THE FTA WITH THE US IS A DISASTER

Negotiations 101: Always be prepared to walk away from a deal and make sure the other party knows this.

Economics 101: The cost of an action is the value of what you give up to make that action.

You are negotiating your next contract with your employer. (This is the twenty first century after all!) Your current salary is k$100 and you know that people doing similar jobs at other companies received k$150. Unfortunately, last Friday you got drunk with the HR manager and in a fit of alcohol induced self doubt you wondered aloud where your career was heading. You also confided that you are financially stretched and your wife has promised to leave you and take the kids if you are ever out of employment for a single day.

Your boss makes a non-negotiable offer of k$101 with a clause that prevents you leaving the company or seeking a further wage rise for the next twenty years. The alternative is to try your luck in the open market on Tuesday, probably with bachelor status. So you take the offer. Was it a good deal?

The question of course is “good compared to what?” Compared to being in the unemployment line, it is a great deal. You are even 1$k better off than you were before. But compared to what you might have got if you had properly used your bargaining power it is terrible deal. Moreover, the penalty clauses in the contract lock you into a bad deal for the foreseeable future. This pretty much summarises Australia’s FTA deal with the United States.

Economic pundits have predicted that Australia will be modestly better off in terms of GDP over the medium term with this FTA than without any FTA at all. I expect that they are correct. But it is not sensible to compare the present agreement with no agreement. The FTA has cost Australia a truly huge amount. The cost is the opportunity cost of not securing an agreement that any competent government could have pursued, not to mention our complete loss of credibility in any future negotiations on virtually anything.

The FTA excludes Australia from most US markets that we care about. Meat is a well known example, where our access is strictly limited for 20 years. The government actually brags about this part of the deal as some kind of win. But again compared to what? Compared to no access at all it is, but compared to what we might have achieved it is paltry.

The FTA excludes shipping. Australia is actually very good at making small vessels, like ferries and patrol boats. There are excellent manufactures in Tasmania and Perth with a distinct price advantage over US competitors. We beat them in open tender contracts all over Asia. Imagine if we could build vessels for the US market? But, shipping is explicitly excluded from the agreement.

If you are a musician wanting to tour America, you will have to convince them that no local musician can supply the same service before you get a visa. There is no such requirement for US musicians visiting Australia.

The FTA excluded sugar and various other important agricultural products. This was certainly well known and could not be hidden. The government and pro-government economists dismiss this with the suggestion that it is churlish to expect everything you want in a two way agreement. But there is nothing important that they can point to that we did get.

Now get this straight. I am not against free trade. Nor do I fall for the simple minded view that free trade has to be even for both parties to enjoy benefits. One way free trade is better than no free trade. But two-way free trade is way better again, and the latest FTA ensures that we will never achieve two way free trade with the US because we have nothing left to bargain with in order to get access to US markets!

How did this happen? Why would the government trade away their only leverage for very little gain? This is where it gets ugly. The reason is political. We went to war in Iraq because of the US alliance. OK, there were other reasons given that largely evaporated. But the US alliance was stated explicitly again and again as one of the major reasons, and stands alone as the remaining rationale.

A government that had invested so much political capital in the special relationship with the US could hardly allow the negotiations to “fail”. Imagine the headlines if our US partners refused a trade agreement after we went to war for them. It would have been a huge political embarrassment for the government at a time when the coalition’s election prospects looked less than promising. So, poor old Mark Vaile was sent over to Washington with the orders to come back with an agreement – any agreement – so long as there was a good photo shoot of him waiving a piece of paper, Neville-Chamberlain-like, as he stepped off the plane.

Our American friends are not stupid. In an ideal world, they would like a two-way agreement but it is politically very painful. They would even like to be nice to us, but that is not the nature of politics. They did what was best for their own short term interests. They knew quite well that the Australian government had to have an agreement – any agreement. So they gave basically nothing away in the sure and certain knowledge that we would buckle to anything.