The AUSFTA and the new bilateralism

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The publicity surrounding the Cairns Group’s twentieth anniversary meeting in September indicated both the possibilities and the problems of Australian trade policy.

The anniversary highlighted the creativity and niche diplomatic skills which Australia utilised in the past to establish a third force in multilateral trade negotiations (MTNs). The Cairns Group effectively ensured that a framework for agricultural negotiations would be inserted in the Uruguay Trade Round.

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However, one of the principal problems remained as the major players continued to be reluctant to liberalise sensitive agricultural sectors, leading to the suspension of the Doha Round. Further to these difficulties, and amidst the nostalgic celebrations of the Cairns Group, were criticisms levelled at Australian policy leaders that after 2000 they were distracted by an enthusiasm for the new bilateralism and, in particular, the Australia-US Free Trade Agreement (AUSFTA). This distraction revealed a shift in Australia’s trade orthodoxy, from multilateralism premised on the norm of non-discrimination, to a renewed focus on the preferential trading of bilateral agreements that had been evident in Australian trade politics until the 1950s.

Yet bilateral negotiations with the US would also be challenging. Many experienced and expert trade analysts in Australia had always understood the difficulty of negotiating bilateral liberalisation deals with the US, particularly in agriculture. Arguably too, through 2003 some of Australia’s developing country Cairns Group fellow travellers may also have comprehended that Australia would need to accept a suboptimal deal on agriculture with the US if it were to sign the new agreement. Any concession on agriculture would diminish the position Australia had advocated for the previous twenty years in international forums and undermine the Group’s activism. Further, the Cairns Group failed to respond in adequate fashion to the text prepared by the EU and US for the WTO Cancun trade ministers’ meeting. By September 2003 after the subsequent failure of the Cancun meeting, nine Cairns Group members, led by Brazil, agreed to participate in the developing countries’ G20 to expedite the pace of global agricultural reform. This group’s attempt to negotiate better outcomes with the EU, US and Japan at once detracted from the authority and leverage of the Cairns Group and complicated consultations; increasing the complexity of negotiations by introducing another player into the cluster.

Over this period, however, Australia was devoting significant diplomatic resources to the AUSFTA deal. While the Australian government had touted the prospects of liberalisation in agricultural trade from the initial stages of the discussions, the US interest in the deal extended well beyond the trade aspect. In addition to negotiating gains for its producers the broader US interest stemmed from its desire to establish the new rules for global governance and regulation in the new economy. For the US, this new bilateralism is about both placating domestic producers and Congressional interests and bolstering security. But importantly it is also about harmonising and internationally regulating the playing field for capital. Hence the drive beyond border tariffs into public policy.

For these parallel economies, then, where manufacturing tariffs are relatively low even despite some dramatic peaks, and consequently where win loss calculations will remain for the most part unspectacular, it is the new bilateralism of regulatory frameworks and governance that is the most remarkable. Though on the one hand the new bilateral agreements are a mechanism for states to protect their sensitive and traditional industries through ‘negotiated protectionism’ (as Capling notes), for the US they are also an endeavour to liberalise and enforce harmonisation in new technologies where it has competitive advantages. The US AUSFTA interest in intellectual property rights, particularly within the copyright, patents, local media content and the public health domains is evidence of its desire to manage the environment in which transactions take place and assert its position as a hub for the new technologies. US concerns with Australia’s quarantine regime also speaks to its interest in public policy governance. But while Australia may have originally intended to construct a deal based on the old WTO inclusive agenda, it was dealing with a more powerful player intent on writing new rules about governance and regulation of the global economy. Moreover, any US interest in protecting sensitive industries was aided by its negotiators’ intimate understanding of the Howard government’s political need to sign a deal which it had declared strategically important and to which it had devoted significant resources.

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Though the impact of the agreement will take years to accurately gauge, it should thus come as no surprise that the nascent trade trends after one year of the AUSFTA’s operation (2004-05) disclose little benefit for the Australian economy. By September 2005 the trade deficit increased from $12.7 billion in 2005 to $13.2 billion, though this hardening of the deficit was in part influenced by the strong Australian dollar restricting export profits to the US. Australian manufacturing exports to the US decreased by 3 per cent to $9.3 billion while imports rose 4 per cent to $21.4 billion. In specific sectors, auto exports into the US slumped by 24.1 per cent and wine exports by 0.8 per cent. Trade in services remained steady. DFAT reported that US investment inquiries have risen by 30 per cent, however, US investment in Australia decreased by $3 billion (after the News Corp $32 billion relocation to the US was removed from the figures). Specific sectors that have been able to maximise the openings to date include lamb, cheese and seafood producers, motor boat and nickel bar and rod manufacturers. Just how much Australian producers will benefit over the next decade from the market access openings, including the opportunities to access segments of the US government sector, remains dependent upon the quality of the product and the business savvy of the producer but also on their capacity to overcome any residual and informal national treatment conditions.

