Snubbing the neighbours
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. While Australian Prime Minister John Howard has hailed it as a 'once-in-a-generation' opportunity, there are some knowledgeable voices in the country who are questioning the wisdom of such a deal, given the country's proximity to a rapidly growing East Asia.
Under the FTA, all tariffs on manufactured exports and the car industry will be eliminated and 66 per cent of agriculture tariffs will be removed. But the Australian beef and dairy industries will still face above-quota tariffs for 20 or so years and Australia's politically sensitive Pharmaceutical Benefits Scheme, which drastically reduces the cost of medicine, will remain. The US refused to remove protection for the sugar industry, so Australia's producers come away empty-handed.
In short, it is a good deal for Australian manufacturers and a pretty ordinary one for the nation's farmers. But then, that is what one of Australia's foremost trade experts, Ross Garnaut, predicted. Professor Garnaut, a former ambassador to China and economic adviser to prime minister Bob Hawke in the 1980s, said last March: '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 by signing the deal, Australia is undermining its crucially important future economic relations with East Asia. His ally on this matter has been one of the pre-eminent international trade scholars, Columbia University's Jagdish Bhagwati. Writing in The Australian last July, the pair said: '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.'
Professor Garnaut testified before an Australian parliamentary committee, 11 days after the article appeared, to elaborate. '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,' he said. 'Any potential gains in the US 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.'
His analysis appears particularly accurate with respect to those industries that have fared less well in the deal - beef, dairy and sugar. If Asean plus three (which includes China, South Korea and Japan) succeeds in achieving its aim of a free-trade deal by 2010, then those key Australian primary industries will suffer devastating losses that will not be ameliorated by the US agreement. To emphasise this, trade with Asean plus three currently accounts for about half of Australia's total merchandise trade - while the US makes up just 10 per cent.
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 the Association of Southeast Asian Nations and before the ink was dry on the US-Australia accord - literally - India, Thailand, Bangladesh, Myanmar and Sri Lanka signed a deal 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 created tension in the region. Richard Woolcott, a former Australian ambassador and long-time Asia observer, has said that Australia is now 'seen by many in our neighbourhood as the odd man out'.
The free-trade deal will reinforce that perception - particularly if it is perceived as being some form of 'reward' from the Bush administration.
All in all, it is hard to see how the agreement will further the cause of economic and security integration in the region. Australia has found it difficult since 1996 and the political demise of Paul Keating - a vigorous proponent of integration with Asia - to penetrate Asian dialogue. The free-trade deal will not help that important cause, and this is likely to be to Australia's long-term economic detriment.
Greg Barns was an adviser to the Australian government from 1996-99 and is now a columnist and writer based in Australia
