The U.S.-Australia Free Trade Agreement: Provisions and Implications
Released: 2005-01-12T00:00:00

Why a U.S.-Australia Free Trade Agreement?

The USAFTA is one among a number of bilateral and regional free trade agreements the BushAdministration has negotiated In the last few years, it has negotiated and entered into free tradeagreements with Jordan, Singapore, and Chile. Along with the USAFTA, the Bush Administrationcompleted negotiations and has signed the Central American Free Trade Agreement (CAFTA) withfive countries in the region, an agreement with the Dominican Republic, and an agreement withMorocco. It has also launched or intends to launch FTA negotiations with even more tradingpartners in various regions of the world all as part of its strategy of "competitive liberalization." That strategy aims to use greater access to U.S. markets as a incentive for trading partners to lowertheir trade and investment barriers.

U.S. and Australian political leaders have also viewed the USAFTA as a mechanism to deepen economic ties beyond the bilateral relationship as they pursue similar goals in the Doha DevelopmentAgenda round of the World Trade Organization (WTO). (2) It has also been argued that since theevents of September 11, 2001, the Bush Administration has employed trade policy in general, andFTAs in particular, to reward those countries that have allied themselves with the United States inthe war on terrorism and the war in Iraq. Australia fits that model. (3) The USAFTA builds on theU.S.-Singapore FTA in establishing an institutionalized U.S. economic presence in the Asia-Pacificregion.

Overview of U.S.-Australian Trade and Investment Relations

The United States and Australia have a strong bilateral economic relationship. The twocountries share similar economic and trade goals. Both are strong supporters of achieving significanttrade liberalization in agriculture and services in the current round of multilateral negotiations in theWTO, while at the same time, both are pursuing market access through regional and bilateral freetrade agreements.

The economic relationship is also built upon increasing flows of trade in goods and services andof capital in various forms of investment in a wide range of sectors. Both countries anticipate thatthe USAFTA will facilitate trade and investment flows.

Trade

According to U.S. data, Australia was the 14th largest destination for U.S. exports of goods ($13.1 billion) and the 30th largest source of U.S. imports of goods ($6.1 billion) in 2003 (see Table1 ). The United States has consistently realized surpluses in its trade with Australia, one of fewcountries in the world where that is the case.

Table 1. U.S. Merchandise Trade with Australia: 1998-2003 ($ millions)

Source: U.S. Census Bureau.

Major U.S. exports to Australia include aircraft and parts, road vehicles, and specialized machinery. Major U.S. imports include meats and beverages (mostly wine) (see Table 2 ). (4)

Table 2. Major U.S.-Australian Trade Commodities: 2002-2003 ($ millions)

Source: U.S. International Trade Commission (USITC) DataWeb.

The United States and Australia conduct a moderate amount of trade in services. In 2003 (preliminary data), U.S. exports of services to Australia totaled $5.9 billion consisting mostly oftravel services ($1.5 billion) and other private services ($2.6 billion). In 2003, the United Statesimported $3.2 billion in services from Australia with travel ($1.0 billion) and other private services($1.1 billion) accounting for the bulk of them. The United States experienced a surplus in servicestrade with Australia of $2.7 billion. In 2003, U.S. residents received $6.3 billion in income frominvestments in Australia, while Australian residents received $2.1 billion in income frominvestments in the United States.

Table 3. U.S.-Australian Trade in Services, 1998-2003 ($ million)

Source: U.S. Department of Commerce. Bureau of Economic Analysis.

Trade in goods and services, plus investment income and unilateral transfers make up the current account, the most comprehensive measure of foreign trade flows. In 2003, the United Statesran a current account trade surplus with Australia totaling $13.0 billion. (5)

Foreign Investment

The cumulative U.S. foreign direct investment (FDI) in Australia , valued on an historical-cost basis, totaled $36.3 billion through 2002. The level has not varied much over the last four years. In 1999, U.S. FDI was at $35.4 billion, $34.8 billion in 2000, and $32.6 billion in 2001. Roughlyhalf of U.S. FDI in Australia in 2002 was in manufacturing ($10.8 billion) and mining ($8.2billion). While not insignificant, the level of U.S. FDI in Australia is dwarfed by U.S. investmentsin other industrialized countries, for example, the United Kingdom ($255.4 billion), the Netherlands($145.5 billion), Japan ($65.7 billion), and Germany ($64.7 billion). However, the United States isthe largest source of foreign direct investment in Australia. (All figures are for 2002.) (6)

Australian FDI in the United States is lower than U.S. investment in Australia but has been increasingly sharply. In 2002, Australian FDI totaled $24.5 billion, having increased from $15.6billion in 1999. That investment is distributed across various sectors including manufacturing ($3.5billion), real estate ($2.8 billion), and other industries ($2.7 billion). (7)

Overview of the Negotiations

Australian Prime Minister John Howard had approached President Bush early in 2001 with aproposal to form an FTA. While not completely dismissing the idea, the Bush Administration at firstappeared to give it lower priority than other trade matters. But, on November 13, 2002, USTRZoellick notified congressional leaders that the Administration would begin negotiations withAustralia. The negotiations proved unexpectedly difficult. President Bush and Australian PrimeMinister Howard had committed to completing the negotiations by the end of 2003, but differencesover agriculture and other sensitive issues caused the deadline to slip. The first of five rounds ofnegotiations took place in Canberra March 17-21, 2003. The fifth, last, and longest round took placein Washington, December 1, 2003 and February 8, 2004. Although the negotiations took longerthan expected, they were completed in less time than the FTA negotiations with Chile andSingapore.

