Morgan BellFree Trade - its a matter of trust
April 28th 2008 17:59
The Australia-United States Free Trade Agreement (AUSFTA) entered into force on 1 January 2005. These were my thoughts just prior to the agreement being finalised:
Economically Australia needs to increase exports – but can we rely on the US to play fair in the Free Trade Agreement?
As Australia delves into its most crucial capitalist venture in recent times, this student examines some of the consequences and motivations which have pushed the issue of The Free Trade Agreement with the US to the forefront, and discovers the potential benefits are only as certain as the integrity of our trading partner.
Australia's current trading pattern has resulted from its origins of being a British white settler colony in the nineteenth century where we export raw materials and import finished, high value added goods. It has had a dependent development where imperial integration with domestic development are joined and Australia is reliant on the export of primary commodities.
As a primary commodity exporter we tend to be overly reliant on a few export items, while the manufacturing nation (the US) has a multiplicity of sources of raw material, as technology has allowed raw material production to be increasingly efficient and available, and lowered supply costs. Being a primary sector exporter and secondary sector importer, our terms of trade will decline in the long run, because of the falling component of raw materials over time, as a proportion of the value added of elaborately transformed manufactures. There are issues of environmental sustainability as natural resources are depleted.
Australia's manufacturing sector is currently unable to competitively supply the elaborately transformed manufacture that we are importing. It is important for Australia's economy that we make moves to increase our exports. Our current account deficit comes about from an imbalance between imports and exports, as we are buying too many goods from overseas while not selling enough exports to break even or be in surplus.
The question is will The Free Trade Agreement that is proposed actually increase exports out of Australia more than imports into Australia?
The Agreement isn't 100% free trade on either side; it is more like "The Mostly Free Trade Agreement". The key is striking a balance where the advantages outweigh the disadvantages. Our Government's stance is that a large proportion of US agricultural exports to Australia already enter our market duty free, while our product is subjected to significant restrictions in tariffs and quotas. The Agreement will see 66% of tariffs applied by the US to Australian agriculture eliminated once the agreement commences, and a further 9% in four years. There are disputes over the current agreement as some products such as beef are having tariffs lifted gradually, and others like sugar are excluded from the deal currently.
Australia exports 3.5 times more agricultural products to the US than we import and Australia is ranked 5th as an agricultural exporter to the US. Because our terms of trade are bound up with the exchange rate of the Australian dollar, imports are relatively dear to us and our exports are relatively cheap to our overseas customers. It seems that Australia has made a huge win with regards to agriculture, but perhaps at the expense of manufacturing and our own sustainability.
Complaints about The Agreement are about specific terms such as media regulations and local content, the right to sue for breaches in the agreement, quarantine laws, copyrights and the Pharmaceutical Benefits Scheme. Also, the free trade agreement is not delivering very many new export markets to farmers just expanding opportunities for existing markets. And there is the x-factor of US farmers being backed by the US government subsidies when Australian farmers are not.
Our market is one of the worlds freest but the US is protected by rising government subsidies. There are doubts that even with lower tariffs and higher quotas that Australia's agriculture will flourish while US subsidies remain as they destroy the concept of a level playing field. Many US agricultural imports are subsidised by the US government. Their recent Farm Bill will increase agricultural subsidies in the next 10 years. Subsidies are a form of trade distortion. Export subsidies in rich countries are seen as crippling the ability of developing nations to compete on world markets. It is not just the US that provides subsidies to farmers, the European Union believes maintaining subsidies preserves European rural culture and reluctant to remove these subsidies regardless of the US.
The Australian Government sees the advantage of The Free Trade Agreement being in having an economically powerful trading partner to be linked to. The US is the world's largest importer, investor and purchaser of goods and services. This does come paired with the risk of the US not honouring the agreements of free trade as they are a greater economic power and have the potential to bully smaller nations.
There are concerns and insecurities from the general public that the US dwarfs Australia economically. The US economy is around 22 times as large as Australia's economy. Competition between equal competitors doing business under equal conditions, such as wage and tax conditions is good, and essential to keep prices down. Australia may be at a disadvantage as it lacks capital (at competitive rates), competitive advertising, huge turnover markets, and cheap raw materials and labour.
Free trade is an advantage to US manufacturing. Access to a greater supply of raw materials at lower prices enables US manufacturers to reduce costs and become more competitive in markets around the world. The presence of foreign produced finished manufactures in the US compels domestic industries to be innovative and efficient, both of which are keys to profitability and longevity. Only 4% of Australian companies currently export. We lack export culture and may not reap the benefits of increased market opportunities.
There is concern from the general public that eliminating tariffs on US manufactured exports to Australia may result in huge job losses as local production is displaced by imports from technologically superior US manufacturers. The Australian Government considers that Australia has an open, efficient and competitive economy in which most US products have enjoyed easy access to for years, and the US has pockets of high protection which are currently limiting the entry of competitive Australian products. Government financial modelling has predicted the Free Trade Agreement will increase Australia's annual GDP by $6 billion in a decade, and deliver 30 000 Australian jobs by 2012.