One of the significant successes for the Australian government was the negotiation of the E-3 business or professional visa to allow 10,500 places into the US. Moreover, the Congressional Liaison arm of the Australian Embassy in Washington most certainly raised Australia’s profile significantly in the process of lobbying for the FTA approval, and Australian businesses will be the beneficiary of their work.

How will this agreement translate into prospective negotiations with either China or Japan? To date, the East Asian intraregional preferential agreements remain more about trade enhancement measures and ‘negotiated protectionism’. In the trade domain, Australia has more to gain in these negotiations because of the complementary nature of the economies. However, because of the importance of agriculture sectors to both national food security and cultural concerns, the sector remains a prickly one to negotiate. Furthermore, Australia’s trade concessions to the US in the agricultural sector and its openness to review quarantine regulations will have been acutely observed in Northeast Asia. Australia’s agreement with the US sets a political precedent in its agricultural bargaining position. Any FTA with Japan has always stumbled at the agricultural chopping block, however, the concessions given to the US and a renewed interest from the LDP and the Ministry of Agriculture, Forestry and Fisheries (MAFF) for some agricultural reform may bring the parties closer together. Given that Japan already has some concerns regarding trade diversion as a consequence of the AUSFTA and prospectively via an Aus-China agreement, it may be more predisposed to negotiate. The China agreement is more complicated, however, precisely because of the nature of its transitional economy. The recent setbacks to progress in agricultural and manufactures sector negotiations in the two country talks are demonstrative of these difficulties. This delay will probably affect the timetable for negotiations of services which is a sector likely to produce significant gains for both countries.

More broadly, as both the WTO and Asian Development Bank have documented, the spate of regional preferential trade agreements with their complicated rules of origin arrangements, conferral of preferences and trade diversion consequences, pose significant risks for the liberalisation of trade. At the conclusion of the Cairns Group meeting in September Australia now has some sense of the epic challenges for the Doha Round. Perhaps Mark Vaile’s departure from the trade portfolio provides an opportunity for Australia to consider how it may recapture leadership in agricultural liberalisation. But perhaps not.

There is no question, however, that in recent times Australia has sacrificed its position of authority in this area. To proceed from this position of diminished legitimacy the government would need to genuinely consider whether agricultural liberalisation through the MTNs (the only venue where the three pillars of market access, export subsidies and domestic support can be addressed) is worth the reallocation of substantial diplomatic resources. With 70 per cent of national output and four of five jobs located in the services sector, and particularly with its rural constituency and Australia’s fine tradition of niche diplomacy in the agricultural sector, the government needs to answer a difficult question. It must decide whether a frank endeavour to revive its agricultural liberalisation leadership should consume its limited diplomatic assets or whether it should allocate these resources to the services domain in the MTNs or the China FTA.

If the government does decide to take this path then how should it proceed? It should prioritise the MTNs and acknowledge that preferential agreements cannot address the problem. Significant resources are necessary to negotiate in the new arena. The WTO is much larger than in 1986 at the formation of the Cairns Group and therefore bargaining is more complicated; the developing countries are more powerful than before; the rich countries are comfortable in their position and structural adjustment is increasingly problematic in developed country domestic politics. Nonetheless, the first step to revitalise the Doha Round begins with a resolution of acceptable formulas for negotiation of the three pillars to agricultural reform. These formulas need to ensure that any agreement on ‘sensitive products’ does not rebalance any gains in the final result. A resolution here precedes negotiations on manufacturing, services and trade facilitation. The Howard government could also use its stated influence in the US to lobby for an extension to Trade Promotion Authority in the US beyond July 2007 to allow for a committed US engagement in any renegotiation of the Doha Round. Work with the US on reforms to the next US Farm Bill needs to done in conjunction with the Round and associated reforms to the EU’s Common Agricultural Policy. And on the twentieth anniversary of the Cairns Group’s inauguration, a rethink of its role vis-à-vis the G20 is worth considering.



References:

Asian Development Bank, 2006, Asian Development Outlook, Hong Kong, http://www.adb.org/documents/books/ado/2006/default.asp

Capling, Ann, 2006, ‘The case for a bilateral trade agreement with Japan’, The Australian, 4 August.

DFAT, 2005, Composition of Trade, Market Information and Analysis Section, Canberra, May.

DFAT, United States Fact Sheet, http://www.dfat.gov.au/geo/fs/usa.pdf accessed 20 August 2006.

Stoler, Andrew L., 2005, ‘Priorities for Australian Trade Initiatives in 2005′, CEDA/PROMINA Economic and Political Overview Conferences, Adelaide and Melbourne, 16-17 February.

WTO, 2004, The Future of the WTO, Addressing Institutional Challenges in the New Millennium, Geneva, http://www.wto.org/english/thewto_e/10anniv_e/future_wto_e.htm

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