The USAFTA negotiations over manufactured goods proceeded smoothly. Tariffs on bilateral trade in most manufactured goods are already low. The average applied Australianmost-favored-nation (MFN) tariff is 4.3%, and its average tariff on agriculture imports is 1.2%. (8) Theaverage applied U.S. MFN tariff is 5.1% and its average MFN tariff on agricultural products is10.0%. (9) Issues pertaining to trade in agriculturalgoods proved the most difficult and forced thenegotiations into overtime.

In the end, both countries were determined to complete the agreement. To do so, each side acceded to very sensitive areas of the other in order to bring the negotiations to a conclusion. Thismeant that Australia acceded to the U.S. objective not to liberalize trade in sugar and to only gradualopening of dairy and beef. It meant that the United States acceded to Australia's position onpreserving its pharmaceutical subsidy program and on maintaining monopolies for the export ofwheat, barley, and rice. The United States also largely conceded to Australia the right to restrict foreign content of television programs and advertising and to preserve its sanitary and phytosanitaryregime.

The negotiations resulted in an agreement to substantially free manufactured goods trade substantially from duties, and to eliminate or reduce tariffs and other barriers on most agriculturalproducts (with the notable exception of sugar). The agreement commits both countries to remove,or at least reduce, barriers to trade in services and to foreign investment.

Major Provisions of the Agreement

The USAFTA covers virtually all aspects of the U.S.-Australian economic relationship fromtraditional trade in goods to leading-edge trade in e-commerce. The agreement also commits the twocountries to ensure mutual access in foreign investment and government procurement and to protectthe rights of intellectual property owners in each other's territory. A more detailed discussion of theprovisions follows.

Market Access for Goods

Chapter 2 of the USAFTA covers bilateral trade in goods, one the least controversial areas during the negotiations. The USAFTA will result in immediate duty-free treatment for 99% of U.S.exports of manufactured goods to Australia when the agreement goes into effect. Among theremaining 1% of U.S. exports, Australian duties will still be applied to such items as textiles andwearing apparel and some footwear, but these duties will be reduced and eventually eliminated overtime. At the same time, 97% of Australian exports of manufactured goods to the United States willbe duty-free when the agreement goes into effect. Australian duties still in place on the date theagreement goes into effect will be phased out over four, eight or ten years. (Tariffs and otherrestrictions on imports of textiles and apparel and some agricultural products will be eliminatedunder separate schedules discussed below.) By 2015, tariffs on all manufactured goods tradebetween the United States and Australia will be eliminated. (10)

During the negotiations, the United States highlighted the importance of obtaining immediate duty-free access for U.S. exports of autos and auto parts; chemicals, plastics, and soda ash;construction equipment; electrical equipment and appliances; fabricated metal products; furnitureand fixtures; information technology products; medical and scientific equipment; non-electricalmachinery; and paper and wood products. (11) Australia highlighted the importance to its exporters of immediate duty-free access for its exports of autos, metals, minerals, seafood, paper, and chemicals. Of particular importance to Australia was the immediate removal of the 25% tariff on Australianexports to the United States of light commercial vehicles (pick-up trucks) and the 35% tariff oncanned tuna. (12)

The USAFTA permits the duty-free entry of goods from one party to the agreement into the other for repair, for use as commercial samples, or in the performance of business activities. Theagreement will also establish a Committee on Trade in Goods consisting of governmentrepresentatives from Australia and the United States to address bilateral trade issues that arise ontariffs, non-tariff barriers, rules of origin and customs administration. (13)

Exceptions

The USAFTA (Annex-2A) contains exceptions to the general "national treatment" principle. Notably, the United States is allowed to maintain restrictions on the export of logs and on importsof foreign-made vessels under the Jones Act. (14) Australia will be allowed to retain controls onexports of certain forestry products and restrictions on imports of second-hand cars, and to retain the"single-desk" arrangements for marketing wheat, barley, rice, and sugar and the export arrangementsfor horticulture and livestock. (See section below on agriculture products for more details on theirtreatment under the USAFTA.)

Rules of Origin

Rules of origin (Chapter 5) are used to determine which goods are "originating goods" and, therefore, should qualify for the preferential treatment under the agreement. Such products are onesthat are: (1) wholly obtained (raw materials) or produced in either Australia or the United States; (2)are produced in either country from materials originating from either country; or (3) are producedpartially from materials that have originated from a non-FTA country but pass a rules of origin test. In general, that test is that the final product must have involved sufficient processing in a FTAcountry as to be in a different tariff classification from the material from the non-FTA-country. Thetariff classification changes that must take place to qualify are product-specific and are listed inAnnex 5-A of the agreement. For some products, such as automotive products, an additional testthat will substitute for or help support the tariff-classification test is the regional value content test. According to that test, the sum of the value of the inputs from either Australia or the United Statesmust equal or exceed a certain percentage (the percentage depending on the product) of the totalvalue of the final product. (Special rules of origin criteria apply to textiles and apparel and arediscussed below.)

