Free trade agreement, ausfta assignment 1

Magdy Shamaly
International Business, GSB 726 – Assignment 1 28/2/2011
Free Trade Agreement - AUSFTA

TABLE OF CONTENTS

I INTRODUCTION 2

II INTERNATIONAL TRADE HISTORY 3

III THE GATT 5

IV THE WTO AND THE MOST FAVOURED NATION 6

V REGIONAL AND BILATERAL TARDE AGREEMENTS 7

VI WHAT IS AUSFTA? 8

VII POSITIVES OF AUSFTA 9

VIII DISADVANTAGES OF AUSFTA 10

IX IS THE MULTILATERAL FTA THE BEST OPTION? 11

X CONCLUSION 12

BIBLIOGRAPHY 14

1

Magdy Shamaly

I INTRODUCTION

International trading among nations dates back thousands of years to

Ancient Egypt. Such trading was incredibly vital for the Egyptians’

prosperity and there is no record of whether such trade was free or

discriminatory. However, the free trade concepts were first recognised and

supported by economists in the eighteenth century. Their theories were

adopted by most nations for a few decades until the US followed restricted

export and import policies. Eventually, the economy worldwide went into the

Great Depression in the thirties of the last century. Following this economic

tragedy, to rise out of the global crisis and the economic effects of the

Second World War, in 1947 twenty three nations agreed on establishing the

General Agreement on Tariffs and Trade in what is known as the GATT.

The GATT’s aim was to remove trade barriers among nations and open the

door once again to free trade. Negotiations continued for 47 years, lifting

many barriers and resulting in the establishment of the World Trade

Organisation (WTO) that replaced the GATT. Discussions concerning

multilateral agreements continued through the WTO and reached nowhere

in the Doha negotiation round, leaving all nations to follow their own

bilateral and regional free trade agreements. By way of example, a bilateral

agreement is in place between Australia and the US, namely AUSFTA.

Regardless of whether such agreements are beneficial or harmful for the

world free trade, there is a need to go

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back to the multilateral system through the WTO in order to have

liberalised free trade world, normal trade relations, and non-

discriminatory free trade policy to the weaker-economy countries.

II INTERNATIONAL TRADE HISTORY

International trading among nations goes as far as millenniums, back to

King Solomon of Israel. He entered into trade agreements with other

nations to import gold, silver, precious metals, wood, chariots and

horses, as well as export farm products such as olive oil, wine and
1
grains. It even dates further beyond Solomon’s age to Ancient Egypt

which had international trading sea-routes with Byblos in Lebanon and

Africa to import various kinds of wood, metal, incense, and precious
2
stones. However, the free trade was first regarded by the economist

3
Adam Smith who wrote “The Wealth of Nations” in 1776. He believed

that if foreign countries can supply his nation with commodity cheaper

than they themselves can make, better buy it from them and export
4
some part of the produce of his nation’s own industry.

1
King, P. & Stager, L. 2001, ’The means of existence’, in Life in Biblical Israel,
Westminster John Knox Press, Kentucky, p. 194.
2
Dollinger, A. 2000, ‘Ancient Egyptian overseas trade’, Overseas trade during the
pharaonic period, Kibbutz Reshafim. Retrieved 29 January 2011 from
www.reshafim.org.il/ad/egypt/trade/
3
Bhagawati, J. 2002, Free Trade Today, Princeton University Press, Princeton and
Oxford. P. 3.
4
Smith, A. 1994, ‘Restraints upon importation from foreign countries’, in Wealth of
Nations, Random House Inc., New York, pp. 364-365. Retrieved 31 January 2011 from
http://www2.hn.psu.edu/faculty/jmanis/adam-smith/Wealth-nations.pdf.
3

Magdy Shamaly

Before and during Smith’s time, the mercantilism was vastly spread in

Europe. Mercantilism was an economic system in which nations’ wealth

depended on its capital (gold, silver and trade value) in a steady and
5
unchangeable international trade. While it supported more exports of

commodities, it encouraged less or no imports, and acknowledged that

trade had been a zero-sum game; i.e. international trade is gained by a
6
nation at the expense of other nations. However, this system began to

decline by the end of the eighteenth century when Smith’s theory of

Absolute Advantage began to be adopted by many nations in Europe.

