Submission to Senate on US-Australia FTA

This is the text of my sub­mis­sion to the Sen­ate Select Com­mit­tee. The sug­ges­tions for lever­ag­ing the agree­ment have appeared here in ear­li­er posts[⇒ relat­ed sto­ry], but this post­ing also con­tains a sum­ma­ry in the Overview sec­tion of my views on the strengths and weak­ness­es of the Agree­ment.

This Agree­ment deserves the Senate’s full sup­port because it offers

  1. Impor­tant ben­e­fits for Aus­tralia that are not at present avail­able by oth­er means, includ­ing through WTO nego­ti­a­tion.
  2. An oppor­tu­ni­ty for Aus­tralia to build a broad­er region­al regime that will more close­ly inte­grate the economies of the Pacif­ic region through trade agree­ments

Overview

The Aus­tralia-Unit­ed States Free Trade Agree­ment achieves a still high­er degree of bilat­er­al trade lib­er­al­iza­tion between two economies that—with the notable excep­tion of US agri­cul­ture barriers—were already large­ly open to each oth­er. One of the main sources ofben­e­fit to Aus­tralia will be the Agreement’s mod­est cuts in bar­ri­ers that our laws and reg­u­la­tions still impose on doing busi­ness across our bor­ders:

  • Goods—Australia’s already low tar­iffs on imports of man­u­fac­tures and com­modi­ties from the Unit­ed States will be elim­i­nat­ed fromthe first day of imple­men­ta­tion. Most US tar­iffs on man­u­fac­tures (oth­er than tex­tiles and footwear) and on food (oth­er than sug­ar, beef, dairy, wine, peanuts and hor­ti­cul­ture) will also be elim­i­nat­ed.
  • Ser­vices—the ‘neg­a­tive list’ approach with a lim­it­ed num­ber of excep­tions appears to fur­ther open up, or at least to bind against future pro­tec­tion, a wide range of sec­tors includ­ing the finan­cial sec­tor on both sides.
  • Gov­ern­ment pro­cure­ment—Aus­tralia will open up its pro­cure­ment pro­ce­dures for the first time although excep­tions remain in place for a range of pro­grams includ­ing the Aus­tralian Indus­try Involve­ment (AII) Defence pur­chas­ing pro­gram that the Audi­tor Gen­er­al found to have un-assess­able net ben­e­fits, if any1. The USA will make sig­nif­i­cant pur­chas­ing oppor­tu­ni­ties avail­able to Aus­tralia.
  • An increase in the Aus­tralian invest­ment review thresh­olds (that seem like­ly to be extend­ed to oth­er par­ties, e.g. Japan under the NARA treaty)—although arbi­trary, non-trans­par­ent, dis­cre­tionary ‘nation­al inter­est’ test remains in place

The Agree­ment does not, how­ev­er, achieve its full poten­tial. Its defi­cien­cies include

  1. Omis­sion of sug­ar from any trade lib­er­al­iza­tion; a flaw that implic­it­ly weak­ens our case for an ambi­tious reform of agri­cul­tur­al mar­ket-access bar­ri­ers in the WTO nego­ti­a­tions
  2. Omis­sion of an investor-state dis­pute set­tle­ment pro­ce­dure that would make the for­eign invest­ment guar­an­tees in the agree­ment com­mer­cial­ly mean­ing­ful
  3. Omis­sion of any pro­vi­sions facil­i­tat­ing the tem­po­rary pres­ence of nat­ur­al per­sons—par­tic­u­lar­ly key busi­ness personnel—that would have made a sig­nif­i­cant, prac­ti­cal con­tri­bu­tion to eco­nom­ic inte­gra­tion
  4. Weak pro­vi­sions on the lib­er­al­iza­tion of dairy (which nev­er achieves a ‘free trade’ sta­tus) and beef (which, in the­o­ry, remains sub­ject to spe­cial safe­guard action indef­i­nite­ly) and hor­ti­cul­ture (which is bur­dened with min­i­mum price con­di­tions dur­ing the imple­men­ta­tion peri­od)
  5. Bur­den­some rules of ori­gin for tex­tiles that effec­tive­ly bar any ben­e­fits for Aus­tralian man­u­fac­tur­ers in the US appar­el mar­ket

Due to these omis­sions, the eco­nom­ic ben­e­fits of the Agree­ment are like­ly to be even small­er than the esti­mates of its mod­est poten­tial2.

