Free trade pact a dud for Australia

Sydney Morning Herald, Australia

Free trade pact a dud for Australia

By Martin Feil

5 November 2011

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

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 US was Richard Zoellick, an ex-managing director of Goldman Sachs. He is now president of the World Bank.

Zoellick arrived for the negotiations with a 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 US were limited at the outset. A lot of what was promised by the US either didn’t happen (sugar and access to the US market for movies and TV) or was put on an 18-year phasing program.

We did allow concessions on the pharmaceutical benefits system and agreed to totally free imports entry by the US. The suggestion that we would have access to the US motor vehicle market was farcical.

We should be thinking about a 30-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. 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 hillbilly 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.

The biggest seducer in our ETM decline has been the US through the FTA. Our policies created an open door for ETM imports sourced from the US. 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 US.

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 no economic or productive capacity to manufacture.

We should have been, and still should be, insisting on BHP and Rio Tinto adding value to iron ore and coal instead of cheering as the minerals left our shores, without any added value.

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.

But the latest data from DFAT’s Trade in Primary and Manufactured Products Australia 2010 shows that Australia is near bottom of the class in terms of adding value to exports, alongside New Zealand - another bastion of tariff reform and no non-tariff barriers.

The second major statistical outcome is the US’s benefit from the proportion of exports of ETMs, much helped by the FTA.

In 2004-05, Australia imported $21.4 billion of goods from the US and exported $9.2 billion back. Last financial year imports had grown to $26 billion and exports declined to $9 billion.

Since the FTA began, we have bought $100 billion more of goods from the US than we have received from sales to it.

This outcome can be further exacerbated by the deficit in our trade with the US 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 US, 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 FTA with the US has not benefited Australia. Bush and Howard have gone, but their legacy lingers on. It’s time to call it a day.

Martin Feil is a tax and industry policy consultant and former director of the Industries Assistance Commission.

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