CHAPTER TEN
WE who deal with trade and commercial issues focus most of our efforts on resolving problems and dealing with trade disputes. Unfortunately this tends to give a dark colour to trade issues. When one looks at developments in trade, however, one sees that the good news far outweighs the bad news. In fact, both of our nations have over the past few decades enjoyed a tremendous boom in trade, which has been an extraordinarily healthy development for the peoples of both countries. For example, both Australia and the United States have roughly doubled their exports in the five years 1986-1991. These export booms can be credited with sharply mitigating the effects of the current recession which afflicts each of our countries. If Australia's exports had not doubled in the past five years, we can estimate that Australia's unemployment rate would be several percentage points higher, with several hundred thousand more people unemployed.
Once we look at bilateral trade figures, we see the same pattern. For example, Australia's current annual exports to the United States of about $US5 billion exceed what Australia's global exports were only twenty years ago. Similarly, Australia imports from the US today more than it imported from the entire world twenty years ago. The United States is now Australia's largest source of imports and Australia's second largest export market.
This good news is sometimes hard to discern, coming as it does in times of overall weak economic performance. But the facts tell us that the men and women of business in both countries can be rightfully proud of their contributions to their countries' economic well-being. Thus the central question in trade issues is not "How can we make a bad situation a good situation?" but "How can we make a good situation even better?"
One other point. Not only have the United States and Australia become more substantial trading nations in recent years, but we have also become more substantial Pacific trading nations. Australia's exports to Asia accounted for only 26 per cent of its total exports in 1960, whereas they now account for 55 per cent of its exports. In the United States the pattern is similar. The 1980s saw their exports to the Asia-Pacific region surpass their exports to the European Community and become their single largest export market, though as Asia constitutes 29 per cent of their total exports the situation is not as pronounced as it is in Australia.
To sum up: over the past few decades, both of our countries have been experiencing a trade boom. Over this same period, our bilateral trade has expanded dramatically. Finally, during this period the Asia-Pacific region has emerged as the most important market for both countries.
These developments reflect the successes of the commercial sectors in our countries. And they also point to areas to which those in government might want to pay particular attention so that these successes might continue. These are the challenges ahead, and they fall into three categories: (a) domestic; (b) bilateral; and (c) regional and global issues.
DOMESTIC ISSUES
When one arrives in America one cannot help being struck by the parallels in the two national economies. In both countries, the recession has ended in a technical sense, but the subsequent growth has been barely measurable. In fact, in both countries the growth has been so insubstantial that unemployment continues to increase. On the plus side in each country, interest rates are very low, as is inflation. It looks increasingly that each country will enjoy a more robust recovery in the near future. And even though my remarks are about trade issues, I could not avoid noticing that in each country there is widespread unhappiness with the political leadership, substantially due to the weak economies.
We should appreciate how trade is undermined by our domestic economies' weak performance. After all, Americans are less likely to be buying additional Australian goods if they are not even buying additional American goods. Thus their trade activities in 1991 and 1992 did not show the type of growth which has characterised the past few decades.
There is another important link between the domestic economies and international trade. Whenever economies start to weaken, protectionist pressures begin to mount. Who better to blame for weak economies than foreigners? It's always easier to look at foreign inefficiencies, such as one country's wheat subsidies, than it is to look at domestic inefficiencies, such as one country's own Wheat Board. It's important that both of our governments resist these misguided pressures and keep on the course of opening up markets, not closing them. Domestic reforms are not alternatives to trade reforms, and they should not be pitted against each other. Both types of reform are necessary components of improving a national economy.
BILATERAL ISSUES
Just as it is clear that our trade relationship is good and growing, it is also clear that impediments to trade remain. Although both countries' markets are substantially open, neither is completely open. Unfortunately, both countries employ a range of barriers to trade, from quotas and tariffs to standards and other non-tariff barriers.
It is unclear to me whether the United States' barriers to Australian products are greater impediments than Australia's impediments to US products, although not surprisingly that seems to be easily accepted in some circles in Australia. Of course it would be very difficult to determine because it would require extensive modelling with demand elasticities. However, I think we can put to rest one assertion which we hear regularly. Some claim that solely because the United States tends to run a trade surplus with Australia, then Australia is necessarily a more open market than the United States. Yet we know there is not necessarily a correlation between trade balance and the openness of a market. I don't think anyone would conclude, from the fact that Australia tends to enjoy a trade surplus with Japan, that the Japanese market is more open than the Australian market.
