Report to Senate Committee on FTA

The battle of the modellers over the US-Australia free trade agreement continues. The critics of preferential trade agreements (PTA’s) have won the latest round. A report commissioned by the Senate Committee looking at the US-Australia FTA from “Dr Philippa Dee”: claims that the Agreement’s costs outweigh the benefits, according to the Australian newspaper, due to changes in access to the pharmaceutical benefits scheme and to changes in copyright law. bq. These concerns are outlined in a special study commissioned by the Senate committee reviewing the proposed agreement. The findings, scheduled for release this week, could mean the FTA faces increased opposition in the Senate. (“The Australian”:,5744,9836615%5E601,00.html) When I testified at a Committee hearing last week, Senator Peter Cook, a former Labor Trade Minister who heads the Committee, referred approvingly to an earlier report by Dr Dee (among others). He disagreed with my assertion that the preponderance of economic evidence on the impacts of PTA’s was, at worst, ambiguous. In a paper she authored with Richard Adams and other staff of the Productivity Commission last year, Dr Dee claimed to find—contrary to many earlier studies—that the majority of regional trade agreements studied diverted more trade (away from economically efficient sources) than they created:

from Table 4.3 of the PC’s reportNew evidence on PTAs as causing net trade creation or diversion
_Past estimates__New estimates_
Net trade creationInconclusiveNet trade diversionNet trade creationNet trade diversion

The full paper, however, provides some important caveats on the conclusion suggested by this table. First, this table reports only on the merchandise trade impacts as measured by the authors. It omits the impacts of investment, which the report acknowledges is more ofen positive bq. “[The model] does find evidence that foreign direct investment responds significantly to the non-trade provisions of PTAs. Interestingly, this is in contrast to a lack of response of FDI to bilateral investment treaties. Further, for most of those agreements where non-trade provisions have affected FDI, the result has been net investment creation rather than diversionfrom the “Productivity Commission report (link to pdf file, about 600k)”: Furthermore, the trade diversionary impacts were shown by the statistical analysis to be less convincing in the case of agreements with a small number of members: there was a “large standard error” in the estimates of intra-trade in these smaller agreements.

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