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IMPLICATIONS OF FREE TRADE AGREEMENTS The U.S - Australia Case Revisited By Larissa Paschyn (ID: 2010280348), Abstract This paper will ask and answer if the Australia – US Free Trade Agreement is a net benefit for Australia, and could the Australia US Free Trade Agreement really pose a serious threat to local content and are the clauses in the agreement strong enough to protect the current arrangement or renegotiate? Subsequently, it will address the key flaws within the current agreement and offer policy suggestions in order to ensure Australia’s interests are not threatened by the international free trade agreement. Section1 Introduction In an industrialized country, there are usually few if any significant barriers to the easy exchange of goods and services between parts of the country. For example, there are usually no trade tariffs or import quotas; there are usually no delays as goods pass from one part of the country to another (other than those that distance imposes); there are usually no differences of taxation and regulation. Between countries, on the other hand, many of these barriers to the easy exchange of goods often do occur. It is commonplace for there to be import duties of one kind or another (as goods enter a country) and the levels of sales tax and regulation often vary by country. In order for trade to grow as a result of specialization, division of labor, etc., many countries consider it imperative to eliminate tariffs, quotas and preferences on most (if not all) goods and services traded between them. To this end, they establish what is known as “free trade area” or "Free Trade Agreement" (FTA). It is like creating a sort of an economic block or making a step towards rule based economic integration. 1

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Page 1: Globalization term paper   ausfta paper

IMPLICATIONS OF FREE TRADE AGREEMENTS

The U.S - Australia Case Revisited

By Larissa Paschyn (ID: 2010280348),

Abstract

This paper will ask and answer if the Australia – US Free Trade Agreement is a net benefit for Australia, and could the Australia US Free Trade Agreement really pose a serious threat to local content and are the clauses in the agreement strong enough to protect the current arrangement or renegotiate? Subsequently, it will address the key flaws within the current agreement and offer policy suggestions in order to ensure Australia’s interests are not threatened by the international free trade agreement.

Section1

Introduction

In an industrialized country, there are usually few if any significant barriers to the easy exchange of goods and services between parts of the country. For example, there are usually no trade tariffs or import quotas; there are usually no delays as goods pass from one part of the country to another (other than those that distance imposes); there are usually no differences of taxation and regulation.

Between countries, on the other hand, many of these barriers to the easy exchange of goods often do occur. It is commonplace for there to be import duties of one kind or another (as goods enter a country) and the levels of sales tax and regulation often vary by country.

In order for trade to grow as a result of specialization, division of labor, etc., many countries consider it imperative to eliminate tariffs, quotas and preferences on most (if not all) goods and services traded between them. To this end, they establish what is known as “free trade area” or "Free Trade Agreement" (FTA). It is like creating a sort of an economic block or making a step towards rule based economic integration.

The underlying principle behind FTA is that in an unrestricted marketplace (in equilibrium) each source of production will tend to specialize in that activity where it has comparative (rather than absolute) advantage. The theory argues that the net result of an FTA will be an increase in income and ultimately wealth and well-being for everyone in the free trade area.

The theory, however, refers only to aggregate wealth and says nothing about the distribution of wealth; in fact there may be significant losers, in particular among the recently protected industries with a comparative disadvantage. In principle, the overall gains from trade could be used to compensate for the effects of reduced trade barriers by appropriate inter-party transfers.

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Generally, countries choose this kind of economic integration form if their economical structures are complementary. If they are competitive, they are more likely to choose ‘customs union’.

The United States, with the largest and richest consumer market, is the economic powerhouse of the world. That is where countries want to have easy access to their products. That being comprehensible, however, it has been the U.S. that has been trying to get a free trade agreement not only with Central and South American countries but also in all other parts of the world. Some of the regional Free Trade Areas, which the U.S. initiated and to which it is also a member are listed as follows:

1. NAFTA or North American Free Trade Agreement that consists of U.S., Canada and Mexico1;

2. FTAA or Free Trade Area of the America: Originally envisioned as an extended NAFTA for the entire western Hemisphere except Cuba, but is currently inactive for various reasons.

3. CAFTA-DR or Central American-Dominican Republic Free Trade Agreement: Signed in 2004 encompasses, other than U.S., six Latin American countries including Costa Rica, Dominican Republic, Guatemala, Honduras, Nicaragua and El Salvador;

4. ASEAN or Association for South East Asia Nations consisting of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam, is a regional association initiated by the U.S. for the purpose of not only to establish bilateral trade agreements, but also to promote economic growth of the member countries thus providing a balance of power to China and Japan.

5. APEC or Asia-Pacific Economic Cooperation includes those countries in Asia and the Americas who border the Pacific Ocean. Member countries to APEC are Australia, Brunei, Canada, Chile, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, Philippines, Russia, Singapore, Taiwan, Thailand, and Vietnam.

6. MEFTI - Middle Eastern Trade Initiative refers to a series of bilateral trade agreement entered by and between the U.S. and countries such as Israel, Jordan, Morocco, Bahrain, and Oman. The initiative endeavors to help other peaceful Middle Eastern countries (Algeria, Lebanon and Yemen) obtain membership in the World Trade Organization (WTO) and enter into Trade and Investment Action Plans (TIFA) that encourages investment2.

1 Canada – United States Free Trade Agreement (Wikipedia)

2 North American Free Trade Agreement (Wikipedia)

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7. AUSFTA or Australia – United States Free Trade Agreement that came into force in 2005 is a preferential trade agreement between the two countries modeled on the North American Free Trade Agreement (NAFTA).

8. US - Chile Free Trade Agreement (FTA);9. US - Singapore Free Trade Agreement (FTA);10. US - Peru Free Trade Agreement (FTA);11. US - Oman Free Trade Agreement (FTA);12. U.S – Colombia Free Trade Agreements (FTA) – under negotiation;

13. U.S – Panama Free Trade Agreements (FTA) – under negotiation;

14. U.S – South Korea Free Trade Agreements (FTA) – under negotiation;

15. U.S. -Trans-Pacific Partnership Agreement (TPPA) comprising Australia, Brunei, Chile, New Zealand, Peru, Singapore, Malaysia and Vietnam – under negotiation;

1. Experience of the North America Free Trade Agreement (NAFTA)

Of the number of trade blocks established to date, which U.S is almost always the central player, the North American Free Trade Agreement or NAFTA is the largest in terms of combined purchasing power parity GDP of its members (U.S., Canada and Mexico) and second largest by nominal GDP comparison in the world. Note: U.S. – Israel FTA is the oldest.

NAFTA's effects, both positive and negative, have been quantified by several economists, whose findings have been reported in publications such as the World Bank's Lessons from NAFTA for Latin America and the Caribbean, NAFTA's Impact on North America, NAFTA Revisited by the Institute for International Economics.

According to available reports, as of January 2008, all tariffs between the three member countries of NAFTA were eliminated and as a result, trade has tripled from $297 billion to $1 trillion in the period between 1993 -2007. There is doubt, as the figures indicate that trade has grown significantly, but the question that strikes the mind is that whether NAFTA has been a win – win venture for all member countries or simply a mechanism to fulfill a broader economic and non-economic agenda of the U.S3.

Considering Mexico, some argue that NAFTA has been positive in that has seen its poverty rates fall and real income rise (in the form of lower prices, especially food), even after accounting for the 1994–1995 economic crisis. Others argue that NAFTA has been beneficial to business owners and elites in all three countries, but has had negative impacts on farmers in Mexico who saw food prices fall based on cheap imports from U.S. agribusiness. Some have suggested that in order to fully benefit and minimize the negatives from the agreement, Mexico must invest more in education and promote innovation in infrastructure for agriculture.

3 North American Free Trade Agreement (Wikipedia)3

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Still others argue that NAFTA have had negative impacts on U.S. workers as millions lost jobs following the transfer of manufacturing and assembly industries from the U.S. to other parts of NAFTA. Looking at the same scenario from another angle, since those same industrial plants that moved out of the United States to Mexico, for instance, have gained 15% plus increase in their income, the benefit outweighs the cost of losing jobs in the U.S.

According to the available reports, it appears that it is Canada that gained the most from NAFTA with its GDP rate at 3.6%, growing faster than the United States at 3.3% and Mexico at 2.7%. Canadian employment levels have also shown steady gains in recent years, with overall employment rising from 14.9 million to 15.7 million in the early 2000s. Even Canadian manufacturing employment held steady.

One of NAFTA's biggest economic effects on U.S. - Canada trade has been to boost bilateral agricultural flows. In the year 2008 alone, Canada’s export to the United States and Mexico was at CAN$381.3 Billion Dollars and imports from NAFTA was at CAN$245.1 Billion Dollars. Even then, critics in Canada charge that since NAFTA's ratification more than 10,000 Canadian companies have been taken over by foreigners, and that 98% of all foreign direct investments in Canada were for foreign takeovers. Notwithstanding, the Canadian mainstream has been unanimous in its recognition of NAFTA's advantages despite a few odd detractors.

Overall, despite the benefit and losses here and there, critics argue that NAFTA has contributed to the rising levels of inequality in all member countries of NAFTA. Moreover, some economists believe that NAFTA has not been enough, (or worked fast enough) neither to produce an economic convergence, nor to substantially reduce poverty rates.

In light of the experiences from the effects of NAFTA, many countries in South America have reservations to join in any similar regional free trade block because of fear, in particular, that eliminating tariffs would allow U.S. - subsidized agribusiness to put their local farmers out of business and forcing their people to work for U.S. corporations. Many, except Chile, Colombia, Panama, Peru and Uruguay, prefer a regional multilateral South American Trade Area Agreement within the context of the objectives, rules and regulations of the World Trade Organization (WTO), Doha Round.4

2. Why is the U.S. interested in FTAs while others are distrustful?

The answer to this question can be inferred from a letter sent jointly by more than 1,600 U.S. companies and associations through the U.S. Chamber of Commerce to the U.S. Congress during its 112th opening in January 2011. The letter urges members of the Congress to pursue trade and investment policies and agreements (FTAs) that will help American companies and workers to remain the most competitive in world. In their letter, they have specifically advised the Congress to consider and approve pending trade initiatives, such as the free trade agreements with Korea, Colombia and Panama.

4 North American Free Trade Agreement (Wikipedia)4

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The main reasons why pro-growth trade and investment policies and agreements are so essential for businesses in America, as argued with figures by the letter are:

1. The United States is the world’s number one manufacturing nation in the world. America continues to lead the world in manufacturing, with 19 percent of the worldwide value-added manufacturing output. Approximately 22 percent of all U.S. manufactured products is exported, and the United States is the world’s third largest exporter of goods.

2. The United States is the world’s number one services exporter and has been since services trade data have been tracked. Services account for 78 percent of U.S. GDP and about 80 percent of U.S. employment.

3. U.S. agricultural exports support nearly a million jobs in the United States. USDA forecasts that agriculture exports will reach a record level of $126.5 billion in fiscal year 2011. Free Trade Agreements (FTAs) are critical to the continued success. Unless the United States continues to open new markets around the world, will lose its market share to competitor countries.

4. 95 percent of the world’s consumers live outside the United States. America’s industries and jobs simply cannot grow if America does not do a better job of reaching the world’s consumers through trade and investment.

5. Over the past 25 years, the United States has implemented FTAs with 17 countries around the globe. While those countries represent just 7.5 percent of global GDP, these FTA countries purchased more than 40 percent of U.S. exports in 2009. Some of these countries are small, but FTAs make big markets even out of small economies.

