Free Trade Lite
The U.S. and Australia signed a Free Trade Agreement (FTA) this week. The "Lite" in the post title refers to (a) the bilateral rather than multilateral scope of the agreement, and (b) the relatively limited relaxation of burdens on agricultural trade in the treaty. [The link above is to the US web page on this, the Australian page is here.]
Paul Blustein reported on the agreement for the Washington Post
- "The United States and Australia announced yesterday that they concluded a free-trade agreement, one of the biggest in a series of two-way deals the Bush administration is pursuing with a number of countries aimed at tearing down barriers to international commerce.
But the accord, while scrapping tariffs on nearly all manufactured goods traded between the two countries, would maintain heavy U.S. protection against imports of Australian sugar, beef and dairy products. That is a sign of the enormous clout American agricultural producers wield over U.S. trade policy, especially in an election year, and it underlines the difficulties of securing broader trade agreements with developing countries whose farmers want to sell more of their goods abroad..."
Free Trade Agreements are agreements to reduce trade barriers between small small groups of countries; the alternative is world-wide "multilateral" negotiations and agreements. The Congressional Budget Office published an issue brief on "The Pros and Cons of Pursuing Free-Trade Agreements" last July.
- "...In most cases, all of their effects--good and bad--should be extremely small. However, the arguments for and against FTAs extend beyond their net economic effects on the United States to considerations of foreign policy and tactics for achieving multilateral free trade.
The net effects of the new FTAs on the other countries involved should also be beneficial but much more significant than the effects on the United States because of the much smaller size of those countries' economies. FTAs thus provide a way for the United States to help various countries for foreign policy reasons while having little effect on the United States. They also offer a way to continue making headway toward the goal of free trade in the face of difficulties that have slowed progress in the Doha Round of WTO negotiations. In fact, they may help stimulate progress in that round because countries not party to the FTAs may fear being left behind while countries that are party to such agreements expand trade with the United States.
Critics worry, however, that the pursuit of free-trade agreements could divert the world from multilateral negotiations and lead to the development of rival trading blocs centered on the United States, the European Union (EU), and Japan. Indeed, the EU has negotiated a number of FTAs in recent years. Critics also argue that because of differences in negotiating dynamics, FTAs between small developing countries and such large entities as the United States or the EU are likely to leave in place some trade barriers that multilateral negotiations in the absence of FTAs would eliminate. Foreign-policy and tactical considerations must be weighed alongside the economic arguments in determining whether the pursuit of FTAs is an advisable path to the goal of multilateral free trade."
The GAO study looks at the evolution of the criteria used to determine which countries to engage in FTA negotiations, and the evolution of the internal U.S. decision-making structure. The report's theme, how does the U.S. allocate its scarce negotiating resources among competing ends:
- "...The administration�s overall trade liberalization strategy has driven decisions about deploying resources to advance the U.S.�s ambitious FTA negotiating agenda. However, decisions to pursue FTAs have been made with little systematic planning regarding trade-offs with other trade priorities, even though FTAs are resource intensive. USTR staff and travel funds are heavily committed to FTAs. For example, FTA-related travel accounted for 37 percent of USTR�s travel budget in fiscal year 2003. USTR also relies on specialists at other agencies to assist with negotiations and analysis. USTR is taking steps, such as sequencing negotiations, to address these constraints. Because of concerns over the resources required to accomplish the growing FTA negotiating agenda, the consideration of resource constraints has now been included as one of the factors used for selecting FTA partners. However, decisions to pursue FTAs still come without systematic data or planning for the actual resources that USTR or other agencies require. As more FTAs are contemplated in the wake of the failed Cancun WTO talks, existing mechanisms may prove inadequate to the task of aggressively pursuing a bilateral FTA agenda while remaining engaged in regional and multilateral forums..."
- "...There are two issues in deciding whether economic integration with the US is a good idea. The first is whether, in general terms, the economic and social institutions of the US are better than those of Australia. If you read the writings of FTA supporters, it's pretty clear that they think this is the case, that we would be better off with less government intervention of all kinds, weaker unions, greater income inequality and so on.
The second issue, thrown into relief by the FTA negotiations is whether it's a good idea to let our economic institutions to be determined by a government that is responsive to American interest groups, but not concerned with the welfare of Australians. The issue of copyright provides a nice example. There are a lot of arguments for and against long periods of copyright, but there are also issues of income distribution. In aggregate, an extension of copyright terms will redistribute income from Australians to Americans because the Americans own more copyrights of general interest than we do. Whatever the balance of the economic arguments, it's a safe bet that American decisionmaking processes will err on the side of long copyright terms..."
- "What will the deal be worth? More data and analysis are needed to make a full accounting. But my initial assessement is:
- In trade terms certainly much less than even the modest projections of the CIS study. What we can see so far points to important commercial results for some Australian farm industries that have previously been almost shut out of the US market. The present value of the access for dairy, for example, will be an additional $US40 million exports in the first year -- more than doubling the value of its current access -- growing to (possibly) an additional $US80 - $90 million in year 20. But the longer-term impacts will be much less than 'free trade' promised. In 2002 I estimated the free-trade potential for the Australian industry at about $US500 million (about one half of one percent of the value of US dairy sales). On current indications the agreement will permit access valued at about 20% of that level.
- Overall however, the outlook is much brighter. It has always been likely that the biggest benefits from this agreement for Australia would be found not in the direct trade impact (because bilateral trade barriers were already low) but in the less tangible impacts of closer economic integration with the world's most productive economy, one of our largest trading partners and our biggest source of (and destination for) investment flows. That benefit remains -- only slightly tarnished by continued US agricultural protection.
Australia's economic outlook will be improved by this agreement, in my view. Assuming, of course, that the proposed treaties make it through an increasingly protectionist US Congress and through a probably hostile reception from the Australian opposition Labor party."
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