Counterpoint 12 March 2007
Free Trade Agreement
Michael Duffy: In July 2005 the US-Australia Free Trade Agreement came in.
Government assured us there would be tangible economic benefits and the
ALP agreeing, with certain qualifications. But many observers couldn’t see
it. Some thought it would actually have bad outcomes. And perhaps the main
intellectual argument about this was put in a book called How to Kill a
Country. The authors of that were Linda Weiss, Elizabeth Thurbon and John
Mathews, and John joins us now. He’s Professor of Strategic Management at
the Macquarie Graduate School of Management. John, welcome to the program.
John Mathews: Thank you, Michael, it’s a pleasure.
Michael Duffy: I’ve just got to ask you about something. It was discussed
much at the time, it’s not a central point, but why was the thing so long?
Many people commented that a real free trade agreement would take about
three pages, so why was this one 1,000?
John Mathews: That’s a very good point to start with. We were pretty
horrified ourselves as we were observing the progress of the negotiations
on this agreement. We thought, like you, there would be a few key points
that the parties would agree to, we could open up markets on beef and
sugar and so on, and instead we find that six whole sectors where
Australia is strong, like sugar exports, are completely excluded from the
agreement. And we have these long, long chapters, much of which seems to
be taken holus bolus out of American legislation, being incorporated,
effectively, in Australian law.
One example is in the copyright provisions. There’s a long section in the
agreement which brings over, more or less word for word, whole sections of
the US Digital Millennium Copyright Act. It extends copyright provision to
70 years, and it upgrades sanctions from civil penalties to criminal
penalties. You know, you in the ABC might be breaching some small facet of
the copyright law and you’ll be up for criminal penalties. The point is
the Australian parliament has never discussed this, it’s just gone through
and it’s more or less adopted into Australian law. So the length of the
document reflects the legalistic mindset of the Americans in looking to
ratchet up their provision for supporting their trade around the world,
agreement by agreement.
Michael Duffy: But is it also the case that a lot of those 997 extra pages
John Mathews: Not really, no. They are detailed specifications of what
kind of investments are to be allowed by Australia from the United States
into this country, what kind of contracts for government procurement are
to be opened up to Americans, the kind of manufactured goods that are to
be allowed into this country, and above all the provisions of the
intellectual property right patent law and copyright law which are to be
harmonised...that’s the nice word for it, but actually we would prefer to
use the word ’institution cleansing’. Basically the United States is
cleansing Australia of its institutions, and that’s what we meant by this
somewhat strange title How to Kill a Country, we meant how one country
gives up its institutions and they’re appropriated or taken over or wiped
out by another country.
Michael Duffy: I’d like to go through some key areas with you in a moment
and I realise that in some of them, 20 months won’t be enough, there’ll be
nothing that one can usually say but I believe in others there are things
that we can say, and we’ll come to that in a second. Is it possible to
give any sort of overview...I mean, in the balance of trade figures, that
might give us some hint of what’s going on?
John Mathews: Yes, sure. Again, modelling was done by the government in
the lead-up to this agreement and we’re led to believe that there would be
substantial economic benefits for Australia. The government ridiculed
anybody who queried that modelling and queried the results of it. But
look, the results are there for all to see. It began, by the way, on the
1st January, 2005, so we’re now two and bit years into it, and in the
first year the balance of trade between Australia and the United States
went down, the deficit grew. In the year 2006 the deficit has actually
gotten worse, yet again. It’s now touching $US10 billion. I say US
dollars, Michael, because the Australian government, to the best of my
knowledge, hasn’t published that figure. We’ve got that figure from US
sources. They’re not trumpeting the benefits of this agreement now in
terms of the overall trade balance between Australia which is
overwhelmingly America’s say, and it’s got better from the point of view
of America in the two years since the agreement.
Michael Duffy: Can you put that into some sort of historical context for
us? Do these sorts of blips happen anyway or is this a marked change?
John Mathews: No, this has been a secular decline, the deficit has been
getting worse and worse. We were just into deficit about ten years ago and
it’s been getting worse ever since. So it’s a steady progressive decline.
