August 5th 2006

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Articles from this issue:

COVER STORY: Top manufacturer slams free trade 'fantasy'

EDITORIAL: Whom the gods wish to destroy

CANBERRA OBSERVED: Nelson turns blind eye to neglected defences

PRIMARY PRODUCTION: Australian Government cutting farmers adrift

QUARANTINE: Can we ensure zero risk on trade?

QUEENSLAND: Afraid of uttering the dreaded 'D' word

OPINION: Pregnancy counselling services under threat

STRAWS IN THE WIND: Israel and Hezbollah / Still call Australia home? / Night thoughts / Victoria and the pokies

OPINION: Robert Manne, the intellectual hero

HISTORY: Knowing history and knowing who we are

INTERNATIONAL AFFAIRS: China and Japan - partners or rivals?

TAIWAN: Taiwan President rocked by scandals

Government the problem, not the solution (letter)

Britain's home-grown terrorists (letter)

Parties under siege from radical feminists (letter)

THE MARKETING OF EVIL: How Radicals, Elitists, and Pseudo-Experts Sell Us Corruption Disguised as Freedom, by David Kupelian

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Australian Government cutting farmers adrift

by Colin Teese

News Weekly, August 5, 2006
Farmers face serious, inescapable and fundamental disadvantages which no other sellers are asked to contend with in quite the same way, argues veteran international trade negotiator Colin Teese.

In a speech he delivered earlier this year before 500 delegates to an Australian beef industry conference, he defended government subsidies to farmers, and warned of the disadvantages farmers are likely to face from bilateral trade agreements, such as the recent so-called free-trade agreement with the United States.

The first thing I have always noticed about selling agricultural products is one which is not always recognised. Farmers are required to endure serious, inescapable and fundamental disadvantages which no other sellers are asked to contend with in quite the same way.

Compared with what might be the case with other forms of economic activity, farming doesn't fit any orthodox market economic model. Generally, farmers comprise a large body of small independent producers trying to sell - in competition with each other - an undifferentiated product. The only bargaining lever they possess is price. And they normally face a much smaller corps of well-disciplined and organised buyers.

Powerless to resist

Understandably, those buyers drive a hard bargain which the sellers are powerless to resist. The consequence is that selling prices are driven down to bedrock - except in certain unusual circumstances. And while these price/cost pressures are present in the home market, they are much worse in the export context - which is why the domestic market is so important.

Don't let anyone tell you - bureaucrat or politician - that the secret of success is to get more efficient and to export more.

Selling isn't the only problem for farmers. When it comes to purchasing the inputs, they are also price-takers. Again, farmers are individuals facing a few powerful and organised sellers who are in a good position to hold the line on price. There are, for example, only two or three manufacturers of tractors in the world. In this case, the seller is in control. Don't imagine a farmer has any chance of beating them in a bargaining duel on price. The result of all this is that farmers are, for the most part, permanently and unavoidably caught in a cost/price squeeze.

Governments in the developed world have long recognised the consequences these market imperfections impose upon their farmers. Various, sometimes ingenious, measures have been adopted to assist them.

It is only in recent years that governments - and also farmers - have come out and admitted openly that all of these measures, which can give farmers some kind of basic income, require either direct taxpayer or consumer funding. Putting it bluntly, the idea of subsidies has been legitimised.

Another essential element of this subsidy policy - as yet unacknowledged - are the measures of border protection to ensure that the major part of the domestic market is retained for local production. And, of course, they make sense. Quite obviously, it's a waste of money to maintain subsidies on local production if the domestic market can be flooded with cheap imports.

Australian governments, were, for many years, part of this unspoken consensus. We wanted to export, but we also wanted a viable farm sector - and all this in circumstances in which market forces could not possibly work effectively.

This was the background against which we went into negotiations with our trading partners - either bilaterally, or in what was then the General Agreement on Tariffs and Trade (forerunner to the World Trade Organization).

From these negotiations emerged various forms of agreements on access to the markets of our trading partners. These outcomes weren't perfect: we never got as much as we wanted; they never gave as much as they could.

If this sounds to you like a complicated and untidy arrangement, you're right. It was. What we got in exports was fine. But above all, we were able to secure our domestic market for local producers and so keep our farm sector reasonably prosperous.

The famous Country Party leader and Trade Minister, "Black Jack" McEwen - architect of many of the early agreements for a kind of balanced access - once famously remarked: "Nobody ever signed an export agreement to go broke." For him, a successful trade negotiation had to be mutually beneficial.

By the time of the Uruguay Round in the early 1990s - which led to the establishment of the World Trade Organization - all of this had changed. Well, at least for Australia.

For some reason, our Government came to believe that the rest of the major producers of temperate agricultural products were of a mood to give up protecting and subsidising their farmers for our benefit. So strongly did they enthuse over this idea that they committed themselves to dismantling the protection of our farm sector with no more than a vague idea about the intentions of others.

