Australia US Free Trade Agreement (AUSFTA) Evaulation

Introduction

One of the most notable changes in the world economy since the 1980s has been the shift towards free trade between different countries in the world. Even countries such as India, Mexico, Spain, Ghana, Poland, Chile and Turkey – among others – have shifted towards the liberalization of their trade policies. Additionally, the successful cessation of multilateral trade negotiations under the General Agreement on Tariffs and Trade in 1994 was a big step towards the liberalization of trade among many development countries as well as the developed countries and in many cases, trade between the developed and developing countries were also liberalized. This Research Essay begins with Identifying what free trade agreements mean and talks about some of the theories behind free trade and why the world has gravitated towards it. Australia itself now has ten free trade agreements in force with China, Japan, the republic of Korea, US, New Zealand, Singapore, Thailand, Chile, the ASEAN and Malaysia with several others still in the negotiation process (“Free trade agreements (FTAs)”, 2018). FTA’s allow Australian exporters and investors to expand their business to key global markets. The essay then highlights the significance of the Australia US Free Trade Agreement (AUSFTA). After identifying the importance of the agreement, the essay then proceeds to criticise some aspects of the agreement and concludes by saying although the Australian market did benefit from the AUSFTA, there were several areas where the government could have negotiated a better deal for the country.    

What are free trade agreements?

The Australian government Department of Foreign Affairs and Trade define free trade agreements as a treaties or trade policies between two or more countries that allows for free flow of goods, services, and investment (“What are FTAs?”, 2017). The aim of free trade agreements is to remove trade barriers such as quotas, barriers, tariffs and regulation to foster stronger commercial ties between countries. Some examples of free trade agreements are European Economic Area, MERCOSUR (South Common Market) and Australia-United States Free Trade Agreements (Grossman & Helpman, 1993).

Theory of comparative advantage 

The ability of a country, firm or individual to produce particular goods or service at a lower marginal and opportunity cost than others is referred to as the theory of comparative advantage. This goes on to explain why two or more involved parties in mutual trade can benefit from each other even when one party has fewer goods or resources to offer as compared to the other. Focusing on the production of the one product that most benefit each individual of the party, can result in the overall net benefit when it is applied to everyone through mutual trade. The theory of comparative advantage can be applied to free trade because it increases the trade, business and investment opportunities in the respective economies. Duty free to zero tariffs make it easier to overcome the assumptions of the theory which doesn’t take into consideration the transport costs. Free trade, especially when paired with specialization is mutually significantly more beneficial to all those involved in trade than protectionism, and the general conclusion of the field is that most of the time, for most of the countries, free trade is the best policy (Milner, 1999).

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Regime Theory

An example of international regime in International Relation can be described as the international trade system that has been identified by General Agreement on Tariffs and Trade agreements (GATT) and has been institutionalised by the establishment of the World Trade Organisation (WTO). The international regime secures the collective interest and provides goods to states in an ‘anarchic international system with no central authorities’ (Kirkelund: 25). The WTO aims to achieve the collective interests in free trade by making the member states cooperate on trade liberalisation and removes trade barriers thus enabling free trade.

Significance of AUSFTA

There were several events that lead up to the AUSFTA. The failure of WTO negotiations in Seattle, Australia’s fear that in the absence of a new multilateral trade agreement, it would be risky for the country to be shut out from a lucrative market and the election of Bush administration all played a key role for the AUSFTA negotiations to begin.  Bayne in his 2000 article argues that there could be three reasons for failure of negotiations in Seattle. The three possible causes that have been identified are disruption by NGOs, organisational weakness of the WTO and errors of the government; wherein the majority of blame lies in the government. Governments and international organisations like the United Nations and the European Union hadn’t fully grasped the extent of demands placed upon them by globalisation.   

The signing of AUSTFA was an important date in the history which solidified Australia’s trade and investment relationship with the world’s largest as well as the richest economy, which also happened to be the biggest importer and exporter of services and merchandise. In the world of continuous growth and competitive market, this agreement made sure that Australia continued to remain an attractive destination for US investment. Even for the Australian exporting industries, the Agreement liberalised access to a key world market, unlocking previously inaccessible export opportunities. The US waives the Merchandise and Processing Fee that it levies on all of its imports, which saves the Australian industry around $10 million USD per year. With its status as a Free Trade Agreement partner as well, Australia is protected from any future global safeguard actions and will be automatically exempted from any safeguard restrictions placed by the US. So, what does the agreement mean to some of the different Australian sectors? For most, it meant that the doors to previously inaccessible US markets were now unlocked and duty-free trade could now commence (“Overview”, 2018).

