The U.S. Free Trade Agreement – always a silly idea, now a deadly trap for Australia

It now seems that Labor will decide to support the US �Free� Trade agreement as early as Monday. Back to the small target strategy, with the national interest left out in the cold, again. And why? So as not to upset the Americans! As Webdiary�s conservative columnist Noel Hadjimichael emailed today, �Labor should stand firm on the FTA to differentiate itself on economic management – but it is gutless! Voters I suspect are suitably keen to vote for someone with a commitment to some values versus the ambiguity of the Latham soft sell lifted from the Dick Morris school of Clinton-era propaganda.�


Webdiarist Brian Bahnisch, a retired public servant who has studied trade agreements closely for years, reports. He also recommends Ross Gittins� pieces No free trade in so-called free trade agreement and Costs aplenty in ‘free’ trade IP deals with US. For the grave warnings of Australian scientists on the deal, see Subsuming us into America – the economic aspect.


The weird thing about Labor�s expected capitulation is that opposing the deal or requiring substantial amendments would allow the Australian people to get an idea of the enormous stakes and risks involved and could even be a potential election winner for Labor. At times like these it�s easy to believe we live in a one party state.


Picking the low-hanging fruit first

by Brian Bahnisch

The distinguished American scholar Immanuel Wallerstein sees multilateral trade negotiations as a means for the core economies of the world, North America, Europe and North Asia, to open the peripheral economies to trade and investment, while protecting their own. He sees this as part of the structure of capitalism and what he calls the World System. It is not a mere policy option, but rather an inherent structural feature.

Whether Wallerstein is ultimately right or not, he bases his remarks on a lifetime of study of the 500 years or so that capitalism has prevailed. We must expect, therefore, that the tendency of the strong to exploit the weak is very durable.

Trade in agricultural produce has been especially difficult to negotiate. Agriculture is heavily subsidised in the advanced economies, to the extent of about US$1 billion per day. (This figure moves, but the last authoritative figure I recall is US$312 billion about 6 months ago. Since then the dollar has fallen against most currencies.) It is generally accepted that if poor countries had access to wealthy countries for their agricultural produce, this would do more to assist them in economic development than direct aid, but only if their markets could be protected from subsidised exports from the likes of the US and the EU in the meanwhile.

In many of the advanced economies, farm subsidies are essential for the survival of many farmers, especially family farmers, and the continuance of subsidies is highly sensitive politically.

Through the many years of the GATT minimal progress was made in freeing up trade in agriculture. The WTO (World Trade Organisation), established in 1995, has fared no better. The entire WTO agenda fell in a heap in 1999, partly because of the ‘anti-globalisation protests’ but substantively because the poor countries were in open rebellion over the hypocrisy of the major powers and the unfair procedures adopted within the WTO by which the major powers controlled the agenda.

The Doha WTO ministerial meeting got things back on track largely because the major powers promised to wind back domestic agricultural subsidies, and to provide greater access to their markets for the produce of poorer countries, dubbing the Doha Round the “development round”. Also, the meeting was held in November 2001, two months after the S11 attacks. The US saw a favourable result as essential to establish faith in the ‘free world’ after the attacks of S11 and conducted a blitz of arm-twisting diplomacy before the meeting.

Even so there were no concessions on procedures made by the WTO – indeed a blatant abuse of procedure continued. And the final mix of concessions and undertakings was not particularly attractive to the poorer countries, as they had to make real concessions for promises in return. Past practice would lead them to believe that the usual hypocrisy and cynicism would result.

They were not disappointed in this sense. The US and the EU went off and increased their farm subsidies, but expected the poor countries to honour their side of the deal. The result was the collapse of the Doha Round in Cancun in September 2003.

As I write, efforts are being made in Geneva write to revive the Doha Round. The prospects are not good. It is true that the US and the EU are talking sweet about the desirability and their willingness to free up agricultural markets. Neither will do it unilaterally, however. It is a case of one in, all in. Moreover, Japan and South Korea are not showing the slightest interest in freeing markets and winding back subsidies. We need to recall that their intransigence was a large part of the problem in Cancun.

It is not surprising in this context that the focus has moved from multilateral trade negotiations to bilateral ones. The pure free traders see bilateral deals as preferential trade deals, rather than ‘free’ trade deals, as they actually disrupt trade with non-participating countries and divert it to the preferred partners. So bilateral deals are essentially a pragmatic second-best approach.

