Written by Greg Jericho
If you want to see a government being held to account, you should plug your ears when you hear talk about the benefits of the China-Australia free trade agreement. Based on old, irrelevant modelling, the benefits of the agreement have been taken by too many in the media as given, rather than properly questioned.
If I can come back in another life, let me come back as an Australian politician announcing a free-trade agreement. Oh the carefree joy. Oh frabjous day to be able to spread good cheer and wealth to all. And oh how wonderful to not have to worry about justifying any of the figures.
This last figure is one of the more interesting ones to come out in the reporting. As Lenore Taylor noted in her report, the $18bn figure is based on a feasibility study done in 2005 and is concerned with a theoretical agreement rather than the one agreed to this week.
But no matter, the figure gets reported as fact, such as when the Australian opens its article with the line that the agreement “will deliver at least at least $18bn over a decade”.
It also gets reported in odd ways. For example the Herald Sun reportedthat “it will drive at least $18bn in extra revenue into Australia’s economy in the next decade and open a new era in economic cooperation”.
But what exactly is this “revenue”?
The 2005 report did not suggest $18bn extra in export revenue – it suggested the extra growth from a China-Australia free trade agreement could “boost Australia’s and China’s real GDP in the order of US$18bn”.
It’s odd as well that the $18bn amount is never reported as being in US dollars, let alone 2005 US dollars when US$1 was A$0.75 rather than the A$0.87 it is now. The modelling actually put the benefits at A$24.4bn.
But what does this mean? Firstly, it is over a 10-year period (from 2005-15 in the case of the modelling) and it is the “net present value” – US$18bn (or A$24.4bn) in 2005 dollars.
It is important to note that this does not mean they thought Australia’s GDP would be $18bn larger by 2015. It means that over 10 years there would be a cumulative addition of $18bn of extra growth in 2005 money terms.
The modelling, which was used in the feasibility study, estimates that had a free-trade agreement been signed in 2005 by 2015, our GDP would have been about $3bn more than it would have otherwise been.
Is that much? Well it’s about 0.37% bigger. So no. It’s not much at all.
The feasibility study – in the very sentence that the US$18bn figure is mentioned – states “the annual average real GDP growth rate for both countries could increase by around 0.04% over the period 2005-15”.
Yep, 0.04% a year. Or, as the economist Tom Westland rather archlydescribes it, “a rounding error”.
And bear in mind that growth figure is based on a deal that includes sugar and rice and involves immediate dropping of tariffs – something that is not in the present agreement.
But never fear, the reporting of the game-changing boom will go forth spouting the $18bn figure.
You might think the government would have thought to update the modelling, given our level of trade with China has changed rather drastically since 2
But no, they haven’t.
Despite the negotiations going on for 10 years, the trade minister, Andrew Robb, told reporters there was “no time” to do new modelling because the deal was being done at “five minutes to midnight”.
What this means is Robb and Abbott were more concerned about signing the deal on Monday so they could have a nice news story while the Chinese president, Xi Jinping, was in town, rather than wait till they had some idea whether the deal they were working towards was any good.
The ludicrousness of citing the 2005 modelling is further highlighted by noting it estimates the 10-year benefit to GNP (which counts production by Australians regardless of where they are, rather than GDP which counts only production in Australia) was US$22bn. This figure is bigger than the GDP amount because it assumed the agreement would improve our terms of trade.
Given the price of iron ore has fallen 47% since December and thermal coal prices have gone down 29% in the same period, does anyone really expect this agreement is going to improve our terms of trade?
The market certainly doesn’t – iron ore futures for 2016 are selling at below US$65 a tonne.
But this bulldust being dished out by politicians regarding free-trade agreements is standard fare. In 2004 when signing the Australia-US free-trade agreement, the then prime minister, John Howard, was askedwhat impact the agreement would have on our trade deficit with the US.
He replied: “I believe over time it will reduce it, I can’t put a quantification on that. I mean, people have given me figures of and adding over time $4bn, depends what measurements you use”.
Well, it did add around $4bn, but not in a good way:
In 2004 our trade deficit with the US was about $10.9bn; in the past 12 months it was about $15.4bn.
This does not necessarily mean the deal was bad for Australia – we may have benefited from cheaper products from the US. But it certainly didn’t do anything to improve our trade deficit. And these deals are always sold on the increase in exports they will generate.
Except, as the Productivity Commission noted when it looked at free-trade agreements in 2010, often what happens is that we do trade more with the country with whom we signed an FTA but we trade less with other non-FTA countries. So it is not really a growth of overall exports, just a change of destination.
Also, improvements in the export sector can also take investment (and jobs) away from other sectors – there is not actually more investment, just investment in a different sector.
But, yes, pretend all you want about the great benefits of a free-trade agreement. Talk up the joys of reaching the Chinese middle class. Heck, back in 2005 Howard suggested the Australian-US deal would mean “there’ll be very big export opportunities opened up, for example they hope to sell the Commodore utility in to the United States and that is a very big, potential, exciting market for Holden”.
Our exports of cars did eventually improve, peaking by the end of 2008. But as soon as the global financial crisis hit General Motors stopped exports of Commodores to the US to protect jobs in Detroit:
A free-trade agreement is no more a guarantee of economic growth than not having one is.
But yeah, “18 billion!”.
At such a time it is worth remembering what Howard also said of the benefits the US deal would bring in 2005: “People who run around with a precise figure are probably trying to kid you.”
See at: http://www.theguardian.com/business/grogonomics/2014/nov/20/why-isnt-the-government-being-held-to-account-on-the-china-free-trade-deal