Economic evaluation

By the time the Enquiry con­venes, the eco­nom­ic mod­el­ing com­mis­sioned by the Gov­ern­ment will be com­plete. Plau­si­ble results from any mod­el will show

  1. Rel­a­tive­ly small sta­t­ic gains from the Agree­ment
  2. Much more sig­nif­i­cant dynam­ic gains that will be, how­ev­er, dif­fi­cult to iden­ti­fy
  3. Fears expressed about poten­tial ‘trade diver­sion’ are overblown

It is impor­tant to bear in mind, too, that the eco­nom­ic mod­els will not iden­ti­fy some of the sig­nif­i­cant val­ue in the Agree­ment aris­ing from the ‘stand­still’ com­mit­ment that both gov­ern­ments will adopt.


    Sta­t­ic gains: We know that these will be small because they mea­sure the price impact on the sup­ply bal­ance in the econ­o­my due to the removal of the explic­it and implic­it tax­es on doing busi­ness across the com­mon bor­der. The Aus­tralian and US economies were already most­ly open to each oth­er in both goods and ser­vices trade (although not in agri­cul­ture) so the response of con­sumers and pro­duc­ers to the change in prices is bound to be small. A close read­ing of the study com­mis­sioned in 2001 from the Cen­ter for Inter­na­tion­al Eco­nom­ics on the ben­e­fits of the Agree­ment show that the expect­ed change in prices for goods (for exam­ple) from full lib­er­al­iza­tion of goods trade is less than 5 per­cent. This is the aver­age cash val­ue of the bar­ri­ers that the agree­ment will remove. It does not sug­gest that there are big changes ahead in prices or in tax trans­fers. It’s more dif­fi­cult to mea­sure the bar­ri­ers that the two sides main­tained to each oth­ers’ trade­able ser­vices, but the CIE study again sug­gests that they are rel­a­tive­ly small. The net sta­t­ic gains have to take account, too, of a one-off loss of gov­ern­ment rev­enue when the duties are removed, some of which are effec­tive­ly trans­fers to for­eign exporters whose prod­ucts are no longer being taxed4. Of course, for­mer­ly pro­tect­ed indus­tries also con­sid­er that they ‘lose’: they lose the high­er prices that allowed them to ‘bid up’ the price of their inputs (labor, land, mate­ri­als). But their ‘loss’ is not a loss to Aus­tralia; mere­ly a trans­fer from them to con­sumers. Dynam­ic gains:  These are the prin­ci­pal gains from trade and are always like­ly to be larg­er than the sta­t­ic results.  Dynam­ic esti­mates take account of the sec­ond-round effects due to the ini­tial changes in prices and pro­duc­tion that result from the removal of tax­es on doing busi­ness across a bor­der. They show the effects of the gains from spe­cial­iza­tion in trade after resources that were for­mer­ly locked into low­er val­ue activ­i­ties move to activ­i­ties where the econ­o­my has greater com­par­a­tive advan­tage. Dynam­ic gains are hard­er to iden­ti­fy than the sta­t­ic gains, because nei­ther eco­nom­ic mod­el­ers nor gov­ern­ments ever know enough about the mar­ket to project where the gains will occur. But they are more cru­cial than the sta­t­ic gains because they reveal the ben­e­fits that flow from the clos­er eco­nom­ic inte­gra­tion of our econ­o­my with the econ­o­my of the Unit­ed States, includ­ing pro­duc­tiv­i­ty improve­ments in our econ­o­my which, from a macro-eco­nom­ic view­point, are “near­ly every­thing5″ that is need­ed for high­er growth and greater pros­per­i­ty. Trade diver­sion: The poten­tial ‘diver­sion’ of trade away from third coun­tries whose more com­pet­i­tive sup­ply is masked by the mar­gin of pref­er­ence cre­at­ed by the bilat­er­al deal is a the­o­ret­i­cal objec­tion to any dis­crim­i­na­to­ry agree­ment. Econ­o­mists have, since the 1950s, dis­put­ed whether diver­sion would be like­ly to out­weigh the cre­ation of trade (a desir­able effect of spe­cial­iza­tion in pro­duc­tion) in a free trade agree­ment. In the past decade or so, it has become pos­si­ble to mea­sure the effects of actu­al FTAs and cus­toms union. The results do not, how­ev­er, pro­vide unam­bigu­ous evi­dence one way or the oth­er6. The already-low aver­age bar­ri­ers to bilat­er­al trade between Aus­tralia and the Unit­ed States reflect­ed MFN tar­iff rates that will not change as a result of the bilat­er­al agree­ment. The mar­gin of pref­er­ence for region­al imports—the duty-paid price advan­tage of region­al imports over imports from the rest of the world— will, there­fore, also be low after the Agree­ment comes into effect7. In these cir­cum­stances, there seems to be a very small dan­ger of trade diver­sion. Stand­still: Some of the ben­e­fits of the Agree­ment are unlike­ly to fig­ure at all in the eco­nom­ic mod­el­ing. The ‘stand­still’ pro­vi­sions of the agree­ment pro­vide a guar­an­tee against future increas­es in bor­der bar­ri­ers in the Unit­ed States to Aus­tralian exports, even on those prod­ucts and ser­vices where the lib­er­al­iza­tion sched­ule is extend­ed; even on ‘non-con­form­ing mea­sures’ on items cov­ered by the ser­vices sec­tor agree­ment; even on pro­tec­tion for sug­ar. The sig­nif­i­cance of this guar­an­tee can be gauged by the uncer­tain­ties that sur­round trade issues in US Con­gres­sion­al and Pres­i­den­tial elec­tions lat­er this year. Trade poli­cies such as the ‘out­sourc­ing’ of man­u­fac­tur­ing and ser­vices jobs are a fore­ground issue; in this envi­ron­ment, and in the future, the ‘stand­still’ agree­ment has a real cash val­ue, not only to Aus­tralian exporters but also to investors on both sides of the Pacif­ic.