Safeguards

The USAFTA (Chapter 9) provides for safeguard measures for trade in goods between the United States and Australia. (In addition to these safeguard measures, the agreement provides forspecial safeguard measures for textiles and apparel and for specific agricultural products. The specialmeasures are discussed in sections devoted to those products.) (15)

The FTA provides that during the transition period (the period during which duties on a product are being eliminated), an importing country may suspend the elimination of duties orincrease the duties on the import of a product from the other trading partner if, as a result of thereduction in duties, imports increase in absolute terms or relative to domestic production, as to bea substantial cause of serious injury, or threat thereof, to the domestic industry producing a likeproduct. (16)

The increased duty that may be applied will not exceed the lesser of: the most-favored-nation (MFN) duty rate in effect at the time the safeguard measure was taken or the MFN duty rate in effectpreceding the date the USAFTA entered into force. The trade remedy can be applied only after aninvestigation has been conducted to determine cause and injury. The trade remedy measures canonly be applied for two years, but may be extended for another two years if a determination is madethat conditions causing serious injury still exist. Furthermore, while a safeguards measure is inplace, the country applying the measure must compensate the other country by making concessionsin other sectors that are equivalent in value to the additional duties. These measures can be used byeither partner on both manufactured and agricultural goods.

Pharmaceuticals

The Australian Pharmaceutical Benefits Scheme (PBS) is a 55-year-old program under which the Australian government subsidizes the costs for pharmaceuticals. To be eligible for the subsidy,the drug must be approved beforehand and appear on a list of subsidy-eligible drugs. If there are twoor more brands of the same drug, the PBS will subsidize the cheapest brand. The United States hasasserted that the methods that the Australian government uses to determine which brands tosubsidize do not take into account the benefits of newer, innovative drugs, many of which areproduced in the United States, and that cost more than older drugs. These pharmaceuticals are,therefore, at a disadvantage in the Australian market.

During the negotiations, the United States pressed Australian negotiators to make the procedures for selecting eligible drugs more transparent and to make the benefits of innovative drugsa factor in determining which brands will be subsidized. Under Annex-2C, Australia agreed toestablish procedures for reviewing product listings and to make more transparent the process bywhich the amount of reimbursement for pharmaceuticals is set. The United States and Australia alsoagreed to establish a Medicines Working Group consisting of federal officials from each countrywho are responsible for federal healthcare programs. These officials will work together on emerginghealth policy issues, including the importance of innovative drugs. The two countries also agreedto strengthen the cooperation between the U.S. Food and Drug Administration and the AustralianTherapeutic Goods Administration to make innovative drugs available more quickly to nationals ineach country.

In an exchange of letters accompanying the agreement, Australia agreed to provide U.S. pharmaceutical manufacturers the opportunities: to consult with officials of the AustralianPharmaceuticals Benefits Advisory Committee (PBAC) prior to submitting an application to thatbody for PBS approval for a subsidy, to respond to reports and evaluations prepared for technicalsubcommittees to the PBAC regarding the consideration of their products, to appear before a hearingof the PBAC regarding the application, and to obtain reasons for the final determination of thePBAC. In addition, Australia agreed to expedite the process as much as possible and to provideopportunities for the reimbursement amount to be readjusted.

Next to agriculture, the PBS proved to be the most controversial issue in the negotiations. The issue exposed fundamental differences between the U.S. and Australian healthcare systems and howeach treats costs of pharmaceuticals borne by their citizens. It is an issue that may be more widelydebated when the Congress considers the agreement.

During congressional consideration of the agreement and the implementing legislation, some Members of Congress expressed concerns about the impact of Chapter 17.9.4 of the agreement andits potential impact on the reimportation of U.S.-brand pharmaceuticals into the United States. (Chapter 17 pertains to intellectual property rights protection.) That provision reads as follows:

Each Party shall provide that the exclusive right of the patent owner to prevent importation of a patented product, or a product that results from a patentedprocess, without the consent of the patent owner shall not be limited by the sale or distribution ofthat product outside its territory, at least where the patentee has placed restrictions on importationby contract or other means.

The concerns centered on whether this provision would prohibit the U.S. Congress, if it so chooses, to pass a law that would permit the reimportation of U.S. patented drugs into the UnitedStates. USTR Zoellick argued that the provision provides no new legal rights to U.S. patent holdersand that such rights as stated the provision are already in U.S. law. In addition, he argued, that notrade agreement can prevent the U.S. Congress from changing U.S. law by passing another law. (17) Nevertheless, the issue may arise as the United States negotiates FTAs with other trading partnersand implementing legislation for the agreements are considered by the Congress.

Agricultural Products

Agricultural issues were the greatest challenge in the bilateral FTA negotiations, as many trade experts had anticipated. Agricultural products accounted for only 4.7% of U.S. exports to Australiabut for 34.5% of U.S. imports from Australia in 2003. As major agricultural exporting countries,the United States and Australia are, for the most part, allies in multilateral negotiations onagricultural issues. They share similar positions in the difficult negotiations now taking place in theDoha Development Agenda (DDA) round in the World Trade Organization (WTO) to reduce oreliminate barriers to trade in agricultural goods. However, the movement towards a tighter economicrelationship under an FTA exposed important sensitivities that threatened to undermine the entirenegotiations.

