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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