Australia is not well placed to conduct bilateral deals, as it has almost completely open markets anyway. Whatever the purists say, trade deals are about trading concessions. At the conclusion of the agreement you would expect to be doing less of the things you are not so good at and more of the things you are good at. As the whole thing nets out both sides are supposed to gain, in large part because your competitive industries become even more competitive and can sell more effectively into third markets. In addition, there are supposed to be general ‘dynamic gains’, which flow from the greater ease of transactions and interchange between the economies. This, I think, is why free traders will always recommend a deal even when no tangible benefits can be identified.

Another way Australia is different is that our farm sector is virtually unsubsidised, so it is in our interest to open all agricultural markets. We established the Cairns Group of agricultural exporting markets to further this agenda. This does not go down well in the third world, as most of those countries need to protect their markets in the short to medium term while they develop their infrastructure and industry. Robbing peasant farmers of income from cash crops causes great personal and social stress.

The US FTA – always a silly idea

The notion of a free trade agreement with the US was always a silly idea for three reasons.

First, every-one saw that we needed to make gains in terms of access for our agricultural produce if it was going to make sense. Howard reminded us at the time that we would need to make concessions in other areas, for example in our culture, if we were to make the necessary gains in agriculture.

Yet how could this ever happen? We were asking farmers in politically crucial areas of electoral support to the Bush administration to put their livelihoods in jeopardy for what in return? It doesn’t profit American farmers one bit if Hollywood or Big Pharmaceutical companies make more money out of our markets. Certainly US farmers want to weaken our quarantine provisions and get rid of our single desk selling in wheat and other grains, but this was never going to be enough. Indeed here too the benefits sought by the US do not apply to and hence mean nothing at all to the US sectors where we would make our biggest gains – beef, dairy and sugar.

So there was no pre-existing complementarity in our rural economies.

Second, if you want to take on a big guy you best get some mates to join you. It is an absolute rule of thumb, I would think, that you don’t take on the big guys bilaterally unless you have significant leverage or they particularly want to confer favours upon you. We didn’t have any leverage and conferring favours in trade matters is not generally the American way.

Third, there is a real question as to why we would give priority to the US rather than a range of other options. Both Japan and the EU (Brussels has the carriage on trade rather than individual countries) are bigger trading partners, for example. There would also be less risk involved in dealing with smaller economies. Given the size and transnational reach of US corporations, signing up with them would seem to be a recipe for becoming a branch office nation.

We need to remember, then, that we initiated this thing. It came out of Howard’s think tank just after the Ryan byelection disaster early in 2001. Howard was a dead man walking politically. The FTA was one of the ideas for making him look like a half-decent politician, let alone a statesman.

The Americans were initially bemused, but the multinationals soon saw the potential and in no time there was an organised lobby of 60 corporations, which rapidly became 120, lobbying for the deal. Trade Secretary Robert Zoellick, known for the occasional charming choice of phrase, muttered something about “picking the low-hanging fruit first”.

What’s in it for the Americans?

First of all there are strategic geopolitical considerations. You do not have sign up to every military adventure, but you do have to behave. New Zealanders need not apply. The US does see trade in terms of national security, indeed in terms of consolidating their hegemonic position in the world.

Second, the US will always act to further the interests of its corporations.

Third, this FTA is said to be the first with an advanced economy. (I’m not sure where that leaves Singapore!) As such it is important in setting standards for further deals, both bilateral and multilateral.

The US has declared themselves well pleased with their handiwork.

Where we are now – up to our navels in alligators, that’s where!

Should we be pleased?

I invite you to look at AFTINET’s summary Ten devils in the detail. Just in terms of the threat to our culture and the democratic deficit (constraints on what laws and regulations can be passed or allowed to stand at every level of government) the price seems too high. That is before you come to the lean pickings in actual monetary benefits.

On the lean pickings, $6 billion in 10 years time is the figure calculated by the government-funded study. Other studies have found lesser figures or even negative benefits. For a convenient overview of the said benefits see the graph on Professor John Quiggin’s website.

The $6 billion figure needs to be considered in the context of a GDP, which, on present trends, should be worth well over $1 trillion dollars per annum by then. Consider also that the changes in copyright and trademarks, the changes in broadcasting and quarantine, as well as the changes in the PBS (Pharmaceutical Benefits Scheme) will have no significant effect according to the study. Some of the other assumptions in the study are similarly heroic.

