Feb. 9 (Bloomberg) -- The U.S. and Australia reached a free trade agreement that would reduce tariffs on almost all manufactured goods, while maintaining protections on U.S. sugar and beef and Australian subsidies on pharmaceuticals.

The agreement will benefit U.S. companies such as Caterpillar Inc., the world's largest maker of earth-moving equipment, and Dana Corp., the world's biggest maker of pickup trucks. Australian sugar producers such as CSR Ltd. were excluded from gaining access to the U.S. market.

``It's hard to call this a free trade deal when sugar, the area that was going to benefit Australia most, is out of the equation,'' Ian Ballantyne, general manager of Canegrowers, Australia's largest association of sugar cane farmers, said in an interview.

The U.S. has estimated that the accord will lead to an extra $2 billion a year in exports of manufactured goods alone. Two-way trade between the countries reached $28 billion last year, the office of the U.S. Trade Representative said.

A report commissioned by the Australian government said a comprehensive free-trade deal would increase exports by $2 billion a year, including $442 million in sugar exports.

The agreement struck yesterday was ``extremely disappointing,'' Andree Taylor, general manager investor relations at CSR, Australia's biggest sugar refiner, said in an interview. CSR accounts for about 40 percent of the 83,000 tons of sugar Australia exports to the U.S. Sugar fetches about 21 cents a pound in the U.S., compared to 6 cents a pound on the global market, Taylor said.

``The Australian sugar industry had hoped to increase the quota so more sugar would be sold in the U.S. at this highly attractive price,'' Taylor said.

Compromise

Australian Prime Minister John Howard said the deal was a compromise. ``It would have been against the national interest to give up a deal that is going to be of enormous benefit to the rest of the economy because we couldn't get something on sugar,'' Howard told Nine Network's Today show.

Jack Roney, vice president at the American Sugar Alliance, supported the U.S. decision to keep protections in place for the sugar industry.

``The only way to address global sugar subsidies is through the World Trade Organization,'' Roney said, adding that 120 countries subsidize sugar to some degree. His group represents companies such as Imperial Holly Corp., U.S. Sugar Corp. and Archer Daniels Midland Co.

Autoparts

Australia exported A$15.6 billion ($12 billion) in goods and services to the U.S. in the 12 months to June 30, 2003, led by beef, oil, alcohol and motor vehicles. Companies such as Ion Ltd., which makes alloy wheels for Harley-Davidson Inc. and Pacific Group Ltd., which makes brake parts for General Motors Corp. and Ford Motor Co., exported about A$550 million in auto parts to the U.S. in 2002, according to government figures.

Under the agreement, Australia will get duty-free access on almost 97 percent of its manufacturing exports, worth about $4.5 billion last year. More than two-thirds of tariffs on Australian goods would be cut to zero once the accord takes effect, Trade Minister Mark Vaile said at a news conference in Washington.

Australia will also be able to keep its commodity monopolies for sugar, rice, wheat and barley.

Trade Surplus

Australia is the 13th-largest U.S. trading partner. The U.S. has a $9 billion trade surplus with Australia, according to the Office of the U.S. Trade Representative.

More than 99 percent of U.S. manufactured exports to Australia will become duty free, U.S. Trade Representative Robert Zoellick's office said in the statement. The agreement will benefit the U.S. automobile, auto parts, chemical and paper products industries, according to the statement.

``An off-highway truck that we produce in Decatur, Illinois, is no longer subject to Australian tariffs of over $50,000,'' said Bill Lane, director of government relations at Caterpillar.

U.S. agricultural exports worth $400 million a year would also receive immediate duty-free access once the agreement is approved. Protections for the U.S. sugar industry will remain in place, the statement said.

Beef, Drugs

The agreement also called for phasing out tariffs on Australian beef over an 18-year period, beginning once U.S. beef exports recover from the effects of mad cow disease or within three years, Zoellick said.

``The deal is a quite modest improvement over a long period of time,'' said Don Mackay, chief executive of Australian Agricultural Co., the world's second-largest cattle rancher with a 460,000-head herd. ``It's a lot better than nothing, but it's not going to have much impact on our company.''

The agreement calls on Australia to make its Pharmaceuticals Benefits Scheme, under which the government buys drugs and resells them at a discount to consumers, more transparent. Mark Grayson, a spokesman for the Pharmaceutical Research and Manufacturers of America, an industry trade group, said this may make U.S. drugs more competitive in Australia.

``On its face, it looks like it's a win-win for both patients and the industry,'' Grayson said. ``A transparent process will be much better for patients in Australia because it will give them access to advanced medicine quicker.''

Zoellick did not say whether the agreement would affect Australia's drug-pricing system.

To contact the reporters on this story: Julie Ziegler in Washington at jziegler@bloomberg.net. Fergus Maguire in Canberra at fmaguire@bloomberg.net

Last Updated: February 9, 2004 01:48 EST