We hear a great deal about a "whole of government" approach to national issues. We also hear a lot about how the Howard government is determined to tackle problems such as salinity created by water usage and agricultural expansion.

The National Party leader John Anderson has even said his dedication to tackling the nation's water problems is why he recently decided not to step aside in favour of his deputy Mark Vaile.

It was not the only disappointment for Vaile, who heard the news while attending the Doha round of global trade talks in Cancun, Mexico, as Trade Minister. The talks failed, partly because the US and Europe would not make significant commitments to dismantling the barriers to agricultural imports.

The big hope now is that the US will be more generous to Australia in a bilateral trade agreement due to be finalised by the end of the year. Sugar growers and dairy farmers are supposed to be the main winners.

Just why Australia would want to expand the sugar and dairy industries is unclear. Taxpayers are funding a restructuring package, partly to reduce the
number of sugar growers. Consumers have paid well over $1 billion in levies to subsidise dairy farmers to leave the industry.

The problems are not confined to the additional costs of the extra water needed for expanded production. The weekly newsletter Chalmers in Canberra has obtained a copy of Treasury's comments on the package of sugar industry assistance that went to cabinet last September.

The confidential submission says "the fundamental problem with sugar is that it is unprofitable at the prevailing world price". According to the Australian Bureau of Agricultural and Resource Economics, the index of sugar prices has fallen in the past 10 years from 112.7 to 79.8, while the index of prices paid by farmers has risen from 94.9 to 119.4.

This does not mean the farmers are inefficient, nor that world prices aren't corrupted by the production subsidies in the US and Europe. But it does suggest we should be wary of expanding the industry, especially once the associated environmental costs of extra water, pesticides, fertilisers and energy are taken into account.

Unfortunately, the modelling work done for the government by the Centre for International Economics does not include these costs in its conclusion that there would be (relatively small) net gains from an FTA. (Other modelling by the consultants ACIL concludes there would be a small net loss).

The CSIRO has done impressive work calculating how much water is used by rural industries. One study (by Barney Foran and Franzi Poldy) shows each dollar of sugar produced requires 1239 litres of water compared with 1470 litres for the dairy industry and 7458 litres for rice. Another scientist, Wayne Meyer, points out that sugar fares much better than beef on the amount of water needed to produce the same unit of food energy.

But calculating the environmental impact of using extra inputs is more complex than simply looking at overall volumes. For example, there is the question of the impact on the Barrier Reef from chemicals used in cane growing. Unless these sorts of "externalities" are recognised, it is not really possible to talk sensibly about an FTA.

Nor is there much point in the common euphoria about how "wonderful it would be if Australia had access to the US market of 280 million people". The Centre for International Economics notes that the US and Australian economies are already among the world's most open.

With few exceptions other than agriculture, Australia enjoys good access to the US. In turn, the US faces relatively small tariffs on the export of cars and footwear, clothing and textiles to Australia.

The centre's modelling in which sugar and dairy comes out tops assumes that all US agricultural barriers are removed.

A more realistic assumption is that George Bush will not scrap all barriers in a presidential election year, especially while his brother Jeb is governor of the main sugar-growing state of Florida.

The modelling should be redone when the upper limits of the US offer are known, and proper account is taken of the extra water and other inputs needed to expand agricultural production. A whole of government approach demands nothing less.