I’ll be participating in a Senate Roundtable on the proposed FTA with the United States next week, and things have been livened up with the release of a new study from the Centre for International Economics with the following optimistic bottom line
The most probable effect on macroeconomic welfare after a decade, as represented by real gross national product (GNP), is an increase of $5.6 billion per year above what it might otherwise be.
Not surprisingly I think this is estimate is way of the mark (warning: big JPEG coming up).
You can read the whole report (PDF) file here, but most of what you need to know is in this graph
As can be seen from this graph, the gains from the trade part of the deal are small. Goods and services are not broken out separately in the figure or (as far as I can tell so far) in the report as a whole, but it’s pretty clear that the net impact on the goods sector in the medium term is small (well below 0.1 per cent of GDP or about $750 million per year). It might even be negative, which would be consistent with my estimates.
I haven’t had time to look at the estimated gains from services, but I thought these were overstated in the previous report (though in part this was because they encompassed dynamic gains, discussed below).
The big gains in the picture come from two main sources. The first is so-called “dynamic gains” from liberalisation. I’ve pointed out many times that such gains are little more than a pious belief held by advocates of free-market reform. They have no basis in neoclassical economic theory and no real supporting evidence. The report is gracious enough to cite my objections, but goes on to ignore them.
The second, arising from another topic in which I’ve been very interested for a long time, is the idea that capital market liberalisation will reduce the equity risk premium and therefore increase economic welfare. For the moment, I’ll just say that this claim is highly problematic.
I know this blog has some readers from the CIE and I’ll be interested in developing the debate
fn1. Full disclosure. I worked there myself in the late 1980s, and am friendly with a number of people there.