6. Since the creation of the WTO in 1994, U.S. exports of goods and services have doubled to more than $1.5 trillion, with manufacturing, agricultural, and high technology exports growing by 65, 40, and 67 percent, respectively, between 1995 and 2007.

7. Academic research has confirmed that countries that have more open economies and that engage in international trade enjoy higher growth rates and faster reductions in poverty than more closed economies. In fact through this recent financial downturn, it is U.S. exports that have saved the economy from going into another recession. The World Bank has also determined that over the past two decades, those developing countries that engaged in trade enjoyed the fastest growth in wages. Since World War II, no nation has prospered without taking advantage of opportunities to trade. Meanwhile, American families benefit directly from imports because imports help to provide access to a wider variety of lower-priced consumer products. Imports also support millions of U.S. jobs in retail, research, design, sourcing, and transportation, warehousing, marketing and sales.

8. U.S. exports to China have quadrupled over the past 15 years. Since China’s accession to the World Trade Organization (WTO) in December 2001, trade between the United States and China has tripled, and U.S. exports to China have grown at five times the pace of U.S. exports to the rest of the world. China is now the 3rd largest market for U.S. exports. And though more work needs to be done to open China’s market further; U.S. companies are making the most of the opportunities that currently exist5.

9. U.S. companies with overseas investments account for 45 percent of all U.S. exports, according to data from the Bureau of Economic Analysis. U.S. investment overseas is a magnet for U.S. exports, helping U.S. companies to better access foreign markets.

5 North American Free Trade Agreement (Wikipedia)5

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10. The relative importance of trade to the U.S. economy has also increased. Trade supports 38 million jobs in the United States — more than one in five American jobs. Nearly 18 million of these U.S. jobs depend on trade with America’s free trade agreement partners. Twenty years ago, the total value of U.S. exports and imports amounted to 17 percent of America’s GDP. In recent years, trade has accounted for as much as a quarter of its economic output.

The bottom line is that the United States remains an economic phenomenon, with annual output exceeding $14 trillion–greater than the total output of the next five most productive economies combined! This unprecedented economic success is not due to the size of the U.S. population or its natural resources (other countries have more of both), but to the free-market principles and policies around which its economy is organized.

The business circle in U.S. very well understands the benefits of FTAs and the U.S. Administration since President Regan have endeavored to expand the number of FTAs throughout the world simultaneous with negotiations pertaining to the WTO. It must be mentioned that the Bush-FTAs were subject for heavy criticism from various corners.

Currently, the Obama Administration has began talks with Asian and Latin American nations to enter into the Trans-Pacific FTA. The talks with Australia, Brunei, Chile, New Zealand, Peru, Singapore, Malaysia and Vietnam were originally initiated by the Bush Administration. Obama has vowed to make the negotiations of FTAs more transparent and their implementations environmentally sound. The Obama administration shall be tested with the Trans-Pacific FTA, whether or not it can come up with a new more transparent and inclusive U.S. trade agreement model to replace the old controversial types6.

In this paper, the Australia – U.S. FTA (AUSFTA) is revisited to assess the pros and cons of the agreement from different stands. The lessons that should be learnt from the agreement are singled out and the short and long term effects of an FTA on junior partners highlighted.

3. History of AUSFTA or Australia – United States Free Trade Agreement

The U.S. interest to have a free trade agreement with Australia dates as far back as 1946, but in more recent times, the prospect of an Australia-U.S. FTA was raised in the 1980s by the Hawke Government of Australia. The idea was entertained later in 1992 by the U.S. Administration during George H.W. Bush era but Australian Labor Party Prime Minister Paul Keating turned down the proposal.

It was not until early 2001, after the election of George W. Bush in the U.S. and with John Howard in power in Australia that an Australia-U.S. FTA finally began to take shape. A private consultancy – the Centre for International Economics (CIE) – was commissioned by the two parties in 2004 to prepare the framework agreement in line with the NAFTA model.

6 North American Free Trade Agreement (Wikipedia)6

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After five rounds of negotiations on the economic impacts of the FTA model, the free trade agreement was signed by the parties in May 2004; and ratified both by the U.S. Congress and the Senate the same year. However, nearly one-third of members of the Congress and one-fifth of the U.S. Senate have opposed the agreement.

In Australia, the agreement's implementing legislation was reluctantly passed, with amendments, by the Senate in August 2004. The U.S. Administration accepted the amended Australian legislation as being consistent with implementation of the agreement; and President George W. Bush signed the United States-Australia Free Trade Agreement (AUSFTA) Implementation Act into law in August 2004. The FTA came into force on 1 January 20057.

4. Objectives of an Australia - USA FTA

More than two hundred U.S. companies have signed on to the US - based coalition in support of the FTA between U.S and Australia. Similarly on the side of Australia, the FTA had received a strong support from what is known as Australia United States Free Trade Agreement (“AUSTA”) business group, which is seen as central to the Common wealth Government’s objective of strengthening Australia’s alliance with the United States (DFAT 2003, 86-91).

The straightforward objective of the free trade agreement between the two countries is of course to increase trade and stimulate the growth of local industries by eliminating tariffs, quotas and other trade barriers. Beyond the straightforwardly related to trade liberalization, political leaders in the two governments and their private sector counterparts have commented upon their respective specific interests. Although most of the comments are sensible, they sound less global but more nationalist and protectionists. As some proponents speculate, the real objectives behind the FTA might not be as simple as stated in the texts of the agreements. The need for transparency is emphasized.

4.1 Expressed Intents and Aspirations - Australian side

1. The Australian Government considered AUSFTA as an effort to make the economic relationship between the U.S. and Australia commensurate to the security relationship.

2. The Australian authorities, when going into an agreement, hoped to see clear trade and other economic benefits as flowing from the AUSFTA;

3. On the industrial side, Australian firms have developed a well-deserved global reputation for producing high - speed catamaran ferries; and they see the AUSFTA as an opportunity to gain an exemption from U.S. “Jones Act” limitations on their use in the American market;

4. On the agricultural side, Australian firms want in particular access to the highly protected sugar and dairy markets, as well as the more - open, but still protected American market for beef.

7 Benefits Of A Free Trade Area Between Australia And The Us in the Context of Developments in The ‘New Economy’;(By Dr Patrick Xavier - School of Business, Swinburne University of Technology, Melbourne; Paper presented to the Australia - US Free Trade Area conference held at the Hyatt Hotel Canberra 21 June 2001)

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5. Australians anticipate that attraction of additional American investment to Australia through AUSFTA to bring positive effects on employment and productivity;

6. Greater integration of business in the U.S. and Australian markets, shall enable new synergies in areas such as research and development, materials sourcing, marketing and use of information technologies;

7. Australians trust that AUSTFTA would foster “competitive liberalization” through its demonstration effects in the WTO and other trade forums;

8. Australians look forward to creating a broader bilateral alliance between U.S. and Australia to help stability and prosperity in East Asia and the Pacific;

9. Australians wish to use the FTA to discipline the extent to which food aid might be used by the United States to undercut commercial Australian agricultural exports to post -war markets in Iraq and elsewhere;

10. Australians consider that AUSFTA would enhance the global competitiveness of Australian companies and the economy;

11. Australians anticipate to see all barriers to trade and investment removed within ten years;12. Australian side want to give legal right to national treatment of investment;13. Australians concur of the need for mutual recognition of professional qualifications

affecting trade in services and in technical standards affecting goods trade; and 14. Free movement of people and safeguards on security of access to markets.

4.2 Expressed Intents and Aspirations – U.S. side

1. Beyond the commercial considerations at stake in the agreement, U.S. wants to see the FTA as a tool to enhance cooperation in the WTO and help achieve jointly held objectives in a shared agenda;

2. U.S. hopes to see AUSFTA strengthen the foundation of the security alliance and “facilitate the building of new networks that enhance the Pacific democracies’ mutual interests, shared experiences, and promotion of common values so that the FTA parties can work together more effectively with third countries”;

3. U.S. seek elimination of duties and other charges affecting imports of American goods, the suppression of Australian single desk export operations for wheat, barley, sugar and rice, and strengthened cooperation between U.S. and Australian authorities with responsibilities for sanitary and phytosanitary measures.

4. U.S expects AUSFTA would enhance the level of Australia’s protection of intellectual property rights 7 and, in certain areas, seek Australia apply levels of protection more in line with U.S. law and practices;

5. U.S. would like to pursue a comprehensive approach to market access in Australia for services and explicitly referenced financial services and telecommunications services; and

6. On the investment front, U.S. targets to eliminate “trade-distorting barriers to U.S. investment in Australia, including piracy issues, a general low priority assigned to IPR enforcement, and the possibility that Australia may allow “spring-boarding” by generic pharmaceutical makers8”

8 Benefits Of A Free Trade Area Between Australia And The Us in the Context of Developments in The ‘New Economy’;(By Dr Patrick Xavier - School of Business, Swinburne University of Technology, Melbourne; Paper presented to the Australia - US Free Trade Area conference held at the Hyatt Hotel Canberra 21 June 2001)

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The above statements were intents expressed by either high level government officials or their private sector counterparts at different occasions during the FTA negotiations. Most of the issues expressed by the Australian side were upheld and incorporated in the final text of the FTA.

5. The Content of the Free Trade Agreement

The text of AUSFTA was prepared with a spirit to repeat the acclaimed success of NAFTA. The Clauses of the FTA (25 in total) stipulate the framework of the bilateral free trade between the U.S. and Australia including but not limited to the following issues:

1. On establishment of the free trade area and definitions;2. On conditions for what types of goods are subject to non-discriminatory treatment; 3. On system for eliminating tariffs and export subsidies for agriculture products being traded

between the two countries;4. On rules for determining the origin of the goods being traded in order to establish

eligibility and also the method to determine the value of the goods traded;5. On requirements of the customs authorities to cooperate with each other on all reasonable

matters;6. On the rights and obligations of Australia and the United States to each other with respect

to combating barriers to trade in line with the obligations laid out by the WTO Agreement on Technical Barriers to Trade, which deals with standards, regulations, and conformity assessment;

7. On the assurances that would be given to investors in order to make it as safe as if they were investing in their own country;

8. On the assurances for fair trade between the telecommunications industries in each country and the exclusion of measures relating to broadcast or cable distribution of radio or television programming;

9. On the assurances of giving a non-discriminatory environment with regard to financial services (all insurance and insurance-related services, and all banking and other financial services, as well as services incidental or auxiliary to a service of a financial nature);9

. 6. Is the Australia – US Free Trade Agreement a net benefit for Australia?

To the opinion in this paper, the deal is between unequal partners and that one cannot expect fair-trade to prevail when liberalizing trade at a time the parties to the agreement have similar interest to export competing products. In this respect, agriculture is one area where objectives of the U.S.-Australian free trade seemed certain to come into conflict (at least in the near term). American agribusiness involves over a million jobs and is heavily subsidized and protected by the government. U.S. has always been adamant in all bilateral and multi-lateral free trade negotiations with countries that rely heavily on agricultural exports. Similarly, Australia also

9 Australia – USA Free Trade: Benefits & Costs of an Agreement (Andrew L. Stoler -Executive Director, Institute for International Business, Economics & Law, The University of Adelaide; Conference on Free Trade Agreements and U.S. Trade Policy ; Institute for International Economics, Washington, DC; May 7-8, 2003)

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depends on export of beef, sugar, wheat, wool and now minerals. Indeed, it is no surprise that Australian negotiators pushed hard during the FTA negotiations with the U.S10.