THE UNITED STATES' BARRIERS TO TRADE
There are two main issues I hear about from the Australian side, although I know there are others. But the two main issues are US export subsidies -- through the Export Enhancement Program, or "EEP" -- and US import quotas for beef and sugar. Thus, they have one program which is part of their trade policy and occasionally has an unintended protectionist consequence; and they have another policy which is purely protectionist.
I believe it is now widely recognised in Australia that their EEP program was designed to deal with the EC and to force it to the table so they can bring the Uruguay Round to a conclusion. It's designed on the "arms race" theory, that they can make it prohibitively expensive for the EC to continue its Common Agricultural Policy, by matching EC subsidies dollar for dollar. They do have a precedent for this tactic, because they had a similar problem for quite some time with subsidies in another area -- subsidised loans. Many countries would subsidise loans for major projects, thereby distorting the market and making it virtually impossible for any American or Australian to win a bid on a fair basis. The United States, through their Export-Import Bank, established a $US1 billion dollar "soft loan" program to match these subsidies, in effect making them unprofitable. As they became unprofitable, interest in them among the users flagged. As a result, this year the OECD reached an accord on prohibiting these subsidised loans, much to the advantage of American and Australian businesses.
They are trying the same approach with the EEP, and I believe that most of the Australian leadership understands their position, with one important caveat. They want to make sure, and we want to make sure, that the EEP subsidies are aimed specifically at the EC, and wherever possible do not affect other exporters who are innocent of subsidising their exports. I sense that over the past two years there has been a marked improvement in this targeting. One of the reasons for this is that Australian wheat growers are more sophisticated in putting their case forward in Washington. They are playing a direct role in the decision-making process and I believe they are increasingly satisfied with the results. Finally, let me note that the EEP is on the table in the GATT round. They will not engage in unilateral disarmament, but they are quite willing to be a part of a multilateral approach.
Their beef and sugar restrictions are not biased against Australia, but apply to all nations equally. So to the extent that they are onerous, they are not onerous to Australia in particular. (Australia is their largest foreign beef supplier, providing them with over half of their imported beef. Similarly, Australia is their fourth-largest sugar supplier.)
These policies are also on the negotiating table. Their chief trade negotiator, Carla Hills, first proposed a 90 per cent reduction in export subsidies, a 90 per cent reduction in tariffs, and a 90 per cent reduction in internal price supports. Much to their regret, all of these proposals were quickly rejected by the EC and they are now looking at reductions of a significantly smaller nature.
There is a notable difference in attitude between Australia and the United States when it comes to dealing with import restrictions. Australia treats the import restrictions as a trade issue. The United States has dealt with them as a domestic political issue. If Australia really wants to make headway on these issues, it needs to use the right tools.
AUSTRALIA'S BARRIERS TO TRADE
The problems that Americans tend to have with their exports to Australia fall into two general categories: agricultural issues and intellectual property rights (IPR), although they also have other problems such as government procurement.
As far as agricultural issues are concerned, American exporters face a range of barriers in trying to enter the Australian market. Australia prohibits the importation of live shellfish. Australia prohibits the importation of fresh and frozen salmon. Australia imposes a tax differential on imported tobacco. Australia bans imported poultry. Australia bans imported cooked pork. Australia imposes a discriminatory tax on imported fruit juices. Australia imposes a discriminatory tax on imported vegetable juices. And Australia bans a range of imported table fruits.
As for IPR, Australia imposes a local content requirement for broadcasting. (Incidentally, there is a greater range of selection of television channels in Beijing's hotel rooms than in Sydney's!) Also, Australia imposes a local content requirement for advertisements. As one example of why this is not a good idea, Australia recently found itself the victim of a similar requirement which was imposed by Malaysia. It seems Malaysia banned an Australian advertisement in part because it was not filmed in Malaysia. It made no difference that the advertisement was for the Australian tourist authority, and almost by definition would have to show scenes filmed in Australia. Dare I admit that I took perverse pleasure in Australia being hoist with its own petard? Just shows how silly protectionism can be. But let me continue. Australia does not provide copyright protection for sound recordings. Australia permits parallel imports for sound recordings. Australia allows parallel imports for books. And finally, Australia does not yet have protection against software decompilation.
Since I've been free in my criticism, let me also be free in my praise. Very much to the government's credit, Australia has taken some steps in the direction of tariff reduction. Whereas once Australia suffered under some of the highest tariff rates in the world, Australia is moving to a position where its tariffs will be much more in line with OECD standards. I believe the Government of Australia deserves credit in that regard, although of late there has been some talk of backsliding.
