Discontent Down Under: US officials say free-trade pact has been a great success, but Australians are unhappy

Shipping Digest | 22 July 2007

Discontent Down Under: U.S. officials say free-trade pact has been a great success, but Australians are unhappy

by Alan M Field

When the bilateral free-trade agreement between Australia and the U.S. took effect on Jan. 1, 2005, global companies predicted that both countries would benefit. More than just an agreement governing trade in merchandise, the comprehensive pact had chapters on market access for goods, agriculture, pharmaceuticals, cross-border services, financial services, e-commerce, investment, intellectual-property rights, government procurement, competition policy, labor, environment issues and dispute settlement.

The pact is designed to stimulate trade in goods and services, generate investment and government procurement, strengthen intellectual-property protections and promote e-commerce.

Like other free-trade agreements, the U.S.-Australia deal was a product of compromise. Australian sugar producers were unhappy that U.S. farmers managed to keep sugar out of the deal. U.S. dairy producers were frustrated that they faced stronger competition from Australian imports as a result.

Much of the opposition in Australia involved the issue of access to pharmaceuticals. The agreement commits Australia to strengthen its intellectual-property protection for U.S. drug companies operating there, directly compromising Australia’s Pharmaceuticals Benefits Scheme. The Australian government argued that the benefits would outweigh such costs. A report by the Department of Foreign Affairs and Trade estimated that the benefits to Australia would amount to US$9.9 billion over the course of 20 years.

Two-and-a-half years later, U.S. officials say the agreement has been a huge success. During a recent visit to Australia, U.S. Trade Representative Susan C. Schwab stressed the increase in two-way trade. "I am very pleased with the results of our FTA, which has boosted flows of goods, services and investment in both directions," she said. "The 16 percent increase in two-way trade in a few short years has benefited farmers, ranchers, manufacturers, service providers and workers in both countries and demonstrates the value of expanded trade and investment."

In 2006, bilateral U.S.-Australian merchandise trade increased 12 percent to US$26 billion. The top U.S. exports to Australia included machinery, trucks and parts, aircraft, electrical machinery, and optical and medical instruments.

Beyond merchandise, bilateral trade in services totaled US$12.1 billion in 2005 (the latest figures available), up 12 percent from 2004. U.S. foreign direct investment in Australia totaled more than US$113 billion in 2005, up 134 percent from 2003. New investments have been concentrated largely in the manufacturing, finance, mining and banking sectors.

Australian foreign direct investment in the U.S. reached US$44.1 billion in 2005, up nearly 79 percent from 2003. It is concentrated in the real estate and rental and leasing, manufacturing and finance sectors.

But Australian critics argue that the agreement has provided far more benefits to the U.S. than to Australia. Australia is one of the few industrialized countries that have a deficit in its trade with the U.S., and that deficit has worsened significantly since the pact was enacted. During 2005, the first year of the FTA, U.S. exports to Australia increased to US$15.8 billion, up from US$14.2 billion in 2004. Yet Australian exports to the U.S. dropped slightly to US$7.3 billion, from US$7.5 billion in 2004. Last year, the deficit worsened, as U.S. exports to Australia grew about US$2 billion to US$17.8 billion, but Australian exports to the U.S. increased only to US$8.2 billion from US$7.3 billion a year earlier.

Much of the criticism in Australia focuses on the fact that the pact mandates changes in Australian laws that reflect U.S. traditions, but not Australian traditions. John Mathews, professor of strategic management at the Macquarie Graduate School of Management, said many of the agreement’s provisions have been taken straight out of U.S. law, and are being applied to Australia regardless of that country’s legal traditions.

For example, the copyright provisions include a long section that incorporates, more or less word for word, whole sections of the U.S. Digital Millennium Copyright Act. Those provisions extend copyright provisions to 70 years and upgrade sanctions for copyright violations from civil penalties, as in the past, to criminal penalties.

"The Australian Parliament has never discussed this; it’s just gone through and it has more or less been adopted into Australian law," Mathews said. "The document reflects the legalistic mindset of the Americans in looking to ratchet up their provision for supporting their trade around the world, agreement by agreement."

Likewise, Patricia Ranald, principal policy officer at the Public Interest Advocacy Center, a division of the Australian Competition and Consumer Commission, said in a recent report that the major source of opposition to the agreement among Australians "arose from the U.S. government identification of Australian health, social and cultural policies as barriers to trade, and therefore targets in the negotiations."

During the negotiations for the pact, U.S. negotiators’ lists of key Australian "trade barriers" included price controls on medicines under Australia’s Pharmaceutical Benefits Scheme, Australian content laws for film and television, and Australian quarantine laws.

In agriculture, Australian pork producers have criticized the Australian government for complying with the FTA by weakening traditional quarantine protection for the pork industry. That means changing protection policy from an Australian focus on disease prevention to one focused on disease management. It also means allowing in pests and diseases that would otherwise be kept out of Australia.

Going far beyond provisions relating to tariffs and non-tariff barriers, the 1,000-page pact provides detailed specifications about the kinds of U.S. investments Australia can allow and the kinds of Australian government procurement contracts that are open to Americans. Because these provisions are patterned on U.S. tradition, this means that the "United States is cleansing Australia of its (Australian) institutions. One country (Australia) gives up its institutions, and they’re appropriated or taken over or wiped out by another country (the U.S.)," Mathews said.

After much public debate on the issue, Australia has agreed to strengthen its provisions for intellectual-property protection, as spelled out in the FTA and in compliance with the World Trade Organization’s Trade Related Aspects of Intellectual Property Rights agreement. The Australian government recently allocated US$10.5 billion to combat intellectual-property theft. The changes increase the criminalization of copyright infringement, according to David Vaile of the Cyberlaw and Policy Center of the University of New South Wales.

What will happen to the U.S.-Australia trade relationship now that the Doha Round of global trade talks appears to be dead? Prime Minister John Howard announced last month that any failure of Doha would cause Australia to return its focus to the Asia-Pacific region. If so, the U.S. could become more engaged with Australia (and the entire Asia-Pacific) or retreat to a focus on North America and other regions of the world. The Bush administration favors stronger ties with the Asia-Pacific.

During Schwab’s recent visit to Australia, U.S. officials dangled the vague promise that Australia might be invited to join the North American Free Trade Agreement if the Doha Round talks collapse. Other Asia-Pacific countries might also be invited. Given the widespread perception that the FTA with the U.S. has provided few benefits for most Australians, however, it may not be possible to muster public support for such a broader proposition in Australia.

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source: IATP