The Absolute Advantage concept is based on the capability of producing

a specific product by a nation in a better and more efficient way than
7
others.

Following the Absolute Advantage theory, an improved notion, namely the

Comparative Advantage theory, was constructed by the economist David

Ricardo. He believed that efficiencies and abilities of a country to produce
8
certain products are at variable levels compared to other countries. This

meant that a country could rank highly in the car industry, while plummeting

in the cellular phone industry. Meanwhile, another country could achieve

the opposite, making the trade between these two

5
Webster’s Online Dictionary 2006, Princeton University, New Jersey. Retrieved 31
January 2011 from www.websters-online-dictionary.org/definitions/mercantilism
6
Wild, J, Wild, K, & Han,J. 2010, ‘International Trade’ in International Business, Prentice
Hall, New Jersey, pp. 178-180.
7
ibid, p. 180.
8
ibid, p. 182.
4

Magdy Shamaly

countries equally beneficial and fulfilling the Comparative Advantage

Theory.

The above-mentioned theories, as well as the subsequent modern trade

theories until the late twentieth century, pioneered in paving the way for

international free trade, birthing the GATT and the WTO.

III THE GATT

Before introducing and discussing the GATT among several nations

around the world, the volume of free trade was at its peak at the end of

the nineteenth century. However, the US went back to the zero-sum

game and restricted its imports, causing other nations to restrict their

exports to the US, contributing to the Great Depression that crippled
9
economies of the US and the world. Further, two world wars in the first

half of the nineteenth century added salt to injury. During that period,

trade barriers such as high tariffs on imports and exports, administrative

delays, quotas on imports and exports, and currency control (which

unfortunately are still applied today in some nations) hindered free trade.

In 1947, the GATT was successfully formed. Through eight rounds of

negotiations from 1948 to 1994, it achieved significant results in reducing

tariffs and breaking other trade barriers that led to the prosperity of free

9
Wild, J, Wild, K, & Han,J. 2010, ‘Business-Government Trade Relations’ in International
Business, Prentice Hall, New Jersey, pp.210-211.
5

Magdy Shamaly

10
trade. Moreover, the last round of GATT firstly, added agreements on

services, intellectual property, and agricultural subsidies, and, secondly,
debated the increasing non-tariff barriers that were a result of
11
nationalism and trade conflicts worldwide . This round was the basis of

forming the WTO and ceasing the GATT.

IV THE WTO AND THE MOST FAVOURED NATION

The WTO is an organisation that is responsible for regulating trade around

the world by helping importers, exporters, manufacturers, and producers of

goods and services to conduct their business peacefully in order to ensure a
12
thriving economic world. WTO promotes a system that is able to advance

peace, resolve trade conflicts amicably, provide more choices for products

and services, raise incomes and make life better, and, above all, encourage
13
the principle of the Most Favoured Nation (MFN). The term Normal Trade

Relations has replaced MFN and it denotes equal favours and treatment to

all WTO’s partners without discrimination. That is, when a country reduces

its trade barriers or opens its market, it should do the same with other
14
trading partners. However every rule has exceptions where under

supposably strict conditions, some countries were

10
ibid. p. 211.
11
ibid, pp. 211-212.
12
‘World Wide Web’, What is the WTO. Retrieved 2 February 2011 from
http://www.wto.org/english/thewto_e/whatis_e/whatis_e.htm
13
ibid.
14
‘World Wide Web’, Principles of the Trading Systems. Retrieved 2 February 2011 from
http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm
6

Magdy Shamaly

allowed to discriminate and establish regional or bilateral free trade

agreements such as, North American Free Trade Agreement (NAFTA) or

AUSFTA.

V REGIONAL AND BILATERAL TARDE AGREEMENTS

From Institutional perspective, the aim of establishing GATT and WTO

was to regulate the international trade in such a way to reduce or

eliminate trade barriers, open the doors for ethical competition among

nations, and implement non-discriminatory trade policies. However, the

increasing numbers of bilateral, and regional trade agreements might

have created a situation where the rich countries became wealthier and

the poor became increasingly destitute, which defeats the principles of

the MFN; the weaker-economy countries might be disadvantaged for the

benefit of the super-power country. AUSFTA is a great example where

the Australian culture started to Americanise and the Australian economy

is being devoured by huge American companies that are continually
15
acquiring Australian companies.