The manufacturers

For the manufacturers, it meant that non-agricultural tariff (excluding textiles and clothing) became duty free from the day the agreement came into force, cutting down on more than 97% of the previous tariff. The 25% tax on light commercial vehicle that kept Australian utes from taking over the American markets were lifted, and the automotive industry was able to penetrate the US market. Australian manufacturers also now have direct access to the US Federal Government procurement market that had been valued over $535 billon US Dollars per year in 2011. The 50% tax on merchant ship repairs and maintenance that was included under the Jones Act as a way of protecting US’s maritime issues was also removed. All of this coming into immediate effect made it possible for the Australian products to get into US markets easily (“2. National Treatment and Market Access for Goods (including Pharmaceutical Benefits Scheme)”, 2018).

The farmers

Immediately after the agreement was signed, sixty six percent of tariffs on agriculture was cut down and dropped to zero. Furthermore, on the 1^st of January 2008, 4 years after the agreement came into effect, there was a further 9% taxes that were also dropped to zero. The exportation of lamb and sheep meat which had the most tariffs were instantly dropped to zero. There was also a clause that allowed a guaranteed annual quota increment which will grow by 18.5 percent over 18 years. By 2023, there will be unlimited duty-free access to beef exports as well (“3. Agriculture”, 2018).   For the first time in history, Australian avocado farmers had access to US market and the tariff for exporting produce such as mangoes, tomatoes, macadamias and oranges were immediately reduced to zero as well. Other food items like celeral, wheat and cereal flour mixes, processes food and a range of baby food and fruit juices were also put to the zero-tariff threshold. Australian seafood as well as canned tuna now are able to export to the US market duty free as well. The Australian agricultural industry had a lot to gain with the AUSFTA (“Overview”, 2018) .

The service providers

Australian education services are quite popular among students in the US and the services that benefit from the arrival of students in Australia are more than just the universities. Grocery stores, restaurants, tourist attractions and real estate industries benefit too. People who want to transfer jobs and move across the world can do it freely due to the recognition of the qualifications between US and Australia. The Australian service suppliers are legally protected from discriminated in a market of more than 300 million people; a significant improvement from the commitment the US had through the WTO. 

Other industries

All metal can be exported to the US duty free due to the agreement. Both the countries have agreed upon the same criminal standards for copyright infringement. The Australian DCM wasn’t as detailed as the American DMCA , and with the AUSFTA the copyright industry benefits from an extended terms of protection (“17. Intellectual Property Rights”, 2018). This makes the Australian market even more attractive to US investment as the investors know they are being protected by the laws they are familiar with. Australia also retains the rights to be flexible about the implementation of the agreement depending on the domestic situation (“11. Investment”, 2018).

Criticisms of the AUSFTA

The Australia US Free Trade Agreement sparked a large community debate in the country that spanned a total of 18 months in 2003-4 until the legislation was taken into effect in 2004. There have been many instances where the Australian government has rushed the agreements, even when it went against the advice given by their own negotiators which has led to them accepting outcomes that weren’t as beneficial to Australia (Capling and Ravenhill, 2015). In the years that have followed, China has now overtaken USA’s position of being Australia’s largest trade partner instead (“Australia’s trade in goods and services 2016”, 2018). The following authors believe that AUSFTA is one of the exemplary cases of Australian government rushing agreements.

Trade Diversions

The Australia-US Free Trade Agreement has raised some concerns of it being a Preferential Trade Agreements (PTA), where considerable trade and investment might be diverted from low-cost and efficient suppliers to high-cost PTA countries due to strong preferences towards them. These preferences are generally developed through what is called the most-favoured-nation rates (MFN), where goods can be imported at low or zero tariff rates. Using econometric modelling on the Productivity Commissions dataset from 1970-2012 Shiro Armstrong found that in 2009, ‘20 to 30 per cent of Australian imports from the United States entered under a non-zero MFN tariff rate. (Armstrong^a, 2015).’ This in turn has led to discrimination towards non-members. In the same report, Shiro also found by comparing AUSFTA with other free trade models that indeed the preferential treatment between Australia and United States had diverted away imports and exports from other countries that they deal with. This is however, not a natural outcome of free trade agreements, as when looking at agreements which were not preferential like APEC, ASEAN and European Economic Community there were not trade diversions detected. The negatives of such preferential treatments are a generally a decrease in net trade and creation of bad relationship with other trading countries (Armstrong^a, 2015). Shiro reports in another article that due to this preferential agreements and trade diversion both the countries cost themselves US$53 billion in their trade with rest of the world and are worse off than they would have been without the agreement (Armstrong^b, 2015).

