One problem with the debate over the trade aspects of the “Free Trade Agreement” with the United States is that a lot of FTA supporters are inappropriately relying on intuition derived from arguments about free trade in a context where trade barriers are removed in a nondiscriminatory fashion. For example, Jason Soon says

Let’s note that unilateral lifting of trade barriers is almost always a good thing so the fact that the Australia has ‘given up’ on more trade barriers than the US is irrelevant. The fact that Australia under the FTA is now committed to the gradual phasing out of car and textile tariffs which hurt consumers is a good thing regardless of whether we get more access to the US market

and Stephen Kirchner pushes the same argument further.

The claim is valid in the context of a small country unilaterally reducing tariffs on a non-discriminatory basis. In this case, the world price is unchanged by tariffs, so the entire burden of the tariff falls on domestic consumers. Provided that the tariff revenue can be matched by a less distorting tax, reducing the tariff unilaterally will improve welfare.

This argument does not work in the case of a decision by country A to make a unilateral cut in tariffs for imports from one country (say country B), but not for others. In this case, in general, the incidence of the tariff cut will be shared between consumers in country A and suppliers from country B. Unless the distortions associated with the tariff are large, the net impact on country A will be negative. (This is a special case of the larger literature on trade diversion and trade creation, all of which casts doubt on the claim that bilateral free trade deals will be economically beneficial to the parties concerned). A straightforward first approximation to assessing the issues in the case of the US-Australia FTA is to look at the reductions in tariff revenue. As I mentioned in the post to which Kirchner took objection, this article states that

Currently, the United States pays 10 times as much as Australia does in tariffs in the joint trade between the two countries.

Except under extreme assumptions about elasticities, this implies that Australia will be worse off under the trade aspects of the deal simply by virtue of the associated revenue losses. Because our tariffs are already close to zero, these transfers will not be offset to any significant extent by reductions in deadweight losses. A straightforward calculation indicates that the deadweight loss from a 5 per cent tariff on imports is around 0.05 per cent of GDP. Since the US only accounts for something like 20 per cent of our imports, the associated loss is around 0.01 per cent of GDP or about $70 million per year, which is trivial in the context of tariff revenues around $1 billion per year

Of course, the trade aspects are less important than the issue of institutional integration, beginning with intellectual property and the PBS, but likely to extend in future rounds to issues such as privatisation, environmental regulation and taxation.

UpdateAlexander Downer has been quick to accuse critics of the deal of being anti-American, and Ken Parish takes a similar line, making the point that no similar objections were made to CER with New Zealand.

The implication is that I and other critics would have welcomed a comparable deal with, say, the EU, one which left the Common Agricultural Policy intact, but removed all restrictions on imports of European goods and gave Brussels the right to control Australian domestic policy, for example by prohibiting the use of any names for varieties of wine or cheese to which Europeans laid claim (a standard EU claim in trade negotiations, which we’ve acceded to on some occasions and rejected on others, comparable to the situation, until now with American claims on IP).

I suggest on the contrary, that most of those who’ve supported the FTA would agree with me in regarding such an agreement as outrageous (I make an exception for those who, mistakenly as I’ve argued, support all unilateral reductions in Australian tariffs). But perhaps I’m wrong on this, and such a deal would be welcomed with open arms.

For those still inclined to defend the Free Trade Agreement with the US, the news that the sugar industry is to be bought off should be the clincher. Both in the specific terms of the Agreement, with respect to copyright, the PBS and other issues, and in the payoffs to those who were left out this deal represents a commitment to bad public policy. What’s the betting we’ll see yet more handouts to Manildra and the ethanol lobby out of all this.

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.

US Secretary of Defense has received general derision for the following rather convoluted statement

Reports that say that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know

As I’m giving two papers on this general topic in the next couple of days, I feel I should come to his defense on this. Although the language may be tortured, the basic point is both valid and important.
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My understanding of the legal status of treaties is imperfect, to put it mildly. I know that, unlike the US, there is no requirement for Parliamentary ratification of treaties. And I recall from the Franklin Dam case, that the Commonwealth Parliament can pass legislation to implement a treaty in a field that would otherwise be outside its jurisdiction, such as environmental protection.

But I don’t know what happens in the case of a treaty like the just-signed FTA, which apparently requires changes to Australian law in a large number of areas – certainly copyright and probably the PBS. I assume the entire treaty must be put to Parliament as a package and ratified without amendment, otherwise the US side can just walk away.

But if this is the case, I would judge that the treaty is already dead. It’s hard to see how Labor can consent to any watering down of the PBS, in full knowledge of the fact that Big Pharma is out to kill the scheme altogether. If no amendment is possible, they’ll have to vote against the treaty outright.

The politics of this seem entirely straightforward for Labor. Hardly anyone in Labors constituency has anything obvious to gain from the deal (in fact, the immediate benefits for anyone in Australia are trivial and the indirect benefits entirely speculative) Latham has already alienated anyone who objects to standing up to the Americans. OTOH, the majority of the Labor base who objected to the Iraq war can see that Howard hasn’t even managed to secure fair treatment in return for our loyal support of the US, let alone any favours.

Conversely, the politics seem diabolical for Howard. If legislation has to be pushed through Parliament that means De-Anne Kelly, Ron Boswell and the rest of the North Queensland Nationals will be opened up to ferocious attack from Bob Katter if they vote in favor. Labor can just sit back and watch, throwing in quotes from Howard and Anderson to the effect that they would “never ever” abandon the canegrowers (and, for that matter, the beef industry). And once the deal is rejected, everyone except the canegrowers and cattlemen will forget about it.

