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

Summary

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

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

Summary

This paper deals with the Free Trade Agreement between US and Australia (US-Australia FTA), which came into force in January 2005, and aims to analyze the negotiation process and economic impact focusing on agriculture. The points are summarized as follows: firstly the theoretical conditions for successful agreement between two countries on the general bilateral reduction of tariff rates are analyzed. Free trade as negotiated and agreed by and between two countries to eliminate tariffs should always be Pareto optimal, but negotiations will not always have such results. Secondly, the effect and impact of the US-Australia FTA are measured quantitatively using a GTAP (Global Trade Analysis Project) approach, in order to compare cases where tariffs are completely eliminated between the US and Australia and cases where the drafted agreement is completely implemented. As a result of the analysis, equivalent variation and GDP are positive both for the US and Australia in the case of perfect tariff elimination. Under the agreed tariff system, however, equivalent variation and GDP rise slightly above the levels of perfect tariff elimination on the part of the US and decline slightly for Australia. According to bargaining theory, the agreement reached is significantly disadvantageous to Australia. And there remains room for Australia to gain further concession from the US. Australia suffers greatly from the US deferment of elimination of a tariff quota system on sugar and dairy products. Sugar producers in particular are losing out.