PROS AND CONS OF FREE TRADE AGREEMENTS

THE U.S - AUSTRALIA CASE REVISITED

By Larissa Paschyn (ID: 2010280348), Iman Ture (ID2010280392), Marsilas Girum (ID2010280392)

ABSTRACT

This paper will ask and answer: If the Australia – US Free Trade Agreement is a

net benefit for Australia. Could the Australia US Free Trade Agreement

really pose a serious threat to local content? Are the clauses in the agreement strong enough

to protect the current arrangement or renegotiate?

It will address the key flaws within the current agreement and offer policy suggestions in order to ensure Australia’s interests are not threatened by the international free trade agreement.

FREE TRADE AREA – FREE TRADE AGREEMENT (FTA) BETWEEN COUNTRIES

PURPOSE: TO ELIMINATE TRADE BARRIERS (TARIFFS, QUOTAS AND PREFERENCES) ON

MOST (IF NOT ALL) GOODS AND SERVICES TRADED BETWEEN FTA COUNTRIES; AND BY SO DOING, EASE EXCHANGE SO THAT TRADE COULD GROW BETWEEN THEM.

  PRINCIPLE BEHIND FREE TRADE:   IN AN UNRESTRICTED MARKETPLACE (IN EQUILIBRIUM) EACH SOURCE OF

PRODUCTION WILL TEND TO SPECIALIZE IN THAT ACTIVITY WHERE IT HAS COMPARATIVE (RATHER THAN ABSOLUTE) ADVANTAGE.

ASSUMED OUTCOME: THE NET RESULT OF AN ‘FTA’ WILL BE AN INCREASE IN INCOME AND

ULTIMATELY WEALTH AND WELL-BEING FOR EVERYONE IN THE FREE TRADE AREA. THIS DOES NOT, HOWEVER, GUARANTEE FAIR DISTRIBUTION OF WEALTH

BETWEEN THE TRADING PARTNERS; IN FACT, THERE MAY BE SIGNIFICANT LOSERS PARTICULARLY AMONG PROTECTED INDUSTRIES WITH A COMPARATIVE DISADVANTAGE.

IDEAL SITUATION FOR ‘FTA’: GENERALLY, COUNTRIES CHOOSE THIS KIND OF ECONOMIC INTEGRATION FORM IF

THEIR ECONOMICAL STRUCTURES ARE COMPLEMENTARY. IF THEY ARE COMPETITIVE, THEY ARE MORE LIKELY TO CHOOSE ‘CUSTOMS UNION’. WHO PROMOTS FREE TRADE AREA AGREEMENTS -THE UNITED STATES IS THE ECONOMIC POWERHOUSE OF THE WORLD. - IT IS WORLD’S NUMBER ONE MANUFACTURING NATION IN THE WORLD. 19

PERCENT OF THE WORLDWIDE VALUE-ADDED MANUFACTURING OUTPUT IS FROM THE UNITED STATES;

- IT IS THE WORLD’S THIRD LARGEST EXPORTER OF GOODS. 22 PERCENT OF ALL U.S. MANUFACTURED PRODUCTS IS EXPORTED.

-ITS AGRICULTURAL EXPORTS SUPPORT NEARLY A MILLION JOBS IN THE UNITED STATES. IT IS FORECASTED THAT AGRICULTURE EXPORTS WILL REACH A RECORD LEVEL OF $126.5 BILLION IN FISCAL YEAR 2011.

- AT THE SAME TIME, IT IS THE LARGEST AND RICHEST CONSUMER MARKET 95 PERCENT OF THE WORLD’S CONSUMERS LIVE OUTSIDE THE UNITED STATES.

AMERICA’S INDUSTRIES AND JOBS SIMPLY CANNOT GROW IF AMERICA DOES NOT DO A BETTER JOB OF REACHING THE WORLD’S CONSUMERS THROUGH TRADE AND INVESTMENT.

- IT MUST CONTINUE TO OPEN NEW MARKETS AROUND THE WORLD. OTHERWISE, IT MAY ALSO LOSE MARKET SHARE TO COMPETITOR COUNTRIES.

- THE AMERICAN BUSINESS COMMUNITY VERY WELL UNDERSTANDS THAT THE EXPANSION OF FREE TRADE AGREEMENTS (FTAS) IS CRITICAL TO THE CONTINUED SUCCESS OF THE ECONOMY.

- THE U.S. ADMINISTRATIONS, PARTICULARLY SINCE THE REGAN ADMINISTRATION, HAVE BEEN VERY ACTIVE TO FULFILL THE INTERESTS EXPRESSED BY THE AMERICAN BUSINESS COMMUNITY; AND TO DATE HAVE NEGOTIATED AND SIGNED 17 FREE TRADE AGREEMENTS. CURRENTLY, AT LEAST 4 ‘FTAs’ ARE ON THE PIPELINE.

