February 22nd 2003


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Articles from this issue:

COVER STORY: Getting a grip on Japan

EDITORIAL: Kiwibank: lessons from NZ

CANBERRA OBSERVED: NSW Liberals in the spotlight as election looms

WATER: Farmers' water rights at risk in the Murray-Darling Basin

Sugar Summit held in Brisbane

STRAWS IN THE WIND: Destruction of wealth / Negative gearing

INTERNATIONAL TRADE: Free trade: where do we stand?

WESTERN AUSTRALIA: Protests in Fremantle

Deregulation and growth (letter)

Iraq and Zimbabwe (letter)

Time to get serious about Australia (letter)

QUEENSLAND: Dangers in Qld Nats' move to become 'relevant'

NORTH KOREA: Is time finally up for dinosaur regime?

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INTERNATIONAL TRADE:
Free trade: where do we stand?


by Colin Teese

News Weekly, February 22, 2003
In a paper delivered at the February 2003 National Conference of the National Civic Council, former Deputy Secretary of the Department of Trade and GATT negotiator, Colin Teese, identified the weaknesses in Australia's current trade policies, particularly the downside in a free trade agreement with the United States.

Travel, George Bernard Shaw said, in the first half of the last century, narrows the mind. Many will disagree, asserting the opposite. What isn't in dispute is that travel gives one a new perspective.

I have been fortunate enough to have been in Europe for the past six weeks and perspectives here on economic issues are far different from those in Australia.

In France, both the English and French language press is full of discussion of globalisation, deregulation and privatisation. Not all of it condemnatory. But unlike the similar press in Australia, there is certainly no sign of wholehearted and uncritical support for such concepts.

Back in Australia, News Weekly seems to be the only journal questioning the merits of current economic orthodoxy.

Differences

There is continuing condemnation of European and Japanese economic practice and their unwillingness to accept the merits of US style free market capitalism. The Wall Street Journal is a prime example. It seems quite unashamed in openly urging Europe and Japan to embrace just those policies that have brought the US to its present unhappy state.

Europe, rather more robustly than Japan, rejects the gratuitous US advice. Neither is it interested in US manoeuvres to expand the reach of its free trade agreements, including one with Australia.

It is too busy with its own plans to enlarge and strengthen the European Union, and Europe is growing stronger all the time. It now has its own single currency (the Euro). Introduced at the beginning of 2002, it has replaced former national currencies, except the pound sterling and the Danish Kroner.

After the next enlargement, the EU will be a union of 450 million people with a GDP matching that of the US. No wonder it doesn't choose to be hectored by the US on how it manages its economies.

Of course, per capita GDP in the new enlarged union will still trail well behind the US. Against that, Europe argues that it is taking in seriously under-developed economies in the interest of creating a durable as well as a prosperous Union.

Many believe it is creating a genuine and potentially stronger free trade area than the US, and based on genuine free trade. In the European Union today, and it will be the same after enlargement, all trade between the member countries will not be subject to border restrictions of any kind.

Compare these ambitions with the US, based only upon the type of free trade area the US is aiming to conclude with Australia.

It is worth noting that about 24% of our imports are from the US, which only takes 10-12% of our exports, yet 50% of Australia's exports and imports are with Asia. Why are we pushing for an agreement with the US especially as the US won't open up their agricultural sector to Australia, so the Australia-US trade imbalance almost certainly won't improve with a free trade agreement?

We don't yet know the full details of what might emerge from the Australian-US negotiations, but we do know that there will be many exclusions on the US side at least.

Given what we know for certain from the US side, it is difficult to understand the enthusiasm on the Australian side for any free trade agreement. And this goes for both the Government and the Opposition.

It is true that the Government commissioned a study of what might be the benefits of a free trade agreement with the US.

Unfortunately, it was concluded by a group ideologically committed to the benefits of free trade.

This group has foreshadowed gains of some $8-9 billion to Australia from a free trade agreement with the US. However, when we look at the fine print, we find that those are potential gains. They are conditional upon all trade between the two countries being totally free.

The picture created by this approach is seriously distorted because we know the US has made it very clear that most agriculture will be excluded from any agreement with Australia.

