HAVING followed the Bush Administration into Iraq on the basis of flimsy evidence about the existence of weapons of mass destruction, it should come as no surprise that the Howard Government has so willingly entered into a bi-lateral free trade agreement (FTA) with the United States. It has done so knowing that it risks damaging Australia’s trading relationships in Asia.

This is the fear of long-time adviser on trade to successive federal governments, Ross Garnaut, who argues that the FTA breaks World Trade Organisation rules and will fuel protectionist sentiments in Japan and Europe. Garnaut sees no benefit in a bilateral FTA with the US, arguing that, “it is hard politically for the US to accept clean free trade with Australia, except in the context of multilateral free trade”. A bilateral agreement with the US, according to Garnaut, would be “damaging economically for Australia” as it “compromises such central agricultural interests as grain, meat and sugar”. Furthermore, he suggests that “analysis has never revealed large enough net economic benefits to Australia”. This is hardly a flattering endorsement.

Until recently Australia was committed to multi-lateral approaches to trade negotiation, building on the processes set in train by the General Agreement on Tariffs and Trade. Frustrated by opposition to the Multilateral Agreement on Investment (MAI) and stalled multi-lateral trade talks, the Bush Administration has revealed it is totally pragmatic when it comes to trade. The Howard Government has once again backed its favourite ally.

This new strategy of bilateralism appears to be designed to intensify pressure on other countries to conform to the US “free trade” model – a model where the US is free to trade with you but you are not free to trade with the US.

The free trade agreement between the US and Australia is a bit like giving a corporate fox the freedom to roam among the free range chickens – the contest is one-sided and the outcome is messy but predictable. The US is one of the largest economies in the world with annual GDP of about US$9300 billion. As we enter the 21st century, it is the most politically and economically dominant nation.

Australia, on the other hand, is a relatively small economy with annual GDP of about US$400 billion. It has little independent sway on the global political stage. Australia is a relatively small market for the US, representing around 1.6 per cent of total US exports. Australia is far more dependent on the US than the US is on Australia. Australia’s exports to the US of about US$8billion represent around 11 per cent of total Australian exports.

The odds of Australia extracting net gains from a free trade agreement (FTA) with the US was always going to be constrained by the massive power differential that exists between the two countries and the relative influence of their domestic corporate lobbies. The recent FTA struck between Australia and the US reflects these dynamics plus the added complication of it being election year in both Australia and the US. The big corporate lobby groups have been working around the clock to ensure that the FTA advances their industrial interests, or at least doesn’t harm them. US agricultural interests appear to have done particularly well, as the complaints from the Australian sugar industry confirm.

The FTA has not been the sweet deal that Australian sugar growers had hoped for. The industry sought an increase in the US sugar quota to enable it to export more sugar to the US. Their US counterparts successfully lobbied the Bush administration to maintain the quota at 87,000 tonnes. Australian growers could have reasonably expected a better outcome, but not in an election year. The FTA struck between the US and Central America saw the Central American sugar quota to the US rise by about 40,000 tonnes. Having made no gains but equally no losses from the FTA, Australian sugar growers are seeking a $600 million sweetener from the Howard Government. It looks like free trade might be very costly in an election year. With no gains for Australian sugar exporters from the deal, the US looks to be the clear winner from the FTA.

Through the noise of the sugar industry lobby, the Howard Government is arguing that the FTA is an historic victory for Australian industry. The Bush Administration sees it as a victory for the US, creating unparalleled access for US firms to Australian markets.

The rhetoric from both sides suggests that each player is a winner. Both can’t be right.
Press releases issued on the FTA by the Howard Government and the Bush Administration provide the usual positive spin, big on the benefits of the deal but sparing on the detail. The problem is that the devil is always in the detail.

Past experience of FTAs struck between the US and other nations and regions suggests there is good reason to fear that Australia will be the loser from an FTA with the US. This is particularly so given the subservient relationship the Howard Government has with the Bush Administration. The Howard Government is very likely to have given far too much ground to the Bush Administration on such key issues as investment policy, access to the pharmaceutical benefits scheme (PBS), local content in broadcast media and competition policy. Already a side agreement has been struck as part of the FTA committing to the sale of the remainder of Telstra.

