June 14th 2003

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Articles from this issue:

COVER STORY: House prices, mortgage rates to decide next election

EDITORIAL: Grave implications in mercy death case

QUEENSLAND: Premier Beattie's double standard on child sex abuse

Sugar industry survey opposes deregulation

STRAWS IN THE WIND: Old friends and new / Of bats and men / Little expected / Little people

Free trade and the USA: it isn't getting any better

COMMENT: Children already have advocates: their parents

Superannuation reform (letter)

Sir William Deane's courage (letter)

National Service (letter)

Tax cuts for families? (letter)

East Timor: a year after independence

WATER: Environmental flows could cost taxpayers billions

COMMENT: How deep is our 'killing culture'?

SOUTH ASIA: Can India, Pakistan reach an accommodation?

FAMILY: Canada sets the way on gay parenting

KOREA: Cold War flashpoint still heating up

BOOKS: Berlin: The Downfall 1945, by Anthony Beevor

BOOKS: Marriage and Modernisation, by Don Browning

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Free trade and the USA: it isn't getting any better

by Colin Teese

News Weekly, June 14, 2003
Readers of the Australian Financial Review (May 31-June 1) may well have followed the truncated debate on the subject of the US-Australia Free Trade Agreement between John Quiggan and Wolfgang Kasper.

The respective approaches of the two men are interesting and the differences between them are quite fundamental. And what becomes immediately apparent is that the basic contradictions inherent in the notion of what we call economic rationalism are present, in larger or smaller degree, whenever the issue of the free trade agreement is debated.

Essentially Mr Kasper urges us to ignore the facts and have faith. Faith is justified, he says, if we allow ourselves to imagine all artificial barriers to our trade to and from the US will disappear. Moreover, he informs us, since multilateralism is dead, we have no alternative. We must sweep away concern about detail in the certain knowledge that the total integration of our economy into that of the US is as essential as it is inevitable.

Professor Quiggan's more cautious approach tackles Mr Kasper head on. He concentrates on what Mr Kasper chooses to ignore - the detail. And, of course, the devil is always in the detail. As any negotiator will tell you, agreement in principle is the easy part; the difficulty comes for those who must try to put flesh on the bones of an agreement.

In contradiction of Kaspar, Quiggan insists that integration of our economy with that of the US is a misnomer. He reminds us of an important fact. When an ant merges with a giant, the effect - and there can be no other - is that the ant will accept the institutions and practices of the giant, not the other way around.

Effectively, the Quiggan position believes that to conclude any free trade agreement with the US will require us to become, in reality, another State of the US without any of the Constitutional protections enjoyed by the existing States; while, at the same time, being required to endure most of the impediments to entry to the US as apply to all outsiders. What we are being offered does not remotely resemble the free trade area which exists in the European Union.

Though Mr Kasper apparently would wish it to be otherwise, we know for certain that the US market will not, in its entirety, be thrown open to us; certainly not in the case of agriculture, and almost certainly not in other sensitive areas of manufacturing industry.

The question therefore becomes: how much of our sovereignty are we prepared to surrender in return for so-called economic benefits which may turn out to be mainly illusion?

In some instances, what the US wants from the agreement on their side is the opposite of free trade. Pharmaceuticals, for example. In that area, the US is asking that we add drugs to the commitment we have already given (unwisely) in some other areas of imports - that is, the right to import cheaper copies of particular goods. At the moment we are able to buy medically important drugs at 'dumped' prices from sources outside the US - that is at prices lower than the cost of production by the big US drug companies.

Under the rules of any new free trade agreement we will not be able to do that any more; as a consequence, medical costs in Australia will rise.

Moreover, the whole area of 'dumping' requires further examination in its own right. There is a tendency for ordinary people to turn their minds away from its consideration because it is too difficult to understand. They should resist the temptation. It may be technical, but it is not difficult.

Traditionally, all countries - whether or not they believe in trade liberalisation - have enacted laws to restrict the entry of imported goods offered at less than the selling price in the home country. That selling practice is called 'dumping'. The reason has been that if countries' permit the entry of 'dumped' foreign goods, then it becomes impossible for a local producer of the same goods to survive.

An example is canned tomatoes currently being imported into Australia from Italy. They have been offered for sale here at prices well below their cost of production in Italy. If Italian canned tomatoes are allowed that privilege, the result will be to drive our tomato growers and canners out of business. The same can be said for other 'dumped' imports of agricultural and manufactured imports competing with domestically produced alternatives.

