Australian-U.S. Economic Relations

CRS Report for Congress
Australian-U.S. Economic Relations
William H. Cooper and Wayne M. Morrison
Specialists in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Australia and the United States maintain extensive economic relations. Each is a
strong proponent of more liberalized trade in the World Trade Organization. Australia,
like the U.S., maintains relatively few trade barriers. U.S.-Australian economic ties
have expanded steadily over the past several years, although some trade disputes have
arisen, especially in regard to agriculture issues. In 2002, the two nations agreed to
begin negotiations for a free trade agreement, which, if achieved, could further boost
bilateral economic ties. This report will be updated as events warrant.
Australia’s Economy1
Australia is a country whose size is nearly as large as that of the United States, but
with a significantly smaller population–about 19.6 million people. It can be described
as “a Western country located in the Asia-Pacific region with close ties and affinities with
North America and Europe and a history of active engagement throughout Asia."2
Australia has a developed economy: in 2002, its gross domestic product (GDP) ofth
$397 billion was the world’s 15 largest. Australia’s 2002 per capita GDP on a
purchasing power parity basis (a common measurement of a country’s living standards)th3
was $27,800, the 9 highest in the world. Based on this measurement, Australia’s living
standards are higher than those of such major economic powers as Japan ($26,930),4

Germany ($27,100), and France ($26,540), but lower than those of the U.S. ($36,390).
1 All data with a “$” sign in this report are U.S. dollars.
2 Australian Department of Foreign Affairs and Trade, Advancing the National Interest,
Australia’s Foreign Trade and Policy Paper. Available at [http://www.dfat/].
3 Economist Intelligence Unit (EIU), Country Indicators. Much of the 2002 data used by EIU
are estimates.
4 Purchasing power parity (PPP) measurements are used to convert foreign currencies into U.S.
dollars based on the actual purchasing power of such currencies (derived from surveys of the
Congressional Research Service ˜ The Library of Congress

Australia’s economy has enjoyed relatively healthy growth over the past few years, due
largely to productivity gains, structural reforms (such as tax reform, deregulation and
privatization, and trade liberalization), and sound macroeconomic policies (such as tax
cuts, balanced government budgets, and anti-inflationary monetary policies), making it
one of the best performing economies among the 30 nations that make up the
Organization for Economic Cooperation and Development (OECD).5 From 1992 to 2001,
Australia’s real GDP grew at an average annual rate of 3.8% (compared to 3.3% for the
United States). The OECD estimates that Australia’s real GPD grew by 3.7% in 2002 and
projects it will rise by 3.3% in 2003 and by 3.8% in 2004.6
Australia maintains relatively few trade barriers.7 Tariffs are low (the average
applied tariff is 4.3%8) and the trade regime is considered to be highly transparent. In
2002, Australia was the world’s 25th largest exporter, and 19th largest importer, of
merchandise products.9 Its principal exports include wheat, barley, beef, lamb meat,
dairy products, wool, coal, iron ore, machinery, and transport equipment. Principal
imports include manufactured raw materials, machinery and transport equipment,
computers and office machines, consumer goods, and petroleum products. Australia’s top
five merchandise trading partners in 2002 were Japan, the U. S., China, South Korea, and
New Zealand (see Table 1).10 The United States was Australia’s second largest
merchandise export market and its largest source of merchandise imports. Australia
incurred a $6.3 billion trade deficit with the United States.
Foreign direct investment (FDI) in Australia at the end of 2001 totaled $111.1
billion, making Australia the world’s 12th largest destination for FDI. The United States
is the largest source of FDI in Australia. By the end of 2001, U.S. investors had direct
investments in Australia valued at $34.0 billion on an historical-cost basis (valued at the
cost at the time the investment was made). Over the same period, Australian direct
investments in the United States were valued at $23.5 billion.11 According to Australian
data, over half of Australia’s total FDI has gone to the United States.

4 (...continued)
prices of various goods and services in each respective country).
5 OECD, Economic Surveys, Australia, March 2003, p. 7.
6 Ibid, p. 34
7 Complaints by Australia’s trading partners have dealt with such issues as domestic and export
subsidies (especially for agricultural products, autos, and certain service sectors), trade and
investment barriers on services, frequent use of anti-dumping measures, failure to join the WTO
Agreement on Government Procurement, and strict sanitary and phytosanitary regulations.
8 High tariffs exist in a few sectors, mainly autos, textiles, clothing, and footwear. The Australian
government has announced that it will complete a reduction in rates for these products by 2005.
9 Economist Intelligence Unit (EIU), Country Indicators.
10 Including trade in services makes the United States Australia’s overall top trading partner (i.e.,
the top trading partner in goods and services) followed by Japan, China, the United Kingdom,
and New Zealand. Australian services exports to the United States were $3.3 billion and its
imports were $3.7 billion, making the United States Australia’s largest trading partner in services.
11 Department of Commerce, Bureau of Economic Analysis.

