ECONOMICS: by Colin TeeseNews Weekly
US-Australia free trade negotiations based on dubious assessments
, August 9, 2003
Recently the Australian Financial Review published a quite useful set of articles about the modelling techniques associated with the attempts to justify a Free Trade Agreement between the US and Australia, and how these produced contradictory outcomes.
This modelling involved calculations - based on necessarily arbitrary assumptions - to evaluate the net benefit to Australia of a free trade agreement with the United States.
Such calculations can deliver only mere approximations.
As a starting point let's recall what has been claimed for the Free Trade Agreement (FTA) by various groups. The Department of Foreign Affairs and Trade has its own view. Without even going through the motions of attempting to model outcomes, it asserted that there would be gains of some A$9 billion from added "efficiencies" alone by getting rid of the rules restricting foreign investment.
What lies behind this assertion is not clear. However, there are a few worthwhile observations to make. None of the other two government-paid modellers judged the issue worthy of mention. Their modelling has concentrated upon the trade in goods flows, about which more also needs to be said later.
The issue of foreign investment may well be a part of the negotiation of a FTA between ourselves and the US, but it is hardly central. In any event, it is an issue which, right now, lies in our own hands.
We don't need a FTA with the US to change the rules on foreign investment. If DFAT really believes that the rules are working so much to our disadvantage, why has it not persuaded the Government to abandon them?
As a matter of fact the rules probably should be discarded, not because we would gain from doing so, but because they no longer serve any useful purpose. The rules were to defend the national interest when it was deemed that certain industries should be retained in Australian hands, either for security or some other important national purpose.
All of that hardly counts any more. Commonwealth and State governments have conspired to allow much of our power generation, transport and communications industries to pass into off-shore ownership and control; they also seem determined to sell off the rest as fast as possible.
So why should we hold on to these last vestiges of economic nationalism? Surely DFAT cannot believe it is of any value in a free trade negotiation?
The whole world knows we are getting rid of these rules as fast as the Parliament will allow. If needed, the Prime Minister tells us, he will trigger a double dissolution of Parliament to achieve that end.
Now, what about those consultants who have modelled the trade in goods and whose outcomes are in mild disagreement? One predicts a tiny benefit to Australia, the other a small disadvantage.
Either way, less than one half of one percent of GDP. And remember, modelling is not intended to produce mathematical certainty of outcome.
Any model is based upon assumptions and is therefore subject to a margin of error. Most certainly, that margin is greater than half-of-one percent of GDP. So, in reality, the claim of a small positive outcome from the modelling of our FTA proposal is virtually useless as a guide to policy making process.
Nevertheless these modelling outcomes provide us with useful, if unintended insights. Each of the two consultants used the same model yet reached different outcomes - one a slight gain to Australia, the other a slight loss. How can this be so?
According to a recent article in the Australian Financial Review
, the Centre for International Economics (CIE) - which forecast a small gain for Australia - added to its calculations a correction based upon findings of US research some thirty years ago.
This research concluded that with imported goods, consumers would not automatically favour a cheaper imported product - they were prepared to pay a little more for the local product over its competing import. CIE took this into account in its calculations, and translated it into a small gain for Australia. The second study, by ACIL, did not and recorded a small loss.
Now here is the interesting part. The protective effect of the consumer preference in favour of the local product translates, in the CIE model, to a gain for Australia. Not using that preference in the ACIL model produced a small loss.
Yet both the CIE and ACIL are among those agencies which insist that protection for local industries is always a disadvantage for our economy.
All of the above modelling is concerned with the trade in goods. Yet none of it challenges the fact that certain practices in that trade, even though endorsed by the World Trade Organisation, are, in fact, restrictive of international trade. These relate to certain items classified as "intellectual property".
For these products, Australia, and most other WTO members, have bound themselves not to import cheaper copies of these same products. Since the products in question are in no sense protected by copyright, can this be regarded as anything but a form of trade restriction?
