A few weeks before Australia’s Trade Minister, Mark Vaile, left to sign the Australia-US Free Trade Agreement in Washington, a report commissioned by the Federal Government into the Australia-US Free Trade Agreement has been described by a leading economist as laughable.
The Trade Minister, in releasing the report conducted by the Centre for International Economics (CIE), estimated that in ten years, the benefits of the Agreement to Australia would be $6.1 billion a year. (PM, April 30, 2004).
When the proposed agreement was unveiled, the Government said that it would be worth $4 billion a year; but since that time, most agricultural commodities have been excluded from the deal.
The Executive Director of the CIE, Andy Stoeckel, told PM that almost half of the $6 billion a year now expected could come from US investment in Australia.
However, a letter from Mr Vaile to Robert Zoellick last March made clear that under existing trade arrangements, there are few if any obstacles to US investment in Australia.
Mr Vaile said, “Consistent with its welcoming policy toward foreign investment, the Government of Australia has historically rejected very few proposals for acquisitions or arrangements by foreign investors on grounds inconsistent with national treatment, reflecting the Government’s commitment to competitive markets.
“Excluding residential real estate,” he added, “over the past five years the Government has only rejected four out of 2,285 proposals for investments.”
In a separate letter to Mr Zoellick and Mr Randal Quarles, of the US Treasury Department, discussing specifically investment in the banking and finance sector, Mr Vaile said that since 1997, “there have been over 250 foreign investment proposals in the financial sector decided with no rejections. Of these, 14 proposals were valued between $500 million and $2 billion, and over half of the 14 involved acquisitions by major US companies.”
The Minister added that Australia’s policy towards investment in the finance industry was already very positive.
He said, “In total, over the three years from 2000-1 to 2002-3, almost $35 billion worth of foreign investment proposals in the financial sector that met the criteria … were approved. Over a quarter of the total equity in Australia’s banking and general insurance sectors is now owned by non-residents.”
Mr Vaile added, “The Government of Australia allows 100 percent ownership of financial institutions, with some 40 foreign-owned banks along with 14 majority-owned Australian banks. There are also several foreign-owned insurance companies, money market corporations and managed funds.
“These firms operate in Australia’s growing financial market, which is now rated as the fourth largest funds management market in the world.”
If, as Mr Vaile said last March, there are few existing limitations on US foreign investment in Australia, it is hard to see how there will be billions of dollars of additional benefits from US investment in Australia, as the CIE report claims.
Interestingly, two prominent economists have ridiculed the CIE report.
In a submission to a Senate Inquiry into the Free Trade Agreement, Economics Professor Ross Garnaut and Bill Carmichael, former head of the Industry Commission, said that the CIE report lacked credibility.
They said the estimated benefits were “potential gains” which might have come about if the agreement had provided comprehensive access to US markets including sugar, dairy and beef. This had not occurred.
As a result, they said, the Government had “heavily overstated” the gains Australia would reap from the agreement, and created “unrealistic public expectations about the outcome for Australia,”
In a separate interview on ABC radio, Professor Garnaut said the CIE report was laughable.
He said, “Before economists are really satisfied with the results of any piece of any econometric modelling, they put it through the laugh test, and the laugh test is, can someone who knows the real world, that’s meant to be described by the modelling exercise look at the results and not laugh. And I don’t think that this exercise passes the laugh test.”
People may wonder what is the Centre for International Economics, which produced this report.
The CIE is a private company operating out of Canberra and Sydney.
The CIE’s staff have largely been trained in the US and/or recruited from the Productivity Commission, formerly the Industry Commission, the principal advisory body which has pushed for the deregulation of Australian industry.
- Peter Westmore