THE HISTORY OF AUSFTA

  THE U.S. INTEREST TO HAVE A FREE TRADE AGREEMENT WITH

AUSTRALIA DATES AS FAR BACK AS 1946; BUT IN MORE RECENT TIMES, THE PROSPECT OF AN AUSTRALIA-U.S. FTA WAS RAISED IN THE 1980S BY THE HAWKE GOVERNMENT OF AUSTRALIA.

THE PROPOSAL WAS ENTERTAINED LATER IN 1992 BY THE U.S. ADMINISTRATION DURING GEORGE H.W. BUSH ERA BUT THE PROPOSAL WAS TURNED DOWN BY AUSTRALIAN LABOR PARTY PRIME MINISTER PAUL KEATING.

NINE YEARS LATER (EARLY 2001), WHEN GEORGE W. BUSH CAME TO POWER IN THE U.S. AND JOHN HOWARD IN POWER IN AUSTRALIA, THE FTA BEGAN TO TAKE SHAPE.

A PRIVATE CONSULTANCY – THE CENTRE FOR INTERNATIONAL ECONOMICS (CIE) – WAS COMMISSIONED BY THE TWO PARTIES IN 2004 TO PREPARE THE FRAMEWORK AGREEMENT IN LINE WITH THE NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) MODEL.

NOTE: NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) IS BETWEEN UNITED STATES, CANADA AND MEXICO. IT WAS NEGOTIATED DURING GEORGE H.W. BUSH ERA AND RATIFIED DURING CLINTON ADMINISTRATION.

AFTER FIVE ROUNDS OF NEGOTIATIONS ON THE ECONOMIC IMPACTS OF THE FTA MODEL BOTH ON U.S. & AUSTRALIA, THE FREE TRADE AGREEMENT (AUSFTA) WAS SIGNED BY THE TWO PARTIES IN MAY 2004;

NOTE: ALTHOUGH RATIFIED, NEARLY ONE-THIRD OF MEMBERS OF THE U.S. CONGRESS AND ONE-FIFTH OF THE U.S. SENATE HAVE OPPOSED THE AGREEMENT. IN AUSTRALIA, THE BILL WAS PASSED RELUCTANTLY, WITH AMENDMENTS, BY AGREEMENT'S IMPLEMENTING LEGISLATION AND BY THE SENATE IN AUGUST 2004. THE U.S. ADMINISTRATION ACCEPTED THE AMENDED AUSTRALIAN LEGISLATION AS BEING CONSISTENT WITH IMPLEMENTATION OF THE AGREEMENT;

 

POST – AUSFTA ECONOMIC MODELLING

  THE PRIVATE CONSULTANCY – THE CENTRE FOR INTERNATIONAL ECONOMICS (CIE) – THAT

WAS COMMISSIONED BY THE TWO PARTIES IN 2004 TO PREPARE THE FRAMEWORK AGREEMENT HAD MADE SEVERAL STUDIES TO FIGURE OUT THE BENEFITS OF “AUSFTA”.

ONE OF THE STUDIES WAS MODELLING OF THE ECONOMIC BENEFITS IN THREE DIFFERENT SCENARIOS.

TOTAL REMOVAL OF ALL IDENTIFIED BARRIERS TO TRADE BETWEEN THE UNITED STATES AND AUSTRALIA;

ON THE BASIS OF A 50 PERCENT REMOVAL OF TRADE BARRIERS;AND 25 PERCENT REMOVAL OF BARRIERS.   THE CIE MODELLING CONCLUDED THAT:   THE ECONOMIC BENEFITS TO THE PARTICIPANTS ARE PROPRTIONAL TO THE

DEGREE OF REMOVAL OF THE TRADE BARRIERS; THE GREATEST BENEFIT FOR AUSTRALIA IS DERIVED FROM SUGAR AND DAIRY; “AUSFTA” WOULD CREATE MORE TRADE THAN IT WOULD DIVERT AND THAT

THERE WOULD BE A POSITIVE ECONOMIC IMPACT ON THIRD COUNTRIES (PARTICULARLY FOR NEW ZEALAND).

THE BIGGEST POTENTIAL GAINS FOR U.S. IS IN EXPORTS OF MOTOR VEHICLES AND PARTS AND METAL PRODUCTS, WITH SMALLER GAINS FOR BEVERAGES AND WOOD

WHAT WERE THE CORE ISSUES OF DISAGREEMENTS?