The Free Trade Agreement has the potential to impact more on investment than trade. Currently the US supplies nearly 30% of Australia's foreign investment, more than any other economy. It is hoped that the agreement will further enhance Australia's attractiveness as a destination for US investment. Countries in our region will then have increased incentive to invest in, and trade with, Australia because of our stronger linkages with the world's most powerful economy. The advantages to Australia and the US may simply cancel each other out and provide a level playing ground, where neither country has a trading advantage over the other. The advantage to both countries would then be in trading with the rest of the world.
Also, until now, Australia has been locked out of the worlds largest government procurement market. Australia will gain immediate access to the $200 billion market of federal government purchases of goods and services. An aim of The Free Trade Agreement is to restore Australia's competitiveness in the US market against other suppliers from Canada, Mexico and other countries which currently enjoy preferential access to the US market.
It is very important for Australia to avoid maintaining a deficit on the current account. It puts downward pressure on the international exchange value of the dollar scaring away further investment and making payments on existing loans more expensive. The Free Trade Agreement with the US may help Australia to reduce the deficit on the current account by increasing our exports either in our strong agricultural sector or, more hopefully, in manufacturing. Remaining a primary commodity trader challenges our capacity to embrace a policy of sustainable development. Moving away from trading in raw materials can be done if we improve the export culture, innovation and efficiency of our market to be truly competitive with the US and the rest of the world.
The US Free Trade Agreement could be a productive push for us to delve into the world of manufacturing, but requires Australia to have:
- a level of trust in the US not to economically manipulate us and to enter into the bargain with a sense of fairness, and
- a confidence in the quality and dedication of our industries to flourish, not fold, under pressure.
The benefit of The Free Trade Agreement is simply that it provides Australia with an opportunity to change its ways, and hopefully become more export and manufacturing savvy. We will have access to markets we did not before, but we are also opening our doors to an economic super power, and only time will tell if we work together or against each other.
References & further reading
Department of Foreign Affairs and Trade fact sheets
www.dfat.gov.au
GATS Australia
http://gats.com.au/
Economically Australia needs to increase exports – but can we rely on the US to play fair in the Free Trade Agreement?
As Australia delves into its most crucial capitalist venture in recent times, this student examines some of the consequences and motivations which have pushed the issue of The Free Trade Agreement with the US to the forefront, and discovers the potential benefits are only as certain as the integrity of our trading partner.
Australia's current trading pattern has resulted from its origins of being a British white settler colony in the nineteenth century where we export raw materials and import finished, high value added goods. It has had a dependent development where imperial integration with domestic development are joined and Australia is reliant on the export of primary commodities.
As a primary commodity exporter we tend to be overly reliant on a few export items, while the manufacturing nation (the US) has a multiplicity of sources of raw material, as technology has allowed raw material production to be increasingly efficient and available, and lowered supply costs. Being a primary sector exporter and secondary sector importer, our terms of trade will decline in the long run, because of the falling component of raw materials over time, as a proportion of the value added of elaborately transformed manufactures. There are issues of environmental sustainability as natural resources are depleted.
Australia's manufacturing sector is currently unable to competitively supply the elaborately transformed manufacture that we are importing. It is important for Australia's economy that we make moves to increase our exports. Our current account deficit comes about from an imbalance between imports and exports, as we are buying too many goods from overseas while not selling enough exports to break even or be in surplus.
The question is will The Free Trade Agreement that is proposed actually increase exports out of Australia more than imports into Australia?
The Agreement isn't 100% free trade on either side; it is more like "The Mostly Free Trade Agreement". The key is striking a balance where the advantages outweigh the disadvantages. Our Government's stance is that a large proportion of US agricultural exports to Australia already enter our market duty free, while our product is subjected to significant restrictions in tariffs and quotas. The Agreement will see 66% of tariffs applied by the US to Australian agriculture eliminated once the agreement commences, and a further 9% in four years. There are disputes over the current agreement as some products such as beef are having tariffs lifted gradually, and others like sugar are excluded from the deal currently.
Australia exports 3.5 times more agricultural products to the US than we import and Australia is ranked 5th as an agricultural exporter to the US. Because our terms of trade are bound up with the exchange rate of the Australian dollar, imports are relatively dear to us and our exports are relatively cheap to our overseas customers. It seems that Australia has made a huge win with regards to agriculture, but perhaps at the expense of manufacturing and our own sustainability.
http://www.daff.gov.au/market-access-trade
Complaints about The Agreement are about specific terms such as media regulations and local content, the right to sue for breaches in the agreement, quarantine laws, copyrights and the Pharmaceutical Benefits Scheme. Also, the free trade agreement is not delivering very many new export markets to farmers just expanding opportunities for existing markets. And there is the x-factor of US farmers being backed by the US government subsidies when Australian farmers are not.
Our market is one of the worlds freest but the US is protected by rising government subsidies. There are doubts that even with lower tariffs and higher quotas that Australia's agriculture will flourish while US subsidies remain as they destroy the concept of a level playing field. Many US agricultural imports are subsidised by the US government. Their recent Farm Bill will increase agricultural subsidies in the next 10 years. Subsidies are a form of trade distortion. Export subsidies in rich countries are seen as crippling the ability of developing nations to compete on world markets. It is not just the US that provides subsidies to farmers, the European Union believes maintaining subsidies preserves European rural culture and reluctant to remove these subsidies regardless of the US.