It is bad enough that we have already accepted some of these restrictions in some areas. Any FTA with the US can be expected to further restrict our ability to buy the cheapest offered overseas goods. What is the sense of getting rid of tariffs if we agree to these sorts of restrictions? More importantly, the gains to the US from these restrictions will far outweigh any gains to us. The US have the products to protect - we don't.
The most obvious problem for Australia in this regard relates to prescription drugs. Quite simply, the US wants us to pay more than we are now paying for these drugs solely for the benefit of US drug manufacturers who developed them.
At the moment these same drugs are being sold on world markets at dumped prices. What the US wants us to do here - as we have already agreed to in some earlier cases - is to stop buying the available dumped product and pay full price for the same US supplied drugs. So far our Government has shown little inclination to resist the US blandishments on this matter, which could produce only harm to Australia.
The issue is yet another example of double standards. When our industries ask for protection against dumped imports, they are told by Australian government agencies that consumers should have the right to buy at the cheapest source, regardless of dumping. Why are we not giving that same response to the US?Agriculture
There is an important side effect to all of this and it concerns agriculture. So far it has received little or no attention. We have been attempting to use the FTA to open up US markets to our agricultural products.
We are unlikely to succeed. But even if we do it may be a mixed blessing, as a number of Latin American countries are finding out as a result of their free trade agreements with the US.
Under the terms of their FTA's these countries have agreed to open up their agricultural product markets to US subsidised imports. As a result, in some cases, their own agricultural industries have been destroyed. We have not heard anything about this in our FTA negotiations with the US, but if we are not careful we may find ourselves - like the Latin Americans - committed to opening up our unprotected agricultural industries to subsidised US imports. Potentially, that could be much more damaging to Australia than anything we may have to gain from selling more of our product to the US.
And how silly would we be to agree to all of this while, at the same time, denying ourselves the right to import cheap prescription drugs.
Still in the area of the trade in goods, there are other considerations of potential danger to Australia. We maintain highly permissive policies on dumping. It continues to be very difficult for our manufacturers to obtain rulings in their favour.
The opposite is true of the US. It maintains tough and strictly applied dumping rules. So much so that they are not in complete compliance with WTO requirements.
If we cannot agree on some better balance of obligations, then the disadvantage for Australia could be large.
The same is true in so far as so-called "rules of origin" are concerned. In an FTA, the benefits of preferred access to the US market for Australian goods will only apply to those judged to be "Australian" according to US rules of origin. Effectively, this term measures how much of the contents of the goods is actually made in Australia. The US requires a much higher percentage of "local content" than does Australia in any goods it will permit entry from the US under the preferential FTA. Here again, unless we can get some balance into these arrangements, Australia could be seriously disadvantaged.Services vulnerable
All of this discussion so far has been confined to the trade in goods. There is also to be considered the trade in services in which the problems are no less complex and difficult, and no less dangerous for Australia. Space does not permit their discussion here.
However, this much can be said. Over the whole range of these issues, it is difficult to avoid the impression that the project had been entered into with undue haste. Have we really calculated the balance of losses and gains to Australia across the entire range of our trade with the US?
More than that, do we have a negotiating strategy capable of matching that which we know the US will apply?
For example, it is now being said by people who should know better that our trade negotiators love exports, but hate imports, and as a result, cannot get the best outcomes for Australia. However, what all negotiators do realise is that the conclusion of a FTA entails the striking of bargains which always means giving and taking more or less in balance.
Those who believe our negotiators only want to boost exports without accepting US imports (i.e., that the negotiating process has been corrupted) should not be supporting the idea of any FTA at all. In that event we would go back to doing what we have done for the last twenty years - dismantling our own protection in the belief that, regardless of what others do, we will be better off. The trouble is hardly any of our trading partners believe that.
- Colin Teese was Deputy Secretary of the Department of Trade