A “claytons” free trade deal

The advertising for Dr Claytons Nerve-Eze formula—a cola-based ‘tonic’—described it as the “drink you have when you’re not having a drink”. It’s become a proverbial expression in Australia. “This agreement”:http://www.dfat.gov.au/trade/negotiations/us.html appears to be the ‘Free Trade Agreement you have when you’re not having free trade’. bq. Mr Zoellick said the deal would offer “the most significant immediate cut in industrial tariffs ever achieved in a US free trade agreement, and manufacturers are the big winners”. But the agreement is much less lucrative for Australia’s competitive farm sectors. Australia could not overcome the growing protectionist sentiment among many US farmers, in spite of Canberra’s loyal support of the US war in Iraq and other Washington foreign policy aims. (“Financial Times”:http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1075982375094&p=1045050946495) According to the negotiators the agreement will result in zero tariffs on “99 percent of goods traded between the two countries.” Which shows how creative you can be with numbers. Restritive quotas (non-tariff barriers) will remain on United States’ imports of sugar, dairy, beef and peanuts with slow quota growth rates (1% annual growth for beef; 3 – 5% growth in the quotas on dairy). The elimination of US tariffs on other agricultural products will take up to 20 years. US agricultural exports to Australia will be duty and quota free from the first day of the application of the agreement (1 January, 2005). The overall value of the agreement for Australia will be smaller than it could have been. When the two sides began to discuss an FTA in early 2002, something much more ambitious seemed to be on the cards. At that stage, it appeared that free trade in dairy and sugar alone could deliver about 60% of the expected Australian gains from an FTA (CIS study commissioned by the Australian Department of Foreign Affairs and trade. Summary and download link “here”:http://www.dfat.gov.au/publications/aus_us_fta/index.html). But, because both markets were reasonably open in the first place, the trade impact of a free-trade agreement was never expected to be very large. The original estimate was for annual gains of just over $US3 billion in merchandise trade for both sides. What will the deal be worth? More data and analysis are needed to make a full accounting. But my initial assessement is:

  • *In trade terms* certainly _much less than even the modest projections_ of the CIS study. What we can see so far points to important commercial results for some Australian farm industries that have previously been almost shut out of the US market. The *present value* of the access for dairy, for example, will be an _additional_ $US40 million exports in the first year—more than doubling the value of its current access—growing to (possibly) an additional $US80 – $90 million in year 20. But the longer-term impacts will be much less than ‘free trade’ promised. In 2002 I estimated the free-trade potential for the Australian industry at about $US500 million (about one half of one percent of the value of US dairy sales). On current indications the agreement will permit access valued at about 20% of that level.
  • *Overall* however, the _outlook is much brighter_. It has always been likely that the biggest benefits from this agreement for Australia would be found not in the direct trade impact (because bilateral trade barriers were already low) but in the less tangible impacts of *closer economic integration with the world’s most productive economy*, one of our largest trading partners and our biggest source of (and destination for) investment flows. That benefit remains—only slightly tarnished by continued US agricultural protection.

Australia’s economic outlook will be improved by this agreement, in my view. Assuming, of course, that the proposed treaties make it through an increasingly protectionist US Congress and through a “probably hostile”:http://www.theage.com.au/articles/2004/02/09/1076175071254.html reception from the Australian opposition Labor party.

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