Impact on the multilateral trading system

This agree­ment rep­re­sents a cred­itable effort by the two gov­ern­ments that meets min­i­mum require­ments for com­pli­ance with WTO rules8, but it is not a ‘bea­con’ of reform that might inspire the sort of ambi­tious out­come that Aus­tralia is seek­ing in the Doha round of WTO trade nego­ti­a­tions . The sin­gle rea­son is sug­ar. The omis­sion of any lib­er­al­iza­tion of the most pro­tect­ed prod­uct in the US agri­cul­tur­al tar­iff sig­nals that, even in bilat­er­al nego­ti­a­tion with one of its clos­est trad­ing part­ners, the USA is unwill­ing to adopt a com­pre­hen­sive approach to the reduc­tion of agri­cul­tur­al bar­ri­ers. The sug­ar omis­sion says, as if in neon: “we intend to make excep­tions to the lib­er­al­iza­tion of agri­cul­tur­al mar­kets.” This is a seri­ous blow to Aus­tralian (and Cairns Group) hopes in the Doha round of nego­ti­a­tions on Agri­cul­ture. It sig­nals that the USA will not only accept but will even demand that ‘sen­si­tive’ prod­ucts should remain pro­tect­ed; in the US case, sug­ar. Once that thresh­old is crossed, the way is opened up for economies with much longer lists of excep­tions (the EU, India, Japan, Korea and many devel­op­ing coun­tries) to insist on main­tain­ing pro­tec­tion for their own ‘sen­si­tive’ prod­ucts. Since ‘sen­si­tive’ prod­ucts are, by def­i­n­i­tion, those with the high­est tar­iffs there will be lit­tle prospect in these nego­ti­a­tions of ‘knock­ing down’ the tar­iff peaks that cause so much of the dam­age in world food mar­kets9. The excep­tions pro­ce­dure will also make it more dif­fi­cult to reach agree­ment on a sim­ple, uni­form, har­mo­niz­ing for­mu­la for cut­ting agri­cul­tur­al tar­iffs. The most regret­table aspect of the sug­ar fias­co is that even a par­tial result—an increase in the US import quota—would have avoid­ed this very neg­a­tive sig­nal. It is pos­si­ble that, in the con­text such as the mul­ti­lat­er­al round where the poten­tial for rec­i­p­ro­ca­tion of a Unit­ed States offer to cut sug­ar pro­tec­tion would be much greater (than in the bilat­er­al nego­ti­a­tion with Aus­tralia), the USA may change tack and pur­sue a ‘no excep­tions’ rule.  We can only hope so.