Under the USAFTA (Chapter 3 and related annexes), U.S. tariffs on around 20% of the agriculture imports from Australia will be eliminated immediately. The United States will alsophase out the tariff-rate quota (TRQ) on beef during the tariff elimination period to begin when U.S.exports of beef reach their 2003 level (to allow U.S. beef producers to recover from the effects ofthe "mad cow" incident), or three years after the agreement goes into effect, whichever is earlier. (18) U.S. tariffs on beef imports within the quota will be eliminated immediately and tariffs on importsabove the quota will be eliminated in stages over the 18-year period.

The U.S. TRQ on dairy product imports from Australia will be increased and phased out over an 18-year period under the USAFTA. Tariffs on within-quota imports will be eliminatedimmediately, while the tariffs on above-quota imports will remain unchanged. The U.S. dairy quotas will apply to Australian exports of such products as certain cheeses, butter, milk, cream, ice-creamproducts, and whole milk powder. U.S. quotas on imports of Australian peanuts, tobacco, cotton,and avocados will also be eliminated over time. U.S. duties on Australian wines will be eliminatedover an 11-year period.

Among the most controversial issues was the U.S. tariff-rate quota on sugar. The United States refused to change the sugar quota and it remains unchanged under the USAFTA.

Australian exports of wheat, rice, barley, and sugar are monopolies of state-sanctioned commodity boards, or "single desk arrangements." During the negotiations, the United Statesasserted that these boards distort trade and targeted them as negotiating objectives during the FTAnegotiations. As a result of the negotiations, however, Australia will maintain the single-deskarrangements but agreed to work with the United States in the WTO to eliminate restrictions on theright of private entities, who are apart from the commodity boards, to export agricultural products.

The USAFTA will provide for special "safeguard" provisions for U.S. imports of Australian beef and horticulture products (e.g., tomatoes, pears, apricots, onions, and peaches). Aquantity-based trigger mechanism will apply to imports of Australian beef during the first 18-yearsof the agreement, and a price-based trigger mechanism will apply beginning in year 19 of theagreement. A price-trigger mechanism will apply during the tariff elimination transition period forU.S. imports of Australian horticulture products.

Under the USAFTA, Australian tariffs on imports of U.S. agricultural products will be eliminated immediately. These provisions are expected to benefit particularly U.S. exports ofprocessed foods, soybeans, fresh and processed fruits, vegetables and nuts, and exports of alcoholicbeverages. (19)

The U.S. government asserted that Australia's sanitary and phytosanitary (SPS) measures are excessively restrictive. The restrictions affect U.S. exports of Florida citrus, stone fruit, chicken,pork, apples, pears, and corn. (20) Australia assertedthat these requirements are necessary to protectthe health of its citizens and to protect Australian produce from disease. The two partners agreedto a compromise under the USAFTA whereby they will establish mechanisms to resolve bilateraldisputes over SPS regulations and to develop science-based measures to protect health and safetythat are trade-related.

Textiles and Apparel

Textiles and apparel represent a very small portion of U.S.-Australian bilateral trade. In 2003, U.S. exports of these products totaled $121.6 million or just under 1% of total U.S. exports toAustralia, and U.S. imports of textiles and apparel totaled $253.6 million or about 4% of total U.S.imports from Australia. The USAFTA (Chapter 4 and Annex-4A) provides for special safeguardmeasures to dampen the adverse effects of surges in textile and apparel imports in U.S.-Australianbilateral trade. If either Australia or the United States determines that imports of textile or apparelproducts from the other are increasing at such a rate as to be a substantial cause of serious injury,or a threat thereof, to the domestic industry, then it can apply a trade remedy in the form of a higherduty to allow the domestic industry to adjust. The safeguard measures are similar to, but differentfrom, the general safeguard measures (described earlier) in the USAFTA. One important differenceis that compensation to the country that is the target of the safeguard measure must be in the formof concessions on textile and apparel, unless the two countries otherwise agree.

The USAFTA contains rules of origin that specifically apply to textiles and apparel. The agreement applies the "yarn forward" principle, that is, fabrics produced for export must be formedentirely from yarns formed in either the United States or Australia and apparel for export must beproduced entirely from fabrics produced in either Australia or the United States from yarns entirelyformed in either of the two countries. In addition, the apparel must be cut or knit to shape orassembled in either Australia or the United States. There are a number of exceptions to this principlethat are product-specific and outlined in Annex 4-A of the agreement.

In addition to the safeguard measures and rules of origin, the USAFTA provides that tariffs on textiles and apparel are to be eliminated more gradually than tariffs on other manufactured goods. For example, whereas 100% of U.S. imports of non-textile and apparel manufactured goods fromAustralia will become duty-free immediately when the USAFTA enters into force, only 7% of U.S.imports of textiles and apparel from Australia will become duty-free immediately. Around 86% ofthose imports will not become entirely duty-free until the agreement has been in force 10 years. (21)

Trade in Non-Financial Services

The USAFTA (Chapter 10) covers the sale, production, distribution, marketing, and delivery of services, and also payment for services. The obligations under the USAFTA mirror closely, andin some cases exceed, those that the United States and Australia have undertaken in the WTO underthe General Agreement on Trade in Services (GATS).

The USAFTA covers service transactions delivered in any of three ways: from the territory of one FTA-country to the territory of the other; in the territory of one FTA-country by a national ofthat country to a national from the second FTA-country; and by a national of one FTA-country in theterritory of the second. The agreement requires the United States and Australia to accordnon-discriminatory treatment, both most-favored- nation treatment and national treatment, to servicesoriginating in each other's territory. The agreement prohibits the Australian and U.S. governmentsfrom imposing restrictions on: the number of service providers; the total value of service transactionsthat can be provided; the total number of service operations or the total quantity of services output;or the total number of natural persons that can be employed in a services operation. In addition, thetwo governments could not require a service provider from the other FTA-country to have apresence in its territory in order to provide services. There are exceptions to this coverage that arelisted in chapter 10.