You might ask why a study purporting to show gains to Australia would include gains from trade liberalisation when it knows in advance it would not be taking place. The answer seems to be that it was not known, and could not be known, what would be the exclusions from any negotiated outcome between the US and Australia.

Quite so. And while the study does qualify its findings by saying that its estimate of gains would have to be adjusted downwards according to exclusions, it chose not to recalculate its estimates of gains for those items known to be excluded. We can only guess why, but by failing to make these calculations, the study has denied the government important information which should have been available to it.

The government has made its assessment based on incomplete information.

That is not the only difficulty. There are the further questions of balance, equity and negotiating leverage.

First, is Australia able to conclude a balanced and equitable outcome or at least one which will be considered as such by both negotiating partners?

US farm lobby

Recently, major US farm industries attacked the proposed agreement at hearings in Washington before the US Trade Representative. The milk, sugar and beef industries told the US government that a free trade agreement with Australia would inflict billions of dollars damage on their sectors and harm America's commitment to free trade

The Australian Financial Review recently reported that the three big US farm sectors did not object to market-opening in principle - dairy and beef are net exporters - but insisted that it should be done through the global mechanism of the World Trade Organisation rather than through bilateral deals.

The US National Milk Producers' Federation told the hearing that the unfettered entry of Australian dairy products would cut US farm incomes by $US2.2 billion (A$3.7 billion) a year for the first four years, or 9 per cent of the industry total.

The sugar lobby told the Interagency Trade Policy Staff Committee, a panel including the US Trade Representative's office plus other major US agencies, that Australian sugar would "swamp" the US producers.

The American Sugar Alliance's director of economics, Jack Roney, predicted that "Australia would almost certainly shift the great bulk of its exports, about 4 million tons, to the US market if tariffs were eliminated."

The US National Cattlemen's' Beef Association president, Wythe Willey, called on Congress to intervene in the negotiations.

He said that free trade would do "irreparable damage" to the US cattle industry and told members of Congress that "your constituents depend on you" to protect the industry from harm.

Outside of agriculture, which is not negotiable on the US side, what is it that Australia wants or needs from America? US industrial tariffs generally, are at low levels, except for a few sensitive items which will not be open for negotiation. And, importantly, some of these items are among the very few US industrial tariffs of importance to Australia.

So nothing we want either in agriculture or industrial tariffs appears likely to be on the table for negotiation.

On the other hand, the US seems to have constructed a long and ambitious wish list of demands upon Australia.

Almost all lie outside the trade in goods and will be pursued bilaterally and in the WTO at the same time.

They include some which will be especially politically sensitive for Australia, some of which will touch upon health considerations, and still more which involve concessions from Australia in the area of trade in services rather than goods.

Let us examine each of these in a little more detail. Many of these areas are not yet politically sensitive because the public does not know enough of what Australia will be asked to give up. And here it is hard to avoid the conclusion that the government hopes to be able to push the detail of any concessions past an uninformed public.

But one is already politically sensitive. And that relates to the quarantine restrictions maintained by Australia, which prevent the entry of certain categories of goods into this country.

Most of these are agricultural products or those derived from agriculture. In almost every case, we maintain these restrictions to safeguard the livelihood of our farmers against financial loss arising from the entry into Australia of product from other countries which carry diseases not present in Australia.

The rules of the World Trade Organisation on this are clear. So long as the restrictions we apply are not disguised trade restrictions, that they genuinely applied for reasons of quarantine, then they meet WTO rules.

Now all this sounds fine, but there will hardly ever be an example of a case where the two sides to any dispute about quarantine measures can agree. Those wanting market access will always insist that their product contains no threat to the spread of any disease.

The rules leave the final say with us, provided we back up our claims with soundly based scientific evidence.

Tactic

During the course of the negotiations, the US will be trying to get around these rules. It will try to have our negotiators agree to a set of rules which limit or otherwise dilute the power the WTO rules give Australia to decide quarantine outcomes and our right to keep out diseased goods.

That's one area of sensitivity.

Now, let's look at another. It is called rather grandly "intellectual property rights". It means, if we agree, that Australia will enact laws to protect the rights of patented goods in the same way they are protected in their home countries. We won't be able to use cheap copies.

We have already taken on some obligations of this kind in the last round of trade negotiations, which were concluded in the early 1990s.