Australian agricultural exports were purported to be the big winners in an FTA with the United States. The Australian government had also promised enormous gains for the sector through the FTA.

6.1 Consider the situation in the dairy sector.

Following Australia’s FTA with New Zealand, the Australian dairy industry is reported to have successfully undertaken a series of structural adjustments, the outcome of which has been the focusing of producers and processors on responding solely to market demands. In the global context, it is a “fair trader”. In addition, the Australian diary industry, while efficient, is small compared to other world producers and its likely focus in the U.S. market would be on shipping increased quantities of value added dairy products (mainly cheese) not the bulk dairy commodities (milk powder and butter).

Seen in context, the ability of the United States to accommodate Australia in dairy seems clear: Australian dairy exports to the USA in 2001 amounted to just US$ 84.3 million and a four - fold increase in that trade (an amount Australia might reasonably be expected to achieve over the medium - term after trade were liberalized) would put total imports from Australia at just 1.4 percent of the value of American farm-gate milk production in 2001. 10

6.2 Consider the situation in the Sugar sector

Sugar, another important export item was left out of the deal altogether and Australia’s access remains unchanged at 87,402 tons per annum. In January 2004 then Deputy Prime Minister of Australia, John Anderson, stated that a FTA without sugar would be “un-Australian”. Allegedly, sugar was excluded from the FTA because of the powerful sugar lobby in the United States, to which the Bush administration had “caved”. Actually, it is not at all clear that Australian sugar producers would benefit from enhanced access to the American market – particularly in light of the United States having also liberalized trade in sugar in the FTAA. The reason being, if at all Australia could be allowed to enlarged quotas at high USA prices, long term, the Australian sugar industry would probably not gain much from USA liberalization of the market as it would be difficult for Australia to compete with Brazil (member of FTAA) which is now achieving cane growing costs 30 to 40 percent below Australia’s.

6.3 Consider the situation in the Beef sector

Beef, one of Australia’s most lucrative exports earned the immediate elimination of in-quota tariffs while over-quota tariffs will be phased out from years 9 to 18 of the agreement. While this may sound promising, in practice it will take 18 years before quotas are dropped and the beef Australians are allowed to sell is at the low end of the market, suitable for hamburgers and pet food .

10 The Australia-Us Free Trade Agreement: A Contest Of Interests (Patricia Ranald; Journal of Australian Political Economy, no. 57, June 2006, pp 30-56).

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In addition, if the price of beef fell 6.5% below its average price, which it did in one year out of two, quotas would be restored. Some have estimated that Australian beef exporters gained A$600 million a year from the deal.

The eventual result of the agricultural agreement means American farmers can export to Australia without impediment while the overall agricultural tariff for Australian goods to the US is 34%11.

6.4 Consider the situation in Investment and access to government tenders

A point of interest in the FTA is the question of free flowing investment between Australia and the US and access to tenders for Australian firms. In theory, the agreement allows equal access for Australian and US firms in both investment and in applying for government tenders. Implicitly, as the most advanced economy in the world is assumed to create more wealth and technologically upgrade productive investment in Australia.

Unfortunately in practice, the vast majority of US investment in Australia in the last 10 years has been for the purchase of firms and assets, essentially the simple transfer of Australian wealth to US hands - a similar situation experience by Canadians as a result of NAFTA. According to AUSFTA, the Australian government maintains the right to screen all foreign investment to ensure they are in the national interest and if they are above A $800 million. This means that around 90% of Australian companies could be purchased without screening.

America is known to have a highly sophisticated protectionist culture in the area of government procurement. The final statistic is perhaps the most concerning; 30 countries that are legally able to bid for government contracts, held only a 2% market share, indicating that it will be very difficult for Australia to enter the US market in comparison to the ease in which US firms will be able to enter in Australia.12

6.5 Consider the situation in manufacturing

Australia is heavily reliant on primary industry. On the other hand, the American market though large is heavily subsidized and protected. As long as this is the case, many rural based parties considered that Australian producers can neither access the U.S. market nor benefit from the FTA. Moreover, Australian labor, wage and environmental protection standards are substantially higher than those of the USA. Hence, many from the labor unions considered that the FTA would lead to manufacturing jobs being outsourced overseas.

6.6 Consider the situation in other service sectors

11 Australia – USA Free Trade: Benefits & Costs of an Agreement (Andrew L. Stoler -Executive Director, Institute for International Business, Economics & Law, The University of Adelaide; Conference on Free Trade Agreements and U.S. Trade Policy ; Institute for International Economics, Washington, DC; May 7-8, 2003)

12 Australia – USA Free Trade: Benefits & Costs of an Agreement (Andrew L. Stoler -Executive Director, Institute for International Business, Economics & Law, The University of Adelaide; Conference on Free Trade Agreements and U.S. Trade Policy ; Institute for International Economics, Washington, DC; May 7-8, 2003)

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U.S. had demanded during the FTA negotiations for radical changes in single desk export operations, restrictions in audio visual services and the pharmaceutical benefits scheme. But as with the situation in the agriculture sector, it was not possible for Australia to meaningfully address specific problem areas considered by the USA as lax and anti-competitive. These include the following aspects: Intellectual property, Local content provisions, and the Pharmaceutical Benefits Scheme.

7. Potential Trade and Investment Effects of AUSFTA

For the Unite d States, an Australia – USA FTA clearly does not have an economic significance in the same league as (NAFTA) or the current FTAA exercise in the Western Hemisphere. The impact of an agreement, as the figures would portray, will be proportionately much more important for Australia. Considerably less than two percent of total American exports are destined for Australia, compared to roughly 11 percent of total Australian exports destined for the United States. Still, the numbers are large enough to make the AUSFTA interesting for both sides.

Two-way merchandise trade exceeded US$ 20.8 billion in 2002 (Australia recorded a deficit in goods trade of US$ 7 billion for the year). Although not based on updated data, in 1999/00, bilateral services trade had reached nearly US$ 6.6 billion, with annual growth in Australia’s services exports to America rising much faster than imports of services from the USA.15

Moreover, sales of services in Australia by majority U.S.-owned affiliates totaled US$15 .1 billion in 2000, while sales of services in the United States by majority Australian-owned firms totaled US$8 .7 billion. Total sales (goods, services and investment income) of U.S. affiliates in Australia amounted to US$ 56 .6 billion in 2000, with Australian affiliates in the U.S. recording total sales of US$31.9 billion. 16 The United States is the largest recipient of Australian investment at US$ 70.4 billion and Australia’s largest source of investment at US$ 141.5 billion.13

Clearly, there was already a certain amount of economic integration of the two markets even before the signing and implementation of AUSFTA. The possible economic effects of an FTA with the United States have been projected by several researchers and more importantly by CIE Consult that was commissioned in 2004 to study the viability of the FTA by US and the government of Australia. The original CIE study is the source for most of the positive economic claims made for an FTA by both the supporters and proponents of an agreement with the United States.

The CIE, in its study, assumed complete removal of all identified barriers to trade between the United States and Australia. Calculations were also done on the basis of a 50 percent removal of barriers and a 25 percent removal of barriers, with the models yielding roughly proportional results in economic benefit to the participants14.

13 DFAT 2003, 89..14 Should Australia Continue Negotiating Bilateral Free Trade Agreements? A Practical Analysis (By Bryan Mercurio*; Lecturer, University of New South Wales; Director, International Trade and Development Project)

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In all of the scenarios studied by the CIE, both the United States and Australia gained through the implementation of an FTA. The CIE also concluded that the FTA would create more trade than it would divert and that there would be a positive economic impact on third countries (particularly for New Zealand).

Some of the figures regularly quoted by the Commonwealth Government and attributed to the CIE study are:

• net economic welfare gains over 20 years of about US$ 20 .1 billion, shared evenly between the two countries;

• a 4 percent (about US$ 2 billion) increase in Australian GDP by 2010, with a cumulative benefit over 20 years of about US$ 15 .5 billion;

• a 0.8 percent overall rise in Australian exports by 2006 (with a potential 350%+ increase in dairy exports); and,

• enhanced investment flows into key Australian economic sectors, such as mining and agriculture. As noted earlier, the CIE modeling was done on the basis of the total removal of all identified trade barriers. Under these assumptions, it is not surprising that the sectors shown by CIE as deriving the greatest benefits from the FTA are dairy and sugar. Other sectors forecast as likely to benefit from reasonably large increases in exports to the United States include ferrous metal products and motor vehicles and parts. For the United States, CIE sees the biggest potential gains in exports of motor vehicles and parts and metal products, with smaller gains for beverages and wood and paper products15

Other studies have also indicated the benefits of FTA outweighing the loss to Australia over the longer term as a result of its integration with the much larger American economy. The 2001 Monash study, which is more qualitative than CIE’s, for instance, expects that an FTA would foster greater competitiveness in the Australian economy through its influence on business adaptation to new information and communication technologies, business culture and encouragement of best practices in key aspects of economic activity16.

The Monash study also predicts important positive inward investment effects for Australia as a result of the FTA’s contribution to improved conditions for investors and endorsement of Australia’s long-term prospects as a place for American firms to do business. Among the important qualitative benefits to Australia identified by the Monash study are FTA inspired institutional arrangements addressed to resolving problems relating to business visas, technical standards, recognition of professional qualifications and other regulatory issues.17

15 CIE, 2001, Tables 4.5 and 4.616 Should Australia Continue Negotiating Bilateral Free Trade Agreements? A Practical Analysis (By Bryan Mercurio*; Lecturer, University of New South Wales; Director, International Trade and Development Project)

17 Monash, 200 1,xii).

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Other study reports like ACIL’s, on the other hand, conclude that “…bilateral free trade cannot on first principles be given a clean bill of health. The merits of a bilateral deal are difficult to estimate with confidence, but they will always hurt some trading partners and benefit others…” (ACIL, 2003, 48) Advocates of the AUSFTA characterize such conclusions as coming from those who are naturally critical of the FTA for other reasons and who seek to bolster their claims with studies of economic effects that support their own position.18

8. Outcome of the AUSFTA in Practice

In the year following the agreement, Australian exports to the U.S. declined, while U.S. exports to Australia increased. This followed the International Monetary Fund's prediction that the Australia-United States FTA would shrink the Australian economy marginally because of the loss of trade with other countries. The IMF estimated $US5.25 billion of extra U.S. imports entering into Australia per year under the FTA, but only $US2.97 billion of extra Australian exports to the U.S. per year. 19However, it remains unclear whether or not Australia's worsening trade deficit with the United States can be solely attributed to the FTA. It may have been a lagged effect of an appreciation of the Australian dollar against the US dollar between 2000 and 2003.

For the U.S., the FTA improved the overall trade deficit situation, creating a trade surplus with Australia which rose 31.7% in the first quarter of 2005, compared to the same timeframe in 2004. U.S. exports to Australia increased 11.7% in the first quarter of 2005 to nearly $3.7 billion for the quarter. Agriculture exports to Australia increased 20%.

According to Australian Department of Foreign Affairs and Trade figures the imbalance in trade between the U.S. and Australia increased substantially during 2007. The United States became Australia's largest import source, with goods and services imported to a value of over A$31 billion. Australia's exports to the U.S., however, amounted to only $15.8 billion AU.20 It remains unclear what, if any, real benefits the agreement has produced.

