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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