Plan B: keep talking
The Australian, Canberra
Plan B: keep talking
OPINION
Paul Kelly, Editor-at-large
26 August 2006
Having initiated the idea of a free trade agreement with China, the Howard Government has been stung by its implications and has fallen back to a strategy of caution and protracted negotiation that will extend beyond the 2007 national election.
The private message from the Howard cabinet is that success will be difficult and the trade gains will be small and limited. On Australia’s side, the manufacturing industry has been suspicious and sceptical and the supposed winners, agriculture and services, have failed singularly to sell the FTA’s benefits.
The logical Australian position of offering China further access for its manufacturing exports in a trade-off that creates openings for Australia in China’s huge services and agriculture sectors is unravelling. There is neither political will nor economic appetite for a bold play. This is apparent from the recent cabinet decision that rejected the previous stance of Trade Minister Mark Vaile to put "everything on the table for negotiation".
Cabinet has decided that everything will not be put on the table. The plans for Australia’s two biggest industry sectors - automotive and textiles, clothing and footwear - that run until 2010 and 2015 respectively have been excluded. The integrity of these plans and the investments that underpin them are guaranteed. Industry Minister Ian Macfarlane last week personally conveyed the Government’s assurance to the manufacturing industry after cabinet’s decision.
This can be interpreted only as a defeat for Vaile and Foreign Minister Alexander Downer, since it limits Australia’s options. Of course, they would not have expected any other result given the politics involved. A spokesman for Vaile said yesterday: "We never intended that these industry plans would be dismantled."
John Howard has enough problems ahead of the 2007 election (try interest rates, industrial reforms and Telstra) without exposing himself to a new scare campaign based on special tariff cuts for China.
The pressure on the Howard Government has been intense.
"Australian manufacturers are ambivalent about any free trade agreement with China and only 24 per cent of them support the FTA," Australian Industry Group chief Heather Ridout told this newspaper. "If there had been any move by the Government to offer up existing plans in automotives and textiles, clothing and footwear, that ambivalence would have turned into strong opposition." Ridout did not expect these plans to be on the table but wanted an explicit assurance from cabinet.
The point is that any outcome will extend over a lengthy time so the government can negotiate post-2010 and post-2015 in these sectors. The reality, however, is that Australian industry is already under severe pressure from China’s exports. The political problem is now. An AIG survey of 700 manufacturers released this week shows that China is imposing "ever increasing competitive pressures" on them. During the past two years, the proportion of manufacturing companies affected by China has grown from 70 per cent to 84 per cent.
The Howard cabinet’s dilemma is elementary: it opposes any more manufacturing reform for political reasons yet needs to do more to get a viable FTA with China. But there is a flipside. Australian manufacturers report that China is seen as offering the best growth opportunities of any market outside Australia. And Australia, with its strong resources and services sector, is better placed than most nations to turn the rise of China into an economic plus.
The business end of FTA negotiations begins next month with the exchange of market access offers. Vaile, in an interview with this paper, explains Australia’s dilemma: "We have to persuade China to come forward with positive proposals for market access. Up to this point they have been defensive. It won’t be easy to win concessions on services and agriculture and Australia doesn’t have a lot to trade-off, given that our manufacturing tariffs are already quite low."
Australia’s leading trade economist, Ross Garnaut, argues the FTA benefits will be modest. "We might get exports gains here and there for services and agriculture," he says. "But China would be wary of the US political reaction to any concessions it makes to Australia that discriminate against the US. That is a real obstacle for us."
The FTA negotiation is against the ugly backdrop of global protectionist pressures and a weakening of trade liberalising momentum within the rich nations. For Garnaut, the Howard Government’s tactic of negotiating FTAs as an insurance against any multilateral breakdown has only contributed to the present multilateral deadlock.
"The international trade system in the Asia-Pacific has evolved over the past few years in ways that are deeply disadvantageous to Australia," he says.
"Australia’s shift towards an FTA strategy was influential in this regional sea change. The American FTA gives US manufacturers superior access to our market than our manufacturers get to the US market, and the China FTA runs the same risks.
"Agricultural liberalisation was never amenable to solution via FTAs and this is now apparent. We are back in the early 1980s problem, with agricultural liberalisation off the active agenda everywhere."
Australia’s foreign and trade policy cannot let the FTA fail. Negotiations will extend until there is a final completion. That China is doing FTAs with other nations is an economic imperative to ensure Australia closes a deal. One senior Australian figure says: "We must do our best in a difficult situation. We won’t have a solution for a few years yet."
One of Australia’s challenges has been to persuade China to accept the idea of a comprehensive FTA. The Chinese Government has been divided because this goes to the question of how far it extends its domestic economic reforms. A genuine FTA would mean tangible benefits for Australia. At present, Australia has duty-free entry to China on only 8 per cent of tariff lines while China has duty-free entry on 48 per cent of tariff lines. A genuine FTA would also force China to confront its hefty non-tariff barriers, notably the lack of intellectual property rights (where piracy and counterfeiting are rife) and problems in its legal and financial systems.
The real benefit for Australia is to integrate itself into China’s institutional arrangements for the long term and either steal a march on or guarantee its place against other competitors. The logic of Australia’s FTA with America demands a similar strategy with Asia, a point that drives the Howard Government.
Garnaut says: "Having started the negotiations with China, it is important for Australia to finish them. The US FTA means that Australia is now discriminating against our three largest exports markets in Japan, China and South Korea. It is not sensible to contemplate this as a permanent arrangement."
Noting that some people are calling for the bolder type of 1957 Menzies-McEwen trade agreement, Garnaut says: "The best outcome would be a non-preferential trade agreement along the lines of the 1957 agreement in which the parties extend to each other the best terms that they have extended to anyone else."
That won’t happen. The irony is that the Howard Government is obsessed by FTAs yet is reluctant to embrace the trade liberalisation supposed to lie at their heart.
