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Free trade or economic integration ?

February 10th, 2004

It looks like we have all the information about the “Free Trade Agreement” with the United States, and I’ve finally had the time to formulate a proper response.

I’ll begin with an observation about responses to the agreement. Although everybody recognises that the official name is a misnomer, immediate responses have naturally focused on what was missing, such as any market access for sugar. But it’s a mistake to view this deal primarily as a free trade agreement with some pieces missing. If that description was correct, it would be reasonable to support the deal.

But far as free trade in the traditional sense is concerned, Australia has almost no trade barriers of any significance to the US, and therefore nothing to remove (a point I’ll refer to). Our general tariff of 5 per cent is at a level which implies minimal distortions and can be justified under the revenue tariff provisions of the GATT.

The US has a lot of relevant barriers and distortions, but the most important, the production and export subsidies in the Farm Bill, weren’t even on the table. In addition, most of the specific barriers to Australian exports of any relevance remained in place. The announcement trumpeted the removal of restrictions on imports of lamb, but we’ve never had any success in persuading the Americans that eating lamb is a good idea.

If the agreement isn’t about free trade, what is it about? The real issue, is that of economic integration with the US. As the example of the European Union, cited by FTA supporters like Alan Oxley, shows, economic integration means common economic institutions. In the present case, it’s obvious that this means Australia adopting the institutions of the United States, and not vice versa. Examples that have come to light so far include the extension of copyright from 50 to 70 years and a range of other measures that enhance the capacity of US owners of intellectual property to act as discriminating monopolists. I expect that, when the details are rolled out, we’ll see things like restrictions on parallel imports.

There are two issues in deciding whether economic integration with the US is a good idea. The first is whether, in general terms, the economic and social institutions of the US are better than those of Australia. If you read the writings of FTA supporters, it’s pretty clear that they think this is the case, that we would be better off with less government intervention of all kinds, weaker unions, greater income inequality and so on.

The second issue, thrown into relief by the FTA negotiations is whether it’s a good idea to let our economic institutions to be determined by a government that is responsive to American interest groups, but not concerned with the welfare of Australians. The issue of copyright provides a nice example. There are a lot of arguments for and against long periods of copyright, but there are also issues of income distribution. In aggregate, an extension of copyright terms will redistribute income from Australians to Americans because the Americans own more copyrights of general interest than we do. Whatever the balance of the economic arguments, it’s a safe bet that American decisionmaking processes will err on the side of long copyright terms.

I’ve developed this argument at greater length here and in a submission to a Senate Inquiry which I’ll try to post here. Around the blogosphere, only Peter Gallagher has made the point that economic integration is the main issue.

A final observation on the FTA process is that it illustrates the validity of a traditional argument against unilateral tariff reductions. If you cut your tariffs unilaterally, you’ll have no bargaining chips to trade for reductions by less high-minded bargaining partners.

More precisely, I’d say that unilateral tariff reductions made sense given our previous focus on multilateral negotiations. In these negotiations our free-trade credentials gave us credibility as leaders of the “Cairns group”. But now that we’re moving to a bilateral approach, this counts for nothing, as we’ve seen.

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  1. Brian Bahnisch
    February 10th, 2004 at 23:09 | #1

    I agree, very helpful.

    Ultimately I think you can say that the US’ purpose in the FTA was geopolitical, part of their hub and spoke hegemony strategy. As such we probably don’t rate as much as the FTAA (free trade agreement of the americas) which concerns hemispheric consolidation.

    I believe that the FTA is more important symbolically than in substance to tjhe Americans. In pharmaceuticals, for example, their sales in our market would be miniscule. More important for them is the nasty precedent we are setting which has been attracting favourable attention around the world.

    Consider also the issue of scale. The Centre of international Economics report “Economic Aspects of an “Economic Impacts of an Australia-United States Free Trade Area” CIE, June 2001 available at http://www.intecon.com.au/reports_list.htm) states that our exports supply 0.7% of their imports and they send 1.6% of their exports to us.

    That was 2001 and the $A has appreciated by about 56% since then, so the while the balance would have changed the numbers would still be small.

    In 2002 when the farm lobbies were arguing vigorously against the FTA they were told by the Busshies that an FTA was important at that time as they were “coalition building”. In the run up to the Iraq war, of course.

    Howard’s motivation was entirely domestic. I understand it came out of a think tank in his office after the Ryan bi-election debacle in early 2001 and was designed to make him look like a statesman.

    So we are little more than a notch on their belt before the real contest between the major trading powers. Wasn’t it Zoellich in 2001 who said something about “picking the low fruit first”?

    Your point about having no bargaining chips to trade is even more important now. We have nothing much left in kitty that would interest them, except perhaps to roll over completely on things that would really hurt, like media and pharmaceuticals.

  2. Homer Paxton
    February 11th, 2004 at 09:52 | #2

    Suyely the main question is whether the Agreement ( it is NOT a free trade agreemnt) encourages trade creation or trade diversion.

    I see little evidence thus far of creation.

  3. February 11th, 2004 at 13:35 | #3

    The FTA looks like a front door way of achieving what the US tried to get using the MAI back door.

    The present US admin does not waste any time with diplomatic niceties. The US’s policy seems to be to divide and conquer, with raids on the ME and trade with the RoW. From a game-theoretic pov, they seem to be operating on the premise of aprez-Bush la deluge.

  4. gordon
    February 15th, 2004 at 18:26 | #4

    Does your identification of the present Australian government as “a government that is responsive to American interest groups, but not concerned with the welfare of Australians” mean you will be voting for a non-Liberal party at the next election, or that you are taking to the hills and forming a liberation front, aiming to establish an independent National government here?

  5. February 21st, 2004 at 08:50 | #5

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  6. gordon
    February 25th, 2004 at 10:57 | #6

    As a bit of a postscript, it may well be that the relaxation of foreign investment rules (see Fiona Buffini’s article in the AFR 10/2/04 p.7) turns out to be one of the most significant aspects. Is it the case that the trade-off for allowing some increased ETM exports to the USA is freedom for US companies to buy the relevant exporters?

  7. Dave Ricardo
    February 10th, 2004 at 19:16 | #7

    “The second issue… is whether it’s a good idea to let our economic institutions to be determined by a government that is responsive to American interest groups, but not concerned with the welfare of Australians.”

    I presume you are talking about the Bush Administration. The scary thing is, though, you could be talking about the Howard Government.

  8. Dave Ricardo
    February 10th, 2004 at 19:26 | #8

    But, I don’t think we are going to turn into the US in a hurry, however much people like Alan Oxley would wish it upon us. Canada is much more economically integrated with the US than we are ever going to be, and the Canadians still retain a distinctively unAmerican approach to “unions, greater income inequality and so on”

  9. February 10th, 2004 at 20:50 | #9

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  10. James Farrell
    February 10th, 2004 at 21:26 | #10

    Extremely helpful, John, if not very different from your arguments against Dr Strangelove in the AFR ‘debate’ last year.

    But I still don’t understand what’s happening with the PBS. Mark Metherell in today’s Herald writes:

    ‘Under the agreement, Australia would establish an “independent process” to review decisions on drugs recommended for subsidies under the scheme.’

    Does anyone know what this means, exactly? Isn’t the Pharmaceutical Benefits Advisory Committee supposed to be independent?

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