As is the case with the GATS, the USAFTA allows the United States and Australia to make exceptions (non-conforming measures) to the national treatment, MFN, market access, and localpresence restrictions. The exceptions apply to any existing non-conforming measure at the federalor regional levels of government and that are specifically identified in eitherAnnex I or Annex IIof the agreement and to all non-conforming measures maintained by local governments. Thenonconforming measures listed in Annex I cannot be made more restrictive, and if made lessrestrictive are then "bound." Those listed in Annex II can be made more restrictive and are not"bound" if made less restrictive. The USAFTA adopts the "negative list" approach to the coverageof services; that is, the countries are obligated to cover all service sectors except those specificallylisted in the annexes. In contrast, under the GATS, no service sector is covered unless specifically identified. The USAFTA's coverage is, therefore, more comprehensive in terms of U.S.-Australianbilateral services trade.

The Australian government has used the non-conforming measures provisions to preserve local content requirements in audiovisual and broadcasting media . The Australian governmentrestricts foreign content of programming and advertising on over-the-air television broadcasting. Between 6:00PM and 12 Midnight, 55% of the programming must be of Australian origin, and 80%of the advertising must be Australian advertisements. The United States wanted the restrictionschanged to permit more foreign access to these markets. Australia insisted that the restrictions arenecessary to preserve Australian culture, and the exception is listed in Annex I. In addition, theAustralian government has reserved the right, as listed in Annex II, to impose new requirementsregarding multi-channel broadcast television programs, expenditure requirements for subscriptiontelevision, tax preferences for investment in Australian film and television productions, amongothers. Annex II also contains an Australian exception to allow it to maintain existing co-productionarrangements and to create new ones.

The United States listed excepted nonconforming measures in its schedules to Annex I and Annex II. Among the most notable was the preservation of many restrictions under section 27 ofthe Merchant Marine Act of 1920 (The Jones Act). Among other things, that law limits shippingwithin the United States to vessels owned, built, and operated by U.S. citizens, and registered in theUnited States.

The USAFTA obligates the United States and Australia in other aspects of their bilateral trade in services. It requires that any procedures that either government employs to authorize the supplyof services be transparent, that an application for authorization must be handled in a timely manner, that the applicant be informed of the status of the application, and that the eligibility requirementsfor authorization not constitute unnecessary barriers to trade in services. Furthermore, the FTArequires that the regulations that govern trade in services be developed and applied in a transparentmanner. It also addresses the issue of government-imposed qualifying requirements (education,experience, certification, licenses, etc.) for providers of professional services obtained in one countryand recognized as valid by the other. Also, the United States and Australia agree to at least maintainthe current level of market openness in providing express delivery services and to ensure thatrevenues earned from a monopoly postal service (for example Australia Post) are not used to providea competitive advantage to its express delivery service.

Financial Services

USAFTA (Chapter 13) specifically addresses bilateral trade and investment in financial services. The agreement defines financial services to "include all insurance and insurance-relatedservices, and all banking and other financial services, as well as services incidental or auxiliary toa service of a financial nature." The obligations that the United States and Australia agree toundertake closely mirror those found in non-financial services: national treatment; MFN treatment;prohibition on limits to the number of financial institutions, the total value of service transactions,the quantity of output, or the number of natural persons that may be employed in a particular firm;prohibition on requirements that senior management or board of directors consists of individuals ofa particular nationality; prohibition on requirement that the board of directors consist of a majorityof nationals from the country where the financial provider is located; and a requirement forregulatory transparency.

As in the case with non-financial services, the agreement allows each FTA country to make exceptions to the coverage of the agreement. These exceptions are listed in Annex III (existingnon-conforming measures that cannot be made more restrictive) and Annex IV (sectors andsubsectors on which existing non-conforming measures can be maintained or tightened and on whichnew non-conforming measures can be applied).

The United States and Australia undertake obligations that are specific to financial services. For example, the agreement allows financial service providers from one partner country to sell anew financial service in the other's market without additional legislation, if local financial serviceproviders are allowed to provide the same service; however, the provider of the new service could be required to obtain authorization and to provide the new service in a particular institutional orjuridical form. The USAFTA permits an FTA-country to recognize as valid the prudential measuresof non-FTA countries without automatically recognizing the validity of the other partner's measures,but it must give the other FTA-partner the opportunity to show why its prudential measures shouldbe so recognized. The USAFTA also requires the establishment of a Financial Services Committeeto consider ways that the financial services sectors of the two countries can be more closelyintegrated.

Telecommunications

Under the USAFTA (Chapter 12), the United States and Australia agree to ensure that enterprises from each other's territory have nondiscriminatory access to public telecommunicationsservices. (The chapter specifically does not apply to broadcast or cable distribution of radio ortelevision programming, except that enterprises operating broadcast stations and cable systems haveaccess to telecommunications services.) For example, both countries will ensure that suppliers oftelecommunications services who dominate the market do not engage in anti-competitive practices. They also ensure that public telecommunications suppliers provide enterprises based in the otherFTA-partner with interconnection, number portability, dialing parity, and access to underwater cablesystems.