Consider also that a major part of the gains are said to come from the so-called ‘equity premium’ which I take to mean the cheaper cost of capital because it will be easier to take over our most dynamic companies. This too seems to be based on what may roughly be termed a guesstimate, with no consideration of the negativities. There was a vigorous discussion on this issue on Quiggin’s website herehere and here.

Professor Quiggin, in his Senate submission, has termed the agreement an economic integration agreement rather than a free trade agreement. You really must ask, then, how much we will change as a nation and whether we really want to go there. American capitalism does have its own value assumptions and operating style.

Given the size disparity in the two economies it is probably a case of economic absorption, an absorption that constrains our own democratic capacity whilst giving no access to the greater polity. Nice work, John!

State Premiers have come out in favour, but I doubt whether any single one has contemplated how they may be required to change laws or be constrained in making laws and setting standards in such matters as professional practice, safety and the environment as a result of this agreement. Or how they may be required in the future to put out to tender some aspect of their portfolio of responsibilities simply because an American multinational wants to make some money out of it. If they had, they would surely be telling us loud and clear.

Nice work, John

We do need to be clear that we owe our current position squarely to our fearless leader. It was his idea in the first place, not, I think, for the general good, but to make him look like a leader when he manifestly didn’t.

At the other end of this tale, it appears from this story and others like it that the negotiators found the task undoable. Enter a little chat between George and John. To quote: “A weekend telephone conversation between Mr Howard and Mr Bush was credited by US negotiator Robert Zoellick with saving the deal.”

The problem is that the deal was resuscitated at the expense of John giving away the farm. Essentially our John gave up the gains in agriculture that were always seen as sine qua non to the deal. Unfortunately he didn’t retract the concessions already made to secure those very gains. That is my best guesstimate on what actually happened. The ungarnished truth is probably forever beyond our reach.

Labor’s self-inflicted web

Labor has got itself into a jam over this one. There seems little doubt that the left in the caucus is solidly against, but is likely to get rolled by the rest. Stephen Conroy has clearly been unable to resolve the differences. This is not a surprise. In my view the caucus contains other members with more aptitude and grasp in trade matters than Senator Conroy.

A more apt spokesman could have made hay on the FTA, which was immediately recognised as a dud by all but the most ideologically committed. The benefits are quite hard to find while the negatives stick out all over the place.

Peter Cook, who is both apt and knowledgeable, chairs the Senate Committee. My feeling is that he will leave the issue finely balanced, thus allowing it to be moved either way, a true servant to his master.

It is said that the Greens have made the rejection of the FTA a condition, not the only one, for a preference deal with Labor.

Which ever way Latham jumps now Howard will term him weak, a flip-flop merchant acting out of political concerns rather than out of principle and probably anti-American to boot.

Latham cannot pass it with loud reservations and promise to renegotiate it if he wins. Trade deals don’t work that way. While there are longer term provisions for review, no American administration is going to sit down next year and renegotiate an outcome less favourable to them. In the longer term a review is likely to tinker with the administration and the machinery of the agreement rather than throw the whole thing into a melting pot.

Should Labor be inclined not to pass the enabling legislation, the Americans do have some leverage and you can be sure Labor knows it. Much of our access to the American market and even visas are on the basis of quotas, which could be unilaterally cut back or withdrawn and allocated to other more compliant partners. Like our beef exports to the US, for example.

Right now we only have days left to influence Labor’s decision as Peter Cook has said there may be virtue in finalising the Senate Report before it is due on 12 August. I must go and send a few emails to caucus members other than those on the left who may just still be open to persuasion.

From what Kevin Rudd has said on radio it seems the first consideration will be by shadow cabinet early next week. Best concentrate on them.

Returning to Wallerstein, it is interesting to contemplate whether we are truly a core country, commanding the heights of capitalist power. I tend to think that even now we are just across the border in Wallerstein’s intermediate category, the semi-periphery. If we enter the FTA there is no doubt in my mind that we will lose some capacity to transact or to exert influence (let alone power) across the board.

Ask yourself if the Kiwis cheer every time we take over another of their companies and celebrate their good fortune? Still, on their example a pleasant enough life will still be available. But some of us will think about what might have been.

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