Impact on Australian economic policies

In 1997, in a paper for the Syd­ney Uni­ver­si­ty Cen­ter for Amer­i­can Stud­ies [10] I argued that the Aus­tralian gov­ern­ment should respond pos­i­tive­ly to the ten­ta­tive Clin­ton Admin­is­tra­tion sig­nals on a US-Aus­tralia free trade agree­ment. My main rea­son for advo­cat­ing the agree­ment was that it would put extend and lock-in into the pro­gram of micro-eco­nom­ic reform in Aus­tralia that had been pur­sued strong­ly up to the ear­ly 1990s but had been allowed to drift as, first, reces­sion under­mined the appetite for reform and, sub­se­quent­ly, the focus of the Howard government’s eco­nom­ic restruc­tur­ing efforts shift­ed to rev­enue chang­ing the tax mix. To a large extent that’s just what has hap­pened. Although the tar­iff reduc­tions and ser­vices lib­er­al­iza­tion are dis­crim­i­na­to­ry, the Unit­ed States is our largest sin­gle trad­ing part­ner count­ing goods and ser­vices togeth­er and is a com­pet­i­tive sup­pli­er in many sec­tors. So it is very like­ly that this agree­ment will set the base­line in com­pet­i­tive con­di­tions in the Aus­tralian mar­ket, par­tic­u­lar­ly for man­u­fac­tures and ser­vices. It will make the remain­ing, gen­er­al­ly low, lev­els of pro­tec­tion against oth­er suppliers—such as the Euro­pean Union our sec­ond largest sup­pli­er of goods and services—less sus­tain­able. The 10-year elim­i­na­tion of Aus­tralian tar­iff on US motor-vehi­cles and parts is a good exam­ple. The Gov­ern­ment decid­ed in Decem­ber 2002 to cut the import duty on motor vehi­cles from 10% in 2005 to 5% by 2010 but to con­tin­ue to offer the indus­try a mas­sive bribe; a $500 mil­lion per year trans­fer from the so-called “Auto­mo­tive Com­pet­i­tive­ness and Invest­ment Scheme” (ACIS) for a fur­ther 10 years from 2005 to its ter­mi­na­tion in 2005.  The Agreement’s elim­i­na­tion of the tar­iff on imports of auto­mo­biles from the USA by 2015 sets a ‘base­line’ for the indus­try that ‘locks-in’ that pol­i­cy deci­sion. Even if no cars are import­ed from the USA, the option to do at zero tar­iff makes it unlike­ly that the indus­try would be inter­est­ed in any increase in pro­tec­tion or even the con­tin­u­a­tion of a 5% rate on vehi­cles from oth­er sources. The tar­iff becomes a com­pet­i­tive dis­ad­van­tage. Since the ACIS trans­fer is based on tar­iff cred­its, the agree­ment also has the effect of ‘lock­ing in’ the planned ter­mi­na­tion date.

