The economic impact of the Australia–US free trade agreement

Abstract

The Australia–United States Free Trade Agreement (AUSFTA) came into effect in 2005. It was the second preferential trade agreement that Australia signed, after its agreement with Singapore, and marked a departure from the primacy of Australia's previous trade policy of unilateral and multilateral trade liberalisation toward preferential liberalisation. This paper assesses the economic effects of AUSFTA by applying the Productivity Commission's gravity model of trade from its Bilateral and Regional Trade Agreements review. The evidence reveals AUSFTA resulted in a fall in Australian and US trade with the rest of the world—that the agreement led to trade diversion. Estimates also show that AUSFTA is associated with a reduction in trade between Australia and the United States.

Keywords:

• AUSFTA
• Australia-United States relations
• free trade agreement

Notes

1 I am very grateful to Son Chu and Tom Westland for excellent research assistance. I am also grateful to the Productivity Commission for sharing their model and dataset with me and assisting in reproducing their results. This early draft benefited from comments by Peter Drysdale, Tom Westland and the participants at the Academy of the Social Sciences in Australia workshop on ‘Ten years since the Australia-US FTA: Where to for Australia's Trade Policy?’ hosted by the University of New South Wales. Any and all errors are my own.

2 See Brown, Kiyota, and Stern (2005), for example.

3 See ‘What's the the FTA worth to us?’, The Age, June 22, 2004; and ‘Drug costs will rise with deal: US official’, Sydney Morning Herald March 11, 2004.

4 Coefficients for all PTA variables for all agreements included here are significant at the 1 percent level.

5 While the estimated effects of nearly all agreements are consistent in their sign between the 1970–2008 and 1970–2012 datasets, the magnitudes vary. The coefficients estimate a long-run or cumulative effect of an agreement and one of the reasons that may change with an extended dataset is the lagged effect of a PTA due to the phase-in process of implementation (Baier and Bergstrand 2007). The implied long-run cumulative effect may change over time depending on the sizes of trade flows and the phase-in or implementation effects of each PTA.

6 It was only in 2010 that a unified threshold was created for all other countries, at A$219 million.

7 The FIRB appears to be restrictive to foreign investment according to the OECD FDI regulatory restrictiveness index—where Australia ranks as more restrictive than the global average and much more restrictive than the OECD average.