Peter Drysdale, Editor of the East Asia Forum, has written a stinging rebuke of the Australia-US Free Trade Agreement (AUSFTA), which he claims has come at a high price to Australia, and also cautioned against the US-led Trans-Pacific Partnership (TPP) agreement, which is currently being negotiated between the US and 11 other nations (including Australia):
A decade down the track, the high price that Australia paid for the conclusion of the Australia–United States Free Trade Agreement (AUSFTA) has become crystal clear.
…the impact of the agreement on trade flows shows that the agreement diverted trade away from the lowest cost sources of import supply to Australian consumers. “Australia and the United States have reduced their trade by US$53 billion with rest of the world and are worse off than they would have been without the agreement…
The problem was that AUSFTA did not remove any of the significant barriers that protected high cost US agricultural sectors like sugar, dairy or even beef. The negative effect is that these agreements divert trade away from more efficient and competitive third country suppliers towards partner suppliers who only become competitive because of the preferential treatment they receive under the agreement…
The TPP might still turn out to be little more than a bunch of tactical bilateral deals that won’t do much to solve the problem of overlapping FTAs in the region — one of its supposed core goals — and boost regional trade and incomes. Much depends on Japan and the United States — whether Japan is prepared to go for the ‘zero option’ on agricultural trade liberalisation and whether the United States is prepared to sacrifice its vested agricultural and other protectionist interests.
A deal done simply to tie a political bow around a ‘free trade’ arrangement between allies and friends, new and old, would weaken not strengthen their economies and, over the years, gnaw away at their regional economic and political strength.
Drysdale makes some salient points about the AUSFTA. The agreement is likely to have been welfare destroying for a number of reasons.
First, as argued by Drysdale, the AUSFTA is likely to have caused trade diversion, which occurs when an importing country shifts its buying from a more efficient, lower cost country whose goods are subject to a tariff towards the less efficient and higher cost FTA partner whose goods are not subject to a tariff.
In such circumstances, the importing country loses the tariff revenue, whilst its consumers do not fully benefit from a price reduction, potentially making them worse-off (see here for a stylised example of trade diversion).
More importantly, in my view, the AUSFTA included extensions to both patent and copyright terms, which has raised the cost of pharmaceuticals and copyrighted materials.
According to Peter Martin, the extension of pharmaceutical patents under the Australia-US FTA, from 14 years to 20 years, has “suppressed the development of a generic drugs industry and cost the government $200 million per year by slowing the entry of cheap generic drugs into the pharmaceutical benefits scheme”. Moreover, “generic manufacturers have missed out on an estimated $2 billion over eight years” whereas “70 per cent of drug patents expire later in Australia than in other countries”.
Market access to US agricultural markets was also heavily restricted under the AUSFTA, with large chunks of agriculture carved-out, draconian price-based safeguards protecting US horticulture (see Annex 3A), as well as complicated product ‘rules of origin’ numbering hundreds of pages.
The end result was anything but ‘free trade’, with the costs from patent and copyright extensions, along with trade diversion, likely offsetting any modest gains from improved market access.
The proposed TPP risks similar drawbacks for Australia.
As revealed by WikiLeaks last year, the draft of the intellectual property chapter included a “Christmas wishlist” for pharmaceutical companies, including the proposal to extend patent protection and strengthen monopolies on clinical data. Most worryingly, the US is also seeking patents for “new forms” of known substances, as well as on new uses on old medicines – a proposal which would lead to “evergreening”, whereby patents can be renewed continuously, forcing-up Australian consumers’ (and taxpayers’) pharmaceutical costs via reduced access to cheaper generic drugs and reduced rights for the Government to regulate medicine prices. Such a move also risks stifling innovation in the event that patent terms are extended too far.
The US has also sought to insert an Investor-State Dispute Settlement (ISDS) clause into the TPP, which could give authority to major corporations to challenge laws made by governments in the national interest in international courts of arbitration. So effectively, US companies would be allowed to sue the Australian Government under international law – a move that is being pursued by Philip Morris against Australia on plain packaging and graphic warnings for cigarettes. It’s a huge threat to Australia’s sovereignty, since it would effectively limit the Government’s ability to form public policy and its ability to regulate in the public interest.
Finally, the US has sought to prevent circumvention of technology that restrict products to certain regions – even though this was recommended by the Australian parliament’s Inquiry into IT Pricing – as well as rules banning parallel importation of goods made under authorisation in other countries, which would hand greater power to US content creators and push-up prices for consumers.
So rather than freeing-up trade, the TPP would grant greater power to international multinational corporations, increasing their rents at the expense of consumers and taxpayers.
For this reason, several notable experts have previously voiced strong opposition to the TPP fearing that it represents grave risks for the global trading system and citizens of countries operating within it.
Former World Trade Organisation (WTO) director-general, Supachai Panitchpakdi, claims the TPP represents a step backwards to the days before the WTO when the US and Europe controlled the global trading system to the detriment of other economies.
Nobel Prize winning economist, Joseph Stiglitz, raised similar fears in an open letter posted in late 2013, whereby he questioned negotiators’ secrecy and warned about “grave risks on all sorts of topics” posed by the TPP, as well as claiming that it contains “many of the worst features of the worst laws in the TPP countries, making needed reforms extremely difficult if not impossible”.
Paul Krugman, another nobel prize winning economist and trade expert, has also slammed the TPP, noting that it would increase the ability of certain corporations to assert control over intellectual property [including] drug patents and movie rights”. Krugman also claimed that “there isn’t a compelling case for this deal, from either a global or a national point of view”, and that the “economic case is weak, at best”, with “the push for T.P.P… weirdly out of touch with both economic and political reality”.
The Australian Government must learn from the mistakes of the AUSFTA and ensure that it does not sign onto a deal that imposes costs on Australia’s consumers, taxpayers, and our world-class health system by placing the interest of US pharmaceutical and digital companies ahead of our own.