Meanwhile, even though regional integration - such as Association of

Southeast Asian Nations (ASEAN) - has great benefits such as regards

trade creation, political cooperation and employment opportunities, its

15
Lloyd, C. 2004, ‘AUSFTA as free trade imperialism’ in the regionalisation of all
Australia’, Dissent, No.15, pp. 44-47.
7

Magdy Shamaly

main drawbacks is the loss of national sovereignty by surrendering it to a
16
foreign policy.

VI WHAT IS AUSFTA?

AUSFTA is a bilateral trade agreement between Australia and the US

that has come into effect on 1 January 2005. It ensures access of the

Australian products to the US market and encourages improving the
17
investment and business environment between the two countries. A

few of the main objectives of this agreement are:

a) making Australia as a destination for US investment;

b) increasing export opportunities to the US for our manufacturers, food

processors, and service providers;

c) minimising and/or eliminating tariffs on agricultural and non-

agricultural products, commercial vehicle and spare parts, ship

repairs and maintenance, lamb and sheep meat products; and
18
d) increasing Australia’s duty free beef quota substantially.

16 Wild, J, Wild, K, & Han,J. 2010, ‘Regional Economic Integration’ in
International Business, Prentice Hall, New Jersey, pp. 248-250.
17 Austrade 2008 (updated 20 February 2009), ‘Australia-United States Free Trade
Agreement (AUSFTA)’, Austrade, Australian Government. Retrieved 8 February 2011 from
http://www.austrade.gov.au/default.aspx?Mode=BusyEditing&ArticleID=8310#Business_
sectors

18 Dept of foreign affairs and trade 2007, ‘Australia-United States Free Trade Agreement:
Fact sheets’, Department of Foreign Affairs, Australian Government. Retrieved 10 February
2011 from http://www.dfat.gov.au/fta/ausfta/outcomes/01_overview.html
8

Magdy Shamaly

A live example of reaping AUSFTA’ benefits is a medium-size Australian

company (Nupress Tools) which manufactures custom-made glass

facades for high-rise buildings. Before AUSFTA, it was impossible to

export this company’s products to the US as they were faced with “Buy

American” culture; however, after the agreement, major projects were

completed in the US such as The Shakespeare Theatre in Washington
19
DC using Nupress Tools.

20
VII POSITIVES OF AUSFTA

From a nation-wide perspective, the strong trade ties between Australia

and the US through AUSFTA has benefited Victoria, NSW and

Queensland, mostly in relation to the increased export opportunities of

beef, meat, sugar and dairy as well as the production of automotive. The

burden of tariffs and quotas have almost been diminished, in which case

products are sold at cheaper prices in both countries. On the other hand,

mutual recognition of some professionals such as overseas-trained-

doctors, for example, fills the severe shortage in rural Australia health-

service sector. In general, more liberalisation for service providers on the

19
Austrade 2007, ‘Benefits of AUSFTA appear clear to Newcastle Business: Australian
export case study’, Austrade, Australian Government. Retrieved 10 February 2011 from
http://www.austrade.gov.au/Benefits-of-AUSFTA-appear-clear-to-Newcastle-
business/default.aspx
20
Swaab, F. 2006, ‘A Summary of the Australia-United States Free Trade Agreement’,
AUSFTA summary. SWAAB Attorneys. Retrieved on 12 February 2011 from
http://www.swaab.com.au/publications/AUSFTA%20Summary.pdf
9

Magdy Shamaly

business, financial, transport and education levels provides more

integration between the countries and helps the labour market.

Elimination of barriers on electronic trades encouraged product suppliers

to offer their products freely and carry on with e-commerce without

bureaucracy, while certain consumer agencies fight fraud and deceptive

kinds of trade for the protection of consumers in both countries. Finally,

the AUSFTA gives greater protection than WTO’s Multilateral

agreements for intellectual property relating to emerging media.

