US motives in an FTA

Otherwise intelligent people are apparently puzzled about what the USA could get out of a Free Trade Agreement with Australia and, seeing nothing obvious that the USA might want assume that the US objectives are non-obvious and possibly devious.  It’s fertile grounds for conspiracy theorists. The Opposition Spokesman (Craig Emerson), desperate for notice, says that the Australian government is in league with the USA in pursuit of a hidden agenda to institute higher pharmaceutical costs and the ‘full sale of Telstra’ as part of the FTA deal. Like all mythologists, the purveyors of the assumption that the USA will demand compliance with the 70-year (‘Bono bill&#8217)copyright term or the abolition of the Pharmaceutical Benefits Scheme (PBS) in return for an FTA agreement are undeterred by the lack of evidence. Neither of these objectives is mentioned in the one authoritative statement of what the USA wants from the deal—the letter that the US Trade Representative sent to the President of the Senate late last year. Nor has either yet emerged as an issue for the negotiations, according to government officials. In March, the US negotiator told the media that he wasn’t sure whether the claims by some US pharmaceutical companies about pricing in the PBS was an issue that could be addressed in an FTA. It’s just not necessary to go hunting around for devious motives: the incentives are in fact obvious. Even the economic advisors to the Australian government had no problem finding a pretty clear US motive in their report in 2001 on the likely benefits of an FTA.

“… For GDP, the net present value of benefits [from an FTA]is US$15.5 billion for Australia and US$16.9 billion for the United States.”

Hard to imagine a more straightforward result.  The USA, which has for decades run a substantial trade surplus with Austrlia, will be better off with a Free Trade Agreement (so will we) and will gain even more than Australia. Of course, there are debates over the CIE numbers. In my paper on the potential gains for Agriculture in the FTA (for the AUSTA Conference) I suggest some reasons for thinking that CIE may have underestimated the gains for Australia. As is often the case with models of the welfare gains from trade its possible—even likely—that the gains have been underestimated for both sides. But wait… there’s more. Its a reliable rule of thumb that the motives for almost any ‘regional agreement’ will turn out to be more about foreign policy than economic gain. As it happens, there are some non-obvious gains for both the USA and Australia in an ambitious FTA. But that story has to wait for another post …

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