How can we sum up this review of the bilateral issues? It's tempting to try and figure out who is the greater sinner and who is the greater victim. As I mentioned before, that's very difficult to calculate, but in another sense the answer is quite simple: the victims are the peoples of our two countries, because we all suffer as a result of these impediments. However, there are two reasons why Australia has a stronger incentive to remove these impediments. First, although the burdens might well fall evenly on each country, I think that Australian consumers suffer to a greater extent. This is because of the relatively small size of the Australian trading system. The CER nations, Australia and New Zealand, constitute only about one per cent of the world's GNP. Thus trade barriers will fall much more heavily on Australians than on Americans, even if the barriers themselves are exactly equal. In any case Australia, because of its comparatively centralist system of government, finds it more feasible to move on liberalisation than does the United States with its more diffuse system of government. This is why America places so much emphasis on the GATT round, because it is otherwise so difficult for them to move on trade liberalisation.
REGIONAL AND GLOBAL ISSUES
During the Cold War period, the industrial democracies devoted an extraordinary amount of time and energy to international security architecture. Over decades of work we were able to refine such institutions as NATO and ANZUS into highly effective organs for co-ordinating international behaviour and advancing our national interests.
It's clear that over the same time we have not made a parallel effort on the economic and trade issues we face. Indeed, if we look at the two paramount institutions, the GATT and the G7, we can see that they are both in need of being reinvigorated.
With the fading of the Cold War and the rapid growth in international commercial and economic issues, the 1990s will be the decade in which the new trade institutions are established and the old ones are redefined. And this poses a challenge both for the United States and for Australia.
It's a challenge for the United States because, given the sheer size of their economy, it's incumbent upon them to play a leadership role in designing these new entities. It's a challenge for Australia because it must live with this new architecture. Though at times it is unable to call the shots directly, it can play a key role in shaping the outcome. The challenge for Australia is how to avoid the "cork in the ocean" syndrome. With a relatively small economy, what can Australia do to enhance most efficiently, for its own benefit, the prospects for these new systems?
It's not as difficult a chore as it might first appear, because on the broad issues, there is consensus among the United States, Australia, and most of the other leading trading states as to what type of goals we seek.
We all seek an open world trading system, one which is based upon fair play and the standard rules on international conduct. We seek an end to market-distorting policies such as subsidies and quotas. We seek transparency. And finally, we seek a series of reinforcing and complementary bilateral, regional, and global mechanisms to help move us to these goals as rapidly as possible.
First, the GATT. I believe the positions of our two countries on the Uruguay Round are identical. We both fully support the round. We both seek progress as substantial and as rapid as possible. And we both share the same view as to why we have not had more progress to date. Still, the US remains optimistic of a successful conclusion to the Round, with substantial benefits accruing to world trade. Agriculture remains the key issues, and I believe both of our governments are united in their approach on this.
Second, APEC. Again, their views are essentially identical to Australia's; we both fully support APEC. Now it is still not entirely clear exactly how far APEC will go. It is a relatively young organisation, and in its first few years, we accepted the trade-off between consensus and inclusiveness on one hand and rapidity of movement on the other hand. It was vital, if APEC were to be a serious regional economic entity, that it enjoy the broad support of all governments in the region. One example of the inclusiveness principle that I believe will pay dividends in the years ahead is that APEC is the only international organisation to which the People's Republic of China, Taiwan and Hong Kong all belong.
The Bangkok APEC Ministerial meeting will be an important point for APEC, because it is at that meeting that we should come to terms with the fundamental operation questions of the institution: location, structure, staffing, and so forth. I am confident that the APEC ministers will make the right decisions to keep the institution moving forward. They see APEC as a vehicle for trade liberalisation and will pursue that goal as far as they can. Yet they will not limit their efforts to liberalise in Asia solely to regional fora.
After GATT and APEC, let me mention the newly-created ASEAN Free Trade Area, AFTA. In some respects AFTA is less ambitious than free trade areas such as NAFTA and the CER; it does not apply to the agricultural or service sectors, and it is to be implemented over a 15-year period. However, AFTA should be fully supported as a GATT-consistent move to liberalise trade. AFTA should assist the ASEAN countries to rationalise their economies, thus paving the way for improved economic performance and follow-on liberalisations.