21
VIII DISADVANTAGES OF AUSFTA

AUSFTA’s many pros are not limited to those mentioned above, however

its cons need not to be ignored. If Australia can balance between the

pros and cons, it may reap the benefits that will help Australian exporters

and producers. Professor Christopher Lloyd of University of New

England, Sydney was very pessimistic in his article about the

implications of the AUSFTA. He viewed it as Free Trade Imperialism and

regionalising Australia to the US. Whether we agree with his views or

not, they should be taken seriously in order to have clear understanding

about the best for Australia’s national interest. The following points detail

some of Lloyd’s fears:

21
Lloyd, C. 2004, ‘AUSFTA as free trade imperialism’ in the regionalisation of all
Australia’, Dissent, No.15, pp. 44-47.
10

Magdy Shamaly

a) AUSFTA does not benefit Australia economically as the gains from

tariffs are minimal.

b) It does not achieve the comparative advantages, as the US does not

open its markets for the Australian agriculture.

c) The Australian way of balancing between capital, labour, and social

equality will be overtaken by the American capitalism and hence the

total control of the materialistic finance that will assassinate

Australian production, culture and social relations, and finally,

d) Australia will lose its national identity and integrity by blindly following

US policies in getting rid of Medicare, Pharmaceutical Benefit

Scheme (PBS), and workplace relations (Work-choices Act adopted

by the Howard Government was one of the worst examples in

following American policies and affected thousands of employees).

IX IS THE MULTILATERAL FTA THE BEST OPTION?

The WTO’s Doha negotiations around the multilateral free trade have

been inactive (since 2006) upon the division among its members on

major topics relating to trade barriers, and as a result of that, hundreds of
22
bilateral and regional trade agreements emerged worldwide.

Accordingly, the countries that had the weaker economy and did not

possess negotiating powers were disadvantaged. On the other hand, the

22
Amal Al-Muhairy 2009, ‘The Multilateral System in the Free Trade Agreements is the
best option for small economies’, Alittihad, Alittihad Arabic Newspaper. Retrieved on 13
February 2011 from http://www.alittihad.ae/details.php?id=124&y=2009
11

Magdy Shamaly

discrimination resulting from these agreements might have diverted the

trade from the most efficient countries to the most inefficient ones, and
23
accordingly, jobs and incomes suffered tremendous losses. In

Australia, there was a campaign against AUSFTA that included diverse

groups such as environmental groups, advocators for public health and

educators, students, trade unions, pensioners and many others who

believed that Australia’s devastating trade with The US is analogous to
24
murdering a country.

Therefore, I would recommend going back to the WTO’s multilateral free

trade agreements with immediate re-start of Doha negotiations. The deal

should be agreed among all members and should cover assurance of no

future protectionism, achieving trade liberalisation, reaching fair farm
25
trade reforms and, finally, addressing the media intellectual property.

X CONCLUSION

The increasing numbers of bilateral and regional free trade agreements

after halting of the WTO Doha round in 2006 have disadvantaged many

23
Drysdale, P. 2011, ‘Free trade agreements Vs multilateral trade negotiations’,
Commerce top stories, Thailand Business News. Retrieved 12 February 2011 from
http://thailand-business-news.com/news/top-stories/28894-trade-policy-needs-to-go-
global
24
Bailey, J. 2007, ‘Australia-US free trade agreement – Fair trade or foul?’, Impacts and
fightbacks, Bilaterals.org. Retrieved on 15 February 2011 from
http://www.bilaterals.org/spip.php?article15237
25
Pritchard, K. 2011, ‘2011:make-or-break year for Doha’, News and advice for business
people, Real Business. Retrieved on 20 February 2011 from
http://realbusiness.co.uk/management/2011_makeorbreak_year_for_doha_deal
12

Magdy Shamaly

nations and established a discriminatory policy against non-members.

The GATT and WTO’s main aim was to remove trade barriers and

encourage the principle of the MFN or Normal Trade Relations. However,

the bilateral and regional systems have contributed to new ways of

trading imperialism where the culture, economy and politics of a weaker

country are controlled by the stronger one. Nations that enter into such

agreements should evaluate them from a nation-state perspective so that

they may not be disadvantaged and subsequently reap the benefits for

the best of their nation’s interests. However, for a worldwide system,

WTO’s nations need to continue their talks and reach a unified world

multilateral free trade system, integrating their bilateral and regional

agreements into that system.

