Report: Economic impacts of an Australia – United States Free Trade Area

Complete Report Summary

Modelling results

• A free trade agreement (FTA) between Australia and the United States has been proposed. This study models the measurable economic gains from trade for this FTA. It should be noted at the outset that this is a study that has not sought to determine Australia’s negotiating priorities or positions.

• Both Australia and the United States gain from the formation of a bilateral free trade agreement modelled here.
  • Welfare (as measured by real household consumption) and production (as measured by GDP) rise for both countries over time, with the removal of barriers to trade assumed to be over a five year period.
  • Using the APG-Cubed model, by 2006, when full implementation of the FTA is assumed, Australian welfare could be nearly 0.3 per cent above what it might otherwise be. This continues to rise to 0.4 per cent by 2010 and 0.5 per cent by 2020. For the United States, welfare peaks in 2006 at 0.016 per cent above what it otherwise might have been.
  • Australian GDP could be 0.33 per cent higher by 2006. This gap would then continue to widen, levelling off by 2010 at 0.4 per cent of GDP – an annual increase in that year of nearly US$2 billion.
  • US GDP, even though rising only by 0.02 per cent above what it might otherwise be, still amounts to an annual increase of US$2.1 billion in 2006.

• Expressing the stream of net benefits over the next 20 years in net present value terms, the gain in welfare to Australia could be US$9.9 billion and for the United States US$10.3 billion.
  • For GDP, the net present value of benefits is US$15.5 billion for Australia and US$16.9 billion for the United States.

• In terms of the share of GDP, the gains to Australia are bigger. This reflects the greater relative importance of the bilateral trade to Australia than the United States, the fact that a couple of key sectors, such as sugar and dairy stand to expand with the removal of the United States’ tariffs, and a slightly higher average barrier removed in Australia.

• For both economies the rise in exports is greater than imports and Australia’s current account (expressed as a percentage of GDP) improves by 0.9 per cent, while there is a negligible change for the United States.

• Overall, world exports rise showing that trade creation is greater than trade diversion as a result of forming the free trade area.
• New Zealand is one of the main third party beneficiaries since its trade with Australia is relatively important and so it benefits from Australia’s expansion. In addition, New Zealand picks up some of the trade diversion in dairy products as Australia shifts product from Asian markets to the United States.

• The GTAP (Global Trade Analysis Project) model captures all trade and resource use interactions in an economy-wide setting and allows detailed commodity effects to be reported. Using this model, the important points are as follows.
  • For Australia the largest gains are in sugar and dairy. The price of sugar in Australia could rise by 13 per cent and the output of raw sugar could rise by 7.8 per cent. Exports of sugar to the United States could rise by 2 550 per cent, but that is off a very low base of just 85 000 tonnes. This represents an initial increase of US$442 million per annum. Even though Australian exports to the United States rise considerably, this still represents a small share of the United States market and has a small impact on US prices and output. Over time, the impact would be larger.
  • For the United States the main gain is in the manufacturing sector. Exports of motor vehicles and parts to Australia could rise by 46.6 per cent and exports of metal products could rise by 25.2 per cent.

• All of the above results have assumed complete removal of all identified barriers to trade between Australia and the United States. Whether this is politically feasible or not has not been the subject of this study. To reflect the reality that less than complete liberalisation of all sectors might materialise if a negotiation of an FTA should be undertaken, simulations of partial liberalisation were also calculated. A 50 per cent removal of barriers gives roughly half the full liberalisation results and, similarly, a 25 per cent removal of barriers gives roughly one quarter of the potential gain.

• These findings need to be considered in light of the fact that FTAs can have economic elements and effects other than simply removing trade barriers – for example, mechanisms to promote linkages and facilitate trade.

Background

• In 1999 Australia exported US$8.1 billion of goods and services to the United States, while the United States exported US$15.2 billion worth to Australia.

• Trade with the United States is far more important to Australia in a relative sense than is Australia’s trade to the United States (see chart 2).
• Australian exports to the United States account for around 11 per cent of total Australian exports and the United States is the source of nearly one fifth of Australia’s imports.
• By contrast, United States exports to Australia account for just 1.6 per cent of total United States exports and Australia is the source of only 0.7 per cent of United States imports.

• Both the United States and Australia are among the most open economies in the world. Average tariffs for the United States are 2.8 per cent, with over a third of all tariff lines duty free. However, the United States does maintain a number of specific tariffs and tariff rate quotas that are not reflected in this figure. All but two of the United States 10 173 tariff lines are bound by the WTO Agreements. Australia’s tariff regime is similarly open with rates varying between 0 and 5 per cent for 85 per cent of items and an average tariff rate of 3.8 per cent. Ninety-four per cent of Australia’s tariff lines are bound by the WTO Agreements.

• Notwithstanding the relative openness of the United States and Australian economies by world standards, there are some significant sectors where there are major barriers to bilateral trade. — For the United States the main barriers to trade are in sugar, dairy, commercial vehicles and shipping (both ships and domestic transport services). The barriers to Australian sugar exports amount to a tariff equivalent of 80 per cent and for dairy exports the tariff equivalent amounts to nearly 24 per cent. There are some other barriers to trade covering lamb, cotton, metals and financial services, among others. — For Australia the main barriers to trade are in motor vehicles, textiles, clothing and footwear. Other barriers to trade are in cheese, wood, chemicals and financial services, among others. Media local content rules and foreign investment screening are difficult to model and have not been included. 2 Summary of relative importance of trade between Australia and US US$8.1 bn Exports to the US 11% 19% % of total Imports from US as % of total 1.6% 0.7% US$15.2 bn Exports to Australia Australia United States % of total Imports from Australia as % of total Data source: Centre for International Economics.

• This study quantifies the size of the measurable bilateral trade barriers and examines the economic costs and benefits of their removal.
  • Trade barriers that can be removed in a bilateral context (for example, tariffs and quotas) are considered. Domestic subsidies, which can also impact on bilateral trade, and could potentially be considered in an FTA, are not included in this study.

• Overall, there are positive economic gains for Australia and the United States as a result of forming a bilateral free trade area. The undertaking would create more trade than it would divert for the world. Third countries also gain.

• These economic gains need to be placed in perspective of the overall political and strategic interests of Australia and the United States, which has not been part of this study.

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