Finally, the North American Free Trade Agreement, NAFTA. This step should be viewed as an exciting one, with broad positive implications for both the United States and Australia. In one sense, it is the most ambitious free trade agreement in the world, due to the substantial income disparity between the contracting parties. Per capita GNP in Mexico is not quite $3,500 a year. Per capita GNP in the United States is over $23,000 a year, a seven-to-one ratio. One of the best models shows that 150,000 jobs will leave the US for Mexico. On the other hand, some 325,000 jobs will be created in the US because of this move. The implications of it are clear. It will break the back of industrial protectionism once and for all. If they can adopt an open trade policy with a middle-income country of 80 million people right on their border, they can do it with just about anybody. Indeed, Administration policy is to establish a hemispheric FTA, "from the Yukon to Tierra del Fuego." They are well under way towards that goal. Negotiations with Mexico are sufficiently advanced for them to have a "handshake agreement" -- that is, to have all of the issues resolved -- by the end of the summer. Then it will be up to the political process to get a treaty ratified. Beyond Mexico, they have framework agreements worked out with 31 countries in the Western Hemisphere -- all but Cuba, Haiti and Surinam -- so this hemispheric goal is well within reach. Remember, NAFTA is not based around a common external tariff, it is not a Common Market. None of their current trading partners will be disadvantaged. Additionally, it is not a customs union in any way; there is no facility for policy co-ordination. It is simply a means for eliminating the internal tariffs between the three participating countries.
What are the implications for Australia? First, there is concern in some quarters over the possibility of a standard economic textbook case of trade diversion. This is to say, if (a) there is a product which Australia and Mexico each currently export to the US; if (b) Australia and Mexico compete relatively evenly; and if (c) there is a tariff on that product, then Mexico will enjoy a competitive advantage as its tariff is eliminated while the tariff on Australian exports is retained.
But the good thing about textbook examples is that frequently they exist only in textbooks. There simply is not a wide body of products in which Australia and Mexico compete for the US market. Australia and Mexico do not share the same comparative advantages with regard to the US market. Mexico's advantages are primarily its low labour costs and its geographical contiguity. So the loss to Australia because of trade diversion is minimal or non-existent.
Another concern I hear from time to time is that NAFTA undercuts the GATT. On a less-informed basis, people sometimes argue that NAFTA is antithetical to the GATT because it is a trade bloc. This argument vanishes when one points out that NAFTA, like the CER, only lowers barriers and is therefore consistent with the letter and the spirit of the GATT. On another basis they sometimes hear the "two suitors" argument: NAFTA undercuts GATT because it shifts their attention and efforts from Geneva to Mexico City. In other words, they should only undertake one courtship at a time. While this is probably sound advice for entering into a romance, I am not sure it's sound advice for trade liberalisation. In fact, the counter-argument seems stronger: pursue trade liberalisation wherever you can, and you will enjoy the advantages thereof. They believe their work on NAFTA will help the United States and Australia itself, and it will also reinforce the GATT process.
How will it help Australia? By making America's industrial sector that much more competitive internationally, it will institutionalise a predisposition towards trade liberalisation. Every victory in the battle to open markets makes the next battle that much easier.
There's another benefit for Australia as well, and that is trade creation. Australian exporters will now have access to an open, growing, and increasingly efficient market. Australian businesses will profit from access to the largest market in the world, and will enjoy economies of scale and decreased transaction costs. It is difficult to measure these direct economic benefits, but no-one to whom I have spoken in the Australian or American governments takes issue with the assertion that the benefits from trade creation will vastly outweigh whatever loss accrues due to trade diversion.
One other third-country issue affects the bilateral trade-relationship. The United States has played an aggressive role in working to open third-country markets, and has done this almost without exception on an MFN (most favoured nation) basis. That is to say, Australian exporters enjoy the same benefits as American exporters. Take the example of their work to open up Japan's beef market, which redounded more to Australia's benefit than it did to America's. From 1988 to 1991, Australia's chilled-beef exports to Japan roughly doubled, from 64,000 metric tons to 125,000 metric tons -- all as the result of US policy. To be sure, there have been a very few specialised cases where they have sought trade benefits not on an MFN basis, but only for America. It is easy to understand why people in Canberra would not be overjoyed at these cases, but they should all be judged in context. They did hear a few complaints when they achieved one such opening in Japan during the President's recent trip, but they did not hear any praise for the MFN openings they achieved on the very same trip.
GRAPPLING WITH THESE CHALLENGES
My thesis for Australia is this: Australia is not a big enough celestial body to affect the tides, but it is smart enough and agile enough to catch the right waves. How can Australia best position itself to take advantage of the changes we will see unfolding in this decade? I see two general areas of activity, both realistic and feasible steps. One is in public diplomacy; the other is in setting the stage for broader liberalisation.