Word count:2,097 Words

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Magdy Shamaly

BIBLIOGRAPHY

• Amal Al-Muhairy 2009, ‘The Multilateral System in the Free Trade Agreements is the
best option for small economies’, Alittihad, Alittihad Arabic Newspaper. Retrieved on 13
February 2011 from http://www.alittihad.ae/details.php?id=124&y=2009

• Austrade 2007, ‘Benefits of AUSFTA appear clear to Newcastle Business:
Australian export case study’, Austrade, Australian Government. Retrieved 10
February 2011 from http://www.austrade.gov.au/Benefits-of-AUSFTA-appear-clear-
to-Newcastle-business/default.aspx

• Austrade 2008 (updated 20 February 2009), ‘Australia-United States Free Trade
Agreement (AUSFTA)’, Austrade, Australian Government. Retrieved 8 February 2011
from
http://www.austrade.gov.au/default.aspx?Mode=BusyEditing&ArticleID=8310#Busines
s_sectors

• Bailey, J. 2007, ‘Australia-US free trade agreement – Fair trade or foul?’, Impacts
and fightbacks, Bilaterals.org. Retrieved on 15 February 2011 from
http://www.bilaterals.org/spip.php?article15237

• Bhagawati, J. 2002, Free Trade Today, Princeton University Press, Princeton
and Oxford. P. 3.

• Dept of foreign affairs and trade 2007, ‘Australia-United States Free Trade Agreement:
Fact sheets’, Departement of Foreign Affairs, Australian Government. Retrieved 10
February 2011 from http://www.dfat.gov.au/fta/ausfta/outcomes/01_overview.html

• Dollinger, A. 2000, ‘Ancient Egyptian overseas trade’, Overseas trade during
the pharaonic period, Kibbutz Reshafim. Retrieved 29 January 2011 from
www.reshafim.org.il/ad/egypt/trade/

• Drysdale, P. 2011, ‘Free trade agreements Vs multilateral trade negotiations’,
Commerce top stories, Thailand Business News. Retrieved 12 February 2011 from
http://thailand-business-news.com/news/top-stories/28894-trade-policy-needs-to-
go-global

• King, P. & Stager, L. 2001, ’The means of existence’, in Life in Biblical
Israel, Westminster John Knox Press, Kentucky, p. 194.

• Lloyd, C. 2004, ‘AUSFTA as free trade imperialism’ in the regionalisation of
all Australia’, Dissent, No.15, pp. 44-47.

• Pritchard, K. 2011, ‘2011:make-or-break year for Doha’, News and advice for
business people, Real Business. Retrieved on 20 February 2011 from
http://realbusiness.co.uk/management/2011_makeorbreak_year_for_doha_deal

• Smith, A. 1994, ‘Restraints upon importation from foreign countries’, in Wealth of
Nations, Random House Inc., New York, pp. 364-365. Retrieved 31 January 2011
from http://www2.hn.psu.edu/faculty/jmanis/adam-smith/Wealth-Nations.pdf

• Swaab, F. 2006, ‘A Summary of the Australia-United States Free Trade
Agreement’, AUSFTA summary. SWAAB Attorneys. Retrieved on 12 February
2011 from http://www.swaab.com.au/publications/AUSFTA%20Summary.pdf

14

Magdy Shamaly

• Webster’s Online Dictionary 2006, Princeton University, New Jersey. Retrieved 31
January 2011 from www.websters-online-dictionary.org/definitions/mercantilism

• Wild, J, Wild, K, & Han,J. 2010, ‘International Trade’ in International
Business, Prentice Hall, New Jersey, pp. 178-180.

• Wild, J, Wild, K, & Han,J. 2010, ‘Business-Government Trade Relations’
in International Business, Prentice Hall, New Jersey, pp.210-211.

• Wild, J, Wild, K, & Han,J. 2010, ‘Regional Economic Integration’ in
International Business, Prentice Hall, New Jersey, pp. 248-250.

• ‘World Wide Web’, Principles of the Trading Systems. Retrieved 2 February 2011
from http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm

• ‘World Wide Web’, What is the WTO. Retrieved 2 February 2011
from http://www.wto.org/english/thewto_e/whatis_e/whatis_e.htm

15

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