November 19th 2005

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Articles from this issue:

EDITORIAL: Terrorism: Australia's moment of truth

CANBERRA OBSERVED: Voters suspicious about workplace reforms

INTERNATIONAL TRADE: Canberra fails to defend Australia's trade interests

PRIMARY PRODUCTION: Brazil, Argentina threat to Australian exports

STRAWS IN THE WIND: Icarus and I / Drugs and getting on with our neighbours / France's Muslims - and ours / Varieties of bribery and corruption

SCHOOLS: Doing without grammar, punctuation and spelling

MEDICAL SCIENCE: Embryo stem-cell research - hype and hope

ECONOMICS: Sun still rising - Japan's invincible might

UNITED STATES: Court assault on parental rights

THE HOLOCAUST: 'Auschwitz' and Górecki: reflections on evil and hope

RU-486 a recipe for nightmares (letter)

Saddam and the Australian Wheat Board (letter)

Labor Party's morass (letter)

BOOKS: THE TYRANNICIDE BRIEF: The Story of the Man who sent Charles I to the Scaffold, by Geoffrey Robertson

THE COST OF 'CHOICE': Women Evaluate the Impact of Abortion, edited by Erika Bachiochi

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Canberra fails to defend Australia's trade interests

by Colin Teese

News Weekly, November 19, 2005
Coalition ministers continue to talk as if a level playing-field exists in the global marketplace, writes Colin Teese, former deputy secretary of the Department of Trade.

Almost everyone accepts that genuine liberalisation of international trade in agricultural products is a lost cause. Even the ideologues accept this; but they are now saying it doesn't matter.

What they won't accept is that, in the end, political realities will always trump economics. Perhaps, in a democratic society, that is just as well.

Of course, we all admit that in many areas of manufactures, multilateral co-operation on trade liberalisation has delivered outstanding results. Yet there have been exceptions - for example, the trade in textiles.

Probably, "exception" is not the right word. Usually, an internationally rules-based system falls over when the interests of the big players are adversely affected by the strict application of one or other rule or commitment.

Certainly that has been true of agriculture. Differential treatment for agriculture goes back to the original negotiation of new trade rules, shortly after World War II, in the General Agreement on Tariffs and Trade (GATT).

No agreement

The parties to those negotiations, which included Australia, quickly realised that there could be no agreement if it were insisted that the rules for agriculture must follow exactly those agreed to for manufactures.

Accordingly, more permissive rules to govern the trade in agricultural products were readily agreed upon. In general terms, protective measures other than tariffs, were not permitted under original GATT rules. For agriculture, it was decided that non-tariff measures of protection, including quotas and government subsidies, would be permissible.

At the time there was the belief that, over time, the GATT membership would come to accept the idea of agricultural trade following the same rules as applied to manufactures.

Even 60 years later that has proved impossible. Apart from a few largely presentational changes, the trade in agricultural products remains the same as it was in 1948.

Why was it necessary to treat agriculture differently? Because of farm politics mainly. But among a few more enlightened economists there was the realisation that agriculture was different.

Market forces operating to keep prices paid and prices received in some sort of balance did not appear to apply to agriculture. At the time, Australia was among those agricultural producers who did not contest that proposition.

Our government made clear its position: domestic policies would secure the position of Australian agriculture at home, and Australia would work with others in the GATT to negotiate what were called "orderly marketing arrangements" covering trade in agricultural products.

It soon became apparent that the subsidies which applied to agricultural production by the developed countries of North America and Europe were so favourable to their farmers that they encouraged significant overproduction of temperate-zone agricultural products.

The purpose of the orderly marketing agreements was to require producing countries to bring production into reasonable balance with overall demand, and thereby to defend export prices.

The various agreements achieved some success; but, ultimately, farm lobby-groups in Europe and North America were able to pressure governments into applying ever larger subsidies to farm production.

As a result, surpluses grew ever larger until they reached unmanageable proportions. The resultant overproduction exercised a permanent downward pressure on export prices for farm products.

That position remains largely with us to the present day, despite all of the efforts in the World Trade Organization (successor to GATT).

Blind acceptance

What has made a bad situation worse for Australian farmers is the blind acceptance by successive governments of free-trade philosophy. Our farm sector is gradually being forced to compete for exports as if world markets were not thoroughly corrupted by subsidised production in Europe and North America.

Worse still, Australian farmers are increasingly being obliged, by the application of so-called competition policy, to sell into the domestic market at the corrupted world price.

The damage done by these policies is reflected in the numbers leaving farming - not because, as is sometimes insisted, they are inefficient; but because they are unable to compete with heavily-subsidised international competition.