Australia practises traditional diplomacy -- government-to-government representation -- as well as anyone in the business. Australian government officials are always quick to let American government officials know their concerns on the various issues of the day. That's traditional diplomacy. Where I think Australia could enhance its activities is in the area of public diplomacy, of trying to reach the general public with its message.
Before the emergence of the modern democracies, of course, traditional diplomacy would be sufficient. If the ruler of the foreign country agreed with you, that was all you needed. With the advent of the modern democratic state, diplomats need increasingly to appreciate the complex decision-making environment they face. With a well-informed electorate and a diversity of mass media, there are the mechanisms as well as the rationale for various programs to reach the general public.
For example, their C-SPAN cable network shows excerpts from the British and the Canadian parliaments; why can't it show scenes from the Australian parliament as well? After all, the Australian parliament's Question Time is known for being, shall we say, televisable. Another example: US Navy ships regularly pay visits to Australian ports, which is a friendly way of reaching a wide audience. Why don't Australian ships visit American ports? After Desert Storm I was a bit surprised when the participating Australian frigates did not visit a series of American ports. What better way would there have been to remind Americans of Australia's contribution? A third example: why don't Australian exporters work directly on trade education with various American importers and purchasers of Australian products? Australia could play a direct role in working with coalitions in the United States to educate the general public as to the benefits of liberalisation, but I don't see any such effort under way. A fourth example: why is Australia closing down AUSTRADE offices in the United States when it should be opening them up? Finally, we should look at some current programs to see if they can be reinvigorated. I'm thinking here of educational exchanges or perhaps short-term work exchanges. Shouldn't we be able to devise a system whereby young citizens of each of our countries have the opportunity to work or study in the other country for a year or two? To the extent that such programs are currently in force, I think that they are not promoted or used as well as they could be. Those are but a few examples of how Australia could augment its public diplomacy, and I believe could enjoy more success over the long run.
As for my second point, how best to set the stage for broader liberalisation, my suggestion here is a modest one and has the advantage of being feasible as well. If we ask the question, "What practical steps can Australia undertake to give itself a little more weight and a little more voice in international trade policy?," there's an answer right in Australia's back-yard. Australia should consider augmenting the SPARTECA (South Pacific Regional Trade and Economic Co-operation Agreement) and the CER to establish a free-trade area encompassing all 15 of the Pacific Island Forum nations.
Such a move would have several advantages for Australia. First, there are the benefits to be gained directly from opening up the markets of the people (over five million) in the Pacific Island countries. In fact, these thirteen smaller island countries represent about three per cent of Australia's GNP. Mexico represents about four per cent of America's GNP. So the direct economic advantage to Australia from such a move would be proportional to the direct advantage the United States will enjoy from its free-trade agreement with Mexico.
Second, such a move would result in a larger economic entity with a larger voice in economic decision-making. A Pacific Free Trade Area would include 15 countries with a population of over 25 million and an aggregate GNP about 80 per cent the size of Canada's.
Third, by rationalising trade links with the smaller Pacific Island states, Australia would be performing a service which few other countries could do. Australia has the broadest range of political and economic activities in the islands, and is in the best position to help integrate these countries into the world economy. By forming an open trading system with them, Australia makes itself a more attractive suitor for the pursuit of follow-on trade links, be they with the EC, AFTA, NAFTA, or all three.
This initiative represents only a modest step in the right direction. But even modest steps are more advantageous than standing still.
CONCLUSION
On a philosophical level, the battle between the protectionists and those who believe in an open market is over. There are very few serious people nowadays who argue that protectionism is the best thing for their country. There is a strong and growing consensus across the political spectrum that the best course is to open markets. That debate is over.
However, on a political level, the debate is never over. There is always a political constituency ready to fight for protectionism, for keeping markets closed. The argument is frequently couched in misleading terms, for its champions know how little popular support they enjoy. Nobody says, "We should keep our markets closed." But people do say, "Yes, but ..." "Yes, I'm for free trade, but not in my industry." "Yes, I'm for free trade, but not this year." There is no end of the clever, self-serving, and misleading arguments invoked as to why everybody else in a country should pay a higher price in order to protect an inefficient or wasteful domestic producer.
Our government has, to its credit, taken Australia down the course to opening its markets. The journey will last several years, and the many benefits to be enjoyed by such a move will at times tend to be less apparent than the few costs incurred. There has been, and there will be, bitter opposition. These will not abate even as the policy proves to be a success. Ignore the sirens of protectionism. Lash yourselves to the mast. Stay the course. Australia will be better for it.