In that case the agreement was concluded under the umbrella of trade liberalisation. This is the exact opposite. Let me share with you an example provided for me a year or so ago.

It involved the owner of a light aircraft of US manufacture. Apparently, as a part of routine maintenance, a fairly simple piece of equipment is replaced as a safety precaution. It was possible for this part to be fabricated by a local manufacturer for a few dollars. Because of an agreement we reached in 1992 the owner of this aircraft was obliged to use a replacement provided by the aircraft manufacturer at a cost of some thousands of dollars.

If the US has its way, this kind of trade restriction will be extended to an ever-widening range of goods.

GATS

Some will already be aware of negotiations which took place in Australia towards the end of last year about the possibility of making cheaper versions of branded drugs to developing companies.

Success was proclaimed in those talks, prematurely, as it turned out. They have foundered, but will be revived in the WTO later this year.

Succeed or not, the outcomes will harm Australia's interests. Under the new rules being promoted Australia will be denied access to cheaper unbranded health giving drugs in the same way my pilot friend was forced, unnecessarily, to pay more for his parts.

This is all part of a push by the US in the new round of negotiations in Geneva on the General Agreement on Trade in Services, the GATS.

Australia has signed the GATS, a WTO multilateral trading agreement. Currently Australia is making offers to open up areas of service industries, in exchange for other countries opening up their service industries to Australian companies.

In Parliament, the Australian government has said that it does not intend to publish the actual text of these requests, nor does it intend to publish the actual text of requests received or documentation analysing the impact of these requests.

Ian Campbell, Parliamentary Secretary to the Treasurer, has said that the government is not aware of any other WTO member that has published the requests it has received from or the requests it has made of other WTO members. Release of requests made by Australia would also be inconsistent with commercial-in-confidence undertakings that have been provided by the Department of Foreign Affairs and Trade industry stakeholders.

But the Democrats have pointed out that Australia should be following the precedent set by Canada and the United Kingdom. Canada's Trade Minister, Mr Pettigrew has released a summary of all of Canada's requests, which runs to some 30 or 40 pages, which is well beyond the two-page document on the DFAT web site.

The only information we have in terms of the requests which have been made by Australia, are dot points as to the headings of the sections that have been requested. No detail is provided. There is no information provided either on what requests have been made from Australia, other than the oft-repeated insistence that the government will consult widely in formulating its response to the requests.

The service industries subject to negotiations are:

  • Accountancy services
  • Architecture services
  • Business services
  • Construction and related engineering services
  • Distribution services
  • Education
  • Engineering services
  • Environmental services
  • Financial services
  • Legal services
  • Maritime transport services
  • Telecommunication services


The DFAT web site indicates those industries Australia supports opening to foreign ownership i.e., telecommunications including Telstra. DFAT says a large number of countries have scheduled limitations on the legal form which commercial presence may take, for example, requiring joint ventures with local partners. In Australia's experience, such limitations on market access inhibit the development of an efficient telecommunications industry. Australia proposes that these limitations be removed from schedules of commitments.

Now perhaps I should digress a moment to clear up a confusion.

If you think I have moved without warning from a discussion about a free trade agreement between Australia and the US to a new round of WTO negotiations, you are right. I have because the two are really inseparable. If only because they will be taking place at the same time.

It isn't clear how any of this will work out in practice, but we can expect that the US will press in one forum for advantages in the other.

Negotiating on the one hand bilaterally, with a partner which far outranks us in power, and on the other in an international forum also dominated by the US, is a very dangerous strategy. And one we can hardly exploit to our advantage.

The agreement on the trade in services which I have already shown has gone against us in drugs, threatens us in the same way in the areas of health, hospital and education support policies, legal services, telecommunications.

The real danger is that for reasons I have already shown, the US has big demands on us in a bilateral negotiation on a free trade agreement, but little or nothing to offer in return.

If our negotiators are skilled and tough (and that is no certainty), the US will quickly realise that their best hopes lie in the WTO. Meanwhile, they will have uncovered much of our negotiating strategy in a process, which has gained us nothing.

The forthcoming processes on trade negotiations, both bilaterally and multilaterally, are fraught with dangers for Australia.

All the rest of us can do is hope that those working on our behalf are up to the job ...




























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