Government Procurement

The USAFTA (Chapter 15) opens up the vast markets of procurement in goods and services by the two governments to suppliers from other country. This chapter is closely modeled on theWTO Government Procurement Agreement (GPA), a so-called plurilateral agreement that the UnitedStates has signed, but Australia has not signed. (22) The WTO Agreement requires its signatories toallow goods and services providers from the other signatory countries to bid on contracts valuedabove a threshold level on an equal, nondiscriminating basis with domestic suppliers, thus waivingany "buy national" requirements. For example, the U.S. "Buy America Act" gives preferentialtreatment to U.S. domestic suppliers vis-a-vis non-GPA signatories. The USAFTA will giveAustralian suppliers of goods and services equal status in the U.S. government procurement marketwith providers from the other countries that have signed the GPA or from other countries with whichthe United States has similar agreements.

To ensure non-discrimination, both the GPA and the USAFTA require participating governments to follow rules that call for transparency and timeliness in tendering bids, such as opentendering and publication of tender opportunities. Coverage of both agreements is limited to thosefederal and regional entities that the participating countries have listed in annexes and to contractsthat are above a threshold value.

Foreign Investment

The USAFTA (Chapter 11) covers foreign investment activities on the territories of the two countries by nationals from the other partner-country. The agreement applies to all forms ofinvestment, including direct investments (controlling investments in enterprises, plant andequipment, real estate, etc.) and portfolio investments (stocks, bonds, intellectual property rights,etc.). The agreement will require the United States and Australia to afford non-discriminatorytreatment, most-favored-nation and national treatment, to the establishment, acquisition, expansion,management, conduct, operation, and sale or other disposition of an investment. The agreement willprohibit, with limited exceptions, either of the governments from imposing performancerequirements on the operation of a foreign investment in its territory. (23) The USAFTA will prohibitboth governments from requiring a foreign-owned enterprise hire individuals of a particularnationality in a senior management position. It will permit the governments to require that a majorityor fewer of the board of directors be of a nationality or resident of its territory provided that such arequirement does not impair the ability of the foreign investor from maintaining control over theinvestment. The agreement will place limits on the right of each government to expropriate theassets of a foreign investor who is a national of the other FTA country.

As with the case of services, the USAFTA will allow each partner to list exemptions from the provisions on foreign investment, and these non-conforming measures are listed in Annex I andAnnex II (the same annexes for services) of the agreement. Australia has used Annexes I and II topreserve its right to screen foreign investments. All foreign investments in Australia are subject togovernment screening and approval. While this process has apparently not stopped U.S. investorsfrom establishing successful operations in Australia, representatives of the U.S. business communityinsisted that the process does not conform to the principle of "national treatment," that is, treating foreign investors no less favorably than domestic investors. The United States has used its right toexceptions, among other things, to preserve programs to encourage minority-owned businesses.

At the outset of the negotiations, USTR Zoellick stated that he wanted the Australian government to eliminate or reduce trade distorting investment measures. (24) The Australiangovernment had indicated that changing the process might be difficult. (25) However, in a compromise,the United States has allowed Australia to maintain its screening process. Australia agreed toeliminate screening of U.S. investment in new entities ("greenfield investments"). It also agreed toincrease the threshold value from $A50 million to $A800 million above which U.S. acquisitions ofestablished entities in Australia will have to be screened. (26) The threshold on U.S. investments insome sensitive sectors, such as telecommunications, transportation, and defense-related areas, willremain at $A50million. U.S. acquisitions of Australian financial institutions will also remainrestricted. (27)

During the negotiations, the United States insisted that a special investor-state dispute mechanism be established under the USAFTA. Australia argued that such a mechanism will not be necessary because U.S. and Australian legal traditions regarding investment were very similar, andU.S. investors will receive fair treatment in Australian courts. The United States agreed to keep themechanism out of the agreement, but the agreement contains a provision that will allow theestablishment of an investor-state dispute mechanism, if changed circumstances warrant it.

Other Issues

The USAFTA contains provisions covering other relatively non-controversial, but nevertheless important, aspects of U.S.-Australian trade and investment. The provisions on labor (Chapter18)and environment (Chapter 19) are structurally similar. Because the Australian and U.S.economiesare both modern and industrialized and are at similar levels of development, with similar averagewage levels and environmental standards, labor and environment issues have not been a cause ofbilateral trade friction. Nevertheless, the USAFTA commits the two countries to enforce their respective labor rights laws, that is those laws that are directly related to the internationallyrecognized labor principles and rights, and to enforce laws to protect the environment. If eithergovernment ascertains that the other FTA partner is not adhering to these provisions, it will be ableto raise the issue through the USAFTA's dispute settlement mechanism (described below).

The USAFTA (Chapter 8) will also commit Australia and the United States to prevent government standards and technical regulations from unnecessarily inhibiting bilateral trade. Governments use these regulations to ensure that the goods sold in their territory do not impair thehealth and safety of their residents. The agreement will also commit the two countries to worktoward mutual recognition of each other's technical regulations as equivalent to their own. Theobjective will be to facilitate trade by eliminating duplicative testing and other technical procedures.