Opportunities to ‘leverage’ this agreement in the Pacific region

A healthy WTO is essen­tial for an econ­o­my such as ours, which has only a 1 per­cent share of world trade and depends on com­modi­ties for 40% of exports. The most basic rea­son is that prices for com­modi­ties, and there­fore our terms of trade, are formed by access to demand in glob­al mar­kets, not bilat­er­al or even region­al trade. The WTO is, how­ev­er, only limp­ing along. The col­lapse of the Can­cún Min­is­te­r­i­al meet­ing last Sep­tem­ber con­firmed that the old for­mu­las for man­ag­ing the glob­al sys­tem no longer work. The Unit­ed States and Europe fum­bled their attempts to lead gov­ern­ments to a con­sen­sus on seri­ous trade conflicts—some of their own mak­ing — and on new direc­tions for the Orga­ni­za­tion. The gov­ern­ments of the giant devel­op­ing economies of Chi­na, Brazil and India — who must even­tu­al­ly assume more respon­si­bil­i­ty for the mul­ti­lat­er­al sys­tem — have begun to exert their own lead­er­ship. But, lack­ing the eco­nom­ic dom­i­nance of the Unit­ed States or the sup­port in WTO that Europe can call-up from its post-colo­nial hin­ter­land, the roles of the devel­op­ing giants in WTO remain ill-defined. They are individually—and through the IBSA ini­tia­tive, jointly—attempting to build coali­tions of sup­port among oth­er devel­op­ing coun­tries via region­al agree­ments. Chi­na is nego­ti­at­ing region­al agree­ments with the ten mem­bers of ASEAN and with Korea; India has begun to nego­ti­ate a trade pact that is planned to encom­pass all of South Asia; Brazil has retained its dom­i­nance of Latin Amer­i­ca despite US attempts to redraw the region­al trade map in the Free Trade Areas of the Amer­i­c­as. Our trade pol­i­cy out­look, too, com­pris­es a grow­ing menu of ‘free trade’ agree­ments. In addi­tion to agree­ments with New Zealand and Sin­ga­pore, the gov­ern­ment is ready to rat­i­fy this Aus­tralia-U nit­ed States FTA and the agree­ment nego­ti­at­ed in the past few months with Thai­land. It is prepar­ing to nego­ti­ate with Chi­na— which is simul­ta­ne­ous­ly nego­ti­at­ing with ASEAN and New Zealand—and it has received an invi­ta­tion from the ASEAN eco­nom­ic min­is­ters that “defrosts” a pro­pos­al for an AFTA-CER region­al agree­ment, frozen by Heads of Gov­ern­ment at their the 2001 Chi­ang-Mai meet­ing. Final­ly (for the present) there is the pos­si­bil­i­ty that Aus­tralia could revis­it its for­mal rela­tions with Japan, to repair the near non-sequitur of the last Howard-Koizu­mi talks. At present, this prospect is lit­tle more than a tan­gle of sep­a­rate­ly nego­ti­at­ed trade agree­ments with vary­ing, over­lap­ping geome­tries and a con­fu­sion of lib­er­al­iza­tion sched­ules, rules of ori­gin, cov­er­age and dis­pute pro­vi­sions. But it need not be. With imag­i­na­tive diplo­ma­cy on the part of Aus­tralia, the tan­gle could be re-con­fig­ured a some­thing much more ben­e­fi­cial for our own econ­o­my and for the future of the region­al econ­o­my. The tan­gle could be re-designed to achieve some­thing not unlike the ambi­tious “APEC region­al agen­da” There is a key dif­fer­ence between the cur­rent col­lec­tion of FTAs and the APEC agen­da that makes such a “Pacif­ic-wide” free trade zone fea­si­ble now, where APEC has stalled. APEC was found­ed on a promise of ‘uni­lat­er­al lib­er­al­iza­tion’ by each Mem­ber econ­o­my that, pre­dictably, turned out to be (near­ly) emp­ty. The idea that, for exam­ple, the USA would con­sid­er offer­ing oth­er APEC mem­bers, includ­ing Chi­na, ‘free trade’ by 2010 and await China’s ‘non-rec­i­p­ro­cal’ imple­men­ta­tion of the same pol­i­cy by 2020 was lit­tle more than wish­ful think­ing. It assumed, wrong­ly, that an ana­lyt­i­cal obser­va­tion (that most small coun­tries lib­er­al­ize their trade bar­ri­ers, even­tu­al­ly, on a uni­lat­er­al basis) could be made the basis of a polit­i­cal pro­gram. The cur­rent region­al nego­ti­a­tions are, by con­trast, based on rec­i­p­ro­cal oblig­a­tions that con­tain a firm pro­gram of access improve­ments embed­ded in an enforce­able bilat­er­al con­tract. But there’s a sec­ond dif­fer­ence, too that is more in APEC’s favor. APEC sought a uni­form stan­dard of lib­er­al­iza­tion among mem­bers; a sin­gle ‘free trade’ ide­al. That ide­al has tan­gi­ble ben­e­fits that a series of rec­i­p­ro­cal pacts, each one craft­ed for the inter­ests of its dif­fer­ent mem­bers will be hard-put to achieve. A col­lec­tion of over­lap­ping region­al agree­ments, such as we and oth­er region­al economies are now cre­at­ing, will bad­ly under­shoot the poten­tial iden­ti­fied in the APEC idea if it embodies—as a result of the dif­fer­ent terms and cov­er­age and rules of ori­gin in each pact—the sort of stul­ti­fy­ing com­plex­i­ty, ‘tai­lor­ing’ of pro­tec­tion, and even sched­ule rever­sals that has dogged, for exam­ple, the ASEAN Free Trade Area since 1992. The ben­e­fit for Aus­tralia of a broad­er approach to ‘region­al free trade’ is that the more diverse the region and the big­ger its mem­ber­ship, the greater our own trade ben­e­fits and the small­er the hid­den costs of trade-diver­sion. We should be active­ly plan­ning to extend to our oth­er trad­ing part­ners — e.g the oth­er mem­bers of ASEAN, Korea and, even­tu­al­ly, Japan —the same arrange­ments that we have agreed with New Zealand, Sin­ga­pore, Thai­land and the USA and that we hope to put in place with Chi­na. There is no need to resile from present com­mit­ments in order to turn the present tan­gle into a design for region­al growth. Also, there are a lot of tricky ques­tions about how to con­fig­ure such a design12. But the he Aus­tralian gov­ern­ment must take some delib­er­ate com­ple­men­tary steps to get the process mov­ing:

  1. Devel­op ideas for the homolo­ga­tion of exist­ing RTAs based on, for exam­ple basic com­pat­i­bil­i­ty in cov­er­age, lib­er­al­iza­tion ‘mile­stones’, stand­still pro­vi­sions and region­al exten­sion of non-bor­der pro­vi­sions e.g. on mutu­al recog­ni­tion. That this ‘homolo­ga­tion’ might take the form of a WTO agree­ment that extend­ed or replaced the cur­rent GATT Arti­cle XXIV.
  2. Cre­ate tem­plates for homolo­ga­tion that could apply to all, or at least a large sub-set, of exist­ing and pro­posed agree­ments in the APEC region
  3. Advo­cate the idea with oth­er APEC part­ners begin­ning at the APEC Trade Min­is­ters’ meet­ing in Chile in June 2004
An Australian technology

The Aus­tralian gov­ern­ment is well placed by expe­ri­ence and by its rela­tions with oth­er coun­tries in the region to trans­form the RTA tan­gle in to a re-invig­o­rat­ed APEC process. Aus­tralian gov­ern­ments and their advi­sors have devel­oped some of the best technologies—combining analy­sis and diplomacy—for craft­ing mul­ti­lat­er­al con­sen­sus on trade agree­ments. The out­stand­ing tes­ta­ment to this capac­i­ty is Australia’s unchal­lenged chair­man­ship of the Cairns Group for most of the past two decades: none of the oth­er mem­bers con­sid­ered it could do the job bet­ter13. Also, unique­ly among ‘west­ern’ economies, Aus­tralia is estab­lish­ing bilat­er­al eco­nom­ic inte­gra­tion agree­ments with the mega-economies of both the indus­tri­al and the devel­op­ing world as well as with our imme­di­ate region­al neigh­bours.  It’s pos­si­ble that China—which has no expe­ri­ence in the design of a WTO-com­pli­ant eco­nom­ic inte­gra­tion agree­ment such as our agree­ment with the USA—wants to nego­ti­ate with Aus­tralia to acquire the tech­nol­o­gy to man­age its own future region­al nego­ti­a­tions. These fac­tors give us, now, both oppor­tu­ni­ty and the ‘track record’ to advo­cate

a new approach to a region­al trade set­tle­ment14.

