There are many ways to measure a free trade agreement.
Tim Harcourt takes a look at old and new free trade models to see how they’re shaping up and how they might perform in the future.
When asked about the likely impact of the French Revolution, Chou En Lai famously said: “It’s too early to tell.” It’s a bit like that with free trade agreements. While some commentators have been quick to applaud or condemn the FTAs that Australia commenced with Thailand and the US on New Year’s Day 2005, their analysis has been based on the limited data available. Others say it’s probably best to exercise some caution and not place too much emphasis on the trade data of a short time frame. After all, our experience with other pacts—such as the Closer Economic Relations (CER) deal with New Zealand signed over two decades ago—shows these things take time.
Australia’s oldest bilateral trade agreement, the Australia-New Zealand CER, was signed with our cousins across the Tasman at the beginning of 1983. While all and sundry on both sides of ‘the ditch’ think it’s been a great success in integrating our respective economies, they weren’t so confident in the middle of 1983. Similarly, the North American Free Trade Agreement (NAFTA) has been lauded in Mexico now as a real benefit to Mexico’s economic development, but the year after NAFTA was signed Mexico experienced a ‘Tequila crisis’, with a sharp devaluation of the exchange rate and related capital outflow. Since then, Mexico’s performance has been relatively successful.
Assessing Free Trade Agreements
In January last year, Australia’s agreements with Thailand and the US came into effect following the deal with Singapore in July 2003. Apart from very limited trade data, how have they been received so far, and what do we look for in assessing the contribution these FTAs will make to Australia?
The composition of our exports in each market can play a big role in explaining short-term developments. For example, Australia has a strong commodity export base and has been enjoying high commodity price growth with our terms of trade (the ratio of the price of our exports to the price of imports) at a 30-year high. In export markets where Australia is a major supplier of commodities, we can expect to see this reflected in the trade figures. By contrast, in markets where Australia’s exports are mainly concentrated in advanced manufacturing and professional services, the export data won’t reflect the benefit of the commodity price boom boosting resource export values.
There are other considerations. Firstly, FTAs are not just about exports. We can’t say that if the home country (in this case Australia) increased exports to a country (such as Thailand) and reduced imports, Australia is the ‘winner’ from the deal (and by implication, Thailand is the ‘loser’). Trade agreements are about expanding the economies of both countries by expanding both exports and imports together, and similarly those of our trading partners.
Secondly, as well as expanding trade, there is also investment, government procurement, standards and associated regulations involved in FTAs. The agreements are about global integration, and as a step in this process, helping two economies get closer and thereby lift overall economic competitiveness and living standards in each economy. Hence the term ‘closer economic relations’ that Australia used when talking about our agreement with the Kiwis. Trade integration is necessary but not sufficient when FTAs are forged.
Thirdly, as well as economic benefits, FTAs help in terms of the psychology of exporting. Historically, Australia has had a poor export culture, with low levels of export ‘intention’. FTAs may help raise awareness of trade opportunities in particular markets. For example, in August 2004, around 19 percent of all exporting SMEs exported to the US. By May 2005 it had risen to 25 percent (just above the UK on 23 percent but below New Zealand on 41 percent).
Finally, FTAs get trade into newspapers and other media outlets. For example, when the FTA with the US was being negotiated, 49 percent of households interviewed by Newspoll mentioned the FTA as the trade issue they had known about (with trade with China a distant second place at four percent). FTAs are very topical, that’s why you are reading this article.
So, these are early days as far as the most recent FTAs are concerned but there is some evidence that even if we just talk a lot about them, more Australian businesses will take up the opportunities available. After all, it’s said of British Prime Minister Winston Churchill, that he won the war basically by talking about it. If this occurs, the Australian community will ultimately benefit and so will our respective trading partners.
* Tim Harcourt is chief economist for Austrade, Sydney.
Trade agreements are about expanding the economies of both countries by expanding both exports and imports together.
Export Still Buoyant
The fifth DHL Export Barometer, released in November last year, reveals the Australian export market remains confident for 2006, despite concerns over rising oil and fuel prices.
