Dynamic Gains and Market Access Insurance: Another Look at the Australia–US Free Trade Agreement

Abstract

We revisit the benefits of the Australia-US Free Trade Agreement (AUSFTA) and, in particular, evaluate the insurance value of this agreement in the face of regional and global trade wars. The insurance benefits are quantified by comparing the AUSFTA against alternative scenarios where some or all regions raise tariffs by 10 percentage points. Issues regarding expectations and the timing of potential trade wars are considered by using a dynamic model. The potential gains relative to these alternative trade war status quo scenarios are found to be as much as four times larger than the traditional efficiency gains.

The Impact on Australia of Trump's 45 per cent Tariff on Chinese Imports

“…McKibbin and Stoeckel () find similar results (adjusted for scale) for GDP in a simulation of a similar “trade war,” in which all countries impose tariffs of 10 per cent. In a simulation of a similar global trade war with 10 per cent tariffs, Harris and Robertson () find that if the Australia‐US free trade agreement was maintained in the face of a trade war, there would be a benefit to Australia of one per cent of GDP per capita.…”

Preferential trade agreements as insurance

“…This convexity will be greater for a PTA that provides members with greater degrees of freedom in tari¤ choice and greater degrees of tari¤ policy coordination. 10 As such, however, as uncertainty increases in a given random variable, the option value of a PTA (and the Nash equilibrium member welfare associated with it) rises by more the more convex the PTA's member welfare function is with respect to that random variable. In this way, as the level of uncertainty changes, the relative attractiveness of PTAs can also change.…”

“…Harris and Robertson (2009) use a dynamic general equilibrium framework to estimate the potential bene…ts to Australia of the Australia-US FTA in the case of a global trade war occurring. While they term this the "insurance bene…t" of the agreement, they do not use the term "insurance" in the formal way intended in our paper Harris and Robertson (2009). do not explicitly model uncertainty or country attitudes to risk.…”

Foreign Direct Investment in Australia Following the Australia–US Free Trade Agreement

“…Modelling of the agreement focused mainly on the implications for trade in goods and services and often explicitly ignored the potential benefits flowing from the liberalisation of investment rules (see, for example, Siriwardana 2007). Most analyses also ignored political economy considerations; for example, the potential value of the agreement in securing Australia's bilateral trade and investment with the United States against a possible future resurgence of global and/or US protectionism (Harris and Robertson 2009).…”