Table 1. Australia’s Major Merchandise Trading Partners: 2002
($ billions)
CountryTotal TradeExportsImportsTrade Balance
J a pan 20.6 12.0 8.6 3.4
United States18.96.312.6-6.3
China 11.5 4.5 7.0 -2.5
South Korea8.
New Zealand6.
Total Australian trade134.465.069.4-4.4
Source: Australian Bureau of Statistics.
U.S.-Australian Trade Relations
According to U.S. data, Australia was the 13th largest destination for U.S. exports
($13.1 billion) and the 28th largest source of U.S. imports ($6.5 billion) in 2002 (see
Table 2). Major U.S. exports to Australia included aircraft and parts, road vehicles, and
specialized machinery. Major U.S. imports include meats, petroleum products, and metal
ores and scrap (see Table 3).
Table 2. U.S. Merchandise Trade with Australia: 1998-2002
($millions and % change)
199819992000200120021998-2002% change
U.S. Exports11,92911,81112,46010,94513,0849.7
U.S. Imports5,3825,2906,4396,4796,47820.4
U.S. Trade balance6,5476,5216,0214,4666,6060.9
Source: U.S. Census Bureau.
Australia and the United States share similar economic and trade goals. Both are
strong supporters of achieving significant trade liberalization in agriculture and services
in the current round of multilateral negotiations in the World Trade Organization (WTO),
while at the same time, both are pursuing market access through regional and bilateral
free trade agreements. The United States and Australia maintain relatively stable
commercial relations; they have brought only a few dispute resolution cases against each
other in the WTO.12

12 The United States won cases against Australia for its use of auto leather subsidies and import
restrictions on salmonids. Australia won cases against U.S. safeguard measures on lamb imports
and U.S. anti-dumping subsidy offsets (the “Byrd Amendment”).

Table 3. Major U.S.-Australian Trade Commodities: 1998-2002
($millions and % change)
SITC 2-Digit Commodity Category199819992000200120021998-2002% change
Major U.S. exports to Australia
Transport equipment (mainly aircraft and
parts)942 1,322 1,353 1,060 3,235 243.4
Road vehicles 857 764 943 835 945 10.3
Specialized machinery976 830 866 850 806 -17.4
Major U.S. Imports from Australia
Meats577 625 826 1,049 1,074 86.1
Petroleum and related products346 312 664 463 584 68.8
Metalliferous ores and metal scrap659 574 739 556 513 -22.1
Source: U.S. International Trade Commission (USITC) DataWeb.
Proposed U.S.-Australian FTA and Negotiations
On November 13, 2002, United States Trade Representative (USTR) Robert Zoellick
notified Congress that the Bush Administration would begin negotiations with Australia
on a free trade agreement (FTA). The negotiations are scheduled to begin on March 17,

2003, in Canberra, Australia’s capital. The second and third rounds of negotiations are13

scheduled to take place the weeks of May 19 and July 21, respectively. While the U.S.
business community has indicated strong support for the negotiations, the American
agricultural community appears to be ambivalent at best. Although negotiations have not
yet begun, key interest groups have already weighed in with their concerns.14 The
following sections present a discussion of the issues that are likely to emerge in
negotiations on a U.S.-Australian FTA.
Agricultural Issues
A consensus exists among trade policy experts that agricultural issues will be the
greatest challenge in the bilateral FTA negotiations.15 As major agricultural exporting
countries, the United States and Australia are, for the most part, allies in multilateral
negotiations on agricultural issues. Nevertheless, the movement towards a tighter
economic relationship under an FTA exposes fault lines on government policies and
practices on trade that seek to assist or protect specific agricultural products.

13 International Trade Reporter. January 24, 2003. p. 182.
14 Trade liberalization often creates both winners and losers among producers. Economists argue
that lowering trade barriers benefits consumers (through lower prices) and usually promotes
greater economic efficiency by redirecting resources to their most productive use.
15 In 2002, U.S. agricultural exports to Australia totaled $317 million, accounting for 2.4% of
total U.S. exports to Australia. U.S. agricultural imports from Australia were $1.8 billion, which
was 28.2% of total U.S. imports from Australia.

