March 27th 2004

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Articles from this issue:

COVER STORY: The PM, farmers, the FTA and the election

EDITORIAL: Telstra has lost its way

CANBERRA OBSERVED: Spending signals start of election campaign

ANALYSIS: Australia-US trade deal a monumental folly

STRAWS IN THE WIND: Lilies of the field / Speaking conspicuously

MURRAY RIVER: Science overturns need for big environmental flows

INDONESIAN ELECTIONS: Indonesia taking control of its own destiny

How alcohol leads to harder drugs (letter)

The Passion of the Christ (letter)

DOCUMENTATION: IVF - Playing against a stacked deck

MEDIA : Join the Fairfax Club

ASIA: Behind the India-Pakistan thaw

ECONOMICS: Eight centuries of wavy prices

BOOKS: JAMES BURNHAM, by Samuel Francis

FILM REVIEW: Shattered Glass

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Australia-US trade deal a monumental folly

by Colin Teese

News Weekly, March 27, 2004
Back in the 1980s, the distinguished American historian, Barbara Tuchman published The March of Folly. It was a work devoted to the proposition that governments routinely commit themselves to policies which are against the public interest - out of sheer folly. She quotes the US President John Adams' remark that, "While all other sciences have advanced, government is at a stand; little better practiced now than three or four thousand years ago."

Tuchman reminds us that misgovernment of the type President Adams identified is still with us, though it can take a number of different forms. Tyranny, excessive ambition, incompetence, or folly. Folly involves the pursuit of a policy position which is against the self-interest of the state in question. All of history, she complains has been filled with acts of misgovernment based on folly - that is to say the implementation of policies counter productive to the interests of the state.


For a policy to qualify, it must be identified as folly at the time, and without the benefit of hindsight. There must have been alternatives available, and it must be the policy supported by a group, rather than merely imposed by a despotic leader.

The Free Trade Agreement with the United States (AUSFTA), concluded by the Howard Government, meets all of the tests set by Tuchman.

The folly begins with a definition. Article 1.1.1 of the agreement - among other things - states that it is a Free Trade Agreement consistent with the obligations that all parties have accepted in the World Trade Organisation. That is incorrect. First, the WTO has not ruled on whether or not AUSFTA has been concluded consistently with WTO rules.

Indeed, were AUSFTA to be considered by the WTO, it could not possibly be deemed to be consistent with WTO requirements on quite fundamental grounds. For a Free Trade Agreement to meet WTO rules, it must cover all of the trade, and that any "phase in" periods must be reasonable. AUSFTA meets neither of these requirements. It certainly does not cover all the trade. On manufactures, there are significant exclusions from free trade between the parties, and - at least on the US side - none of agriculture provides unrestrained access for Australia.

Presumably, the parties to AUSFTA feel confident to claim legitimacy for the agreement on the basis that the WTO membership has not challenged a very large number of similarly flawed agreements already negotiated. These include, in particular, the North American Free Trade Agreement between the US, Canada and Mexico, and the agreements the US has concluded with certain Latin American countries.

These considerations aside, the fact remains that AUSFTA does not meet WTO requirements: and we will have no defence should other WTO members exercise their right to demand the same concessions that we have conferred upon the US.

The fact that none of the other flawed agreements has been challenged is, of course, puzzling, and perhaps, for Australia and the US comforting. But that does not confer legitimacy upon AUSFTA - even by default. What it means is that, for whatever reason, the WTO, as an organisation, for the moment, is not in a position to enforce its own rules.

And we may observe that there will be consequences for the organisation, if it persists with that attitude. There have been some already. At the very least its authority is already undermined. For this, and a number of other reasons, the future of the WTO is worthy of serious study, though not in this article.

Interesting though these considerations are, the basic question for Australia is whether AUSFTA confers benefits upon us which justify what we have chosen to concede.

In agriculture, which, in the lead up to the negotiations, was always said to be the defining aspect of the agreement for us, we seem to have been prepared to accept almost nothing - except possibly on lamb. Nothing has been gained on sugar, and only small, heavily qualified gains, have been achieved on beef and dairy. In the case of the latter, the gains with conditions are to be phased in over many years.

There is a concession on wool, again somewhat qualified, but is it really important? We are the only source for wool purchasers; does it really matter whether we sell it to the US or to someone else?

And yet, in return for all these dubious benefits, we have committed ourselves to apply no tariffs to imports of US agricultural products from the day AUSFTA comes into force.

Each party has committed itself not to apply export subsidies to exports of agricultural goods to the other. The value of this commitment is dubious. As a matter of practice the US does not use export subsidies. Its farmers are put into a strong competitive position on the basis of income support measures. Australia, for its part, as our politicians never cease telling farmers, is in no position to apply either income or export support subsidies.

On balance, if there is any advantage in this arrangement, it favours the US. Their income support measures - which we can't match - could allow their farmers to enter low cost imports into Australia which we would be powerless to prevent. The same possibility is not open to us in the US market, because we have accepted that measures other than tariffs may remain in place against our imports.

Quarantine is another problem area. The government insists that nothing has been given away. And, on the face of it that may seem so, though there is to be a new committee set up to monitor quarantine decisions. If our procedures are in line with WTO requirements, what is the purpose of such a committee? If they are not, then they can be the subject of challenge in the WTO. Given all of this, cynics are unlikely to accept the government's assurances - especially in light of the fact that our quarantine authorities, once the terms of AUSFTA had become known, immediately released findings relaxing quarantine restrictions on a number of agricultural imports, some of which advantaged the United States.

