Who really benefits from the US/Australian Free Trade Agreement?
Listener: 6 March, 2004.
Keywords: Globalisation & Trade;
Free (or preferential) Trade Agreements (FTAs) may not always benefit the economies involved. Certainly, there will be sector beneficiaries, and their acolytes will loudly proclaim the benefits, but within an economy there will also be losers. Do the sector benefits outweigh others’ detriments? The economist’s answer is “not necessarily”.
Beneficiaries often mention substantial aggregate gains from an FTA. Their claims are based on economic models, which involve assumptions, such as perfect competition in all markets and no economies of scale in any industry, with resources released from contracting industries and regions switching smoothly and quickly into expanding ones. Under these assumptions, the models show that there will be some (typically minor) gains from the complete elimination of border protection. But the models do not always show that free trade agreements (where there is a reduction in border protection only to some countries) are also beneficial, even assuming that protection between the partners is eliminated.
The problem is trade “diversion”, where trading partners start sourcing from each other, and not from a third country that offers the product at a lower price, but is excluded by the remaining tariffs. Thus, a recent IMF working paper, “The United States and the New Regionalism/Bilateralism”, found under some assumptions that Australia could be worse off under a free trade agreement with the US, even though the US would be better off. Apparently, the trade diversion outweighed the trade creation. Of course, the actual package will be different from the one that the model assumed, but one revealing tabulation showed Australia does even worse if agriculture is excluded from the agreement (as has largely happened), while the US is even better off.
The model also assesses the impact on other countries. Summing up all the gains and losses, it concludes that the world will be worse off from a deal, the gains to the US failing to outweigh the losses to all the other countries.
Such models –– there are others that are more optimistic, although they all show the countries not involved in the FTA suffering –– are based on predicted outcomes. “The Trade and Investment Effects of Preferential Trading Arrangements –– Old and New Evidence”, a paper from the Australian Productivity Commission, provides a retrospective evaluation based on actual outcomes. The Australian Government’s APC is as staidly pro-market as the IMF, although these are only the authors’ views (one was New Zealander Philippa Dee).
Nevertheless, they conclude that 12 of the 18 recent free trade arrangements “diverted more trade from non-members than they created among members …… Some of the more prominent [arrangements] have not even succeeded in creating more trade among members.” The report is acerbic about the prospective models, commenting that they “sometimes made assumptions that have skewed the findings in favour of economically beneficial outcomes”.
It concludes, however, that “the finding on investment is more positive than for trade, but not without qualification”. Arguably, the Australian strategy has been to position their economy more closely to the US, to encourage investment, even at a possible cost of some serious sector losses in the short term.
Although Australia may or may not benefit from AUSFTA, the New Zealand economy will suffer to some extent, both because it will lose export markets to US and Australian suppliers and because US investment is likely to be more attracted to Australia. However, that does not mean we should rush into a deal with the Americans, since it is possible we could be worse off. (The IMF study did not look at a prospective NZUSFTA.)
If we go into a serious negotiation –– it is unlikely to be before next year because of the presidential election –– New Zealand does not want to end up in the Australian situation of having to do a deal, despite it being unclear whether there was a national benefit (although in the interests of some sectors), because uncritical cheerleaders claim the deal is absolutely vital (they don’t add “for them”) and eliminate the government’s room for political manoeuvre.
The ideal would be a multilateral agreement –– the sort of thing being discussed in the Doha Round under the World Trade Organisation –– although, as the APC points out, bilateral deals that disadvantage third parties make multilateral deals less attractive to the insiders. Even more gloomily, the US gave so little away on the agricultural front –– nothing on sugar, small increases in initial quota access on beef and dairy, and elimination of low tariffs (the Australians promptly increased support for their sugar industry). This suggests that the rhetoric of major agricultural concessions in the Doha Round may be overridden by domestic interests.
The protectionist agricultural lobbies in the US and the European Union must be laughing at the feeble AUSFTA, even if we are crying.