——

fn1. The Audi­tor-Gen­er­al, Audit Report No.46 2002—03. Accessed at http://www.anao.gov.au/WebSite.nsf/Publications/899EF35C11B1F5FACA256D3D000605A1

p id=“fn2”>2 Australia—United States Free Trade Agree­ment, Cen­ter for Inter­na­tion­al Eco­nom­ics (Can­ber­ra), June 2001. CIE point­ed to gains of about — 10 bil­lion on each side over 20 years: real mon­ey, but not a large sum for either econ­o­my.

p id=“fn3”>3 Of course, we trade more with the rest of the world than we do with the Unit­ed States, so the impact of the FTA on the health of the world trad­ing sys­tem is hard­ly a dis­in­ter­est­ed con­cern.

p id=“fn4”>4 Shares in the trans­fer depend on the price elas­tic­i­ty of demand for imports. A sim­i­lar trans­fer of tax rev­enues ‘fore­gone’ by gov­ern­ment takes place on the US side. It mat­ters to the out­come of this admit­ted­ly flawed cost/benefit assess­ment how you treat the rev­enue fore­gone: as a ‘once only’ trans­fer or as a stream of future earn­ings fore­gone. In my view, no gov­ern­ment tax (or trans­fer) can prop­er­ly be con­sid­ered as a stream of future earn­ings. Since gov­ern­ments are free to vary any tax at any time, the rev­enue can­not be thought of as hav­ing a ‘future val­ue’ that can be hypoth­e­cat­ed to the pur­pos­es of the ben­e­fi­cia­ry or dis­count­ed like a secu­ri­ty.

p id=“fn5”>5 Australia’s eco­nom­ic ‘mir­a­cle’, Banks G., Aus­tralian Pro­duc­tiv­i­ty Com­mis­sion, talk to the Nation­al Insti­tute of Eco­nom­ics and Busi­ness, ANU, Can­ber­ra, 1 August 2003. Quot­ing the US econ­o­mist, Paul Krug­man.

p id=“fn6”>6 The WTO rules are spelled out in Arti­cle XXIV, Add Arti­cle XXIV and the Uruguay Round Under­stand­ing on the Inter­pre­ta­tion of Arti­cle XXIV. The Aus­tralia-US FTA, pri­ma facie, meets all of the require­ments except that of Para. 3 of the Under­stand­ing which clar­i­fies the ref­er­ence in Arti­cle XXIV.5© to a ‘rea­son­able length of time’ for the ‘inter­im period’—that is for the com­ple­tion of the lib­er­al­iza­tion under an FTA. This may be more than 10 years only in ‘excep­tion­al cir­cum­stances’ that must be explained to the WTO Coun­cil. Since the Aus­tralia-US FTA pro­vides for an ‘inter­im peri­od’ longer than 10 years in the case of many prod­ucts (dairy, beef, hor­ti­cul­ture, peanuts etc), the two Gov­ern­ments may have to explain ‘excep­tion­al cir­cum­stances’ to the Coun­cil. The Under­stand­ing does not how­ev­er pro­vide for the Coun­cil to approve or dis­ap­prove of the expla­na­tion, so the ques­tion of whether any peri­od would actu­al­ly be in breech of the Under­stand­ing on this point is moot.

p id=“fn7”>7 Eco­nom­ic impacts of an Aus­tralia— Unit­ed States Free Trade Area, Cen­ter for Inter­na­tion­al Eco­nom­ics, Can­ber­ra, 2001. Table 4.3 shows that full trade lib­er­al­iza­tion leads to a change in aver­age import prices of about 5 per­cent.

p id=“fn8”>8 World Trade Report 2003, World Trade Orga­ni­za­tion, Gene­va 2003, Box BI.2. For exam­ple, although there is lit­tle evi­dence of trade diver­sion in either the EU or NAFTA, the degree of trade cre­ation due to the region­al agree­ment is not very large either. The coun­tries in these regions trade with each oth­er more intense­ly than with the rest of the world, but not much more so than would be expect­ed in any case, giv­en their geo­graph­i­cal con­ti­gu­i­ty and open­ness to each other’s mar­kets.