-FROM “MULTILATERALISTS” WHO INSIST THE AUSTRALIAN GOVERNMENT TO PERSIST WITH A TRADE NEGOTIATION CALLED THE DOHA DEVELOPMENT AGENDA (OR DOHA ROUND) OF THE WORLD TRADE ORGANIZATION (WTO) RATHER THAN WORKING ON BILATERAL AND REGIONAL TRADE AGREEMENTS.

-OTHER SOURCE OF OPPOSITION ON THE AUSTRALIAN SIDE IS FROM THE RURAL BASED PARTIES. THEY ARGUE THAT AUSTRALIAN PRODUCERS CAN NEITHER ACCESS THE U.S. MARKET NOR BENEFIT FROM AUSFTA. THEY REASON THAT:

-THERE HAD ALSO BEEN STRONG OPPOSITION ON THE SIDE OF AUSTRALIA REGARDING INTELECTUAL PROPERTY RIGHTS STIPULATED IN AUSFTA.

-ANOTHER SOURCE OF AUSTRALIAN OBJECTION IS THE PHARMA-FAVORED PROVISIONS INCLUDED IN AUSFTA [MANY RECENT U.S. TRADE DEALS];

THERE IS ALSO A BROADER CULTURAL CONCERN THAT AUSTRALIANS WOULD LIKE TO RAISE CONCERNING LOCAL CONTENT PROVISIONS IN AUSFTA.

OUTCOMES

-In the year following the agreement, Australian exports to the U.S. declined, while U.S. exports to Australia increased. This followed the International Monetary Fund's prediction that the Australia-United States FTA would shrink the Australian economy marginally because of the loss of trade with other countries.

-The IMF estimated $US5.25 billion of extra U.S. imports entering into Australia per year under the FTA, but only $US2.97 billion of extra Australian exports to the U.S. per year.[13] However, it remains unclear whether or not Australia's worsening trade deficit with the United States can be solely attributed to the FTA. It may have been a lagged effect of an appreciation of the Australian dollar against the US dollar between 2000 and 2003.

-For the U.S., the FTA improved the overall trade deficit situation, creating a trade surplus with Australia which rose 31.7% in the first quarter of 2005, compared to the same timeframe in 2004. U.S. exports to Australia increased 11.7% in the first quarter of 2005 to nearly $3.7 billion for the quarter. Agriculture exports to Australia increased 20%.

According to Australian Department of Foreign Affairs and Trade figures the imbalance in trade between the U.S. and Australia increased substantially during 2007. The United States became Australia's largest import source, with goods and services imported to a value of over A$31 billion. Australia's exports to the U.S., however, amounted to only $15.8 billion AU. [14] It remains unclear what, if any, real benefits the agreement has produced.

In U.S. Fiscal Year 2006 (October 2005 through September 2006), which was the first full year during which E-3 regulations were in effect, the U.S. Department of Homeland Security recorded 2,123 admissions of Australian citizens as E-3 status foreign workers under the treaty.[15] 9,294 admissions were recorded in U.S. Fiscal Year 2007 (October 2006 through September 2007).[16]

 

NET BENEFIT?

Larissa Paschyn

AGRICULTURE

Shortcomings of the negotiations? Dairy quota access increase 3x in volume, growth in

quota 5%. Worth $41 mil. -grants access for dairy previously excluded.

Beef earned immediate elimination of in-quota tariffs, over-quota tariffs phased out in years 9 -18. In practice take 18 years before quotas drop &

beef at low end of market. Australian beef exporters gain A$600/year.

Sugar left out of the deal and access unchanged at 87,402 tons per annum. 2004, Dep. Prime Minister John Anderson stated a FTA without sugar would be “un-Australian”.

American farmers can export to Australia w/out impediment; overall agricultural tariff for Australian goods to the US is 34%.

LOCAL CONTENT PROVISIONS

Many in the Australian film and television community expressed concern over the effect of the agreement on government regulations enforcing a mandatory minimum of locally-produced content on television.

Since American content can be purchased by networks at a cost far less than the local production of Australian content, fears that the agreement will result in the diminishing fraction of home-grown media being screened on Australian television networks and in Australian cinemas being reduced even further.

COMPARATIVE FILM ADVANTAGE?

Huge disparity between budgets - US market recoup costs of production locally, Australian productions rely heavily on government assistance. Screening costs for Australian productions greater,

while broadcasters can screen big budget American series for fraction of their production cost. Thus foreign content which costs less and looks aesthetically better.

Via globalization and free trade, no protection for local content in emerging technologies. Cannot predict future technology and what new methods of data transmission.

