Has the Australia-US Free Trade Agreement been good for both parties?

The Australia-US Free Trade Agreement (FTA) has just completed its seventh year. The US Bureau of Census calculated that most marriages which end last for eight years. That was almost fifty years ago. The itch is supposed to begin in the seventh year. The fundamental issue is whether the relationship has been good for both parties.

[Author, right: Martin Feil (B.Arts B.Ec M.Ec) is an economist specialising in Customs, logistics, ACCC actions, industry policy and international trade-related matters, including transfer pricing.]

Past events and behaviour are generally the best way to predict the likely course of future relationships.  

The FTA was a major event. It was conceived by the friendship between Prime Minister John Howard and President George Bush.  It had the total support of the Australian Department of Foreign Affairs and Trade. The chief negotiator for the USA was Richard Zoellick, a senior official in the US State Department and an ex-Managing Director of Goldman Sachs. He is now President and Chairman of Directors of the World Bank.

Zoellick arrived for the negotiations with a very large and sophisticated team. We were almost drowned before we knew we were in deep water. Australia’s prospects of selling Elaborately Transformed Manufactures (ETMs) to the USA were very limited at the outset. A lot of what was promised by the USA either didn’t happen (sugar and access to the US market for movies and TV) or was put on an eighteen year phasing program. 

We did allow concessions on the Pharmaceutical Benefits System and agreed to totally free imports entry by the USA. The suggestion that we would have access to the US Motor Vehicle  market was farcical.

We should be thinking about a thirty year-long itch. We have been opening up the Australian economy for that long and have only succeeded in closing down our ability to produce ETMs.

Despite the contrary rhetoric, we have been inward looking and confused in our thinking for a long time. We have focused on innovation and productivity. We have focused on our services sector. We have focused on a mining boom that has been all about extracting and exporting raw materials. 

We have never focused on what the rest of the world was doing. We even gave our hill-billy dogma a name – unilateral trade liberalisation. That meant that we would ignore what the rest of the industrialised world regarded as sensible industry policy practice.

In the first part of the 21st century we commissioned a number of studies which talked about the Low Road or the High Road (Australian Business Foundation) or the importance of “elaborately transformed manufactures”  (Koop et al). In Australia’s case that is mainly a name for further processing of agricultural products and minerals. Instead we decided we would be a service economy, or a regional finance capital or that innovation and productivity was the problem we needed to solve.

Recently we decided again, with a great deal of self-righteous enthusiasm, that we would lead the world in climate change legislation and the introduction of a far reaching and society changing Emissions Trading Scheme, with a collection of taxation and bells and whistles to compensate those industries still producing ETMs.

The biggest seducer in our ETM decline has been the USA through the FTA. Our policies created an open door for ETM imports sourced from the USA. China, with its voracious appetite for world best quality and lowest priced coal and iron ore, and its cheap consumer goods, has aided and abetted the USA.

We have been inward looking. Whenever we talk about ETMs we talk about aerospace and pharmaceuticals and high-tech pie in the sky stuff that we have absolutely no economic or productive capacity to manufacture. 

Our Government response to the rape of our mineral resources has been to attempt to introduce a mining tax. We should have been, and still should be, insisting upon BHP and Rio Tinto adding value to iron ore and coal instead of cheering as the minerals left our shores, without any value added. All of the elaborate transformation occurs overseas.

So it is really a double whammy. We have been inward looking with the nature of Australian manufacture and have concentrated on the domestic market and protection through tariffs or whatever. We have let obvious ETM exports go by. We have focused on service exports and hallucinogenic dreams of exporting jet planes and global Big Pharma. Everyone else has stuck to their knitting.

Australia’s great weakness is hubris. We think we are too smart to follow what is the obvious and proven course in other industrial economies. We have walked off on a false trail of innovation and productivity, which is frankly a dead end and a costly diversion for Australia. It must be connected to the manufacture of ETMs.

The table below clearly demonstrates our international weakness:

Vision-impaired Freddy could see the problem. Australia and New Zealand, the theoretical bastions of tariff reform and no non-tariff barriers, are at the absolute bottom of the class in terms of adding value to exports. We are too stupid for our own good.  

The second major statistical outcome is the USA’s benefit from the proportion of exports of ETMs, helped considerably by the FTA. The data below details the US-Australia imports/exports values from 2004-05 to 2010-2011.The statistics have been directly sourced from DFAT’s Statistical Section.

The obvious result from this table of facts is that we have bought more than a hundred billion dollars’ worth of goods from the USA than we have received from sales to them since the FTA commenced.

This outcome can be further exacerbated by the deficit in our trade with the USA for services (probably more than $20 billion over the FTA period, but needs its own analysis). There are also significant adjustment issues arising from the movement in the exchange rate between the US dollar and the Australian dollar since 2004. These adjustments would increase the Australian disadvantage. 

The analysis does not include internet ETM imports from the USA, which will be an increasingly significant item.

Make up your own mind. Is this a good deal for Australia?

We have to go back to first principles. We must do what the rest of the world is doing and balance our exports of ETMs against our imports. The US-AFTA has not benefited Australia. George Bush and John Howard have gone, but their legacy lingers on. It’s time to call it a day.

[Article originally appeared in The Age.]