Ross Garnaut: FTA worsens our woeful trade outlook
The Australian February 10, 2004
AUSTRALIA'S dreadful trade problems have just become worse. The signing of a poor Free Trade Agreement with the US will make it more difficult to correct the longest period of declining exports for more than a century.
Official Australia has not yet faced up to the severity of the present trade problem. Exports have declined in each of the past three years after 15 years of sustained strong growth. Never in the 20th century did exports decline for three years in a row - not even in the Great Depression of the 1930s or in either of the world wars.
Australian domestic costs are rising much faster than those of our trading partners. And a strong Australian dollar this year compounds the difficulties. The early signs are that 2004 will see a fourth year of declining exports.
The focus on the US FTA over the past three years is only one of many reasons for the poor export performance. The FTA's main effects are in the future. But already the FTA has contributed to Australia's failure to dissuade the US from a set of trade policy decisions over the past three years that are the most damaging to Australia since World War II. Such policies are led by the steel quotas (affecting Australian exports of steel and steel-making raw materials to East Asia) and the egregiously protectionist US Farm Bill.
The US ambassador said at the time that the US Farm Bill was the price for the President obtaining Congressional negotiating authority for the FTA. Given the choice, Australian farmers would be quick to turn the clock back on that "deal".
From January 1 this year, Australian farmers are starting to feel the effects of discrimination against them in the Chinese market, as the "early harvest" for the China-ASEAN FTA has its effect. The Chinese interest in discriminatory FTAs follows the lead of the US and Australia in their own bilateral discussions.
When Canada entered the North American Free Trade Agreement in 1994, its exports to Asia and Europe collapsed, at a time when Australia's and the rest of the world's exports to these regions were increasing.
Australian shares of European and Asian markets have been falling over the past three years, and the "head-turning effect" may be part of the explanation. It can be expected to become much stronger now that the US-Australia deal has been signed, as it did in Canada in the second half of the '90s.
The bigger effects will be longer term. The excitement about bilateral and regional FTAs has starved the multilateral trade negotiations of oxygen. This was apparent at the failure of the WTO ministerial meeting in Cancun five months ago. US Trade Representative Bob Zoellick is now in East Asia trying to revive the Doha Round negotiations. Two weeks of intense negotiations in Washington on the Australian FTA is not the ideal preparation. This is a betrayal of our farmers, as the multilateral negotiations alone are able to deliver substantial liberalisation, including of subsidies, in the highly protected markets in North America, Europe and East Asia.
For the first time, Australia has conceded the legitimacy of significant agricultural exclusions from bilateral FTAs. In recent years, Canberra has elevated the quest for an FTA including agriculture with Japan to the forefront of its trade strategy with that country. After the events of the weekend, forget about it.
What about the famous "$4billion" of benefits that the Government has been claiming for Australia from the FTA? That $4billion number comes from a study commissioned by the Department of Foreign Affairs and Trade from the Centre of International Economics. The main costs of a bilateral FTA were excluded from that study by assumption.
The $4billion, even in the terms of the CIE study, was actually less than $3billion at today's exchange rates. The number was contested at the time. Another study by ACIL Consulting came up with different and negative numbers. But now we know some (but not much) of the detail that has been agreed, let's take the CIE assumptions at face value, and see what survives of the "less than $3 billion".
The majority of the gains in the study for DFAT come from Australia's own reduction of barriers to American exports. We could have these gains, and much more, without the costs of an FTA, by liberalising imports from all countries, in a continuation of the unilateral liberalisation that was a feature of Australian trade policy from the mid-1980s to 2000.
The part of the "less than $3 billion" that comes from America's own liberalisation derives overwhelmingly from two products only: dairy and sugar. The DFAT study assumes immediate and complete removal of quotas and tariffs on all Australian agricultural exports to the US. Enough said.
It gets worse. The DFAT study removed by assumption the critically important issues of "rules of origin". These are what a bilateral FTA, unlike multilateral or unilateral liberalisation, needs to determine what products qualify for preferential access. An Australian car or medical microscope will only be able to enter the US under the FTA if there is more than a specified amount of Australian and US value added in the production of the product.
We do not yet know much about the detail of how the rules of origin will work. If the detail of the rules of origin turn out to be similar to those in NAFTA -- and we do not yet know whether and how they will be different -- most Australian manufactured products would be excluded because they would have too many New Zealand, Asian and European components. Australian manufacturers would be excluded unless they changed the way they made their goods. US manufacturers, on the other hand, typically have higher proportions of domestic value added in their goods, and would be more likely to qualify for free entry to Australia.
Australia's trade malaise will be fixed only by renewing focus on our competitiveness and sorting out the confusion in our trade policy. Any further delay in sound diagnosis and prescription will compound the pain when reality bites us.
Ross Garnaut, a former Australian ambassador to China and economics adviser to prime minister Bob Hawke, is professor of economics at the Australian National University in Canberra.