Critics argue that Australia has left itself open to an onslaught from American producers in newly developing areas and effective inability to regulate this new content because of obligations.

PHARMACEUTICAL BENEFITS SCHEME

Drugs added to the formulary on basis of assessment of comparative effectiveness and cost effectiveness compared to the therapy replaced. Where no evidence of incremental benefit, a drug may not be listed at a higher price than comparator.

Thus prices for subsidy purposes are cheaper than in other major markets.

While the scheme is effective at keeping drug prices low, pharmaceutical corporations in US argue that higher drug prices are necessary to fund the costs of research and development.

The American pharmaceutical companies claim that in enjoying low-cost medicines, Australians are essentially "free riding" on the costs of research performed in the US.

INTELLECTUAL PROPERTY (IP)

Chapter 17 of the AUSFTA treaty binds Australia into a US-style IP rights regime. However, the USA’s IP regime criticized by significant sections of US IT industry. In US, IP rights favor digital content creators and limit the rights of consumers and software developers. Linux Australia has raised obligations over what

AUSFTA could bring to the local OSS industry.

Concern over software patents, and anti-circumvention legislation.

OUTCOMES

Australian exports to U.S. declined, U.S. exports to Australia increased. International Monetary Fund predicted FTA would shrink the Australian economy marginally because of loss of trade with other countries.

Unclear whether Australia's worsening trade deficit with the United States can be solely attributed to the FTA. Effect of an appreciation of the Australian dollar against the US dollar between 2000 - 2003?

For the U.S., the FTA improved the overall trade deficit situation, creating a trade surplus with Australia - rose 31.7% in the first quarter of 2005. U.S. exports to Australia increased 11.7% in the first quarter of 2005 to $3.7 billion. Agriculture exports to Australia increased 20%.

United States became Australia's largest import source, with goods and services imported to a value of over A$31 billion. Australia's exports to the U.S., however, amounted to only $15.8 billion AU. It remains unclear what, if any, real benefits the agreement has produced.

POLICY RECOMMENDATIONS

ISSUES WITH PHARMACEUTICAL BENEFITS SCHEME

Major concessions to the US pharmaceutical industry that undermine egalitarian principles and operation of the PBS and increase costs of drugs to Australians.

AUSFTA’s approach to the PBS emphasizes need to reward manufacturers of “innovative” new pharmaceuticals, instead of emphasizing consumers’ need for affordable access to necessary medicines.

May pressure Pharmaceutical Benefits Advisory Committee to list “innovative” drugs that the committee initially rejected because the evidence for cost-effectiveness was not compelling.

Intellectual property provisions of AUSFTA will delay entry of cost-reducing generic products when pharmaceutical patents expire.

PBS RECOMMENDATIONS That “experts” involved in any PBS Advisory Committee

“review process” broadly representative of all PBS stakeholders: government, health professionals, consumers and industry.

Discussions of “Medicines Working Group” made fully transparent by posting agenda, discussion and recommendations on PBS website. All documentation submitted by pharmaceutical applicant made available to public on website.

Capacity of generic manufacturers to rapidly “springboard” their cheaper products from existing data on the expiry of a patent be unequivocally protected.

Independent study jointly funded by both parties to determine health impact of all IP and PBS changes, including Dissemination of information by Internet.

LOCAL CONTENT

That Australia’s Annex II reservations be changed to allow:

Complete flexibility in modifying and introducing new sub-quotas within existing commercial TV quotas.

Measures affecting subscription TV, interactive video and/or audio and other audiovisual services to ensure that Australian content or genres is reasonably accessible [instead of not unreasonably denied] to Australian audiences.

INTELLECTUAL PROPERTY AUSFTA aims to harmonize Australia's patent system

with the US system. This would mean broader patentability.

Detrimental to Open Source industry - it is much simpler to prove violation since the source code is available. In past Open Source content to compete on technical merits. Apache web server example that continues to increase 65% market share.

Innovators should not be rewarded for R&D investment; however, current software system in Australia has mechanisms to protect these investments via copyright and source code control.

Difficult to argue that software patent protection is required; OSS industry will not be protected from the software patent minefield.

REVERT BACK SCHEMENew framework does nothing to encourage innovation

diversity, provides legal framework that encourages anti-competitive practices, which will hurt adoption of Open Source solutions.

AUSFTA obligations favor current IP stakeholders, which are typically large multi-nationals, to the detriment of smaller local companies - overly burdensome weight on the shoulders of local Australian IT industry.

Need to revert back to the national Australian IP protection system.

Government should take note of the issues encountered by US in implementing similar scheme, and tailor scheme to the Australian legal and social environment.

Monitor the issue of peer to peer file sharing.

THANK YOU!