p id=“fn9”>9 “Peak” tar­iffs in indus­tri­al­ized coun­tries are defined by WTO as tar­iff rates over 15 per­cent. The high­est tar­iff rates in the Unit­ed States (as else­where) are for the most part the ‘out of quo­ta’ rates on agri­cul­tur­al prod­ucts where access is con­trolled by a two-part quo­ta (a ‘tar­iff rate quota&#8217). In fact, although the medi­an US MFN tar­iff on agri­cul­tur­al prod­ucts is only 2.7 per­cent, the mean is almost 12 per­cent; pulled up by a small num­ber of very high tar­iff rates includ­ing 24 lines with tar­iffs between 100 and 350 per­cent. See Pro­files of Tar­iffs in Glob­al Agri­cul­tur­al Mar­kets (AER-796), USDA Eco­nom­ic Research Ser­vice, Wash­ing­ton D.C., 2001

p id=“fn10”>10 The effect of bor­der pro­tec­tion for agri­cul­ture commodities—particularly in the large indus­tri­al­ized economies— is to depress the world price of those com­modi­ties to the detri­ment of devel­op­ing coun­tries and com­pet­i­tive exporters like Aus­tralia. The ‘peak’ tar­iffs in prod­ucts such as sug­ar have the biggest price sup­pres­sion effect.

p id=“fn11”>11 “Aus­tralia, Unit­ed States and Free Trade”, Cen­ter for Amer­i­can Stud­ies, Syd­ney 1987. At the time this was far from an ortho­dox view: the gov­ern­ment did call for an eval­u­a­tion of the idea from its advi­sors, who crit­i­cized it strong­ly for a vari­ety of rea­sons but most­ly because it was not the ortho­dox view.

p id=“fn12”>12 Among oth­ers: the dif­fi­cul­ty of defin­ing region­al ‘bor­ders’. Unlike the cur­rent non-rec­i­p­ro­cal APEC pro­pos­als (the “Bogor Declaration&#8221), an APEC con­fig­ured around rec­i­p­ro­cal agree­ments would prob­a­bly not be ‘open’ to non-rec­i­p­ro­cal non-region­al economies. One exam­ple of this chal­lenge would be to rec­on­cile an ‘APEC’ design with those agree­ments, such as MERCOSUR and the pro­posed MERCOSUR-EC agree­ment, that com­prise some APEC economies (e.g. Chile) but also many non-APEC economies. The answer might lie in a WTO agree­ment that pro­vid­ed a new mul­ti­lat­er­al frame­work for RTAs. As it hap­pens, the man­date for the Doha Round of WTO trade nego­ti­a­tions already pro­vides for the nego­ti­a­tion of new rules and pro­ce­dures for RTAs (para­graph 29).

p id=“fn13”>13 The evi­dence of the past six months, fur­ther­more, shows that the lead­er­ship of the ‘G-20’—half of them Cairns Group members—is dis­cov­er­ing for them­selves immense chal­lenge of coor­di­na­tion on mul­ti­lat­er­al agri­cul­tur­al nego­ti­a­tions that Aus­tralia has man­aged all of this time.

p id=“fn14”>14 To suc­ceed, such a strat­e­gy would need the sup­port of both the Unit­ed States and Chi­na. But there is no rea­son to believe that will be dif­fi­cult. No mat­ter how warm the bilat­er­al rela­tion­ship, no ‘mega-econ­o­my’ is like­ly to con­sid­er a bilat­er­al agree­ment with a much small­er econ­o­my like Aus­tralia as an end in itself: the rec­i­p­ro­cal ben­e­fit is too small. Although the cre­ation of a mul­ti­lat­er­al net­work of RTA’s in which nei­ther pro­vides the ‘hub’ might not be a strate­gic first choice, there are costs inher­ent in a hub-and-spoke con­fig­u­ra­tion that each could avoid by being a big node in a more bal­anced net­work.

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