Free trade or economic integration ?
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.