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The high price of 'free trade' with the United States

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In Brief

It is well known that the many bilateral FTAs signed to date in Asia have not brought significant commercial or domestic reform or benefits. For one thing, bilateral 'free trade agreements' (which are preferential in character) are less likely to deliver substantial trade opening benefits unless the partners to them are a very large part of global trade, like the United States, Europe and China are for example.


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For another, liberalisation under the agreement needs to be comprehensive and not carve out sensitive sectors. What economic analysts understand is that even if a country like the United States is participating in a bilateral preferential agreement there is no guarantee that overall economic benefits to its partner(s) will be positive. They could be positive; they could be negative: it all depends on the nature and circumstances of the agreement. A decade down the track, the high price that Australia paid for the conclusion of the Australia–United States Free Trade Agreement (AUSFTA) has become crystal clear.

In our lead essay this week, Shiro Armstrong explains how the critics of the controversial agreement at the time were right. His analysis of the impact of the agreement on trade flows shows that the agreement diverted trade away from the lowest cost sources of import supply to Australian consumers. ‘Australia and the United States have reduced their trade by US$53 billion with rest of the world and are worse off than they would have been without the agreement’.

Preferential trade agreements have two main effects: one that is positive and one that is negative. The positive effect comes from the exposure of uncompetitive, sheltered home producers to competition from lower cost partner country suppliers. The problem was that AUSFTA did not remove any of the significant barriers that protected high cost US agricultural sectors like sugar, dairy or even beef. The negative effect is that these agreements divert trade away frommore efficient and competitive third country suppliers towards partner suppliers who only become competitive because of the preferential treatment they receive under the agreement. This discrimination is built into the nature of these agreements. Optimistically, discrimination against outsiders provides incentives for other countries to join the game and negotiate preferential deals of their own that will negate the discrimination they face — so long as that possibility is open. The question is where the balance of costs and benefits lies. It’s a question, as Armstrong says, that can be estimated with a fair degree of confidence in advance but judged with much more certainty after implementation of these arrangements.

At the time AUSFTA was being negotiated, a comprehensive study for the Australian Senate Trade Committee warned that it would bring little or no benefit. But AUSFTA was rushed ahead and signed within a year — driven by the political determination of Australia’s then prime minister, John Howard, to do a deal with US president George W. Bush after agreement to join the Iraq War. The cost of whatever political gain derived from the deal has not been trivial. And pertinently, only someone unprepared to face the facts would not now acknowledge the costs of the agreement in terms of the opportunity to spend income lost through its implementation on larger defence procurements and political security. Let’s be clear. Australia alone has suffered trade losses the annual equivalent of the current price of around 18 Japanese, German, Swedish or French submarines through this deal. This is big money lost.

Vague, misguided appeals to political and security benefit from arrangements like this must be tested against the corrosion of national strength and independence calculated in terms of very substantial trade and income losses and how they impact on political as well as economic strength. Recently Australia has concluded bilateral trade arrangements with South Korea, Japan and China. They promise to be more beneficial than the ‘free trade’ agreement with the United Statesthough all of them are less than perfect.

With difficulties in concluding the Doha Round, the hiatus in trade reform has shifted emphasis to regional trade initiatives, like the Trans-Pacific Partnership (TPP) negotiations of which the United States is the leading proponent and the Regional Comprehensive Economic Partnership in which ASEAN has taken the lead. There is more likelihood of benefits from broader arrangements like these, if indeed they do commit to substantial trade liberalisation. But there is no guarantee: that will all depend on the nature of these agreements and the circumstances of their conclusion, especially on whether they are comprehensive in their coverage and really open to others to join. While these initiatives can be used to prosecute regional economic and political cooperation, they are unlikely to be really beneficial unless they are also directed to strengthening the global economic system.

The political pressure is now on to conclude the TPP agreement. The TPP might still turn out to be little more than a bunch of tactical bilateral deals that won’t do much to solve the problem of overlapping FTAs in the region — one of its supposed core goals — and boost regional trade and incomes. Much depends on Japan and the United States — whether Japan is prepared to go for the ‘zero option’ on agricultural trade liberalisation and whether the United States is prepared to sacrifice its vested agricultural and other protectionist interests. A deal done simply to tie a political bow around a ‘free trade’ arrangement between allies and friends, new and old, would weaken not strengthen their economies and, over the years, gnaw away at their regional economic and political strength.

Peter Drysdale is Editor of the East Asia Forum.

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