Structural Background

Before looking at this issue, we need to first look at the broader trade background in which this FTA was reached.

Australian FTA negotiators have consistently faced an uphill battle when negotiating FTA’s with most of our major trading partners.

This is primarily because our major trading partners have preserved tariffs or subsidy support to help support their local industries and maintain employment and profits in their home economies.

By way of contrast, Australia unilaterally slashed or eliminated its tariffs from the 1970’s.

This has left us in a situation where we do not have much in the way of concessions to offer our trading partners in exchange for them agreeing to lower their tariffs on Australian goods and services.

Accordingly, modern “Free Trade Agreements” (“FTA”) negotiated by Australia with other countries do not produce a free trade situation for both parties to these agreements. After each FTA is put in place, the non-Australian country still continues to enjoy the benefit of most of its import tariffs, subsidies and quotas which restrict Australian imports.

For example, in the 2013 FTA with Japan, Japan was allowed to retain its trade protection measures in dairy, pork, sugar and rice (major lucrative potential markets for Australian farmers). In beef, the Japanese did agree to reduce tariffs on Australian imports to Japan, but only from 38.5% to 19% over 15 years (`China FTA: more about diplomacy than trade’, Newsweekly 22 November 2014 p.3)

Impact of Other Recent FTAs

The trend of recently-negotiated FTA’s have had negative impacts on Australia’s terms of trade.

For instance:

1. Since the Thailand-Australia FTA came into effect on 1 January 2005, Australia’s trade deficit with Thailand rose from $711 million to $3.5 billion (`China FTA: more about diplomacy than trade’, Newsweekly 22 November 2014 p.3);
2. Since the Singapore-Australia FTA came into effect on 28 July 2003, Australia’s trade deficit with Singapore rose from $3 billion in 2004 to $6.4 billion in 2007 (`China FTA: more about diplomacy than trade’, Newsweekly 22 November 2014 p.3);
3. Since the US-Australia FTA came into effect on 1 January 2005, Australia’s purchase of US goods rose from USD6.4 billion in 2004 to USD16.8 billion in 2013 (`Trade in Goods with Australia’ by the United States’ Census Bureau published at https://www.census.gov/foreign-trade/balance/c6021.html).

If the Australia-China FTA follows the trend of other recently-negotiated FTA’s, it is likely to worsen Australia’s trade deficit with China at the same time as the value of Australia’s mineral exports to China decline due to falling international mineral prices.

Suggestions for Improvement

While there are many practical strategies for improving Australia’s trade and industry, I would suggest that the following could have a big impact on improving Australia’s terms of trade, Australian industry and employment:

1. Adopting `world best practice’ in following our major trading partners’ practice of using tariffs to give limited protection to Australian farmers and manufacturing industry. Tariffs could be set at a level to offset the impact of subsidies given to foreign producers by their governments so that Australian products can compete with imported products in Australia on a more level playing field. The tariffs would also have the benefit of helping reduce Australia’s serious underlying trade deficits and increase government revenue to reduce the Federal government’s ongoing deficits and debt;

2. Negotiating future FTA’s so as to reduce Australian tariffs with other countries who are prepared to make similar reductions to their tariffs against Australian exports;

3. If tariffs are set at a high enough level, these should boost foreign and domestic investment in the Australian economy as businesses set up Australian-based factories and enterprises aimed at producing goods and services for the Australian market to avoid the tariffs. This additional business activity and employment should increase government revenue (through higher taxes) and reduce government expenditure (through lower unemployment benefits).

In my view, there would be many economic, social and political benefits flowing to Australia in following this practice common to many of our major trading partners.

This strategy would certainly be better for Australia than continuing to negotiate FTA’s which have the effect of worsening Australia’s trade deficits and terms of trade