July 15th 2000

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Articles from this issue:

Cover Story: Human Genome mapping milestone?

Editorial: Managing Australia’s interests in S.E. Asia

Canberra Observed: Defence: opportunity beckons for Howard Government

Families: The hollowing of the middle class continues

New South Wales: Follow Swedish model: drug forum told

Trade: Canberra capitulates without firing a salvo

Doctors suspended over 32 week abortion

Straws in the wind

Education: New Queensland syllabus attacked

Economics: UN to look at the Tobin Tax

Media: GST ads unchained media bias

Development: Amartya Sen: the return of humane economics

Comment: The politics of suicide

Law: Death penalty debate resurfaces in USA

United States: Rising tide leaves poor floundeirng

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Trade: Canberra capitulates without firing a salvo

by Colin Teese

News Weekly, July 15, 2000
Colin Teese, a former Deputy Secretary of the Department of Trade, looks at Canberra’s capitulation on the Howe Leather case in which Australia displayed its weakness before the world.

The World Trade Organisation (WTO) must have been relieved when it was informed of the terms of the settlement reached between the United States and Australia on the matter of Australia’s leather exports to the USA.

For the first time the WTO’s dispute settlement procedures seem actually to have been implemented without the aggrieved party rejecting the ruling and suffering punitive trade sanctions. But that is hardly good news. For Australia the resolution of this dispute appears to have broken new ground, not necessarily to Australia’s advantage. And there is not much evidence that Trade Minister, Mark Vaile, recognises this, or understands its significance.

Briefly, the background to the dispute was that Howe Leather — a Melbourne-based exporter — won a contract to supply leather to US car manufacturers worth some hundreds of millions of dollars, beating off competition from US owned off-shore based suppliers. Those companies persuaded the US Government to have the matter of Australian Government assistance to Howe Leather considered by the WTO in terms of the organisation’s subsidy rules.

A WTO dispute settlement panel found against Australia. Canberra appeared ready to accept the ruling, except that the US was insisting that Howe Leather repay its $A30 million government subsidy.

Canberra had no power to recover the subsidy payment from Howe. Hence a settlement had to be negotiated.

Under that settlement, Howe Leather agreed to repay $A7.2 million over 12 years. In addition Australia agreed to reduce the tariffs on 12 imported items. No significance can be attached either to the money amount or the goods upon which tariffs were reduced, other than to observe that they emerged from negotiated settlement.

However, the outcome was unusual in one important respect. Under the rules of the WTO’s predecessor, GATT, Australia would have been required to discontinue the subsidy practice forthwith. If it were not prepared to do so, then the US would have been permitted to apply penalty duties against a like amount of subsequent Australian imports. There would have been no question of retrospective application of the finding, as is implied in the WTO requirement that the company repay a subsidy already received.

Disturbingly, this settlement broke new ground. For the first time the injured party — apparently sanctioned by the WTO — was able to negotiate in relation to a subsidy paid before the WTO ruling.

If this is, henceforth, to be a rule of general application, then the dispute settlement procedures of the WTO could quickly descend into farce.

The European Union, for example, has recently won a case against the US for its use of income tax rebates for US-owned, off-shore based exporters. This practice has been in use for some years, and the US administration is unlikely to persuade Congress to change it, despite the WTO ruling. The application of retrospectivity to this outcome, could result in the US facing a compensation bill running into billions of dollars.

For Australia and Howe Leather, there is a certain irony to all this. The companies that brought the case against Howe Leather are US-owned, off-shore manufacturers, themselves in receipt of the very income tax subsidies now ruled illegal by the WTO.

The question immediately for Australia’s Trade Minister is: why, from the moment the case against Howe Leather was brought to the WTO, did Australia not counter-petition in the WTO against Howe Leather’s adversaries, the US-owned leather manufacturers?

And, having failed to do that, why, when it came down to negotiation, did the US subsidies to its own leather manufacturers, not become part of the settlement equation?

As it has turned out Australia has been doubly disadvantaged by the negotiated settlement.

First, Howe Leather has been obliged to pay back part of the assistance granted to it by the Australian Government, while its competitor for sales in the US continues to receive a subsidy now declared by the WTO to be illegal.

Second, and worse still, as part of the settlement Australia has agreed to reduce the tariff on a dozen items of trade interest to the US. Our Trade Minister has made much of the fact that these items are not made in Australia, and therefore, no Australian manufacturer is affected. Fair enough. But what about the cost to revenue and to the budget bottom line, of the tariff reductions?

Further, the Government can count its lucky stars that it has retained enough of what are called “nuisance tariffs” —those tariffs of less than five per cent which have no protective effect — to use as bargaining chips in settlement negotiations.

Mr Beazley’s recently repeated commitment to free trade would see all tariffs reduced to zero, leaving nothing with which to bargain in a dispute before the WTO.

Under Labor, either Howe Leather would have repaid the full amount of its assistance, or the compensation demanded by the United States would have come in the form of punitive tariffs on Australian agricultural exports to the US. The US had mentioned wine as an obvious example, but it could just as easily have been any other agricultural commodity.

Let us hope that the Government is learning the lesson that trade negotiations are hard ball games, in which every advantage must be pressed home; and the further lesson that in trade negotiations, tariffs can become bargaining chips as well as protective devices. Our trading partners certainly understand this point and have been exploiting it for many years.

We must also cherish the hope that some of this may rub off on the Leader of the Opposition, and those advising him.

There is a final wider issue to consider. The dispute settlement procedures governing the operation of the WTO inherently favour the larger economies over the smaller. In a dispute of the Howe Leather kind, if we do not fall into line, the US is in a position to really hurt our exports.

But when we are the injured party, we do not have any power to harm more than a tiny fraction of US imports. We learned this when we tried to stop the US illegally restricting our lamb exports.

So, whatever the circumstance, the advantage in the WTO always rests with the US and other big economies.

Nevertheless, our policy makers still insist that the WTO protects the weak against the strong.

The old GATT also favoured the strong over the weak; but less so than the WTO, whose legalistic attitude to rules places the heavier burden of compliance upon the weak.

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