In U.S. Fiscal Year 2006 (October 2005 through September 2006), which was the first full year during which E-3 regulations were in effect, the U.S. Department of Homeland Security recorded 2,123 admissions of Australian citizens as E-3 status foreign workers under the treaty. 9,294 admissions were recorded in U.S. Fiscal Year 2007 (October 2006 through September 2007).21

18 (Andrew L. Stoler, 2003).19 The U.S.-Australia Free Trade Agreement: Provisions and Implications (William H. Cooper, Specialist in International Trade and Finance Foreign Affairs, Defense, and Trade Division; CRS Report for Congress, Jan 12, 2005)

20 North American Free Trade Agreement (Wikipedia)

21 Australia – USA Free Trade: Benefits & Costs of an Agreement (Andrew L. Stoler -Executive Director, Institute for International Business, Economics & Law, The University of Adelaide; Conference on Free Trade Agreements and U.S. Trade Policy ; Institute for International Economics, Washington, DC; May 7-8, 2003)

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9. Implications of AUSFTA for Trade Relations with Third Countries

There are three questions that need to be answered under this Section.

(1) Would the negotiation of an FTA undermine the prospects for a successful WTO “Doha Round”?

(2) Should we expect the proposed FTA to produce important trade diversion effects?; and,

(3) What could be the impact of the FTA on Australian (and to a lesser extent USA) political, security and trade interests with East Asian countries?

9.1 FTAs versus WTO

The World Trade Organization (WTO) is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade (GATT), which commenced in 1948.

The organization deals with regulation of trade between participating countries; it provides a framework for negotiating and formalizing trade agreements, and a dispute resolution process aimed at enforcing participants' adherence to WTO agreements, which are signed by representatives of member governments and ratified by their parliaments22. The WTO has 153 members, representing more than 97% of the world's population, and 30 observers, most seeking membership.

The organization is currently endeavoring to persist with a trade negotiation called the Doha Development Agenda (or Doha Round), which was launched in 2001 to enhance equitable participation of poorer countries which represent a majority of the world's population. However, the negotiation has been dogged by "disagreement between exporters of agricultural bulk commodities and countries with large numbers of subsistence farmers on the precise terms of a 'special safeguard measure' to protect farmers from surges in imports. At this time, the future of the Doha Round is uncertain."

There has been heated agreement in Australia between advocates of bilateral free trade agreement with the U.S. and those that favor multi-lateral non-regional arrangement such as the WTO. The most vocal spokesman for the later viewpoint is Professor Ross Garnaut, who has stated categorically that he is opposed to the free trade agreement with the United States “amongst other things, because it is not free trade, and because it would be antithetic to continued progress towards free trade”. Garnaut also believes that the negotiation of an FTA

22 Australia’s interests in the WTO* ( Gary Banks, Chairman, Productivity Commission; Address to the Australian/Melbourne Institute Conference ‘Towards Opportunity and Prosperity’, Melbourne, 4 April 2002).

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will distract Canberra and Washington from the important WTO work in Geneva and decrease the prospects for a successful Doha Round.23

In the opinion ofis t paper, looking at the increasing number of bilateral FTA’s between U.S. and regional actors (e.g., US – Australia, Chile , Singapore, Peru , Oman Free Trade Agreements, and the U.S. Panama, Colombia, South Korea Free Trade Agreements under negotiations), and the cascades of similar model agreements between these and other countries in their respective regions (e.g., The ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA); The Australia - New Zealand Closer Economic Agreement (ANZCERTA);The Australia – Singapore Free Trade Agreement (SAFTA); The Australia-Chile Free Trade Agreement; and etc.,) appears to help WTO achieve its goal easily rather than distracting it.24.

9.2 Trade diversion effects

The CIE study found a number of cases where an FTA between the United States and Australia could be expected to produce trade diversion, but also concluded that trade creation for Australia, the United States and the world as a whole would outweigh the trade diversion.

For example, according to the CIE study, there would be increased American automotive exports to Australia displacing a considerable value of auto exports from Japan and Europe; and increased Australian sugar and dairy exports to the USA displacing Latin American and European product.

But the modeling also shows the FTA leading to considerable increases in these regions’ exports of other goods to the United States. In terms of net trade creation, the CIE estimated an increase in net imports to Australia of US$675 million and an increase in net USA imports of US$ 1.1 billion25. These figures and the models used to derive at are, however, strongly challenged by opponents of U.S. – Australia Free Trade Agreement. They consider that the negative impact of the U.S. – Australia Free Trade Agreement on Australia is “the predominance of trade diversion, especially from Asia, that such an agreement would create”.

To the opinion in this paper, the Trans-Pacific Partnership Agreement (TPPA) that is being negotiated by the Obama Administration in a new spirit with countries including Australia, 23 Australia’s interests in the WTO* ( Gary Banks, Chairman, Productivity Commission; Address to the Australian/Melbourne Institute Conference ‘Towards Opportunity and Prosperity’, Melbourne, 4 April 2002).

24 The Association of Southeast Asian Nations (ASEAN)–Australia–New Zealand Free Trade Area (AANZFTA), which will come into effect by 2010, The Australia-Chile Free Trade Agreement (ACl-FTA), which came into effect in March 2009, The Australia-United States Free Trade Agreement (AUSFTA), in place since January 2005, The Australia-Thailand Free Trade Agreement (TAFTA), in place since January 2005, Singapore-Australia Free Trade Agreement (SAFTA), in place since July 2003, The Australia New Zealand Closer Economic Agreement (ANZCERTA), in place since 1983.

25 CIE, 2001, 42-44.16

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Brunei, Chile, New Zealand, Peru, Singapore, Malaysia and Vietnam would help resolve the dilemma, which critics had in mind pertaining to trade diversion consequent to the signing and implementation of AUSFTA

9.3 The political, security and trade impacts of the FTA

Is Australia likely to do irreparable harm to its important political and economic relations with East Asia for having signed and implemented the AUSFTA? That seems very doubtful, because since the signing of AUSFTA, Australia itself has concluded FTA with several East Asian countries.

Moreover, there are only a very limited number of goods and services where U.S. and East Asian exporters are likely to be competing head-to-head in the Australian market, so the introduction by Australia of preferences favoring U.S. suppliers is unlikely to divert importers away from Asian and toward American suppliers.

Another reason to doubt the prediction by some that there would be East Asian backlash is the East Asian history of choosing deals with clear economic benefits when faced with a choice of concluding either a politically or economically-motivated trade deal. China recently faced such a choice in concluding a long - term gas & iron supply contracts. A political choice favoring regionalism would have given the gas contract to Indonesia, but China chose Australia as its partner because the economics outweighed the politics26.

10. Conclusive Remarks

The United States Administrations, both Republican and Democratic administrations, since the Regan Administration in particular, have relentlessly endeavored to expand ‘Free Trade Areas’ and ‘Free Trade Agreements’ (FTAs) throughout the world to satisfy the export and import interests of the large business communities of the U.S.

Accordingly, the U.S has so far signed free trade agreements with 17 economically and politically strategic countries and trade blocks in the Americas and Austro – Asia. As a first step towards the Free Trade Area of the Americas (FTAA), which was envisaged for the entire Western Hemisphere except Cuba, what is the North American Free Trade Agreement (NAFTA) has been created in January 1994 comprising U.S., Canada and Mexico27.

This trilateral trade block (NAFTA) is the largest in terms of combined purchasing power parity GDP of its members and second largest by nominal GDP comparison in the world. Despite the stern criticisms, U.S views NAFTA as an ideal free-market liberalization model to expand to

26 The U.S.-Australia Free Trade Agreement: Provisions and Implications (William H. Cooper, Specialist in International Trade and Finance Foreign Affairs, Defense, and Trade Division; CRS Report for Congress, Jan 12, 2005)/

27 North American Free Trade Agreement (Wikipedia)

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other regions of the world. Even the FTAA, which was being negotiated by 34 countries of the Americas; the Trans-Pacific Partnership Agreement (TPPA) that incorporates eight countries bordering both sides of the southern Pacific Ocean including Australia, Brunei, Chile, New Zealand, Peru, Singapore, Malaysia and Vietnam; the planned free trade agreements with Columbia, Panama and South Korea were intended to be based on the model of the North American Free Trade Agreement (NAFTA). The object of the present paper, AUSFTA or Australia – U.S. Free Trade Agreement, which came into force on 1 January 2005, was also modeled by NAFTA.

Many argue, however, that NAFTA itself is a failure for various practical reasons let alone to become a model for others. As elaborated briefly in Section 2 of this paper above, NAFTA has had negative impacts on farmers in Mexico who saw food prices fall based on cheap imports from U.S. agribusiness. While unrestricted transfer of manufacturing and assembly industries from the U.S. to other member countries of NAFTA has benefited factory owners from cheap labor and material resources, millions of U.S. workers, on the other hand, have been made to lose their job. Although Canada is said to have benefited from the overall trade and investment within NAFTA, critics in Canada charge that since NAFTA's ratification more than 10,000 Canadian companies have been taken over by foreigners, and that 98% of all foreign direct investments in Canada were for foreign takeovers.

Notwithstanding, trade figures show that since all tariffs between the three member countries of NAFTA were eliminated, trade has increased from $297 billion to $1 trillion in the period between 1993 - 2007. There is doubt of the increase in trade volume, but was it a win – win venture for all population strata in the member countries? Critics insinuate overall, NAFTA has been beneficial to business owners and elites contributing to the rising levels of inequality in all member countries.

In the opinion of this paper the fate of AUSFTA or Australia – US Free Trade Agreement would not be different from that of NAFTA. Indeed, it is precisely the reason why countries whose economy is primarily based on subsistence agriculture are fearful of joining Free Trade Area Agreements with US. Though the contribution of trade to national GDP may increase, it is worrying for many pro-poor governments that the fate of millions of poor Mexican farmers would repeat as a result of open trade liberalization policies and free trade agreement with US. Many, including this paper, advocate free trade agreements to include precise terms of 'special safeguard measure' to protect farmers from surges in imports; as was envisioned earlier on by the now defunct Doha Round negotiation of World Trade Organization (WTO).

At the time of the negotiations, the forecast made using different scenarios of tariff eliminations were bright and gainful both for United States and Australia (big businesses?) through the implementation of an FTA. However, trade figures for the first quarter of 2005, the year immediately following the agreement, showed that while Australian exports to the U.S. declined, U.S. exports to Australia increased by 11.7% compared to the same timeframe in 2004, thus rising the trade surplus of U.S. with Australia by 31.7%. What must have been bothering to

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Australia in the meantime is that U.S. had already increased its agricultural export to Australia by 20% - a significant threat to the Australian farmers, of course28.

According to Australian Department of Foreign Affairs and Trade figures the imbalance in trade between the U.S. and Australia increased substantially during 2007. The United States became Australia's largest import source, with goods and services imported to a value of over A$31 billion. Australia's exports to the U.S., however, amounted to only $15.8 billion AU29.

It appears that we may be cautioned to wait and see the long term effects of the AUSFTA on the economy of Australia. It remains unclear for now what, if any, real benefits the agreement has produced to Australia.

United State’s strategy to form a cascade of smaller Free Trade Areas (FTAs) throughout the world could be viewed as a mechanism of facilitating globalization of trade. From the experience gathered so far, however, that would only enrich the rich and make the poor poorer in all countries. A multilateral approach with all the disciplines of the proposed services agreement of the World Trade Organization (WTO) - the General Agreement on Trade in Services (GATS) - with the powers of the failed Multilateral Agreement on Investment (MAI) remains imperative.

