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Australia's trade and war with Iraq.

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Thursday 13 March 2003

Fredoun Ahmadi-Esfahani, Associate Professor in Agricultural Economics, Faculty of Agriculture, Food and Natural Resources, University of Sydney


Australia's Trade and War with Iraq  


Wars are, by and large, a consequence of deadly clashes of vested interest groups and nations to enhance their political and economic might. A US-Iraq war is not an exception to this rule. The US administration seeks, among other things, to remove Saddam Hussein and install a pro-American regime in Iraq, to enhance its control of the supply of oil from the Middle East, and to increase its share of markets for US products, including military hardware, in this region. The Australian government appears to support the United States in this dangerous game, without having fully considered or disclosed the costs of this war to the economy. I'd like to explore some of the costs and likely benefits associated with the war, and to analyse their implications for trade with Iraq and the Middle East. 


The recent uncertainties surrounding the US economy which, at least in part, stem from an imminent US attack on Iraq have led to a significant reduction in the value of the US dollar relative to other currencies, including the Australian dollar. The higher value of the Australian dollar, while beneficial to importers, consumers and Australians travelling overseas, has already damaged Australian exporters, particularly primary producers, and will reduce their competitive edge in international markets; the edge that saw Australia through the Asian crisis. Accordingly, as US exporters appear to be enhancing their gains, their Australian counterparts are expected to lose their shares in these markets significantly. While a swift US victory in the war may offset some of the loss, an opposite scenario may further reinforce it. 


The impact of the war will be felt particularly on two heavily-traded basic necessities, oil and food. While oil exporters in the Middle East are set to benefit substantially from the expected hike in oil prices, oil importing nations and consumers, including Australian consumers, will be clear losers. With respect to food, Australian primary producers are expected to benefit potentially from higher prices stemming, in part, from hoarding and uncertainties in food markets, at least in the short run.


However, due to the significant anti-US and anti-Australian sentiments that may emerge, both countries are likely to be encountering boycotts from consumers in the region, which may indeed yield a net loss in the long run. 


There is also an additional force at play here which needs highlighting. That is, one of the major consequences of the current international environment is the emergence of the diplomatic rift between the United States, France and Germany. It is highly likely that the United States will retaliate against the latter countries by imposing a trade war on them, if they keep refraining from supporting the US position. The trade-diversion effects of this war are expected to significantly damage all third parties, particularly Australia, as evidenced by the trade war between the United States and Europe in the past two decades. However, in addition to the Middle East, Australia may end up losing market share in South East Asia, given that large Muslim communities live in this region.


Whether or not Australia can afford to lose these key export markets, when the country is still recovering from a savage drought, constitutes a fundamental concern in itself. 


Finally, all these costs will obviously be augmented by the actual costs of the war, which will have to be borne by Australian taxpayers. In considering the actual costs, one must include the opportunity costs of shifting resources from the peace economy (eg, education and health) to the war economy (eg, defence equipment and manpower). Adding to these the human costs of the war in terms of possible loss of lives will yield a clearer "big picture" perspective of the impact of the US-Iraq war on Australia's trade with Iraq and the Middle East. 


In conclusion, the single most important observation I'd like to make from this brief is that, irrespective of how it is being justified by the Australian government, a US attack on Iraq cannot be supported on economic grounds. The war, if won by the United States, is likely to lead to the further enhancement of US hegemony in the Middle East. Whether or not this outcome will be consistent with the national aspirations of Australians, politically or economically, is a topic of significant importance, which should be addressed on another occasion. 


Guests on this program:


Fredoun Ahmadi-Esfahani  

Associate Professor in Agricultural Economics 

Faculty of Agriculture, Food and Natural Resources 

University of Sydney