On the basis of vague promises of agricultural trade liberalisation to be implemented over a long period, Uruguay was hailed as a triumph. The U.S., Europe and Japan would be opened up to us.

Of course, it never happened. And we now know the present WTO negotiations are still being held up over what might be done on agriculture. Meanwhile, the world is turning away from the WTO and negotiating bilateral agreements.

Necessarily, Australia has become part of that push. We have negotiated some bilateral agreements (one of them with the U.S.), and others are in the pipeline. What is obvious - though the Government doesn't seem yet to have got the message - is what could not be achieved for agriculture in the WTO is no more achievable in bilateral agreements.

Despite the setbacks, however, our Government has not given up on its policy of cutting Australian farmers adrift. We still insist that the measure of farm sector efficiency is whether or not our farm sector can - without assistance - meet the full weight of subsidised overseas competitors, both at home and in export markets.

Surprisingly, the traditional voice of farmer support, the National Party, appears wholeheartedly to endorse this policy. Indeed, the Nationals have joined enthusiastically in the fruitless and futile task of attempting to persuade our European, United States and Japanese trading partners to follow our example, give up on subsidies and open their markets to unrestricted import flows.

There is not the slightest chance that they will succeed in this endeavour. If they need any convincing, there is the evidence of our so-called "free trade" agreement with the United States.


The gains from this agreement are tiny at best - and in some cases illusory. But I wonder how many people know that, in return for these meagre outcomes, we have given the United States duty-free access to our market for all of their agricultural exports?

All Australian farm sectors will be adversely affected by this concession.

Let us look, for instance, at the unhappy consequences which could apply to Australian beef producers - consequences which, I stress, could have been, or should have been, anticipated. The bilateral agreement with the U.S. provides for U.S. beef to enter Australia duty-free. You may argue that will not happen unless it is competitive. Perhaps.

But the agreement does not automatically allow that we deny access to a subsidised product. If that possibility arises, the parties will consult. Nothing in the agreement indicates how such issues, in dispute, are to be resolved. And subsidy questions are always in dispute.

On my observations, in recent years our Government has not won many trade arguments with the U.S.

That is one thing. Another is that other beef producers in the WTO may demand duty-free access to our market. On my reading of the WTO rules, we would have to give our WTO partners the same concession as we have given to the U.S. And many of them are low-cost producers who could beat us on price.

Some, maybe all, it will be said, can be kept out on quarantine grounds. Let us hope so. But on quarantine, it seems that the goalposts are being shifted. I can still remember an unguarded comment by Trade Minister Mark Vaile at the time of negotiations with the U.S. "Everything is on the table," Mr Vaile pronounced, "including quarantine." The signed agreement demonstrates he was as good as his word.

Once I would have said that any relaxation of the quarantine rules on beef was inconceivable. Now I'm less certain. Note the decisions on salmon and pork, and the fight over apples and bananas, to name a few. Pork is particularly interesting. The imported product is not required to meet the same production standards as are local producers - which actually gives it a competitive advantage.

These days, the Australian Quarantine and Inspection Service (AQIS) admits taking trade into account in its decisions on quarantine matters. WTO rules, the agency claims, require it to do so.

I can tell you all that our traditional quarantine practices are WTO-legitimate. The WTO itself has said so. I don't know what the AQIS agenda is. Maybe some Commonwealth official can offer an explanation. But it is not compliance with WTO rules.

That's one side of the quarantine equation. There's another. In the past, we had zero tolerance for imports from countries with foot-and-mouth disease. I wonder whether we still do.

Remember the instance of beef imports recently in which the product was authorised on the basis of its being from a so-called "safe haven" within an infected country, Brazil. Well, it gained entry and, given the way the entire issue was handled, we still can't be sure it has not done harm.

We can expect to see more pressure for such imports, both from within and outside Australia, including the possibility - supposedly for the benefit of consumers - of legitimising cheap imports from so-called safe havens in at-risk countries, despite the fact that we know many of those countries probably cannot police any such condition to our satisfaction. But that won't stop it happening. If and when it happens, our producers could be exposed to a flood of infected beef from low-cost competitors.

Exports are important to farmers, and so are the assurances we are able to provide as to the disease-free qualities of our product. But we cannot do that unless we can be certain that our borders are closed to products from dubious sources.

What concerns me is that the pressures will come on us - not least because of our bilateral trade agreement with the U.S. - to relax our health standards. As I understand it, a U.S. firm was behind the idea of the Brazil imports.

Much is at stake here. There appear to be forces, with the sympathetic ear of governments, both state and Commonwealth, who believe that cheap imports serve our economy better than adequate quarantine protection.

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

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