The potential for a free trade agreement (FTA) encompassing the United States and Australia was put forth by the United States Trade Representative (USTR) in March 1997. This report is an analysis of the USTR proposal, and shows that an accession of the Closer Economic Relationship (CER) between Australia and New Zealand to the North American Free Trade Agreement (NAFTA) would provide significant benefits to both parties.
The report first examines the political situation in Australia and the United States that such a proposal faces and concludes that Australia's current infatuation with Asia is a substantial obstacle to the negotiation of a CER-NAFTA linkage. It then conducts a cost benefit analysis of a linkage and shows how the benefits of closer trading relations with the United States are systematically undervalued in Australia, while the costs are significantly overstated. Finally, a computable general equilibrium model of CER-NAFTA liberalization is conducted using Global Trade Analysis Project methodology. This model shows that the CER would experience a net gain in exports of between $2.9 billion and $1.9 billion while NAFTA would experience a net gain in exports of between $3.5 billion and $2.0 billion. These gains would occur without significant trade diversion from East Asia.