Bibliography

1. Canada – United States Free Trade Agreement (Wikipedia)2. North American Free Trade Agreement (Wikipedia)3. Benefits Of A Free Trade Area Between Australia And The Us in the Context of

Developments in The ‘New Economy’;(By Dr Patrick Xavier - School of Business, Swinburne University of Technology, Melbourne; Paper presented to the Australia - US Free Trade Area conference held at the Hyatt Hotel Canberra 21 June 2001)

4. Australia’s interests in the WTO* ( Gary Banks, Chairman, Productivity Commission; Address to the Australian/Melbourne Institute Conference ‘Towards Opportunity and Prosperity’, Melbourne, 4 April 2002);

5. Australia – USA Free Trade: Benefits & Costs of an Agreement (Andrew L. Stoler -Executive Director, Institute for International Business, Economics & Law, The University of Adelaide; Conference on Free Trade Agreements and U.S. Trade Policy ; Institute for International Economics, Washington, DC; May 7-8, 2003)

28Australia – USA Free Trade: Benefits & Costs of an Agreement (Andrew L. Stoler -Executive Director, Institute for International Business, Economics & Law, The University of Adelaide; Conference on Free Trade Agreements and U.S. Trade Policy ; Institute for International Economics, Washington, DC; May 7-8, 2003).

29 Australia – USA Free Trade: Benefits & Costs of an Agreement (Andrew L. Stoler -Executive Director, Institute for International Business, Economics & Law, The University of Adelaide; Conference on Free Trade Agreements and U.S. Trade Policy ; Institute for International Economics, Washington, DC; May 7-8, 2003).

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6. Should Australia Continue Negotiating Bilateral Free Trade Agreements? A Practical Analysis (By Bryan Mercurio*; Lecturer, University of New South Wales; Director, International Trade and Development Project)

7. The Australia-Us Free Trade Agreement: A Contest Of Interests (Patricia Ranald; Journal of Australian Political Economy, no. 57, June 2006, pp 30-56).

8. The U.S.-Australia Free Trade Agreement: Provisions and Implications (William H. Cooper, Specialist in International Trade and Finance Foreign Affairs, Defense, and Trade Division; CRS Report for Congress, Jan 12, 2005);

9. The Association of Southeast Asian Nations (ASEAN)–Australia–New Zealand Free Trade Area (AANZFTA), which will come into effect by 2010

10. The Australia-Chile Free Trade Agreement (ACl-FTA) , which came into effect in March 2009

11. The Australia-United States Free Trade Agreement (AUSFTA) , in place since January 2005 12. The Australia-Thailand Free Trade Agreement (TAFTA) , in place since January 2005 13. Singapore-Australia Free Trade Agreement (SAFTA) , in place since July 2003 14. The Australia New Zealand Closer Economic Agreement (ANZCERTA) , in place since 1983

Section 2 AUSFTA Implications for the Australian State, Market, and Society

Is the Australia – US Free Trade Agreement a net benefit for Australia?

It seems fitting to begin with the Pharmaceuticals Benefits Scheme when analyzing elements of the free trade agreement, because most Australians rely on the PBS to make essential medications affordable. The PBS has been operating for almost 60 years, administered by the Australian Governments Department of Health and Ageing. Current provisions governing the operations of the PBS are in part VII of the National Health Act 1953 together with the National Health (Pharmaceuticals Benefits) Regulations 1960 made under the act30. According to the Government the scheme has proven to be one of the best drug subsidy systems in the world and around 80% of prescriptions dispensed in Australia are subsidized by the PBS31. The PBS covered around 170 million prescriptions in the year to June 2005, which equates to about eight prescriptions per person in Australia for the year and leads to an annual cost of approximately $6.0 billion per year32. Not surprisingly, opposition to the PBS is strong in the United States and their highly influential pharmaceuticals industry which actively lobbied to remove the scheme or at least water it down. Consider the point that for drugs in the US that may cost you hundreds, in

30 Australian Government, ‘About the PBS’, Department of Health and Ageing on the Web, 4th January 2007, <http://www.health.gov.au/internet/wcms/publishing.nsf/Content/health-pbs-general-aboutus.htm-copy2>, consulted 20th May 2011.

31 Australian Government, ‘About the PBS’, Department of Health and Ageing on the Web32 Australian Government, ‘About the PBS’, Department of Health and Ageing on the Web

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Australia from the 1st of January 2007, all drugs under the PBS will cost up to $30.70 for general patients and $4.90 for people with concession cards33. Essentially, the Australian Government is in the position of a monopoly purchaser, keeping our prices for drugs some of the lowest in the World34. On average, prices in the United Kingdom and Canada are 1.5 times greater and in the US 2 to 3 times greater35. Conversely, the pharmaceutical companies argue that they are entitled to the profits generated from the sale of their products. This is certainly a valid point, as a large amount of that money is reinvested in research and development, a costly venture in which there is no guarantee of a marketable product at the end. In 1980, US companies spent a total of $5.5 billion on research and development of pharmaceuticals and medicines, according to the National Science Foundation, while by 2003 that figure had grown to more than $17 billion, an average increase of 5% per year36. The Pharmaceutical Research and Manufacturers of America (the industry’s trade association) reported even larger expenditures and faster growth37. Spending by its member organizations rose more than six-fold between 1980 and 2004, from $6 billion to $39 billion which represents a real growth rate of around 8% a year on average 38. By Comparison, drug firms’ gross margins have been increasing more slowly at around 4% annually39. Looking at these figures we can certainly understand why US drug manufacturers would want to secure higher prices for their goods. According to the Australian Government however, it would appear the PBS is relatively safe. In a media release from Mark Vaile, he states that there is nothing in the FTA which would increase drug prices in Australia or change the way the PBS operates in relation to drug availability or pricing40. Pharmaceuticals is covered under Annex 2-C of the AUSFTA, where Australia’s rights are reserved in relation to the PBS41. In light of this clause, one might wonder what warrants so much concern. It is the fact that provisions in the agreement allow for pharmaceutical giants to mount legal challenges to the decisions of Australia’s Pharmacy Benefits Advisory Group and the creation of a joint Medicines Working Group which will act as a means of injecting the US pharmaceutical industries viewpoint into the decision making process of the PBS and of wearing Australian resistance down42. A statement made by US Senator Kyle praising Robert Zoellick for “having secured an agreement that would deliver higher prices paid by the PBS for US-patented drugs” is certainly cause for concern. It would appear likely that the PBS will be unlikely to continue

33 Australian Government, ‘About the PBS’, Department of Health and Ageing on the Web34 R. Lopert., ‘The Pharmaceuticals Benefits Scheme: Economic Evaluation Works…but it is not a panacea’, 2002, Australian Prescriber, <http://www.australianprescriber.com/magazine/25/6/126/7/>, consulted 8th May 2011.35 R. Lopert., ‘The Pharmaceuticals Benefits Scheme: Economic Evaluation Works…but it is not a panacea’36 Austin, D., ‘Research and Development in the Pharmaceuticals Industry’, October 2006, Congress of the United States: Congressional Budget Office on the Web, <http://www.cbo.gov/ftpdocs/76xx/doc7615/10-02-DrugR-D.pdf >, consulted 8th May 2011.37 Austin, D., ‘Research and Development in the Pharmaceuticals Industry’38 D. Austin., ‘Research and Development in the Pharmaceuticals Industry’39 D. Austin., ‘Research and Development in the Pharmaceuticals Industry’40 M. Vaile., ‘The AUSFTA, PBS and access to medicines’, 21 May 2004, Trade Ministry on the Web, < http://www.trademinister.gov.au/releases/2004/mvt036_04.html>, consulted 10th May 2011.

41 Australian-United States Free Trade Agreement, ‘Guide to the Agreement’, 6 March 2004, Australian Department of Foreign Affairs and Trade on the Web, <http://www.dfat.gov.au/trade/negotiations/us_fta/guide/2.html>, consulted 10th May 2011.42 R. Manne., ‘Little America: How John Howard has Changed Australia’, The Monthly, March 2006 in Australian Foreign Policy Reader, Flinders University, 2007. p. 29

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functioning as successfully as it has in light of the AUSFTA as US companies will certainly lobby hard for higher prices.

Australian agricultural exports were purported to be the big winners in an FTA with the United States. In a country which still relies heavily on agricultural exports like beef, sugar, wheat, wool and now minerals, it is no surprise that Australian negotiators pushed hard during talks while the government promised enormous gains for the sector. The results of the negotiations could best be described as disappointing. The office of the Trade Minister seems far more optimistic about the deal than the Department of Foreign Affairs and Trade, which acknowledges the shortcomings of the negotiations. Dairy producers have come away with quota access immediately increasing nearly threefold in volume, with ongoing growth in the quota at an average 5%43. DFAT predicts the deal could be worth up to $41 million and grants access for some dairy products which had previously been excluded44. Beef, one of Australia’s most lucrative exports earned the immediate elimination of in-quota tariffs while over-quota tariffs will be phased out from years 9 to 18 of the agreement45. While this may sound promising, in practice it will take 18 years before quotas are dropped and the beef Australia is allowed to sell is at the low end of the market, suitable for hamburgers and pet food46. In addition, if the price of beef fell 6.5% below its average price, which it did in one year out of two, quotas would be restored47. Some have estimated that Australian beef exporters gained A$600 a year from the deal48. Sugar, another important export item was left out of the deal altogether and our access remains unchanged at 87,402 tons per annum49. In January 2004 then Deputy Prime Minister John Anderson stated that a FTA without sugar would be “un-Australian”50. Essentially sugar was excluded from the FTA because of the powerful sugar lobby in the United States, to which the Bush administration had “caved”51. The eventual result of the agricultural agreement means American farmers can export to Australia without impediment while the overall agricultural tariff for Australian goods to the US is 34%52.

Another point of interest is free flowing investment between Australia and the US and access to tenders for Australian firms. In theory, the agreement allows equal access for Australian and US firms in both investment and in applying for government tenders. Ideally, the US would carry out more wealth creating, productive or technologically upgrading investment in Australia, unfortunately in practice, the situation seems to be somewhat different. Purportedly the vast majority of US investment in Australia in the last 10 years has been for the purchase firms and assets, essentially the simple transfer of Australian wealth to US hands53. While there is indeed a

43 Australian-United States Free Trade Agreement, ‘Frequently Asked Questions’, 5 October 2005, Australian Department of Foreign Affairs and Trade on the Web, <http://www.dfat.gov.au/trade/negotiations/us_fta/faqs.html>, consulted 12th May 2011.44 Australian-United States Free Trade Agreement, ‘Frequently Asked Questions’45 Australian-United States Free Trade Agreement, ‘Frequently Asked Questions’46 R. Manne., ‘Little America: How John Howard has Changed Australia’ p. 2847 R. Manne., ‘Little America: How John Howard has Changed Australia’ p. 2848 R. Manne., ‘Little America: How John Howard has Changed Australia’ p. 2849 Australian-United States Free Trade Agreement, ‘Frequently Asked Questions’50 Australian-United States Free Trade Agreement, ‘Frequently Asked Questions’51 R. Manne., ‘Little America: How John Howard has Changed Australia’ p. 2852 R. Manne., ‘Little America: How John Howard has Changed Australia’ p. 28.53 E. Thurbon., ‘The Real Deal: Reading Between the Lines of the Australia-US FTA’, The Australian Interest on the Web, <http://www.australianinterest.com/TheRealDeal.pdf >, consulted 12th May 2011.