These are issues of great consequence for Australia – and especially South Australia, which has suffered greatly from the retreat from sensible levels of industry protection. A recent study by the Productivity Commission on the impact of tariff phase-down on Australia’s regions found that SA experienced a net loss of employment in tariff-sensitive manufacturing industries. SA stands to lose even more employment as a result of the FTA, which will accelerate tariff reduction in Australia.

Under the FTA with Australia, the US has been given the capacity to tender for all Federal Government contracts. It appears this may be extended to State government procurement. To achieve this, the Howard Government is likely to use its National Competition Policy payments to SA as leverage. The FTA provides US firms with the capacity to get a stronger foothold in the provision of services to Australians. They will intensify pressure on governments to outsource service provision as a “requirement” of competition policy. In SA, this could lead to US-based firms gaining a foothold in the running of our public education and health systems.

In a State with a shrinking local media focus, South Australians should be concerned about the implications of the FTA for local content. While the Department of Foreign Affairs and Trade states that the FTA protects local television content requirements, US trade officials claim the new agreement provides “important and unprecedented provisions to improve access for US films and TV programs over a variety of media including cable, satellite and the internet”.

An ageing state such as SA should be concerned about the prospect of escalating pharmaceutical costs. The inclusion in the FTA of an independent review of PBS drug listings creates an avenue for US companies to hold up the listing of rival products where these might threaten US pharmaceutical interests. Tom Allen, a member of the US Congress, warns that the proposed changes to the PBS “... could tilt the admirable balance Australia has struck between manufacturers and consumers”.

The ideal of “free trade” may sound a noble pursuit but it obscures the harsh reality that trade negotiation is a grubby process of political trade-offs forged between political elites and large corporate interests. The latter are a relatively small group wielding enormous economic and political influence. Trade analyst John Madely has observed that just 500 of the world’s largest transnational corporations control 70 per cent of total world trade. Just six transnational corporations (TNCs) control about “... 85 per cent of world trade in grain, eight TNCs account for between 55 to 60 per cent of world coffee sales, seven account for 83 per cent of world trade in cocoa, three account for 80 per cent of bananas”.

In practice, the most powerful countries and corporate interest groups are able to preside over trade negotiations, knowing that they have the political and industrial muscle to dominate the markets they seek to enter. Occasionally, wider community interests prevail in the trade and investment debate, ensuring that labour and environmental standards are considered and that a “fair” rather than “free” trade agenda has some prominence.

The supporters of the free trade agenda argue that mechanisms such as tariffs, quotas and subsidies insulate domestic industry from competitive pressures, fuelling inefficiencies. Government assistance to industry is seen as penalising consumers by denying them access to cheaper imported goods and services. Critics of free trade point out that advanced industrial economies like the US and Australia owe much of their early industrial development to tariff protection and other forms of industry assistance. They argue that it is difficult to envisage how any nation might achieve a level of industrial success and diversification without industry protection. They also highlight the hypocrisy of industrialised countries like the US and Australia that have developed mature industries behind tariffs and quotas and now expect less- industrialised countries to do otherwise.

What can Australia learn from previous free-trade agreements involving the US, like the North American FTA and the US/Singapore FTA? The lessons are sobering. One of the most perverse impacts of FTAs is the way in which they can place downward pressure on the wages and conditions of working people. The North American Free Trade Agreement (NAFTA) has done just this, resulting in a flight of capital from the US and Canada to the sweat shops of Mexico. This has left thousands out of work in the US and Canada while rewarding the low-wage and environmentally hazardous industrial landscape of Mexico. Increasingly FTAs are being used to lock nations into the sale of public assets or to prevent them from nationalising assets. The FTA struck by the US and Singapore in 2003 contained a commitment to the sale of SingTel and ST Telemedia. No doubt this was the inspiration for attaching the sale of Telstra to the US/Australian FTA.

Governments normally have the capacity to aquire private assets to meet public interest objectives. This practice is barred by NAFTA. If a similar clause is in the US/Australian FTA, failed outsourcing and privatisation projects could never be reversed. The sovereign right of elected governments to act in the public interest would be undermined.

Sources: Garnaut, Ross (2002) “An Australian-United States free trade agreement”, Australian Journal of International Affairs, Vol 56, No 1. Madeley, John (2000) Hungry for Trade, Zed Books, London.