The Senate Committee on the FTA held a roundtable meeting to which I was invited along with a fairly high-powered panel (listed below). Apart from the Andy Stoeckel and Lee Davis of the CIE, who were, naturally enough, defending the work they did for DFAT and Alan Oxley of Austa, the main pro-FTA lobby group, the evidence was almost uniformly against the FTA. Although there were a lot of different perspectives, there was, in the end, agreement on the point that the net welfare effects of the FTA on merchandise trade were sufficiently close to zero to be disregarded. Since these are the only effects for which economists have more-or-less reliable measuring techniques, this was somewhat discouraging, but it indicates that the terms in which the FTA have been discussed so far have missed the point.
The real issues relate to questions like services, intellectual property, the interaction between politics and economics, the US and Asia and so on. These are complicated, but most of the evidence suggested that the FTA will be a net negative, unless, like Oxley, you think that tying ourselves as closely as possible to the US is the optimal response to all these issues.
For what it’s worth the discussion reinforced the view I reached (with some assistance from Ken Parish) when the FTA came out .
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…the [standard] 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).
For those interested, the participants were:
Andrew Stoeckel & Lee Davis (CIE); John Quiggin (UQ); Ross Buckley (Bond); Allen Oxley (Austa); Ross Garnaut (ANU); Greg Cutbush & Steve Brown (ACIL), Peter Drysdale (ANU); Andrew Stoler (Adelaide uni); Jane Drake-Brockman (Australian Services Roundtable); Linda Weiss & Elizabeth Thurbon (Sydney Uni)
John Quiggin 
Did you ask Alan Oxley how his stoush with Eddie Maguire is going?
Do you have a link for this apparent category mistake?
Do either of these links help?
To clarify, the benefits from the liberalisation of trade was about $200 million per year. If you include the estimate for services liberalisation and government procurement, the number becomes $360 million per year. The CIE never said that these numbers were insignificant.
Further, while there was much agreement between some of the pannelists – it also turned out that some of what they were agreeing on was just plain wrong. The obviousness of the error should be a cause of embarrassment.
For example, Garnaut and Drysdale (both professors) claimed that the agreement was trade diverting, and they cite chart 7.1 as proof. Chart 7.1 clearly shows that this is not the case. In what could only be considered an undergraduate level mistake, they somehow ignored terms of trade (let alone the endowment effect).
They went on to claim that if allocative gains were negative (which they were not) then dynamic gains must be negative. This is just simply not true – and seems to represent a fundamental misunderstanding of what is meant either by trade diversion (maybe not surprising as Q himself was confused about this only one month ago) or dynamic productivity gains.
Very few commentators left that round table with their credibility in tact. To be fair, Q didn’t join in the above comedy of errors.
According to Ross Garnaut, the CIE’s claimed benefits for relaxing the investment rules, if applied to all other countries, would yield a benefit of $40 billion, an amount greater than from all the economic reforms of the past 20 years.
Robert Solow once said of Supply Side Economics, that there was nothing wrong with it that division by ten wouldn’t fix. It looks like the same is true of the CIE report.
I haven’t got the figures in front of me… but following the asian financial crisis the equity risk premium increased by … well, a lot (like I said, I haven’t got the figures in front of me). Some countries saw their GDP reduced by 40%. In addition, Garnaut’s above estimate involves a problematic linearisation error.
I think it is fair and honest to question the size of the shock that we modelled (as Q has done), but I think it is a bit of polemic trickery to question the methodology that was used(which Q has previously endorsed).
I fear that Garnaut is going to run into a credibility problem soon if he keeps up his current approach. Making simple errors while pushing his offensive and counter-productive “laugh test”. Good politics maybe?
John H, I have only crude tools to work with, eg a pocket calculator and the back of an envelope.
As far as I can make out our GDP is about $720 billion. The average wage (AWOTE) is about $48,700.
$360 million is about 0.05% of GDP.
0.05% of the average wage is $24.35.
How is that significant, or am I missing something here?
What is your definition of “significant”? The discussion at the roundtable implied that the benefits were sufficiently small to be irrelevant. I don’t think that is true, even if we exclude dynamic and investment gains (of course, I wouldn’t exclude these).
I’ve never claimed that the benefits of the FTA will change the world. I’ve simply claimed that the benefits are sufficient to justify implementing it.
I don’t have a definition for “significant”. It is a judgement. Intrinsically large numbers like 360m can impress, so I try to see what the proportional increase means in an analogous situation that is within my experience. Then it seems like small change.
Personally, I regard the investment benefits as problematic, with as John Q says some unidentified negatives that have to be dealt into the equation.
But even without the investment negatives, I don’t see the economic benefits as anywhere near enough to compensate for some the effects that are hard or impossible to deal into the economic equation.
For starters, to be honest, I don’t want closer relations with the US in preference to about 50 other countries I could name. Attaching ourselves to a declining superpower may not look all that smart even in ten years time. Furthermore, to be honest, no economic gain would compensate for the apparent threat to our culture, let alone the foot-in-the-door approach that could weaken our quarantine laws and influence the cost of pharmaceuticals.
I understand that a trade dispute mechanism is to be set up; even the notorious NAFTA Ch 11 arrangement is still a possibility which the US are almost certainly bound to press for sooner or later. The experience of trade dispute mechanisms under NAFTA seems to be that you lose some control over your capacity to legislate. In relation to health and the environment the precautionary principle goes out the window. Actual harm must be demonstrated before an activity can be prevented.
Apart from geopolitical strategic concerns, the major aim of FTA’s for the Americans seems to be to open the world to their multinational corporations. Government in this regard responds to their paymasters. Call me paranoiac but I’ll be less confident than I am now in drinking water out of the tap when it is supplied by the likes of Bechtel. I’m sure I’ll pay more for the privilege as well.