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level of “Greenfield” investment, investment which creates more Australian jobs, it is miniscule in comparison54. It is also accurate that the Australian government maintains the right to screen all foreign investment, and according to DFAT, significant foreign investment proposals will be screened to ensure they are in the national interest in non sensitive areas if above A$800 million55. This means that around 90% of Australian companies could be purchased without screening56. Concessions to Australian small business were option but to the American ones obligatory, while America has also developed a highly sophisticated protectionist culture in the area of government procurement, in which the 30 countries already legally able to bid for contracts held a 2% market share57. The final statistic is perhaps the most concerning, indicating it will be very difficult for Australia to enter the US market in comparison to the ease in which US firms will be able to enter here. This debate is also about losing sovereignty, for as Australia becomes further entwined in the American system, it may begin to inherit its flaws as well. The lobbyist chosen by Australian big business to lead the push for the FTA, Alan Oxley, described most concerns as “dross”, stating that what really excited him about the AUSFTA was that it would bring about the total integration of the Australian economy into the more dynamic, more innovative and more productive American one58.

Perhaps one of the most pressing concerns for the broader Australian community in relation to the Australia US Free Trade Agreement and local content is the promotion and preservation of Australian culture. Movies and cinema are perhaps the most important cultural outlets, not because they have an inherently higher cultural value than, say, theater or dance, but because they have the potential to reach the largest audience. In order to illustrate this point, we can look at figures from the Australian Bureau of Statistics which reveal interesting trends. For the year 1995 the most popular cultural venue by far was the Cinema, with 58.8% of males attending during the year and 65.2% of females attending59. What can be considered as more traditional cultural venues rated quite poorly in comparison with cinemas with only 14.7% of males and 23.8% of females attending the opera or musical theatre60. Unlike in television broadcasting, which has the Broadcasting Services (Australian Content) Standard 1999, there is no provision for local content in our cinemas61. In response to the impending free trade agreement, the director of the Australian Screen Directors Association stated that “Australia has handed over its cultural policies to the US, which effectively means that our cultural policies will now be determined by the major US studios”62. The basis for the concern is that US productions have far larger budgets than Australian productions, allowing for more impressive sets and CGI effects

54 E. Thurbon., ‘The Real Deal: Reading Between the Lines of the Australia-US FTA’55 Australian-United States Free Trade Agreement, ‘Frequently Asked Questions’56 E Thurbon., ‘The Real Deal: Reading Between the Lines of the Australia-US FTA’57 R. Manne., ‘Little America: How John Howard has Changed Australia’ p. 2858 R. Manne., ‘Little America: How John Howard has Changed Australia’ p. 2959 Australian Bureau of Statistics, ‘Australian Social Trends’, Australian Bureau of Statistics on the Web, 24 June 1999, <http://www.abs.gov.au/AUSSTATS/[email protected]/2f762f95845417aeca25706c00834efa/804a32db984a99a8ca2570ec0011493a!OpenDocument >, consulted 3rd May 2011.60Australian Bureau of Statistics, ‘Australian Social Trends’, Australian Bureau of Statistics on the Web61 Australian-United States Free Trade Agreement, ‘Schedule of Australia: Annex II’, Australian Department of Foreign Affairs and Trade on the Web, <http://www.dfat.gov.au/trade/negotiations/us_fta/final-text/non-conforming_measures/Annex_II_combined.pdf >, consulted 5 May 2011.62 G. Henderson., ‘The trouble with our stories’, The Age on the Web, 25 May 2011, <http://www.theage.com.au/articles/2003/11/24/1069522534829.html>, consulted 13t May 2011.

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which appeals to many viewers. It is also important to note that content laws may not be applicable to new types of media.

The AUSFTA certainly delivers advantages for Australian firms and does allow for a larger degree of access to the domestic US market. However, this may be one occasion where the costs of such an agreement outweigh the benefits. By allowing US firms greater and more unrestricted access to Australian markets, Australia may be exposing itself to the risk of inheriting the US’ socio-economic problems, like low wages and less emphasis on social welfare. The Howard government may well have put strategic interests ahead of economic and sold Australia’s sovereignty by integrating Australia completely with the US market. However, it may also be prudent to wait before judging the agreement too harshly, as any dramatic changes as a result of its adoption will take time. In any event, time will be the final arbiter in this dispute.

Could the Australia US Free Trade Agreement really pose a serious threat to local content and are the clauses in the agreement strong enough to protect the current arrangement or renegotiate?

There are several aspects of the AUSFTA that impact on the production of Australian films and television programs that raise concerns, such as the waiving of all customs duties in article 2.8 and its relationship to the provisions set out in Annex II of the Australia US Free Trade Agreement. Prior to the commencement of negotiations for a free trade agreement between the US and Australia, the Department of Foreign Affairs and Trade invited public submissions on issues relevant to the negotiations, and it is interesting to note that submissions were received from the Australia Council for the Arts, Australian Screen Directors Association and Road show Films, indicating a high level of interest from Australians in the fields of film and television63.

Perhaps one of the most pressing concerns for the broader Australian community in relation to the Australia US Free Trade Agreement and local content is the promotion and preservation of Australian culture. Australians are acutely aware that they live in a young country, highlighted by the fact that we celebrated our centenary of federation in 2001, only six years ago. Because of this fact, there is much public discourse on what constitutes Australian culture and what we can claim as uniquely Australian characteristics. When talking about culture one is referring to intangible aspects like beliefs, ideas and values which form the content of culture as well as tangible aspects like symbols or technology64. Culture also relates to the ways of life of a society, or of groups within a society and can include how they dress, their marriage customs and family life, their patterns of work, religious ceremonies and leisure pursuits65. Culture is also important because it gives a sense of belonging to something greater than just a family unit or town and can be a source of great pride. Most governments place an important emphasis on cultural development and promotion to not only the local population but internationally as well. The underlying argument is that promoting cultural projects through funding and education will have

63 Australian-United States Free Trade Agreement, ‘Public Submissions’, Australian Department of Foreign Affairs and Trade on the Web, <http://www.dfat.gov.au/trade/negotiations/us_public_submissions.html>, consulted 20th May 2011.64 A. Giddens., Sociology, p. 22.65 A. Giddens., Sociology, p. 22.

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a beneficial impact on society by building cohesion and a sense of unity. The United States has a strong commitment to the principles of liberty, justice, freedom and democracy. These are ideals that Americans have fought a war of independence for and have enshrined in a bill of rights. Australian’s are committed to the same principles, but we have never been forced to fight on our own soil for our independence. As a result, Americans feel these ideals to be at the very core of their identity and this is reflected in their culture, especially their films. Movies and cinema are perhaps the most important cultural outlets, not because they have an inherently higher cultural value than, say, theater or dance, but because they have the potential to reach the largest audience. In order to illustrate this point, we can look at figures from the Australian Bureau of Statistics which reveal interesting trends. For the year 1995 the most popular cultural venue by far was the Cinema, with 58.8% of males attending during the year and 65.2% of females attending66. After cinemas, the next most popular cultural venue was botanic parks, which attracted 35.5% of males and 41.3% of females, illustrating a substantial lead in popularity by cinemas of almost 30%67. What one might consider as more traditional cultural venues rated quite poorly in comparison with cinemas with only 14.7% of males and 23.8% of females attending the opera or musical theatre, while theatre attracted only 13.1% of men and 20.0% of females, dance attracted 7.4% of males and 12.5% of females while classical music performances attracted only 6.3% of males and 9.0% of females68. Though perhaps not overly surprising given the advancement of computer generated imagery and big budget blockbusters, it does illustrate the importance of movies as a cultural conduit. Unlike in television broadcasting, which has the Broadcasting Services (Australian Content) Standard 1999, there is no provision for local content in our cinemas69. In response to the impending free trade agreement, the director of the Australian Screen Directors Association stated that “Australia has handed over its cultural policies to the US, which effectively means that our cultural policies will now be determined by the major US studios”70. Comparative to the rest of the world, the Australian motion picture industry is quite weak, and according to the Australian Film Commission was ranked at number 32 in terms of films produced in 200571. In comparison, Austria produced 24 films in 2005 while Australia only managed 2272. This might not seem like a large disparity, but consider the fact that Australia has a population of just over 20 million while Austria has a population of just fewer than 8,200,000 or less than half our total population73. In comparison the United States produced 699 films in 200574. In article 10.2 of the AUSFTA, it states that each party shall accord to service suppliers of the other party treatment no less favorable than that it 66 Australian Bureau of Statistics, ‘Australian Social Trends’, Australian Bureau of Statistics on the Web, 24 June 1999, <http://www.abs.gov.au/AUSSTATS/[email protected]/2f762f95845417aeca25706c00834efa/804a32db984a99a8ca2570ec0011493a!OpenDocument >, consulted 3rd May 2011.67Australian Bureau of Statistics, ‘Australian Social Trends’, Australian Bureau of Statistics on the Web68Australian Bureau of Statistics, ‘Australian Social Trends’, Australian Bureau of Statistics on the Web69 Australian-United States Free Trade Agreement, ‘Schedule of Australia: Annex II’, Australian Department of Foreign Affairs and Trade on the Web, <http://www.dfat.gov.au/trade/negotiations/us_fta/final-text/non-conforming_measures/Annex_II_combined.pdf >, consulted 4 May 2011.70 G. Henderson., ‘The trouble with our stories’, The Age on the Web, 25 November 2003, <http://www.theage.com.au/articles/2003/11/24/1069522534829.html>, consulted 4 May 2011.71 Australian Film Commission., ‘International Comparisons’, Australian Film Commission on the Web, <http://www.afc.gov.au/gtp/acompfilms.html>, consulted 6 May 2011.72 Australian Film Commission., ‘International Comparisons’73 Central Intelligence Agency Factbook., ‘Austria’, Central Intelligence Agency on the Web, May 2011, <https://www.cia.gov/library/publications/the-world-factbook/geos/au.html>, consulted 12 May 2011.74 Australian Film Commission., ‘International Comparisons’

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accords, in like circumstances, to its own suppliers75. Essentially Australia cannot institute any new import restrictions on American motion pictures, and with the easing of import restrictions like duties and tariffs, it will be not only easier to import films, but more importantly, cheaper as well. Since 1986 there have only been three Australian films to come in at number 1 at the box office, which were Crocodile Dundee in 1986, Crocodile Dundee in 1988 and Strictly Ballroom in 199276. It is also interesting to note that the Crocodile Dundee series were tied closely with the US. Domestic films share of box office takings has also steadily decreased steadily since 2000. 2000 and 2001 were the best years with Australian films taking 8% of total takings, but this fell to 5% in 2002, 4% in 2003, 1% in 2004, but back up slightly to 4% in 200577. In a speech to Parliament Premier Bob Carr stated that about 250 films are released into the Australian market each year, 70 per cent of them are from the United States while only 10 per cent of the films we see are Australian78. Premier Carr also added that last year (2002), 94 per cent of movie tickets sold in Australia were for films made in the United States79. Of course the government does provide incentives to invest in the production of local films, without such incentives many iconic Australian films would never have been produced. Currently, if you invest in an Australian film, you may be eligible for a special tax deduction for capital expenditure incurred in acquiring an interest in the copyright of an Australian film80. There are two divisions to the deduction, division 10B and 10BA from the Australian Taxation Office81. Division 10B is in part III of the Tax Assessment Act 1936 and gives investors a deduction, normally spread over two years, for capital contributions used to acquire rights in or under copyrights relating to an ‘Australian film’, while division 10BA gives investors a 100% deduction for capital expenditure used to produce a ‘qualifying Australian film’ where, as a consequence, they acquire an interest in the initial copyright of the film82. There is of course a lot more small print involved in the final deduction, but it still represents an attractive venture for investors. Many argue that such deductions and incentives do not go far enough, and that the government needs to inject more funds into the Australian film industry and impose limitations on the import and screening of foreign movies. Unfortunately, import restrictions on foreign content in our cinemas, particularly from the US would be next to impossible with the AUSFTA, and it would most likely be hugely unpopular with movie goers. There is nothing in the agreement that rejects continued funding for the film industry, which may prove to be the most productive option, and promoting filmmaking as a career. Renowned actress Toni Collette stated at a recent AFI awards ceremony