The full consequences that this will have, not merely for farmers, but for rural life in Australia, are only just beginning to emerge.

But the problem for the process of international trade rule-making is not solely confined to agriculture.

From time to time, especially, there have been problems for certain sectors of manufacturing exports. The push for a more ideological approach toward free trade in the World Trade Organization (which was created to succeed the GATT as part of the outcome of the Uruguay Round of Trade negotiations in 1994) appears to have made things worse.

In the decade since then, the major players have elected, on a number of occasions, to take defensive actions whenever sensitive areas of their manufacturing sectors have faced threatening import competition.

As the pressure of free trade has bitten ever deeper, an increasing number of industries have been demonstrated to be no less politically sensitive than agriculture. In every case, the commitment to free trade was swept aside as the major players moved to protect threatened industries.

The US protected its motor vehicle production by imposing illegal quotas on Japan. The Japanese got the message and established manufacturing plants in the US. So did some of the Europeans. But that always amounted to cosy deals among the biggest players.

Cheap labour

The matter of developing countries and clothing and textiles was something else. Here the competitive advantage was cheap labour. There could be no question of solving the problem by allowing developing countries to set up in the major markets.

The problem of textiles and clothing in international trade emerged in GATT about 40 years ago; and, although it has remained largely unacknowledged, it has, like agriculture, proved to be unsolvable. Yet it has totally different origins.

In the early days after the GATT was established, various tariff negotiations resulted in the major developed countries substantially reducing tariffs on imports of clothing and textiles from developing countries.

These concessions were part of a deal whereby developing countries would buy textile machinery from developed countries and, in return, be able to sell their much-increased output in developed countries.

It did not work out quite that way. The flood of cheap imports seriously disrupted the textile and clothing industries of the importing countries.

Under the GATT rules, the tariff rates for the textile-exporting developing countries could not be increased without offering the same countries concessions of similar value in some other areas of trade. And, for those developing countries, there were none.

Power plays by Europe and North America forced the textile exporters into a negotiation in GATT. Eventually an agreement was reached forcing developing countries to accept quotas.

It was illegal under GATT rules, but the GATT membership and the organisation's secretariat endorsed it. Thus in 1974 was born the Multi-Fibre Arrangement (MFA).

Exports of textiles by developing countries were being restricted by a quasi-legal arrangement which denied them their rights properly negotiated in the GATT. Yet they had no alternative. It was made clear to them that they should agree to the new rules, or have something much worse imposed upon them.

Australia, it should be emphasised, actually joined the arrangement, though it had played no part in the blackmail of the developing countries. Australia had not fixed any of its tariff rates on textile imports and was free to deal with imports by resort to legitimate use of GATT rules.

The Uruguay Round of trade negotiations, which established the World Trade Organization, incorporated into its outcome a new Agreement on Textiles and Clothing (ATC) in 1995.

In this agreement, developing countries were persuaded to give up formally their tariff advantages into Europe and the US for a new agreement on textiles guaranteeing them access to those markets (in much the same way as, presumably, workers under the new Workplace Relations legislation will be invited to trade off on-going leave rights for a "one-off" wage increase).

Developing countries took the bait, and the new agreement entered fully into force in January 2005.

By September of this year, both the US and Europe were already reneging on their commitments in the face of imports flooding in from China.

In recent days, China has been persuaded to agree to cut its exports to both destinations. China's two major markets have been willing, once again, to deny formal WTO commitments, rather than see their textile and clothing industries destroyed by cheap imports.

By contrast, the Australian Government has shown no such concern for its textile industry - or, for that matter, any other manufacturing industry threatened by cheap imports.

As with agriculture, it has been prepared to stand by and allow them to collapse - even though legitimate protective measures were available under WTO rules. Is it any wonder that our manufacturing sector is now among the smallest of all the developed countries - and still shrinking? That has been the fall-out for Australia.

Worse behaviour

For the WTO, the behaviour of the major developed countries has been even worse. Not only have they walked away from solemnly negotiated commitments of a fundamental kind, but they have begun to negotiate bilateral deals which undermine the multilateral application of WTO rules which represent the cement binding the organisation together.

With confidence in the multilateral trading system eroding from the top down, it is hardly surprising that there are difficulties in persuading developing countries to become involved in any new negotiations.

In this sort of climate, it is hard to see how Australia can advance any of its trading concerns to a successful conclusion in the WTO.

The more likely possibility is that we will be left to trade on the basis that we continue offering our trading partners the luxury of an armchair ride into our market while being guaranteed nothing in return.

  • Colin Teese is a former deputy secretary of the Department of Trade.

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