And, of course, we might well ask how quarantine measures, scientifically based can become part of a trade negotiation.

Industrial tariffs on both sides have been reduced to zero. Except for sensitive areas. On the US side, tariffs on ferry-type vessels, which Australia is good at producing, will remain. And the same applies to many processed foods.

As to the duty free items, a number of comments should be kept in mind. First, since tariffs on both sides - outside the exceptions - were very low before AUSFTA, then exporters stand to gain very little from the further reductions. If 5% tariffs are reduced to zero, the gain to the exporter will not be 5%, but 5% of the previously applying 5% tariff.

Thus the gain to exporters will be miniscule - and certainly not enough to generate significant new flows of trade. And, whatever tiny gains arise from these reductions will flow in far greater measure to the US because of the nature of our respective trade flows. The US exports vastly more manufactures to Australia - in both value and volume - than do we to them.

Accordingly, we can be certain that AUSFTA will further increase the already very large trade surplus the US already enjoys with us.

As to foreign investment, the Australian government insists it has given nothing away, and on a quick reading of AUSFTA that appears to be the case. But there are some interesting features to the debate on this subject. First, in an exchange of letters attached to AUSFTA, Trade Minister Vaile explained to his US counterpart (who accepted his explanation) why Australia felt no need to change the present arrangements. We had, under present rules rejected only four out of two and a half thousand applications, and all requests were handled without delay. No wonder the US negotiator accepted Mr Vaile's explanation. What else could the US want?

There is, however, a more interesting point. In all the debate before the negotiation, it will be recalled that the rather loosely argued opinion the government obtained from one source suggested $4 billion of trade gains (itself a trifling sum in terms of a total GDP of some $700 billion ), if a free trade agreement could be concluded. When that figure was challenged Mr Vaile's own Department said the trade gains were not themselves vital. Far more important was to free up foreign investment. In terms of greater efficiencies for our industries, more permissive investment rules could generate many billions for Australia. Now it turns out that the rules on foreign investment are to remain unchanged because they are as permissive (and judged so by the US) as they need be. Who is kidding whom?

As far as the Pharmaceutical Benefits Scheme is concerned, we are getting confused signals. Our government insists nothing has been conceded. The US claims to have gained concessions. And the US drug companies claim the new arrangements offer them the prospect of more profits. These various claims cannot all be true.

What we know from the agreement is that a new body is to be set up to review decisions taken by our own committee which currently decides which drugs will or will not be included in the scheme. (Inclusion in the scheme means that the government will subsidise the cost of providing such drugs to ensure Australians obtain them at low cost.)

Our Prime Minister insists that the review body will not have the power to overturn any decisions of the government's own committee. Clearly the US government and its drug manufacturers believe otherwise. Only time will tell. But one is entitled to ask, what possible purpose could there be in having a review committee if it is not capable of influencing the outcomes of the primary committee? And what are we to make of the drug companies' view that the new arrangements could give them higher profits?

But perhaps the most disturbing fact is that all this discussion has taken place in the context of negotiations for a so-called free trade agreement. In effect the US is asking Australia to accept the principle that we should not favour cheaper generic brands of drugs over the more expensive US company brands - and we have been prepared, at least, to debate such a principle. Is there a rightful place in any free trade agreement for an arrangement which obliges consumers (whether governments or individuals) to pay more rather than less for its pharmaceuticals?

And the same can be said about the debate over so-called intellectual property. Here again we seem to have signed away our rights to buy from the cheapest source, in favour of protecting the profits of certain US suppliers. Again - does this commitment really have a place in a free trade agreement?

In all, AUSFTA covers around one thousand pages, and this writer confesses to not having yet considered all of the issues. In particular, the cultural implications of what we might have conceded on the entry of more foreign-made television programs. But enough has certainly been considered to cast doubt on the value of the bargain for Australia.

AUSFTA, in its present form, is now to be considered by the US Congress and by the Australian government. The outcome of those processes is difficult to predict.

On our side we may assume the agreement will pass easily through the House of Representatives, courtesy of the government's majority. The Senate is, however, another story. Hopefully, it will insist on taking a careful look at the gains and losses in AUSFTA and make its decision accordingly. And we can't rule out the possibility that political considerations, in the run up to an election, will come into play.

The US is presumably confident that the Congress will agree to accept AUSFTA. But suppose it decides - as it apparently can - to reject parts of the agreement? Then it will be decision time for the Australian government. We have already been told that the Agreement was so good we had to accept it without a deal on sugar. How much more would the government be prepared to sacrifice? The US Congress might just be prepared to test its resolve.

Assuming, however, that the agreement comes into force, it is already clear that there in no firm body of public opinion in favour of AUSFTA, even in its present form. The government, and, in particular, the Prime Minister stands firmly behind it. Along with certain opinion leaders in academia and the media. Notwithstanding, there is, at least in the opinion of this writer, every reason to question seriously, whether or not AUSFTA offers real gains to Australia. And many others seem to support that view.

Who knows? If the agreement does come into force, perhaps in fifty or so years some historian choosing to revise Barbara Tuchman's book will find reason to add AUSFTA to the list of follies earlier identified in The March of Folly.

  • Colin Teese was a Deputy Secretary of the Department of Trade and GATT negotiator for Australia

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