75 Australian-United States Free Trade Agreement., ‘Chapter 10: Cross Border Trade in Services’, Australian Department of Foreign Affairs and Trade on the Web, <http://www.dfat.gov.au/trade/negotiations/us_fta/final-text/chapter_10.html>, consulted 6th May 2011.76 Australian Film Commission., ‘No. 1 Film at the Australian Box Office since 1972’, Australian Film Commission on the Web, <http://www.afc.gov.au/gtp/wctopeachyear.html>, consulted 13th May 2011.77 Australian Film Commission., ‘Domestic Films Share of Box Office’, Australian Film Commission on the Web, < http://www.afc.gov.au/gtp/acompboxofficeozshare.html>, consulted 13th May 2011.78 B. Carr., ‘Film and Television Industry Free Trade Agreement’, Parliament of New South Wales Hansard, Parliament of New South Wales on the Web, 2 December 2003, <http://www.parliament.nsw.gov.au/prod/PARLMENT/hansArt.nsf/V3Key/LA20031202025>, consulted 12 May 2011.

79 B. Carr., ‘Film and Television Industry Free Trade Agreement’80 Australian Taxation Office., ‘Australian Film Industry Incentives 2006’, 2006, Australian Taxation Office on the Web, <http://www.ato.gov.au/content/downloads/NAT0954-06.pdf >, consulted 10 May 2011.81 Australian Taxation Office., ‘Australian Film Industry Incentives 2006’82 Australian Taxation Office., ‘Australian Film Industry Incentives 2006’

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in response to negotiations surrounding AUSFTA “I just beg you, Mr. John Howard, to just see straight and not jeopardize our cultural future”83. While such comments may seem unnecessarily alarmist, it is interesting to view how other countries have dealt with, and consider, the importance of local content. Ukraine is an interesting example to consider, although sharing many similarities with neighboring Russia, like linguistic and historical roots, the overwhelming influx of Russian television, films, radio broadcasts and literature was causing concern in cultural and political circles which before hadn’t seen a need for concern. Since then new quotas have been introduced to alleviate the fact that 80 per cent on sale are from Russia, as well as most television and radio broadcasts84. While the circumstances are different, the problem is the same and while Ukraine was able to limit imports and impose new quotas which have lead to greater cultural awareness, Australia will be tied by a free trade agreement.

Television, however, is in a slightly different situation. While the major commercial television networks are consistently criticized for not presenting enough locally produced content, there is a quota in place to protect current levels. The Australian government opted to maintain current broadcast quotas, which is guaranteed under Annex II of the AUSFTA. In Annex II, Australia reserves the right to maintain transmission quotas for local content in multi-channeled free-to-air television broadcasting services, quotas for local content where more than one channel of programming is made available by a provider of free-to-air commercial television broadcasting services85. Such quotas may not exceed 55 per cent of the programming on an individual channel of a service provider transmitted annually between 6am and midnight and may not be imposed on more than two channels or 20 per cent of the total number of channels (whichever is greater) made available by that provider86. It goes on to state that no such transmission quotas shall be applied to more than 3 channels of an individual service provider87. There are of course those who believe these quotas aren’t enough to protect locally produced television, a problem which is compounded by the fact the free trade agreement locks us into current quotas with little room for maneuvering. In 2003, according to data from the Australian Film Commission, out of the top 20 rating drama series on Australian television, only 5 were produced locally while in 2004, only 4 were locally produced88. One of the big concerns that arises is that industry groups may lobby to remove local content regulations because of economic imperatives, and while the AUSFTA allows for current regulations to remain, if lowered, cannot be raised. The basis for the concern is that US productions have far larger budgets than Australian productions, allowing for more impressive sets and CGI effects which appeals to many viewers. EIDC, a non-profit organization, conducted a study into the average production costs of a single pilot (the first episode) of a series for television. According to the EIDC an average pilot for a drama costs around 4 million dollars (USD) for 1 hour while the average comedy costs around 2 million

83 G. Henderson., ‘The trouble with our stories’, The Age on the Web84 T. Kuzio., ‘Status of Russian Language again Threatens Ukrainian-Russian Relations’, January 10 2001, Analysis, Stasiuk Program on the Web, <http://www.ualberta.ca/~cius/stasiuk/st-articles/an-rus-lang.htm >, consulted 15th May 2011.

85 Australian-United States Free Trade Agreement, ‘Schedule of Australia: Annex II’86 Australian-United States Free Trade Agreement, ‘Schedule of Australia: Annex II’87 Australian-United States Free Trade Agreement, ‘Schedule of Australia: Annex II’88 Australian Film Commission., ‘Top 20 drama series and serials’, Australian Film Commission on the Web, < http://www.afc.gov.au/gtp/wftvtopseries03.html>, consulted 9th May 2011.

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(USD) for half an hour89. For 2005/06 Australia produced 13 dramas at a combined budget of 83 million dollars, this works out roughly to 290,000 dollars per episode90. Obviously there is a huge disparity between budgets and while the US market can recoup the costs of production locally, while Australian productions rely heavily on government assistance. This means screening costs for Australian productions are also greater, while broadcasters can screen big budget American series for a fraction of their production cost. The end result is foreign content which costs less and looks (at least aesthetically) better. Premier Bob Carr, in the same motion in Parliament, stated that 75 per cent of new television programs launched between September 2003 and April 2003 were foreign, while in the US only 4% of programs were foreign91. He went on to quote George Miller, who stated that “My kids know more about American culture than our own, simply because of the onslaught of American culture”92. A second concern is that via globalization and free trade, there is no protection for local content in emerging technologies. Nobody can predict what future technology will bring and what new methods of data transmission will emerge, like high definition TV which will soon replace analogue. Critics argue that Australia has left itself open to an onslaught from American producers in newly developing areas because of the free trade agreement, and Australia’s effective inability to regulate this new content because of its obligations. However, while production of local programs may have fallen slightly since the 1980’s, it has still remained fairly stable and we have yet to see a dramatic impact from US productions. Whether or not new technologies will result in a predicted deluge is also debatable. What requires less debate is Australia’s desire to see local productions on their screens, to promote their values and project their identity. This is not because of a belief that American content is inherently flawed, inferior or morally corrupt, arguments that have been used by other countries, but simply because Australians have an obligation to provide Australians with viewing that they can relate to and feel proud of, as has been voiced by the protests towards the trade agreement.

The important economic impact on the Australian film industry with the introduction of the AUSFTA must also be considered. The data collected by the Australian Film Commission will perhaps give a clearer indication of whether the free trade agreement will have a detrimental impact on economic conditions, one of the most important being employment indicators in the relevant sectors. Unfortunately the most recent data available covers only until 2001, but they paint an interesting picture none the less. Overall, Australia has seen a substantial increase in the number of people working in the audiovisual sector with employment increasing by 37% between 1996 and 200193. Occupations of particular concern included screenwriters and authors, media producers, film/video editors, directors and technical positions. Statistics show that employment in these fields have actually increased, with screenwriters and authors

89 EIDC., ‘Overview of Pilot Production Activity and Economic Impact’, 4 May 2005, Film L.A on the Web, <http://www.eidc.com/EIDC_Press_Release_050405.pdf#search=%22production%20cost%20of%20a%20television%20TV%20pilot%22>, consulted 15th May 2011.

90 Australian Film Commission., ‘Total production budgets’, Australian Film Commission on the Web, <http://svc012.wic030p.server-web.com/GTP/mpserialssummary.html>, consulted 13th May 2011.

91 B. Carr., ‘Film and Television Industry Free Trade Agreement’92 B. Carr., ‘Film and Television Industry Free Trade Agreement’93 Australian Film Commission., ‘Numbers employed in selected occupations’, Australian Film Commission on the Web, <http://www.afc.gov.au/gtp/oeoccupsummary.html>, consulted 16th May 2011.

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increasing from 2,140 in 1996 to 2,931 in 2001, an increase of 37%, media producers increasing from 1,950 in 1996 to 3,054 in 1996, an increase of 57%, film/video editors increasing from 144 in 1996 to 195 in 2005, an increase of 35% and directors increasing from 734 in 1996 to 857 in 2001, an increase of 17%94. In technical fields, sound technicians have increased 32%, light technicians 36% and camera operators by an impressive 104% (camera operators include film, TV and video)95. Jobs in acting have also increased overall by 27% between 1996 and 200196. These statistics seem to indicate that the Australian film industry is actually growing, even rapidly in certain area while the only area that recorded significant declines were motion picture projectionists, declining by 43% in the period between 1996 and 200197. There are several possibilities for this decline, but the most likely is the advent of new technology which makes projectionists obsolete, rather than foreign competition. There is also another angle to consider in relation to the free trade agreement, and that is the opportunity for Australians to gain experience and employment overseas in the US. The advent of the E-3 Visa allows qualified Australians access to a dedicated visa that is easier and less costly to obtain than the old H1-B business visa and allows 10,500 Australians access per annum98. The visa also allows spouses to work in their profession, potentially increasing the number of Australians working in the US while also allowing for extensions99. This visa allows Australians specializing in aspects of film, video or television production the ability to gain experience overseas and bring that experience back to the domestic market, potentially leading to more domestic productions. In a statement by Tim Harcourt, Chief Economist with the Australian Trade Commission, statistics demonstrate that foreign production can be good for film industry workers in Australia – particularly special effects crews, first assistant directors, grips, gaffers, sound editors, directors of photography and art directors100. When Australian film crews were asked to name the benefits of working on a foreign production, 41% responded that the major benefit was to realize their creative goals, 38% highlighted increased pay levels, 24% said learning new skills was a benefit while 21% mentioned continuity of employment101. Mr. Harcourt also added that foreign production was helping to expand opportunities for local aspiring filmmakers – 18 out of 19 Australian producers felt that foreign productions were creating opportunities for new entrants while US producers liked the egalitarian, efficient and highly performing Australian crews102. When many think of exports, they think of traditional items like agricultural products and mineral resources but neglect to consider the enormous flow on effects from service industries like the film industry. Cinemas are extremely popular recreational venues and many attend to view big budget US productions. Cinemas and the jobs they create are also an important part of the economy, as many cinema “mega-plexes” include restaurants and merchandising outlets. Although the long

94 Australian Film Commission., ‘Numbers employed in selected occupations’95 Australian Film Commission., ‘Numbers employed in selected occupations’96 Australian Film Commission., ‘Numbers employed in selected occupations’97 Australian Film Commission., ‘Numbers employed in selected occupations’98 E-3 Visas., ‘The United States E-3 Treaty Professional Visa for Australian Nationals’, 3 February 2006, Australian Department of Foreign Affairs and Trade on the Web, <http://www.dfat.gov.au/geo/us/e3_visa.html>, consulted 8th May 2011.99 E-3 Visas., ‘The United States E-3 Treaty Professional Visa for Australian Nationals’100 T. Harcourt., ‘Globalisation or Hollywoodisation?’, 14 April 2003, Economists Corner, Australian Government Austrade on the Web, <http://www.austrade.gov.au/Globalisation-or-Hollywoodisation-/default.aspx>, consulted 15th May 2011.101 T. Harcourt., ‘Globalisation or Hollywoodisation?’102 T. Harcourt., ‘Globalisation or Hollywoodisation?’

