Is the opportunity cost of our FTA with the US better trade with Asia?

After the obligatory all-night sessions and the accompanying media "will they or won't they" stories, Australia and the US signed a Free Trade Agreement (FTA) in the early hours of Monday last week. While Prime Minister John Howard has hailed the Agreement as a "once in a generation" opportunity, there are some knowledgeable voices in Australia who are seriously questioning the wisdom of such a deal given Australia’s proximity to the fast-growing Asian region.

Under the FTA, all tariffs on manufactured exports and the automotive industry will be eliminated; 66 per cent of agriculture tariffs will be removed; the Australian beef and dairy industries will still face above-quota tariffs for the next couple of decades; and the politically sensitive Pharmaceutical Benefits Scheme, which drastically reduces the cost of medicine, will remain. The US refused to remove protection for their sugar industry, so Australia’s sugar producers come away empty-handed.

In short, it’s a good deal for Australian manufacturers and a pretty ordinary one for Australia’s farmers. But then, that’s how it was predicted to be by one of Australia’s foremost trade experts, Professor Ross Garnaut. Professor Garnaut, a former Australian Ambassador to China and economic adviser to then Prime Minister, Bob Hawke, in the 1980s, told the media on 16 March last year:

It is quite possible that we would end up with an agreement that is best described as a highly qualified free trade agreement. Lots of exceptions, lots of limitations, and both sides declaring victory, and then arguing politically to their own constituencies that they've got a great deal.

Professor Garnaut believes that for Australia to sign a FTA with the US is to undermine Australia’s crucially important future economic relations with Asia.

Professor Garnaut’s ally on this matter has been one of the pre-eminent international trade scholars, Columbia University’s Professor Jagdish Bhagwati. Garnaut and Bhagwati noted:

The downside for Australia would be large if an Australia-US FTA was followed by FTAs in East Asia that excluded Australia. And the small direct advantages that might come from preferential access to the US market may vanish as Australia's rivals start playing the same game, as Mexico has discovered (The Australian, 11 July, 2003).”

Garnaut testified before an Australian Parliamentary committee 11 days after the Garnaut/Bhagwati article and elaborated on why, in his view, the FTA with the US will damage Australia’s standing in Asia:

Trade discrimination within East Asia with Australia being excluded – for example, giving Thai and Philippine preferences in the Chinese, Korean and Japanese markets – would be devastating for Australia. Any potential gains in the United States market from the bilateral agreement would, on analysis, be trivial compared with the potential losses of our main markets and main growth markets in East Asia.

Garnaut’s analysis appears particularly accurate in respect of those industries that have fared less well in the US-Australia FTA - beef, dairy and sugar. If ASEAN Plus Three, (China, South Korea and Japan with ASEAN), succeeds in achieving its aim of an FTA by 2010 then those Australian key primary industries will suffer devastating losses that will not be ameliorated by the US deal. To emphasise this point, trade with ASEAN Plus Three currently equates to around 50 per cent of Australia’s total merchandise trade, while the US currently sits at around 10 percent.

Australia also needs to cultivate countries in South Asia such as India – now emerging as the world’s second-fastest growing nation after China. Last year India signed an FTA with ASEAN and before the ink was dry on the US-Australia FTA, literally, India, Thailand, Bangladesh, Myanmar and Sri Lanka signed an FTA designed to eliminate tariffs between 2012 and 2017.

Then there is the question of perception. Australia’s eager participation in the Iraq war and the US-led War on Terrorism caused tensions in the Asian region (although Indonesia and Australia agreed recently to establish a counter-terrorist centre for the region). As a former Australian ambassador and long-time observer of the Asian region, Richard Woolcott, has said of its closeness to the US over Iraq and the war on terrorism, Australia is now “seen by many in our neighbourhood as the odd man out”.

The US-Australia FTA will reinforce that perception – particularly if it is perceived as being some form of "reward" by the Bush Administration for Australia’s loyalty over the Iraq war.

All in all, it is hard to see how Australia’s FTA with the US will further the cause of economic and security integration in the Asian region. Australia has found it difficult since the demise in 1996 of the vigorously pro-Asian integration Prime Minister, Paul Keating, to penetrate Asian dialogue. The FTA with the US will not help that important cause and this is likely to be to Australia’s long-term economic detriment.