Analysis of the Economic Impact of the US-Australia Free Trade Agreement

1. Introduction

2. Analysis of Trade Liberalization Negotiations, Based on Bargaining Theory

4. Economic Impact of the US-Australia Free Trade Agreement

1. Introduction

In the wake of the failure to start up a new round at the WTO Ministerial Conference of 1999 held in Seattle, many countries soon came to focus on FTAs (Free Trade Agreement). One reason is the promptness with which an FTA agreement can be concluded, selecting a country with less conflict of interest compared to the multilateral WTO negotiations for trade liberalization. The multi-layered global situation, where there are many bilateral FTAs, is known to be inefficient (1). However, in circumstances where no substantial progress is expected from the WTO, FTAs play a role in liberalizing world trade, and "multi-channeled" trade liberalization is likely to continue for some time.

In the meantime, even if an FTA enables free selection of a trade partner, it still aims for further trade liberalization, and makes it difficult to address the problem of weak domestic industries or declining industries, which suffer from aggressive export thrust from the other party. In the event that interest groups from declining domestic industries unite and strongly resist the FTA, such a move would hinder the progress of negotiation significantly. Agriculture is one field where such resistance is easily aroused, against both the WTO and FTAs.

Agriculture became a particular issue for many FTAs concluded after the Seattle Conference. A typical instance could be FTAs between the US and Australia (hereinafter "US-Australia FTA") agreed in February 2004 and made effective in January 2005. For the first time the US-Australia FTA has presented a solution to a very interesting problem of how to treat agricultural products in an FTA between two advanced countries that are major exporters of agricultural products. The solution suggests the conclusion that trade liberalization without exception is inconvenient even for a country that actively promotes trade liberalization. As is well known, both the US and Australia call for aggressive liberalization of trade in agricultural products in WTO negotiations. Nonetheless, between themselves, they faced difficulty on agricultural trade and finally reached a compromise to exclude certain products from liberalization.

This paper will analyze the negotiation process of the FTA concluded between the US and Australia, and its economic impact, focusing on agriculture. The paper is composed as follows: first, conditions of a successful negotiation for general tariff rate reduction between two countries are analyzed, employing bargaining theory. More specifically speaking, the necessity of negotiation and conditions for successful compromise is discussed within the framework of game theory. Secondly, highlighting agriculture, this paper analyses the effect and impact of the US-Australia FTA on economic welfare, prices and trade of third party countries including Japan by GTAP (Global Trade Analysis Project), a general equilibrium model for analyzing trade liberalization. Finally future perspectives and research themes for FTAs will be summarized.

Note (1)　Bhagwati [2] on the issues arising from disorderly conclusion of FTAs