Agreements cut to suit

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This was published 14 years ago

Agreements cut to suit

By Martin Feil

US PRESIDENT Barack Obama has promised to review the North American Free Trade Agreement (the agreement between the US, Canada, and Mexico), because he wants to be sure that any bilateral trade agreements are in America's interest.

The US Congress has used ''Buy American'' legislation (which was first passed during the Great Depression) to protect America's steel industry, and this is likely to be extended to other major manufactured goods. There is no suggestion that Australia will be excluded from the steel-protection measures, even though our steel exports to the US are worth about half a billion dollars.

Why aren't these measures deemed a major breach of the United States Australia Free Trade Agreement? The Productivity Commission has been given a reference for a study into free-trade agreements, both bilateral and multilateral. It was given the reference on December 23, and it, in turn, only gave participants until February 1 to make submissions - while allowing itself 10 months to then write a study on a subject that has been very well understood for ages. I have the impression that Trade Minister Simon Crean, who is an avid supporter of agreements, has been unhappy about the statistics coming out of the bilateral agreements. He should be - they all show that Australia is being disadvantaged.

When the USAFTA began on January 1, 2005, it was promoted by then deputy prime minister and trade minister Mark Vaile as the most significant free-trade agreement in Australia's history. He said: ''This FTA is worth billions of dollars and will create thousands of jobs.''

In the past 23 years, Australian imports of goods and services from the US have exceeded our exports to that country by $275 billion. In the 18 years before the free-trade agreement came about, our trade deficit with the US averaged $10.95 billion a year; but in the five years since the USAFTA came into effect, our merchandise deficit with the US increased to $14.8 billion a year.

Mining the database to examine specific product groups shows that the USAFTA hasn't delivered the specific results that were promised as part of what the Australian government of the day called ''this historic agreement''.

Our exports of unprocessed and processed foods have already fallen during the agreement's short life - even though we were promised big improvements in access to the American market for our beef and agricultural products.

On top of this, we will certainly lose global sales as a consequence of the recent US decision to reintroduce subsidies on its dairy products. This event wasn't covered or considered in the agreement.

There have been a few Australian winners from the USAFTA. Officially, trade agreements aren't supposed to be about benefits for the few, but about an overall advantage for all sectors of the economies involved. Our industry policy for the past 30 years has been about creating economy-wide benefits, and the USAFTA was certainly promoted as achieving that intention.

The trade deficit numbers quoted above are from our trade in physical merchandise. They do not include income payments and payments for intangibles such as royalties, management fees, technical service fees, and dividends. When those items are included, our deficit with the US is much worse. If the unreported obligations of US affiliates to their parent companies were also tallied, the total deficit of our trade with the US would be frightening.

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Why did Prime Minister Rudd tell us emphatically that we couldn't introduce a ''Buy Australian'' campaign because it would result in retaliation? When has any country retaliated against an Australian trade policy? There have been dumping complaints, but that is not retaliation. That is a global process that involves hundreds of complaints a year about the breach of very specific rules agreed in the World Trade Organisation.

The Button Plans of the 1980s created quotas that decimated imports of cars and textiles, clothing and footwear. No one retaliated. Australia is too good a market and too poor an exporter of value-added goods for countries to want to start a trade war with us.

Once again, the cornerstone of Rudd government policy has been theoretical economics rather than evidence-based experience. Government rhetoric has collapsed when confronted by a small challenge from the US.

Times are tough in the crisis. We should know that. We don't need the millstone of the USAFTA-induced deficit around our neck to make them tougher. The US would walk away from the agreement in a heartbeat if it judged that it was in its sovereign interest to do so. We should adopt the same attitude.

Martin Feil is a tax and industry policy consultant and a former director of the Industries Assistance Commission. This is an edited excerpt from his book The Failure of Free-Market Economics, to be published next month by Scribe.

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