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The Korea FTA, one year on: Those touting the benefits are cherrypicking results

The Korea FTA, one year on: Those touting the benefits are cherrypicking results

Happy first birthday to the Korean Free Trade Agreement (KAFTA), which came into effect on 12 December last year. At the time, Trade Minister Andrew Robb said:

KAFTA will increase export opportunities across a wide range of industries: from beef, wheat, sugar, dairy, wine, horticulture and seafood, to automotive suppliers, and the resources and energy industries.  It will also open up significant opportunities for service providers.

Let's check the data, one year in. Here is what has happened to Australia's merchandise exports to Korea.

It certainly doesn't look like exports have increased. But this graph is a bit unclear as the monthly data jumps around a bit. Let's look at a graph with an annual frequency, with a forecast of 2015 based on the growth we have seen in the first 10 months of this year versus the first ten months of last year (that's all the available data).


Alright, I am being a little unfair. There are some transitional arrangements, so not all trade barriers were removed on day one. And also, what has happened here is likely a resources story. Commodity prices have fallen, so exports have dropped off. But the impact of such factors also proves a point, which is that many things have larger effects on trade than preferential agreements. The benefits from these agreements are typically small beer, which means we should carefully consider the costs.

That's something we do not do, and KAFTA is a classic case. [fold]

In KAFTA, we extended some of our intellectual property (IP) protections, which is costly for Australia because we import intellectual property (extending protection makes IP more expensive). In the National Interest Assessment on KAFTA, which is supposed to evaluate the impact of the deal, no effort at all was made to evaluate the cost of this provision.

As I've explained before ('Discuss; Upsides not worth the downsides in FTAs'), I think IP provisions are costly in a broader sense. In many cases, intellectual property protections inhibit innovation.

But let's get back to the small beer. After the impressive balance of payments figures were released on 1 December, Robb put out a press statement that had this to say:

Australia's new Free Trade Agreements are also providing new opportunities for exporters with data showing strong growth in a number of our exports to Korea and Japan since those agreements entered into force. Agricultural and horticultural exports have flourished in particular.

This 'strong growth' is not evident from the graphs above, but let's focus on 'agricultural and horticultural exports'. This reference takes me back to September, when Barnaby Joyce was trumpeting the effect of KAFTA . In particular he noted that over the first six months of KAFTA, beef exports were up around $150 million. Let's suppose that trend continued, so they were up around $300 million for the year. That's nice, but we should recognise that that's not a magical increase of $300 million.

Firstly, these increased exports may have just been diverted from another market to the Korean market where the price was a bit better. And, secondly, look at the graph. Exports in 2014 were about $20 billion; $300 million represents about 1.5% of that. Horticulture was also mentioned by Joyce. Cherry exports to Korea were $3.5 million in the first seven months of KAFTA. At this point, it is important to keep in mind the difference between millions and billions. I always find this instructive: a million seconds is 11.5 days, a billion seconds is nearly 32 years.

I mean no disrespect to the hard-working cherry farmers out there, but they aren't big. If they are held up as a KAFTA success story, then there isn't much else going on.

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