The USAFTA devotes a separate chapter (Chapter 16) to electronic commerce (e-commerce) . Among other things, the agreement commits the United States and Australia not to impose customsduties on any digital product. A digital product is defined as the "digitized form, or encoding of,computer programs, text, video, images, sound recordings, and other products, regardless of whetherthey are fixed on a carrier medium [e.g., CD] or transmitted electronically [online]." In addition, thetwo countries agree to accord no less favorable (non-discriminatory) treatment to digital productsthat originate in the other USAFTA-country or in a non-FTA country, than it accords digital productsthat originate in its territory. Exceptions to this principle are those that the FTA partners have listedunder the foreign investment chapter and the services chapter. Furthermore, if a governmentpractice, action, or regulation presents a conflict between this principle and the provisions of theUSAFTA pertaining to intellectual property rights protection (Chapter 17), the latter will prevail.

Under the USAFTA (Chapter 17), the United States and Australia reaffirm their obligations to a number of international treaties on intellectual property rights, including the WTO Agreementon Trade-Related Aspects of Intellectual Property Rights (TRIPS). Furthermore, the USAFTAcommit the two countries to ratify and accede to the World Intellectual Property Organization(WIPO) Treaty on Performances and Phonograms and the Treaty on Copyrights. The United Stateshas ratified the two treaties, while Australia has not. Other key provisions would:

protect the rights of holders of copyrights, including programs carried over encrypted satellite signals;

protect the rights of patent holders, with flexibility to exclude from patent ability the methods of treatment and regulations that re used to protect public order and morality;

protect the rights of holders of trademarks, including geographical designations;

require Australia to extend the duration of copyright protection to coincide with U.S. protection -- from the life of the author plus 50 years to the life of the author plus 70 years;and

protect internet domain holders from "cybersquatting."

The USAFTA (Chapter 21) provides for a mechanism for the two countries to resolve disputes that arise over interpretation of the agreement. The agreement requires the formation of a JointCommittee of representatives from each FTA country that will meet annually to review the operationof the agreement to consider and to discuss possible disputes or changes that one or the other countrywishes to make to the agreement. The agreement places a premium on resolving throughconsultation, but if that means fails, it provides for the establishment of a panel to arbitrate thedispute and assign compensation if warranted.

Reactions to the Agreement

With some notable exceptions, the reactions to the USAFTA of representatives from affectedsectors of the U.S. economy have been positive, although the reaction of any specific industry orsector is largely a function how it will be affected by the agreement. The Advisory Committee forTrade Policy and Negotiations (ACTPN) was established by the Congress to provide private sectoradvice to the President on trade agreements before he signs them. The ACTPN's membership cutsacross virtually all sectors of the economy, including manufacturing, agriculture, labor, services, andthe environment. With the exception of one member (see below), the ACTPN has endorsed theU.S.-Australia Free Trade Agreement. The vast majority of the committee's membership concludedthat the agreement fulfills U.S. trade objectives that Congress set down in the Trade Act of 2002, andthe membership supports the trade liberalizing measures to which the agreement commits the UnitedStates and Australia. (28)

Although, endorsing the agreement, the majority of the ACTPN expressed some concerns:

that some issues regarding Australia's sanitary and phytosanitary (SPS) regime still needed to be resolved before U.S. agricultural exporters will be able to take full advantage ofthe agreement;

that the agreement does not include an investor-state dispute provision and calls for the U.S. government to ensure that such a provision be added if it proves warranted;and

that the environmental provisions in the agreement are adequate for Australia, since Australia has a strong record on environmental protection, but they should not be considereda model for other U.S. FTA agreements where the partners' records on the environmental protectionis not so strong. (29)

The ACTPN member representing labor, James P. Hoffa, Jr., General President of the International Brotherhood of Teamsters, filed the lone dissenting view against approval of theagreement. He argued that the agreement's labor provisions only require Australia to enforce itslabor laws. Hoffa claims, "While Australia is a developed country with a relatively high standardof living and a vibrant, independent labor movement, it has an imbalanced, inadequate system oflabor laws that fail to fully protect workers' rights." (30)

The agricultural negotiations were the most difficult and the results somewhat ambiguous. The reactions of agricultural and food producers reflect the ambiguity. U.S. sugar producers wererelieved that the agreement did not include liberalization of sugar imports, while sugar-usingprocessors were critical. U.S. wheat exporters oppose the agreement because Australia will bepermitted to retain its single-desk monopoly on wheat exports. Pork producers have indicated thatthey will not support the agreement until Australia implements a final risk assessment on U.S. porkfor import into Australia and U.S. pork exports to that market begin to increase. The reaction of beefproducers has been mixed. They are disappointed that greater access to the U.S. market forAustralian exporters was not matched by openings in other foreign markets for U.S. beef exportersthrough the WTO negotiations. They are pleased that the U.S. beef market will be opened graduallyto Australian exporters over an 18-year period. The American Farm Bureau supports the USAFTAas long as the SPS issues and other issues that affect U.S. agricultural exports are resolved beforethe Congress votes on the agreement. (31)

U.S. manufacturers strongly support the USAFTA, calling for immediate congressional approval. National Association of Manufacturers (NAM) Vice-President Frank Vargo has labeledthe USAFTA "the manufacturers agreement." (32)