Many of Australia’s concerns over U.S. trade barriers pertain to U.S. agricultural
policies. Primarily, Australian officials have argued that the farm bill that was enacted
in 2002 (The Farm Security and Rural Investment Act of 2002, P.L.107-171) contains too
much assistance to U.S. farmers providing them with an unfair competitive advantage
over Australian farmers. They further argue that the subsidies undermine efforts by the
United States, Australia, and other agricultural exporting countries to get WTO members
to agree to reducing agricultural supports and other trade barriers. Australia may attempt
to seek a reduction in U.S. subsidies to U.S. farmers.
Australia also takes issue with U.S. tariff-rate quotas (TRQs) on dairy products,
sugar, and beef.16 Regarding dairy products, one Australian study cites TRQs on cheeses,
skim milk powder, butter, and butter-oil as impediments to Australian exports to the
United States and likely Australian targets under an FTA. The study also mentions
Australian fresh milk producers’ concerns with testing requirements under the Federal
Milk Import Act of 1927 as an impediment to selling in the U.S. market. In addition, the
study states that the assigned share for Australia of 8.3% of the total quota on sugar
imports heavily restricts Australian sugar imports and also cites the U.S. TRQ on beef,
the leading Australian export to the United States.17 Australia also has identified other
U.S. barriers to its agricultural exports: U.S. TRQs on cotton and peanuts; and U.S. tariffs
on wool, a range of fruits, vegetables, nuts, certain cut flowers, wheat gluten, rice,
vegetable oils, wine, margarine, chocolate and cocoa preparations, and bovine leathers.18
Although the U.S. business community as a whole has indicated strong support for
an FTA, the American agricultural community appears to be ambivalent at best. U.S.
producers of dairy, sugar, and beef oppose a U.S.-Australian FTA that would seek to
reduce U.S. import restrictions on their products. The National Milk Producers
Federation (NMPF) has argued that the benefits of an FTA would be decidedly
unbalanced in favor of the Australian dairy industry. The NMPF argues that the FTA
would open up the U.S. market to Australian dairy producers, increasing import
competition for U.S. producers. However, U.S. producers’ exports to Australia would not
be expected to increase given the small size of the Australian economy.19 The National
Cattlemen’s Beef Association opposes the FTA on similar grounds of “no net benefit” to
U.S. beef producers.20 The American Sugar Alliance (ASA) has argued that the
elimination of restrictions on sugar imports from Australia would cause major harm to the
U.S. sugar industry. The ASA also cited trade distorting practices that would prevent
U.S. exporters from gaining access to the Australian market. These practices include

16 TRQs are restrictions in which a limited volume of a product can be imported at a low
(sometimes zero) tariff rate, but imports above that limit can be imported only at another,
usually much higher, tariff rate.
17 Center for International Economics. Economic Impacts of an Australia-United States Free
Trade Area. Prepared for Department of Foreign Affairs and Trade (Australia). June 2001. p.


18 Australia Department of Foreign Affairs and Trade, "Free Trade Agreements: United States"
at [].
19 Testimony Presented on Behalf of the National Milk Producers Federation Before the Trade
Policy Staff Committee, Office of the United States Trade Representative. January 15, 2003.
20 The National Cattlemen’s Beef Association, press release, January 15, 2003.

“single desk selling” in Queensland (which accounts for 95% of Australian sugar
production), where all raw sugar is bought and sold by a state-owned entity, and
Australian government subsidies for the domestic sugar industry.21 Australian exports of
wheat and rice are monopolies run by government-run commodity boards which the U.S.
government has cited as trade barriers and will likely be targeted during FTA negotiations.
Sanitary and Phytosanitary (SPS) Measures
U.S. exporters of agricultural products have long complained that Australian
government SPS requirements violate Australia’s obligations under the WTO Agreement
on Sanitary and Phytosanitary Measures. They contend that Australia’s quarantines and
health measures are excessively restrictive, are not scientifically grounded, and have
restricted U.S. exports of Florida citrus, stone fruit, chicken, pork, apples, pears, and
corn.22 Australian officials argue that these requirements are necessary to protect the
health of its citizens and to protect Australian produce from disease. The Australian
ambassador to the United States stated that Australia would strongly defend its SPS
measures against change in FTA negotiations, arguing that they are scientifically based
and fully transparent.23
Investment Restrictions and Other Issues24
All foreign investments in Australia are subject to government screening and
approval. While this process has apparently not stopped U.S. investors from establishing
successful operations in Australia, representatives of the U.S. business community insist
that the process does not conform to the principle of “national treatment,” that is,
treating foreign investors no less favorably than domestic investors. The U.S. business
community has called for its elimination under an FTA or at least for the Australian
government to make it more transparent. USTR Robert Zoellick has stated that he would
seek a commitment from Australia to eliminate or reduce trade distorting investment25
measures, including the screening and approval process. The Australian government has
indicated that changing the process might be difficult. Other trade issues that the United
States might seek to address in FTA negotiations include Australia’s price controls on
prescription drugs, enforcement of intellectual property rights, and trade barriers on
services and government procurement. New Zealand has indicated interest in
participating in a FTA with the United States and Australia, or for a separate FTA with
the United States.

21 American Sugar Alliance. Submission to the United States International Trade Commission
Hearing Investigation Nos. TA-131-24 and TA-2104-04. Proposed Free Trade Agreement
Negotiations Between the United States and Australia: Advice Concerning Probable Economic
Effect. Washington, D.C. January 21, 2003.
22 United States Trade Representative. 2002 National Trade Estimate Report on Foreign Trade
Barriers. Washington. p. 9.
23 Inside U.S. Trade. February 14, 2003.
24 For a broader discussion of U.S.-Australian issues, see CRS Report RS21358, Australia:
Background and U.S. Relations, by Thomas Lum.
25 Text: Zoellick Letter on Australia FTA, November 15, 2002. Reproduced by Inside US Trade.