Omission of Sugar in exports

According to Capling and Ravenhill (2015) the then prime minister John Howard was not one to calmly assess the cost and benefit of an agreement. Consequently, when he spearheaded the Australia-US Free Trade agreement it became one of the more harmful of these rushed agreements. It is reported that he ignored the advice given by the Department of Foreign Affairs and Trade, who advised him to not accept agreements that excluded meaningful concessions of some of Australia’s key agricultural exports (Capling, 2005). One of these key agricultural exports being sugar. If the agreement had gone in favour of Australia, the local producers would have gotten access to the large but heavily protected American market. However, under the AUSFTA sugar has not been included as exports from Australia (Dee, 2005). Many believe that this is to protect the thriving sugar industry in US. As a response to these concerns the Australian Government announced a $440 million fund as relief to the sugar industry. However, Phillipa Dee in her economic analysis of the free trade agreement points out that this $440 million fund can only be funded from an additional tax revenue, which means the burden of which will eventually fall on the consumers. Going a step further the author calculates the welfare cost of raising the fund through tax revenue, and it adds up to be $5 million per year for perpetuity.

Changes to PBS

Perhaps one of the potentially harmful points in the free trade agreement are the changes that allow US multinational companies to pressure PBS into approving their drugs. Pharmaceutical Benefit Scheme (PBS) is a tool used by the Department of Health and Ageing to provide ‘timely access to the medicines that Australians need, at a cost individuals’ and the community can afford’ (“National Medicines Policy”, 2014). Under this scheme an expert committee selected certain medicines to be listed on the PBS, and the full cost of these listed medicines are not directly passed on to the patients. Instead, the patients make co-payments which is a small portion of the actual cost of the medicine. The PBS stands as a body that deals in the stead of consumers with large pharmaceutical companies and determines the fair cost of a drug. However, the Australia-US Free Trade agreement would allow US multinationals to coerce and threaten the power PBS to stand as a fair body. This is beneficial for US companies as having power over PBS means that they can price their medicines according to the market they are operating in reducing the price differences in markets. This is the most basic principle in economics which discourages people from arbitrage, which is the act of buying goods or services from geographical markets where prices are lower. Therefore, this will most likely lead to increases in prices of medicines in the future. Furthermore, in the current system if a company’s drug is rejected either due to quality or price, it is only able to appeal for the decision after substantial proof has been collected of improved quality or better prices. However, with the FTA an alternative independent review process can be requested, which means it will become easier to get another decision if they do not agree with the one made by PBS (Faunce, Bai & Nguyen, 2010).

The IP lock-in

One of the biggest criticisms of the free trade agreement is that significant parts of the Australian Intellectual Property Law was allowed to be re-written as a pre-requisite for the free trade deal. This according to Kimberlee Weatherall of The University of Melbourne is a huge blow for innovation and creativity in Australia. Kimberlee states that generally treaty obligations are stated in a broad level so that both parties have some level of flexibility, and that it is left upon the countries to create adequate legal protection and punishment against the violation of IP laws. However, the chapter on IP rights is so detailed that it locks in Australia to one specific model of IP law (Weatherall, 2004, pp: 2). This kind of detailed treaty has two downfalls. First, IP laws need to be country specific and go hand in hand with the level of innovativeness of the country, therefore, sometimes the Australia government has granted patents to software creations that would have otherwise not passed the criteria. However, now since the Australian law is forced to look more like the US law, certain companies might face fines or might not even be able to start up. Secondly, IP laws are meant to be reviewed frequently to keep up with the pace of technological innovations. Since the adherence to the US IP law is so strict, the Intellectual Property laws in Australia might just be a hindrance. For instance, the view of what is considered fair use of copyright material is very different in US and Australia. While in Australia under the Digital Rights Management Laws, for instance, its frowned upon and not very strictly pursued by the copyright owners when a person makes a copy of music they bought so that they can upload it into their iPod. However, with the strict US laws this is considered a serious offence and acts like these can be pursued by the owners more strictly (Weatherall, 2004).

Conclusion

In conclusion, although the Australia US Free Trade Agreement was originally designed to help the Australian economy grow and take hold in the US markets, that’s not how it panned out. Instead, trade between the two countries diminished and China managed to overtake the US as Australia’s largest trading partner. The Free Trade Agreement was rushed and could have been negotiated better by the Howard Government, which can be seen in the unfavourable terms that Australia agreed to, in order to secure the deal. With hindsight, it is easy to see that the major changes to IP laws and the increase in power of US multinational against PBS put Australia at a massive economic disadvantage. All in all, everyone had high expectations form the trade agreement but when it couldn’t deliver on those expectations many saw this a colossal failure on the part of the Howard Government.

Word Count (without the reference list): 2906 words

References

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4. Capling, Ann. 2005. All the Way with the USA: Australia, the Us and Free Trade. Sydney: UNSW Press.
5. Capling, A., & Ravenhill, J. (2015). Australia’s flawed approach to trade negotiations: and where do we sign?. Australian Journal of International Affairs, 69(5), 496-512.
6. Dee, P. (2005). The Australia–US Free Trade Agreement: An Assessment.
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17. 17. Intellectual Property Rights. (2018). Retrieved from https://dfat.gov.au/about-us/publications/trade-investment/australia-united-states-free-trade-agreement-guide-to-the-agreement/Pages/17-intellectual-property-rights.aspx