The Australian Government sees the advantage of The Free Trade Agreement being in having an economically powerful trading partner to be linked to. The US is the world's largest importer, investor and purchaser of goods and services. This does come paired with the risk of the US not honouring the agreements of free trade as they are a greater economic power and have the potential to bully smaller nations.
There are concerns and insecurities from the general public that the US dwarfs Australia economically. The US economy is around 22 times as large as Australia's economy. Competition between equal competitors doing business under equal conditions, such as wage and tax conditions is good, and essential to keep prices down. Australia may be at a disadvantage as it lacks capital (at competitive rates), competitive advertising, huge turnover markets, and cheap raw materials and labour.
Free trade is an advantage to US manufacturing. Access to a greater supply of raw materials at lower prices enables US manufacturers to reduce costs and become more competitive in markets around the world. The presence of foreign produced finished manufactures in the US compels domestic industries to be innovative and efficient, both of which are keys to profitability and longevity. Only 4% of Australian companies currently export. We lack export culture and may not reap the benefits of increased market opportunities.
There is concern from the general public that eliminating tariffs on US manufactured exports to Australia may result in huge job losses as local production is displaced by imports from technologically superior US manufacturers. The Australian Government considers that Australia has an open, efficient and competitive economy in which most US products have enjoyed easy access to for years, and the US has pockets of high protection which are currently limiting the entry of competitive Australian products. Government financial modelling has predicted the Free Trade Agreement will increase Australia's annual GDP by $6 billion in a decade, and deliver 30 000 Australian jobs by 2012.
The Free Trade Agreement has the potential to impact more on investment than trade. Currently the US supplies nearly 30% of Australia's foreign investment, more than any other economy. It is hoped that the agreement will further enhance Australia's attractiveness as a destination for US investment. Countries in our region will then have increased incentive to invest in, and trade with, Australia because of our stronger linkages with the world's most powerful economy. The advantages to Australia and the US may simply cancel each other out and provide a level playing ground, where neither country has a trading advantage over the other. The advantage to both countries would then be in trading with the rest of the world.
Also, until now, Australia has been locked out of the worlds largest government procurement market. Australia will gain immediate access to the $200 billion market of federal government purchases of goods and services. An aim of The Free Trade Agreement is to restore Australia's competitiveness in the US market against other suppliers from Canada, Mexico and other countries which currently enjoy preferential access to the US market.
It is very important for Australia to avoid maintaining a deficit on the current account. It puts downward pressure on the international exchange value of the dollar scaring away further investment and making payments on existing loans more expensive. The Free Trade Agreement with the US may help Australia to reduce the deficit on the current account by increasing our exports either in our strong agricultural sector or, more hopefully, in manufacturing. Remaining a primary commodity trader challenges our capacity to embrace a policy of sustainable development. Moving away from trading in raw materials can be done if we improve the export culture, innovation and efficiency of our market to be truly competitive with the US and the rest of the world.
The US Free Trade Agreement could be a productive push for us to delve into the world of manufacturing, but requires Australia to have:
- a level of trust in the US not to economically manipulate us and to enter into the bargain with a sense of fairness, and
- a confidence in the quality and dedication of our industries to flourish, not fold, under pressure.
The benefit of The Free Trade Agreement is simply that it provides Australia with an opportunity to change its ways, and hopefully become more export and manufacturing savvy. We will have access to markets we did not before, but we are also opening our doors to an economic super power, and only time will tell if we work together or against each other.
References & further reading
Department of Foreign Affairs and Trade fact sheets
www.dfat.gov.au
GATS Australia
http://gats.com.au/
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Comment by Jeff Musall
Secular Humanity
Comment by Morgan Bell
Science News
Deep Pencil
Business News
Movie Train
Artist Quirk
i tend to agree, i think the idea is good in theory but i wonder if it will ever be fair in practice?
thanks for stopping by the business blog, it was getting lonely over here by myself! haha
Comment by Jeff Musall
Secular Humanity
Comment by RubySoho
Music Zone
Thought Zone
Morgan, business blogs too? You little work horse you. I can't keep up.
Comment by Morgan Bell
Science News
Deep Pencil
Business News
Movie Train
Artist Quirk
thanks for sharing your ideas, you are absolutely right "tight controls and strong enforceable regulation" are the only way to go
hi Ruby,
yes sometimes i like to take time away from stirring up the prudish old ladies and try to produce something sensible! haha
i took over this business blog fairly recently to attempt writing in a more formal style in an area that doesnt have many writers on orble so far (niche market wink wink nudge nudge haha)
i think you have summed up exactly where most peoples fears about free trade stem from: the US have a terrible track record and we are only a little country and dont want to be "dwarfed"
the devil is always in the details and i think theres a place for negotiations rather than a simple yes or no . . . i also think it is telling that the US doesnt offer a 100% free trade agreement as they are just as concerned with protecting their own interests as we are with ours.
thanks for stopping by, i appreciate your contribution!