Congress and the USAFTA

United States Trade Representative Robert Zoellick and Australian Trade Minister Mark Vailesigned the agreement on May 18, 2004, in Washington. Within 60 days after signing the agreement,the President must submit a preliminary list of U.S. laws that will have to be changed in order tocomply with the agreement. After entering into the agreement, but within no specific time frame,the President then can submit a draft of the agreement, the implementing legislation, and statementof administrative action to both Houses of Congress. The three documents must be submitted ondays in which both Houses are in session. The Congress then has a total of 90 legislative days inwhich to act: The House Committees with jurisdiction over the agreement have 45 legislative daysduring which to review and report out the agreement followed by 15 legislative days for floor action. The Senate Committees of jurisdiction have an additional 15 legislative days to consider and reportout the implementing legislation followed by an additional 15 legislative days for floor action. Under trade promotion authority the amount of time for debate on the agreement in both Housesis limited and the vote is strictly yea or nay (no amendments). (33)

On June 23, 2004, the House Ways and Means Committee and the Senate Finance Committee each held a "mock mark-up" of implementing legislation. The Ways and Means Committeeapproved by voice vote the "legislation" on June 23 without amendment. On a largely party-linevote, the Finance Committee approved an amendment that will require the USTR to obtain approvalfrom the Ways and Means and Finance Committees before he could waive requirement to implementa safeguard measure against imports Australian beef. On June 24, Senate Finance reported thelegislation out unfavorably (7-14). The Bush Administration was expected to submit implementinglegislation based on the House Ways and Means Committee version.

On July 6, 2004, the President formally submitted legislation to implement the agreement. On July 8, the House Ways and Means Committee favorably reported out the implementing bill, H.R. 4759 , by voice vote, and the full House approved the measure (314-109) on July15. On July 15, the Senate Finance Committee reported out bill, and the full Senate approved themeasure (80-16) on July 16. The bill was sent to the President for his signature. President Bushsigned the U.S.-Australia Free Trade Agreement Implementation Act on August 3, 2004( P.L.108-286 ).

The Australian parliament approved implementing legislation on August 13, 2004, but with two amendments insisted on the by opposition Labour Party, whose support the government needed inorder to get sufficient support to get it passed by the Senate. The amendments stipulate thatpharmaceutical companies that hold drug patents must certify that any legal action they seek to blockcheaper generic drugs from entering the Australian market must have been done in good faith. Thecompanies would be subject to monetary penalties if they violate the certification. The USTR mustcertify to the President that the amendments comply with the FTA as signed by the two countriesbefore the agreement goes into effect. On November 17, 2004, USTR Zoellick and Trade MinisterVaile exchanged diplomatic notes certifying acceptance of each other's implementing legislation butonly after Australia assured the United States that the implementing legislation would be changedto address U.S. concerns. The FTA entered into force on January 1, 2005.

Impact of the USAFTA

The USAFTA will have implications for the U.S.-Australia economic relationship and possiblyfor U.S. trade and trade policy as a whole. Because tariffs on most manufactured goods and manyagricultural products were already low, one can conclude that the removal of the tariffs and otherrestrictions will not result in major shifts in trade patterns, in large increases in the total volume oftrade, or in significant trade diversion. An analysis of the potential economic effects of the USAFTAconducted by the United States International Trade Commission concluded that the largestpercentage increases in U.S. exports to Australia will occur in coal, oil, gas, and other mineralproducts; textiles, apparel, and leather products; and other processed food and tobacco products,although these increases will occur from small bases. The largest value increases in U.S. exports toAustralia will occur in other machinery and equipment and motor vehicles and parts. The largestpercentage increases in U.S. imports from Australia will occur in textile, apparel, and leatherproducts; meat products; and other processed food and tobacco products. The greatest increase invalue of U.S. imports from Australia will occur in meat products. The report estimated that U.S.consumers will realize a net welfare benefit increase of $438 million to $639.4 million if theagreement is fully implemented. (34)

Under the USAFTA, the United States and Australia addressed the few significant irritants in their bilateral economic relationship. Accordingly, the agreement could further solidify an alreadystrong relationship. For Australia, those irritants include U.S. restrictions on beef and dairyproducts. For the United States they include Australian local content requirements in televisionprogramming, sanitary and phytosanitary (SPS) measures, state-sanctioned monopolies in exportsof wheat and other grains, and screening of foreign investments. In some cases, such as U.S.restrictions on beef and dairy and Australian investment screening, the two sides agreed to loosenrestrictions. In the case others, such as the Australian SPS measures and state-sanctionedmonopolies, they agreed to establish mechanisms for further discussion. However, in the case ofsome irritants, such as U.S. import controls on sugar, the two countries agreed no change waspossible.

The agreement may have implications for U.S. trade policy and strategy as a whole. Enactment of the agreement will build on the increased U.S. use of FTAs, especially by the BushAdministration, as a trade liberalization tool. For some observers, FTAs act as building blocks toglobal trade liberalization, especially at a time when the multilateral negotiations in the WTO areproceeding slowly at best. Others have argued that FTAs undermine multilateral trade liberalizationefforts and create a confusing web of intertwining economic relationships.

If approved by Congress, the USAFTA may also set precedents for other FTAs the United States might form. For example, the steps that Australia agreed to take to make the PharmaceuticalBenefits System more transparent may be a model for the United States in future FTAs withcountries that have similar government- subsidized drug programs. Some observers have alsosuggested that the exclusion of U.S. sugar import restrictions from the USAFTA will encourageother trading partners to exclude politically-sensitive products from agreements with the UnitedStates or encourage other U.S. import-sensitive industries to push for exclusion in future tradeagreements.