More free trade: Australia & China

Well, I finally got my name into the Australian papers.  So I guess I can come back to Canada now.  (We’re flying home, sigh, in another few weeks.)

I worked with the Australian Manufacturing Workers’ Union (sister union, sectorally and politically, to the CAW) to produce a critique of the proposed Australia-China free trade agreement.  We used a similar “job content / input-output” methodology as in the earlier study I worked on with Daniel Poon, regarding the employment effects of a Canada-Korea FTA.  Based on an extrapolation of import and export patterns under Australia’s other FTAs, we estimate the first-order employment effects of an FTA with China to eliminate 170,000 jobs here — about 15 percent of the whole sector.  This is only very partially offset by small job gains in agriculture and mining.

Here’s the link to the full study:

A couple of aspects to the story may be interesting to Canadian readers:

* As usual, the Walrasian CGE modelers have been shamelessly promoting the FTAs with their idealized simulations.  There’s only been one published CGE study of the Australia-China FTA (which the John Howard government here has been trying to negotiate for a couple of years now with the Chinese).  It’s worse than most.  At the core is the standard CGE BS (full employment, income-expenditure equilibrium, representative household, etc.).  It projects utterly tiny gains from standard factor reallocation following the FTA.  Then the modelers imposed, exogenously and on top of the CGE itself, additional assumptions that the FTA would: independently improve productivity in several manufacturing sectors and the entire services sector, independently boost productivity economy-wide (through the effect of liberalized investment), and independently enhance investment in all sectors (through the effect of enhanced investor confidence).  Lo and behold, when the model assumes higher productivity and investment, then it predicts more substantial (but still small) GDP gains.  I don’t think you need a PhD economist to make that kind of “prediction”: more productivity and investment is good.  Duh.  Nevertheless, the model (built by economists at Monash university, on commission to the federal government — go figger) has never been challenged until now.  We give it a good critique in our AMWU study.

* We also reviewed Australia’s experience with the 3 FTAs that have already been recently signed by the Howard government: Singapore, Thailand, and the U.S.  In every case, Australian imports grew far faster than Australian exports (in Singapore’s case they actually fell).  Moreover, there hasn’t even been the predicted “comparative advantage” specialization (with Australia’s abundant agriculture and mining industries getting a hypothetical Heckscher-Ohlin-style boost from trade liberalization).  In practice, no such pattern is visible — which suggests to me that Australia’s resource-based exports are limited more by global market conditions and supply constraints, not by trade barriers.  There is a clear anaology here to the Canadian experience.  My & Poon’s review of Canada’s recent FTAs found exactly the same pattern: much faster growth of Canadian imports than exports, and not even a boost to Canadian resource exports.  For two economies (Australia and China) which are rapidly devolving into resource suppliers to the world economy, a fair question can be asked: what is the benefit of an FTA, anyway?  All we are exporting is resources, which our customers need anyway.  They won’t get a boost from the FTA — but our imports sure will.

* The politics of globalization debates are downright bizarre Down Under.  The Labor party, and even most of the unions, have been supporting free trade — a holdover from Labor’s embrace of so-called “economic rationalism” in the late 1980s and early 1990s.  There are a few critics, but not many.  The new Labor leader, Kevin Rudd (who is miles ahead of Howard in the polls, with an election required later this year) is very business- and market-friendly.  He is also a real China-phile: he speaks Mandarin, and spent time in China as a diplomat.  So he is not well disposed to cancelling the FTA talks with China, even if he wins.  There will be a fight about this within Labor, however, with the AMWU leading the way.  Our best hope is that the FTA quietly dies after Labor wins.  But who knows.

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