Shiro Armstrong, Co-Director of the Australia-Japan Research Centre at the Crawford School of Public Policy at the ANU, 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 cautions against proceeding with future agreements for political reasons:
The critics were right. Ten years after the Australia–United States Free Trade Agreement, or AUSFTA, came into force, new analysis of the data shows that the agreement diverted Australia’s trade away from the lowest-cost sources. Australia and the United States reduced their trade with rest of the world by US$53 billion and are worse off than they would have been without the agreement…
Enough time has now passed and there is enough data to update the Productivity Commission’s model to estimate the effect of AUSFTA on trade. What this shows is that the agreement was responsible for reducing — or diverting — $53.1 billion of trade with the rest of the world by 2012. Imports to Australia and the United States from the rest of the world fell by $37.5 billion and exports to the rest of the world from the two countries fell by $15.6 billion over eight years to 2012.
Beyond that, there is no evidence that the agreement has been associated with an increase in trade between the two countries, or with the creation of efficient low-cost trade. In fact, the trade diversion from other partners suggests that Australia–US trade would have fallen even further without AUSFTA…
Deals that are struck in haste for primarily political reasons carry risk of substantial economic damage.
Armstrong 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 Armstrong, 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 more than offsetting any modest gains from improved market access.
The proposed TPP, whose draft text included further copyright protections as well as an Investor-State Dispute Settlement clause, obviously offers even greater drawbacks for Australia.
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.