Developed in conjunction with Austrade, the survey analyses export confidence and identifies Australian export trends. “Exporters are not only concerned about the effect of rising oil prices on overall global demand, but also the fuel-related cost pressures on their own businesses,” says Tim Harcourt, Austrade chief economist. “Although this is seen as a barrier to trade for most Australian exporters, overall confidence has risen, largely driven by the optimism as seen in the manufacturing and service sectors, and because all exporters appear to be used to living with a higher Australian dollar.”
“The results of the November 2005 DHL Export Barometer are encouraging; with 62 percent of Australian exporters anticipating their orders to increase in 2006, the market certainly remains buoyant,” adds Harlis Malkic, general manager, DHL Express Australia.
The study also revealed a sharp rise in the number of exporters who are facing fewer trade barriers (47 percent compared to 30 percent six months ago), which the report says proves Australia’s Free Trade Agreements (FTAs) are coming to fruition. “With two new agreements (Thailand and the US) in place, there are strong sentiments amongst the exporting community that formal trade barriers are being reduced,” the report reveals.
In the case of the FTA with the United States (AUSFTA), manufacturing exporters were the most positive on 48 percent, while agricultural exporters were the most interested (60 percent) in the potential FTA with China. The Barometer reveals more than 53 percent of Australian exporters are expecting a rise in orders to China over the next 12 months, while 51 percent expect an increase in exports to the US.
And in Harcourt’s Why small is still beautiful: Australian SME exporters report of the latest Sensis Business Index, he acknowledges although New Zealand is still the number one destination for SME exporters (41 percent in May 2005), since the introduction of the AUSFTA, the US (25 percent) has passed the UK (23 percent) as the next preferred export market.
Wine Innovation Case Study
While we know the international market is keen to drink our great drops, it seems they are also fans of our wine innovation.
Imagine a wine sealer that seals like a screw cap but pops like a cork. That about sums up Zork, an alternative to the screw top and traditional cork wine closures designed to eradicate cork taint and oxidation problems in wine bottles. And according to Zork’s co-inventor, Conor McKenna, not only is the seal good for the wine, it still creates a gratifying popping sound when released from the bottle, unlike the screw cap.
Since the Australia-United States Free Trade Agreement (AUSFTA) came into action on January 1, last year, the Zork company has come up trumps thanks to a growth in export to prominent wineries in America and other parts of the world, as well as continued local interest.
But as Mark McAllister, Zork CEO, admits, the company spent a lot of time and money preparing for the American market. “We have visited the US many times over the last two years. So we’ve invested a lot of money and time in the market, learning about it, finding the right distributor there, and working out our potential export for that market.”
Founded in May 2002, Zork’s first product prototypes began testing 18 months ago, and the company has been exporting for the past six months. “Wine closures like our product are part of a very price sensitive market. The [FTA] makes us more price competitive in the market,” says McAllister, whose company currently exports the product to American wine industry experts Red Knot, and Don Sebastiani and Sons.
The AUSFTA has helped niche market organisations like Zork export to larger, more profitable organisations abroad. While an impressive wine market exists in Australia, Zork still remains a niche market product and one that can benefit from the expansion of markets to include international buyers. “Although the wine industry is large in Australia, it’s still pretty small compared with the rest of the world, so there’s a lot of room for growth in export,” McAllister says. “Austrade have put significant effort into promoting Australian companies so that the country can benefit from the free trade agreement. We are exhibiting at a wine show in Sacramento in January so we can invite potential customers along. We ship to wineries over there, or we sell to Australian wineries who ship to the US. Nine out of 10 products are opened in the US, and so for us the US is the absolute key market.” The AUSFTA also helps protect the intellectual property rights of Australian exporters, which is imperative for companies like Zork who export patented products.
Zork now has distributors in Chile, South Africa, Greece, Israel and the UK, and McAllister is convinced the company’s export opportunities will continue to grow, especially in terms of volume. “We’re seeing quite rapid growth. In fact, this month we shipped our first container load of products to the US.”
If this sort of success continues, it’s certain that one company will be celebrating with a few bottles of wine, Zork-sealed, of course.
—Hannah Tattersall