So, how do we - and other countries - deal with this problem? We put a tax on the import goods equal to the amount of dumping. The imported goods can still enter in competition with the local product, but will be denied any unfair price advantage.

Now the detail of the reasons why it suits some countries to sell certain products below home prices is technical, and need not bother us here. Essentially, it has to do with the difference between large and small economies and surplus production generated with the benefit of subsidies.

Countries don't usually concern themselves with the issue when there is no domestic industry likely to suffer harm.

And this is precisely the point with pharmaceutical imports and the US. We don't make them here, so why should our consumers pay more to protect the interests of US drug companies when the same goods are being offered to us more cheaply?

Yet that is what the US is asking of us in the proposed free trade agreement. Worse still, they are calling it free trade when it seems to be just the opposite.

As straightforward as this all seems, the issue of dumping is shrouded in controversy - and, dare it be said, contradiction. Economic rationalists believe dumped imports should not be taxed. Their belief is that dumping is advantageous to the country receiving dumped goods. Consumers should, they insist, enjoy the price benefits of subsidies applied to production in other countries.

They reject entirely the idea of shielding a local industry from unfair competition. What this view ignores is that dumping is almost exclusively the privilege of very large manufacturers in a large economy, challenging very small manufacturers in a small economy. Australia is a perfect example.

Put simply, in a world without dumping rules there is nothing which Australia now produces - agriculture or otherwise - that we cannot buy cheaper from overseas. Not because others can necessarily produce cheaper or better than us, but because large producers - especially those with the benefit of subsidies - can afford to sell us the fag end of their output at below cost.

So even if you assume consumers - rather than middlemen - reap the benefit of the lower prices, consumers are also citizens who need employment if their nation is to prosper. And, of course, if the nation wants to import everything because it's cheaper, the obvious question then arises, how can it be paid for?

In that context it is illuminating to remember that our present and, as yet, not totally permissive attitude to imports has led us to the position where we are borrowing about A$30 billion a year to fund imports of consumer goods.

All of this is relevant to our discussions of the detail of a free trade agreement with the US and it is brought into clear focus in a piece in the Financial Review (June 2) by the Executive Director of the Centre or International Economics.

It will be recalled that the Centre persuaded the Australian Government to pursue the idea of a free trade agreement with the US - by pointing to total benefits of A$8 billion if all the trade barriers between the two countries were removed. Presumably the Centre was aware that was an unrealisable assumption, and yet, surprisingly, it never attempted to calculate the benefits on the basis of realistic assumptions.

Mr Stoekel, the Centre's Executive Director, is on record as suggesting that a proposed amendment to our anti-dumping laws to deal with China, entitles him to characterise, rather extravagantly, anti-dumping as the "new protection". It will, according to Mr Stoekel, result in our importers being unable to source cheap Chinese imports, both for sale in the domestic market and for inclusion into products which will find their way into our export trade. And it will harm our relations with China.

Unfortunately for Mr Stoekel, in another part of the Financial Review on the same day it is pointed out that the US will require Australia, in any new free trade agreement, to accept the US "rules of origin" for our exports to the US.

What does all of this mean for Australia in any free trade agreement with the US?

First we have to understand that the proposed agreement is essentially a deal within which preferential access arrangements are agreed upon by the parties for the exchange of certain goods. These preferential terms would not apply to goods from any other country. Just how this deal could be squared with our WTO commitments has never been explained, but that's another story.

Our preferences in the US market would apply to Australian goods. And here's the rub! "Australian goods" that is, as defined by US rules of origin, which are the most restrictive in the world. So if we included the tiniest percentage of imported product in our exports to the US, from say China, they will considered "foreign", and denied preferential access.

They may well suffer further penalty if the Chinese element in the goods is deemed by the US to be dumped - and the US dumping laws are the toughest in the world.

On this analysis most of Mr Stoekel's argument falls to the ground.

But there is more. Australia's laws on dumping and rules of origin are among the least restrictive, and are interpreted liberally. And we can assume that the US will keep its present tough laws.

Thus, we will be giving much more than we get on the matter of preferences. Unless, of course, we adopt the US rules, which presumably, Mr Stoekel, and perhaps also Mr Kaspar, would not suggest.

The consideration for both of these men, along with all others standing behind the idea of a free trade area with the US is this: the more we delve into the issue the more difficult it becomes to present the agreement in a favourable light for Australia.

Surely the time has come for this to be recognised, especially by those who have, in the past, been its strongest supporters. At the very least we are entitled to ask that they no longer seek to gloss over the problems.

  • Colin Teese was Deputy Secretary of the Department of Trade and Australian negotiator at GATT

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