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term effects of the free trade agreement cannot be accurately predicted, the opportunity for Australians to work abroad and making it easier for foreign productions to be made in Australia seem to be having a beneficial economic effect.

There is no doubt that the Australian film industry has difficulty producing Australian films that generate substantial revenue. It is also clear that in a globalized world Australians are exposed to American culture far more than vice versa, not that this is inherently a negative scenario, but it does make it difficult to promote Australian cultural values and ideals which make them proud to be Australian. The Howard Government has locked the nation into a content requirement which may be lowered, but not raised and left out provisions to protect medians which may eventuate in the future. This is cause for concern as production of tele-movies, for instance, has dropped since the 1980s. However, the industry has experienced rapid growth in jobs in professions associated with the production of films, videos or television, creating positive flow on effects. This data could lead one to predict an eventual increase in local production because of the extra opportunities Australians can now take advantage of. It would be a great shame if Australian content is swallowed up in a sea of US productions, but the data does not suggest this is an imminent scenario, none the less, Australia must continue to encourage local talent and productions and strengthening our industry at home.

Policy Recommendations

Key concerns of the AUSFTA remain, namely retaining the right to regulate new media, and increase existing media local content quotas.

One of the main problems of the agreement is that any bid to increase caps, particularly in the Pay TV environment must firstly involve consultations with any ‘affected’ parties. These ‘affected’ parties may include organizations such as the Motion Picture Association of America (MPAA). They have already stated objections to any attempts to make the Australian arrangements ‘more restrictive.’ Further, regarding the fact that Local content in the digital Multichannel environment is limited to a maximum of 3 channels – regardless of how many channels may exist in the future. While this capping may appear reasonable in the context of non-existent multi-channeling in the current digital environment, it is short sighted, and does not allow for a reasonable proportion of local content in the future. For instance, if there was ability for one network to carry up to 15 channels, then a maximum of only 3 channels would ever contain local content. On Subscription services (Pay TV) expenditures on Australian adult drama will be set at 10% and capped at 20% (providing attempts to increase quotas from 10% to 20% has allowed for consultation with ‘affected’ parties to occur) and children’s, documentary, arts and education channels at 10%. According to the Screen Producers Association (SPAA), at this level, the Pay TV caps on expenditure for local content, would in fact be amongst the lowest in the developed world. It is important to note that even under current quotas on Subscription services (Pay TV) which are capped at 10% only translates to about 3.8% of local content programming. So even if caps were raised to 20% this effectively only equates to around 6.4% of actual local programming seen on Drama channels.103 Having the MPAA as a necessary party in

103 http://www.aph.gov.au/senate_freetrade/report/final/ch03.htm30

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negotiations will most likely result in a stale-mate or hinder Australia’s ability to protect their film industry. Given the power the MPAA has in the US and abroad, Australian organizations will virtually be left without any leg to stand on. Other methods must be used to regulate and promote cultural content, and consultations with ‘affected parties’ should be given less authority. Rather, a system of checks and balances and veto power should be developed to ensure that stale-mates do not occur, and allow the Australian industry the same authority and ability to make necessary reforms if their industry is in crisis. These checks and balances would cover both state and market policies at the national and international level.

Measures also need to be imposed to ensure that Australian content on such services is not denied to the Australian consumer, and measures adopted should be implemented through a transparent process, and be based on objective criteria. They should also only be the minimum necessary, and be applied only to enterprises carrying on a business in Australia. Another problem with the current agreement is that little detail is given about interactive and/or video new media, and the processes involved in getting agreement to incorporate new media. Thus, Australia’s Annex II reservations should be changed to allow complete flexibility in modifying and introducing new sub-quotas within existing commercial TV quotas; and that measures affecting subscription TV, interactive video and/or audio and other audiovisual services be introduced to ensure that Australian content or genres is reasonably accessible to Australians104.

Digital content is another matter of contention in the agreement. Chapter 17 of the AUSFTA treaty binds Australia into a US-style IP rights regime. However, the USA’s IP regime has been criticized by significant sections of the US IT industry. In the USA, IP rights favor digital content creators and limit the rights of consumers and software developers. Linux Australia has thus raised obligations over what AUSFTA could bring to the local OSS industry (see http://linux.org.au/fta). Their first concern is over software patents, with the second regarding anti-circumvention legislation. Software patents traditionally held that software, along with things like business methods and mathematics weren't patentable, but as a result of various court rulings in the 80's and 90's, software became patentable in Australia105.

Software patents are challenging to procure, and this is evident by the many controversial patents that have been awarded in the USA. Software patents are intended to encourage innovation, but rather than encourage innovation, they prevent innovation. This is because many cover miniscule advances and cover broad areas of general software development knowledge. The AUSFTA aims to harmonize Australia's patent system with the USA system. This would mean broader patentability, including software. Open source software is at a distinct disadvantage since it is much simpler to prove violation since the source code is available. Apache web server is an example that continues to increase on its 65% market share. Innovators should not be rewarded for R&D investment; however, the current software system in Australia has strong mechanisms to protect these investments via traditional copyright and source code control. It is difficult to argue that software patent protection is required on top of

104 Given, pg. 6-8105 http://michaeldavies.org/docs/idm-fta4.txt

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these other two protection mechanisms, and thus should be relaxed; otherwise the OSS industry will not be protected from the software patent minefield.106

The other area of concern is anti-circumvention. This is an extension to copyright which deals with the rights of digital content creators and consumers. The anti-circumvention obligations of the AUSFTA, means Australians cannot circumvent anything which controls access. This places them at the whim of the manufacturer. Australia already has laws which limit what can be done with digital content, defining that any device that allows you to use digital content in a way not envisaged by the copyright holder is an anti-circumvention device. Trading such devices specifically designed to circumvent copyright is illegal today. The AUSFTA introduces US-style Digital Millennium Copyright Act (DMCA) obligations to Australia, broadening the definition of what an anti-circumvention device is, and narrowing the legal use of something declared to be a "circumvention device". In the USA, the DMCA has been used to protect market share and attack competitors rather than protect digital content creator, and this control could be extended as most hardware sold today has a software component. Hardware manufacturers, with the support of DMCA-style legislation, could prevent the development of 3rd party software drivers for their hardware. This will dramatically affect open source software where many drivers are created by 3rd parties107.

This new framework does not encourage diversity, and provides a legal framework that encourages anti-competitive practices, which will hurt the adoption of Open Source solutions. The AUSFTA obligations favor current IP stakeholders, which are large multi-nationals, thus hurting small local companies, and giving an overly burdensome weight on the shoulders of local Australian IT industry. In short, policy regarding these issues mentioned above needs to revert back to the national Australian IP protection system, and if Australia is going to make changes to IP law it needs to learn from the mistakes of the USA, rather than copy them. The Australian government should take note of the issues encountered by the US in implementing a similar scheme, and tailor a scheme to the Australian legal and social environment, which would protect the national market system in OSS. It should also monitor the issue of peer to peer file sharing.

Regarding, the PBS scheme under the agreement, the Australia–United States Free Trade Agreement (AUSFTA) contain concessions to the US pharmaceutical industry that may undermine the operation of the Pharmaceutical Benefits Scheme (PBS) and increase the price of medicinal drugs for Australian consumers. AUSFTA emphasizes rewarding manufacturers of “innovative” new pharmaceuticals, instead of consumers’ equitable and affordable access to medicine. This goes against Australia’s National Medicines Policy, and AUSFTA may bring pressure to the Pharmaceutical Benefits Advisory Committee (PBAC) to list “innovative” drugs initially rejected due to evidence for cost-effectiveness not being sufficient. In addition, intellectual property provisions of AUSFTA will delay the entry of PBS cost-reducing generic products when pharmaceutical patents expire108.

106 http://michaeldavies.org/docs/idm-fta4.txt107 http://michaeldavies.org/docs/idm-fta4.txt108 MJA 2004; 181 (5): 256-259, Will the Australia–United States Free Trade Agreement undermine the Pharmaceutical Benefits Scheme?, 25 July 2004

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At the State-International level, clarification of the Australia–United States Free Trade Agreement concerning the Pharmaceutical Benefits Scheme (PBS) is needed including that this agreement be interpreted and implemented to protect public health and promote universal and affordable access to necessary medicines. Clauses must also be added that explicitly state that this agreement shall not inhibit Australia as an exporting country to alleviate public health crises in neighboring regions. Further, the “experts” involved in any Pharmaceutical Benefits Advisory Committee (PBAC) “review process” must be broadly representative of all PBS stakeholders: government, health professionals, consumers and the pharmaceutical industry109. This will ensure participation by both countries as well as by local consumers. In addition, any discussions by the “Medicines Working Group” must be transparent and all agenda items, discussion and recommendations need to be posted on the PBS website. The transparency must also ensure no bias and be all encompassing rather than selective, and therefore, all documentation submitted by a pharmaceutical applicant should be made available to the public on the PBS website. Most importantly, generic manufacturers’ opportunity and ability to “springboard” their cheaper products from existing data on the expiry of a patent have to be protected. An independent study should also be jointly funded by the US and Australia to determine the public health impact of all intellectual property and PBS change. In particular, the dissemination if information by the internet paragraph in Clause 5 of Annex 2-C, has to be monitored and frequently assessed110.

Finally, AUSFTA has weak labor and environmental clauses which are not enforceable. The Australian government at the state-national level should support strong labor clauses that require signatories to enforce the core International Labor Organization’s (ILO) standards in the ILO Conventions. The Australian government should also support strong environmental clauses that require signatories to meet all applicable international environmental standards, including those contained within UN environmental agreements, with trade penalties for non compliance.

Bibliography

Australian-United States Free Trade Agreement, ‘The Consultation Process’, 6 March 2004, Australian Department of Foreign Affairs and Trade on the Web, <http://www.dfat.gov.au/trade/negotiations/us_fta/guide/introduction.html >, consulted 28th May 2011.

Australian-United States Free Trade Agreement, ‘Guide to the Agreement’, 6 March 2004, Australian Department of Foreign Affairs and Trade on the Web, <http://www.dfat.gov.au/trade/negotiations/us_fta/guide/2.html>, consulted 10th May 2011.

109 MJA 2004; 181 (5): 256-259, Will the Australia–United States Free Trade Agreement undermine the Pharmaceutical Benefits Scheme?, 25 July 2004110 MJA 2004; 181 (5): 256-259, Will the Australia–United States Free Trade Agreement undermine the Pharmaceutical Benefits Scheme?, 25 July 2004

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Australian-United States Free Trade Agreement, ‘Schedule of Australia: Annex II’, Australian Department of Foreign Affairs and Trade on the Web, <http://www.dfat.gov.au/trade/negotiations/us_fta/final-text/non-conforming_measures/Annex_II_combined.pdf >, consulted 5th May 2011.

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