But of course, all of the above is premised on my shaky understanding of the procedural rules – would anyone care to set me straight.

Update Ken Parish answers my questions on the process and argues that the procedures for examining the treaty mean that nothing will come before Parliament until after the next election. It seems to me that this makes things even better for Labor. Rather than rejecting the treaty outright, they can say that, when elected, they will demand a renegotiation of the treaty (the fact that the US will also have an election complicates the issue, but mostly in a way favorable to this claim – for example, a statement by Bush that the terms of the agreement are ironclad can’t bind his successor).

I was going to post on a piece by David Dale in the Sun-Herald asserting (with reference to the use of the baseball code [first base, etc] as an indicator of progress in dating) that no-one under 60 now uses Australian sporting metaphors. He cited “sticky wicket” and “hit for six” as examples that have gone out. In my lexicon, the first of these has always been confined to toffee-nosed Poms, and the second is still current. But I’m only a decade or so short of 60, and I thought perhaps I was just showing my age.

I’m therefore please to note the following unsolicited comment from Steve Edwards, on the FTA “Latham is 10 metres out, directly in front on this one. He can’t miss.”

On a marginally more scientific note, a Google search on “hit for six” :.au produces 1660 hits. Most are in a (metaphorical) sporting context, but there are also several political and financial instances.

Here (late again, but on Monday at least) is your chance to comment on any topic (civilised discussion and no coarse language, please). I may be a bit quiet for the next few days. (I’m in Melbourne to become a Distinguished Fellow of the Australian Agricultural and Resource Economics Society), so please do your best to fill the gap in my absence.

So far, all we have on the US-Australia Free Trade Agreement is a rewritten press release, but I think that’s enough to conclude that this is an election-loser for Howard. The reports have noted that there’s nothing on sugar and nothing much on beef or dairy, but it’s more revealing in some ways to look at the list of wins. Of particular interest is that the US Federal government procurement market has been opened up to Australian suppliers. As of last weekend, our demands included state government procurement as well, particularly in California.

And of course we have yet to see the list of concessions on things like IP, parallel importing and so on. The PBS looks to have been kept off the table, but I wouldn’t count on it.

Overall, this is about as unbalanced an agreement as could be imagined.

Update I’m travelling and haven’t yet had time for a detailed study, but I thought I’d look at the US reponse. Naturally, it’s anything but front-page news. Buried deep in the business section of the NYT, I found this article, which notes, with respect to the abolition of tariffs on manufactures

supporters of the trade pact said its main significance, assuming Congressional approval, was the virtual elimination of import duties on American manufactured goods to Australia. Currently, the United States pays 10 times as much as Australia does in tariffs in the joint trade between the two countries.

This is a pretty fair summary of the distribution of gains and losses in the deal. The Washington Post has a story leading to a broken link and the LA Times nothing I could find.

Further updateI’ll take this chance to welcome Ken Parish who’s back as an active blogger. Ken is deferring judgement, but has a lot of useful links.

Welcome back also to Kim Weatherall who reports that the IP components of the agreement are as expected, that is, about as bad as they could possibly be.

Anyone who’s been following recent discussion of the US economy will be aware that the Bureau of Labor Statistics produces employment statistics from two different surveys, and that the results have diverged radically since 2001. The BLS preferred numbers on employment growth come from a survey of employers (the Establishment Survey) while other numbers, including the unemployment rate are derived from a survey of households (Current Population Survey). As the BLS Commissioner’s latest statement notes (PDF file)

From the trough of the recession in November 2001 through January 2004, payroll employment decreased by 716,000. Over the same period, total employment as measured by the household survey increased by about 2.2 million (after accounting for the changes to that survey‚s population controls).

Not surprisingly supporters of the Administration have been pushing hard to discredit the Employment Survey in favour of the CPS. While noting some reasons for the discrepancy, the BLS seems to be sticking with the payroll survey, noting that there are a lot of problems in estimating employment growth from the CPS, and that the payroll data is consistent with data on new claims for unemployment benefits.

If that’s the case though, the implication appears to be that the CPS results are unreliable, and therefore that the unemployment rate (derived from the CPS) is an underestimate. Allowing for the fact that non-employed people are divided between unemployed and those not in the labour force, the discrepancy could easily be a full percentage point, implying that unemployment is now higher than when the recovery (as measured by output) began. This seems consistent with anecdotal impressions.

I’m reading After the New Economy by Doug Henwood, after Brad DeLong kindly sent me a copy. I plan to do a review of this book, which has already been reviewed by several contributors to Crooked Timber.

I watched the first round of The Einstein Factor, which turns out to follow, in crucial respects, the Mastermind format peculiar to public broadcasters, namely a round of questions on a special topic that would be regarded as too narrow if proposed for a PhD thesis (those today were Jack the Ripper, Australian campaigns in France in WWI and heavy metal bands of the 1980s), followed by absurdly easy general knowledge questions (in one round there was even multiple choice – shades of Eddie McGuire!).

The “special topic” approach is unsatisfactory in too ways. First, even a well-informed viewer doesn’t have a chance of answering more than a handful of questions, which makes viewing not that much fun.

Second, it’s impossible for anyone (including the setters) to tell whether the questions are of comparable difficulty between topics. Which is harder, to name the head roadie for Megadeth or the constable who discovered the body of Jack the Ripper’s third victim? For all I know, one question is comparable to naming the song sung by the Sirens and the other is basic knowledge for all aficionados of the topic. Think about blogging as a special topic from the viewpoint of your non-blogging friends, and see what I mean.