Magdy Shamaly International Business, GSB 726 Assignment 1 Free Trade Agreement - AUSFTA

28/2/2011

TABLE OF CONTENTS

INTRODUCTION

2 3 5 6 7 8 9 10 11 12 14

II INTERNATIONAL TRADE HISTORY III THE GATT IV THE WTO AND THE MOST FAVOURED NATION V REGIONAL AND BILATERAL TARDE AGREEMENTS VI WHAT IS AUSFTA? VII POSITIVES OF AUSFTA VIII DISADVANTAGES OF AUSFTA IX IS THE MULTILATERAL FTA THE BEST OPTION? X CONCLUSION BIBLIOGRAPHY

Magdy Shamaly International Business, GSB 726 Assignment 1 Free Trade Agreement - AUSFTA

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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 GATTs 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

Magdy Shamaly International Business, GSB 726 Assignment 1 Free Trade Agreement - AUSFTA

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back to the multilateral system through the WTO in order to have liberalised free trade world, normal trade relations, and nondiscriminatory 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 grains. It even dates further beyond Solomons 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 stones. However, the free trade was first regarded by the economist 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 some part of the produce of his nations own industry.
4 3 2 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.

Magdy Shamaly International Business, GSB 726 Assignment 1 Free Trade Agreement - AUSFTA

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Before and during Smiths 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 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 nation at the expense of other nations. However, this system began to decline by the end of the eighteenth century when Smiths 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 others.
7 6 5

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 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

Websters 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 8

ibid, p. 180. ibid, p. 182.

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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 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.
9

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

Wild, J, Wild, K, & Han,J. 2010, Business-Government Trade Relations in International

Business, Prentice Hall, New Jersey, pp.210-211.

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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 nationalism and trade conflicts worldwide . This round was the basis of forming the WTO and ceasing the GATT.
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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 thriving economic world.
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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 the principle of the Most Favoured Nation (MFN).
13

The term Normal Trade

Relations has replaced MFN and it denotes equal favours and treatment to all WTOs partners without discrimination. That is, when a country reduces its trade barriers or opens its market, it should do the same with other trading partners.
14

However every rule has exceptions where under

supposably strict conditions, some countries were

10 11 12

ibid. p. 211. ibid, pp. 211-212. 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 14

ibid. 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

Magdy Shamaly International Business, GSB 726 Assignment 1 Free Trade Agreement - AUSFTA

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allowed to discriminate and establish regional or bilateral free trade agreements such as, North American Free Trade Agreement (NAFTA) or AUSFTA.

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 acquiring Australian companies.
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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.

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

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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 investment and business environment between the two countries. 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 nonagricultural products, commercial vehicle and spare parts, ship repairs and maintenance, lamb and sheep meat products; and d) increasing Australias duty free beef quota substantially.
18 17

16

Wild, J, Wild, K, & Han,J. 2010, Regional Economic Integration in

Austrade 2008 (updated 20 February 2009), Australia-United States Free Trade

International Business, Prentice Hall, New Jersey, pp. 248-250.

17

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

Magdy Shamaly International Business, GSB 726 Assignment 1 Free Trade Agreement - AUSFTA

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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 companys 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 DC using Nupress Tools.
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VII

POSITIVES OF AUSFTA

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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-traineddoctors, for example, fills the severe shortage in rural Australia healthservice 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-Newcastlebusiness/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

Magdy Shamaly International Business, GSB 726 Assignment 1 Free Trade Agreement - AUSFTA

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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 WTOs Multilateral

agreements for intellectual property relating to emerging media.

VIII

DISADVANTAGES OF AUSFTA

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AUSFTAs 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 Australias national interest. The following points detail some of Lloyds fears:

21

Lloyd, C. 2004, AUSFTA as free trade imperialism in the regionalisation of all

Australia, Dissent, No.15, pp. 44-47.

10

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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 WTOs 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 bilateral and regional trade agreements emerged worldwide.
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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

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Magdy Shamaly International Business, GSB 726 Assignment 1 Free Trade Agreement - AUSFTA

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discrimination resulting from these agreements might have diverted the trade from the most efficient countries to the most inefficient ones, and accordingly, jobs and incomes suffered tremendous losses.
23

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 Australias devastating trade with The US is analogous to murdering a country.
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Therefore, I would recommend going back to the WTOs 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 trade reforms and, finally, addressing the media intellectual property.
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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-goglobal
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

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Magdy Shamaly International Business, GSB 726 Assignment 1 Free Trade Agreement - AUSFTA

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nations and established a discriminatory policy against non-members. The GATT and WTOs 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 nations interests. However, for a worldwide system, WTOs 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 International Business, GSB 726 Assignment 1 Free Trade Agreement - AUSFTA

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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-clearto-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-togo-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

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Magdy Shamaly International Business, GSB 726 Assignment 1 Free Trade Agreement - AUSFTA

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Websters 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

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