March 1st 2003

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TRADE: Multilateral or bilateral?

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Multilateral or bilateral?

by Colin Teese

News Weekly, March 1, 2003
The efforts of Australia and the US to conclude a free trade agreement seem to have found rocky ground such that may be impossible to traverse. And for reasons which, at least for this writer, seemed unlikely as recently as a month ago.

The problems that have now been exposed were always there but the Government had either refused to concede them or wanted, for its own reasons, to keep the lid on them.

Neither position is any longer possible. The reason lies in unanticipated developments.

To this writer's certain knowledge, four reports have been generated to consider the issue of a free trade agreement. All have been commissioned by the Federal Government or its agencies. Three have been released to the public. A fourth, done in house, by the Department of Foreign Affairs and Trade, DFAT, remains confidential to government and departmental sources.

The first report, commissioned by the Government, was prepared by the Canberra-based Centre for International Studies. This document, prepared by persons of undisguised ideological commitment , was bold enough to proclaim and quantify the benefits from a free trade agreement between the US and Australia as substantial. When its numbers were challenged, the CIS then explained that these were based on the assumption that all the trade between the two countries would be completely free.

Of course, it added, the gains would be reduced to the extent the items of trade were excluded from the agreement. By what amount would depend upon the magnitude of the exclusions; and this, obviously, cannot be known until the negotiations are finalised.

So, stripped of its optimistic and unrealistic starting assumption ( that all the trade will be freed) all the CIE can really tell the Government is that we can't know until after the negotiations whether and to what extent benefits will flow to Australia.

The APEC Study Unit at Monash University, also commissioned to study the issue, presented its assessment to the government in August 2001.

Wisely, APEC made no attempt to quantify benefits, but more subtly, pointed to the benefits which could be secured by parties to a free trade agreement which it claimed were not available 'under WTO agreements'.

These benefits were described with reference to particular agreements, notably the Mexico and Canadian agreements with the US, and the New Zealand/Australia Agreement.

Unfortunately, in all of the examples quoted, precisely similar benefits are, in fact, possible under WTO rules. The extent to which they are not available, arises because important members of the WTO prefer not to abide by the rules.

Strangely, APEC failed to mention the one agreement where benefits applying are certainly not available through the WTO, and that is the arrangements which sustain the European Union. The EU free trade agreement provide its Member Countries with a full range of exclusive benefits, and it is permitted, under WTO rules because the agreement covers all of the trade between Member Countries.

All other free trade agreements, including the one in contemplation between the US and Australia, are not in strict conformity with WTO obligations because they do not cover "substantially all the trade".

The third report has been compiled by ACIL Consulting for the Rural Industries Research and Development Corporation.

It reached the Government in February 2003, and immediately became controversial, because it was reported to have concluded that there would be, at best, negligible overall benefits to Australia, and our agriculture would be harmed by it.

Initially, the Government refused to release it, but the document is now in the public domain and confirms what was claimed for it.

In particular, the report concludes that the impact on Australian farmers is likely to be negative if domestic considerations prevent the US conceding genuine free trade in sugar, dairy and meat.

It also points to downside adverse effects which none of the other reports consider seriously; and is the only one to note that what is proposed is a "special trade agreement" with the US and therefore not a genuine free trade area of the type of the European Union.

A fourth report known to be in existence is one prepared by DFAT itself. It has not been released publicly, but bits of it have been dribbled out. It is reported to have concluded that by virtue of the freeing up the rules on foreign investment likely to flow from the agreement, efficiency gains could flow to our economy worth about $A4 billion.

Without knowing the assumptions underlining this assertion it is hard to comment upon it, but one thing can be said: if these gains are really available, then why don't we now, unilaterally, dismantle the foreign investment rules? That is, unless DFAT is trying to persuade us it can trade off the foreign investment concessions to the US for even larger gains for Australian agriculture.

Now the benefit of all these studies is they have at last thrown the spotlight upon the whole idea of a US/Australia agreement and have encouraged the community to question its value to Australia. Previously, that much had been assumed and asserted as fact by the Government and those agencies and media which seem to lose sight of common sense and reality whenever the words "free trade" are mentioned, no matter what the context.

What has so far emerged is good, but there is much more to consider. And it is the task of those sceptical of the proposed agreement to ensure that the pressure is kept up on Government. And further that ministers are not panicked into foolish statements, such as that made by the Minister of Trade recently.

Mr Vaille's statement gives us no cause for comfort. The US has made no secret of its position on agriculture, explicitly and implicitly; it won't be on the table. Mr Vaille has shown no such restraint. Apparently in response to press taunting, he announced boldly, on behalf of Australia, everything is on the table. Sadly, he then became specific. "Trade in services, genetically modified food labelling, and quarantine."

"Quarantine?" some of us were compelled to ask. Is the Minister seriously offering to negotiate away those restrictions we apply against imports for the sake of human, plant and animal health? Whatever was he thinking of?

Is it possible that the Minister for Trade is actually suggesting that our quarantine restrictions disguise trade restrictions? If so his words will be music to the ears of our many trading partners who have been insisting for years that our quarantine restrictions do just that.

Let us hope they have either missed Mr Vaille's remarks, or, for other reasons, choose not to parade us before the disputes settlement panel of the World Trade Organisation. There they could rightly demand that these quarantine restrictions which, out of the Minister's own mouth, are admitted to be trade barriers and therefore outside WTO rules.

Then there is the question of the likely reaction to any negotiation with the US towards a free trade agreement from other trading partners. The effect of any negotiation where we exchange concessions with the US, means we get a preferred position in their market for certain products or services and, in return, the US achieves a preferred position for certain goods or services in our market.

Important and serious problems arise from this. The US already enjoys a healthy trade surplus with Australia. Any exchange of preferential access to our respective markets will not change that relative advantage for the US. What will our Asian trading partners - most of whom maintain trade deficits with Australia - say about an arrangement which allows the US preferred access to our market over our Asian partners?

That's one point. There is another. How can any free trade negotiation with the US not cut across what we are aiming for and hope to achieve in the WTO. Just to take one example. We want concessions on agriculture from the European Union, among others. The EU has made public its wish list of concessions it will be asking of Australia; high on their list is a range of concessions in the trade in services.

Off the hook?

Mr Vaille has already said that services are on the table in the context of the US negotiations. If in free trade negotiations with the US we give them a preferred position on some aspect of the trade in services, that position won't be available to others, e.g., the EU. Will not this provide the EU with a wonderful opportunity to get off the hook on agriculture in the WTO?

Could we complain, for example, if the EU says the preferential access we have given the US on services was exactly the concession they wanted from Australia in return for better access to the EU market for Australian agricultural products? Hardly.

It is for this precise reason that the ACIL report fears that Australia might well be sacrificing multilateral gains for agriculture in the WTO if it persists in pursuing, simultaneously, a bilateral agreement with the US.

And while some, including this writer, may not share the optimism of the writers of the ACIL report about the likelihood of a successful outcome for agriculture in the WTO, one thing seems certain; it cannot possibly help the WTO processes, or Australia, if we are negotiating, bilaterally, with the US on the side.

  • Colin Teese was Deputy Secretary of the Department of Trade

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