation
A Bridge Too Far? An Australian Agricultural Perspective on the Australia/United States Free Trade Area Idea Prepared by
ACIL Consulting
ACN 058 284 521February 2003
This report by ACIL Consulting Pty Ltd (ACIL) has been prepared for Australia’s Rural Industries Research and Development Corporation, a government-funded organisation which allocates a portion of its funds to the exploration of topical farm policy issues. Its purpose is to review, from the Australian farm sector’s perspective, the proposal for a free trade agreement (FTA) between Australia and the United States of America (US).
Our assessment is that the economic benefits of the FTA to Australia as a whole are, at best, very finely balanced. The impact on Australian farmers is likely to be negative, especially if domestic political considerations in the US prevent genuinely free trade in the most sensitive industries — sugar, dairy and meat. Given this, the case for the FTA must rest on broader strategic arguments, the articulation of which has not been clear to date.
Trade diversion effects, the diversion of government resources away from other trade initiatives, and the disaffection of countries that on the whole are more important trading partners, all threaten the worth to Australia of a special trade agreement with the US. Note “special”: it is unlikely to be genuinely “free”.
The official view seems to be that these problems are illusory (or at least can be readily overcome) and that they are small relative to the gains to be had. This is not ACIL’s view, nor that of several other commentators.
ACIL doubts the robustness of the quantitative support advanced to date by commentators for the US FTA idea. For example, the Centre of International Economics’ (CIE’s) work for the Department of Foreign Affairs and Trade (DFAT) in 2001, which argued that, on balance, such an agreement would be trade creating, found that if it started in 2001 it would be raising real GDP by 0.33% annually and real consumption by about 0.4% by 2010 relative to otherwise.
Modelling results
Modelling commissioned as part of ACIL’s research indicates there is room for doubt that a free trade agreement with the US (even one covering all protection and all products) would be of benefit to Australia.
The reasons are complex. They relate to the fact that much of the increased bilateral trade with the US would be trade diverted from Asia.
There is also the fact that, given the current low levels of protection we now have and the relative price insensitivity of Australian commodity sales, any parallel opening up of export opportunities has to be substantial if Australia is to obtain a positive national income result.
ACIL’s modelling has projected that a bilateral deal with the US involving a phase-in of complete free trade over 5 years from 2005 would be slightly detrimental to the Australian economy.
One reason ACIL’s results differ from those of the CIE is that ACIL has not assumed the FTA will, of itself, induce a significant productivity increase throughout Australia’s service sector as a result of greater awareness of US managerial methods. ACIL is not at all convinced that this is a plausible assumption to make, but it is central to CIE’s analysis.
The qualifications to the CIE’s results have tended to be lost in their subsequent promotion.
As for agricultural commodities, not surprisingly our results show large increases in the volume of trade in sugar in particular and, to a lesser extent, in dairy products and meat. As with the CIE’s projections, the net increases for these products are generated by increased sales to the US which are bigger than the amounts diverted from China, Japan and Korea.
Whether these increased sales to the US would be allowed, given the real-politik of US agricultural protection, is another matter.
Arguments for an FTA with the US
Australian Government documents supporting the idea of
pursuing an FTA with the US have argued that:
These arguments need to be viewed against the
many official statements that have appeared over the years championing
the multilateral trading system ideal. Australia’s leadership of the Cairns
Group has been essentially a multilateral initiative and in many forums
Australia has led the debate in complaining about the untoward effects
on outsiders of the rules adopted by trading blocs such as the European
Union.
Reasons for caution
The pros and cons of bilateral FTAs have been discussed for centuries.
The complexities involved are not merely theoretical oddities, but have practical implications for what a bilateral negotiation can achieve.
A significant reason why Australia could be worse off under an FTA with the US than otherwise is that such an agreement would be likely to have a deleterious effect on the prospects for advancing other forms of trade liberalisation. The fruits of freer trade with the US would not, as some seem to believe, simply add to any gains we might obtain in the Doha round within the WTO or from unilateral cuts in protection at home.
Then there is the issue of feasibility. Leaving aside ACIL’s quantitative results which cast doubt on them, if we are to receive even some of the modest potential gains to agriculture and Australia as a whole from an FTA with the US that have been suggested by earlier work, it will be necessary for the US to undo the Farm Security and Rural Investment Act (the formal name of the most recent ‘Farm Bill’) it passed on 13 May 2002. It is hard to see, in the light of the recent Farm Bill outcome, that the US would agree significantly to liberalise access for Australian agricultural exports under an FTA. Better access to the Australian market is likely to cut little ice with the domestic lobbies in the US behind agricultural protection.
Quibbles about the limitations of earlier analysis published by DFAT aside, the detailed results of both the 2001 CIE’s simulations and ACIL’s indicate that the prospect of trade being created by a US/Australia hinge on increased access for agricultural products and on the benefits of domestic liberalisation.
Even if it were good for the economy as a whole (and this should always be the main consideration), the exclusion of agriculture could quite feasibly lead to the shrinkage of Australian agriculture (because of the twisting of the Australian economy caused by selective liberalisation — working through both direct price effects and the consequent change in the exchange rate).
Beyond the modelling results, the possibility is that an FTA with the US could undermine Australia’s participation in the WTO and its multilateral negotiations. Among other things, credibility effects need to be considered. If an FTA were pursued without agriculture, Australia’s insistence in the Doha round that agriculture be included would be seriously undermined.
The idea of going ahead without agriculture if negotiations prove difficult has been promoted by some supporters of an FTA. One argument is that the declining relative importance of agriculture in Australia’s trade reduces its importance in other respects. However, the decline in agriculture’s trade significance can be attributed in significant measure to import restrictions of the very type the US applies.
An FTA with the US that included a selective reduction in import barriers in Australia (eg, removal of tariffs on industrial products, reduction or removal of tariffs on textiles, clothing, footwear and cars) could greatly irritate other important Australian trading partners, such as China and Japan.
Finally, a US FTA could be a distraction both of officials’ time and of Government interest. The US, for example, might feel that it had done enough if it had moved somewhat to meet Australia’s demands in the FTA context and might be less interested in meeting those demands in the WTO context.
The primacy of the multilateral option
Australia is a small player on the world scene and, despite its generally warm relations with the US, has limited access to US officials’ time.
Thus a relevant issue is whether Australia could do better
by:
Concentrating on the WTO Doha round could serve Australia
better and in the end might achieve greater liberalisation of US agricultural
trade than if we engaged in a parallel bilateral negotiation.
ACIL’s modelling projects full multilateral trade liberalisation to be an overwhelmingly preferable course for Australia than either unilateral liberalisation or free Australia/US trade.
ACIL’s conclusion is that both Australian farm and Australian national interests will be best served if our negotiators devote their time and energies to the pursuit of global trade liberalisation in the WTO Doha round.
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