Michael Duffy: I’d like to run through a couple of the major areas with
you now and you can just tell us if there’s much to say about them or not.
Agriculture was one that was very much in the news, imports and
exports...let’s start with Australia’s exports. Any significant benefits
yet? Are we selling more to America?
John Mathews: No, we’re not, and the provisions in the agreement were very
lightweight, if you like. On beef, for example, the Americans were going
to open up their market progressively over 18 years. I mean, that’s a
ridiculous kind of concession. But let me say on meat and exports from
Australia that pork producers have been up in arms over this agreement
because the Australian government during the negotiations and since the
signing of the agreement have been weakening the quarantine protection for
the pork industry in Australia, drastically changing it from disease
prevention to disease management, looking at the risks and allowing in
pests and diseases that would otherwise be kept out. And so bad was this
that the pork producers actually took the government to court to have one
of their import risk assessments invalidated, and the government appealed
against that decision. So here we have the pork producers of the country
fighting their own government to get decent standards of quarantine
Michael Duffy: This is to stop US pork coming into Australia?
John Mathews: The quarantine standards that Australia has utilised, which
gives a clean and green agriculture, are seen as a trade barrier by US
Michael Duffy: To be fair they can be used as a trade barrier, and
sometimes Australia has had standards in these areas much higher than
John Mathews: And why not? We’re an island nation and it protects us as a
clean and green agricultural exporter.
Michael Duffy: That leads us into beef rather nicely and I know that Linda
Weiss, Elizabeth Thurbon and you have done a paper on this. This is a
story about, as I understand it...well, it will be about American beef
coming into Australia, in part.
John Mathews: Not so much that, Michael, it’s more a case of American beef
versus Australian beef going into Japan and Korea. Here you have a case
with Mad Cow disease or BSE, Bovine Spongiform Encephalopathy, here we
have a case where the European industries, in particular the British
industry, were almost wiped out with Mad Cow disease. The Americans
maintained that they had no problems at all and maintained a stringent
policy of no imports from countries afflicted with BSE. Australia of
course has been all through this without any BSE at all.
The Americans had to change when the US Department of Agriculture had to
admit that there were some cases of BSE, so then their strategy changed,
they were excluded from the markets in Korea and Japan, and they saw
Australian beef exporters getting a leg-in there. Under the Free Trade
Agreement we’ve agreed to a side letter, not even part of the text of the
agreement but a side letter exchange later where we agree to relax our
standards on Mad Cow disease and go with the Americans on trying to get an
international animal health standard that is weaker than the Australian
standard, and that of course puts us on a level playing field as far as
the Americans are concerned in the markets for Japan and Korea.
Michael Duffy: And how would relaxing our standards affect the
international standards and what’s happening up in Japan and Korea?
John Mathews: Because the Japanese and Koreans had very stringent
r12 March 2007
Free Trade Agreementequirements on imports of beef into their country, for consumption of
beef in their country, and quite rightly so, and they’re concerned that
the Americans are not, for example, being all that careful with the way
they export their beef, that there might be some kind of spinal cord
residues in the beef that they export and that might lead to cases of Mad
Cow disease in Japan. The point about this is why would a country like
Australia that has a competitive advantage-we are clean and green, we have
the markets in Japan and Korea-why would we give that away to the
Americans, to our great and powerful friend? That’s the conundrum that we
keep coming up against, Michael, in looking at this Free Trade Agreement
and the trade actions of the Howard government in general.
Michael Duffy: Do you have any thoughts on that? It’s quite a question.
John Mathews: It’s quite a question. If you use the perspective of
national interest, that governments are there to protect the national
interests of the country they’re governing, then you are constantly amazed
by the actions of this government and particularly the way that they’ve
given away whole sectors of Australian industry in the Free Trade
Agreement. But if you change that perspective and you actually say that
maybe the goal of the government is to do favours for our American
friends, then perhaps some of the actions become more explicable.
Michael Duffy: Why would it want to do a favour like that? You can
conceivably see why they might want to go into Iraq for some long-term
perceived political gain or an alliance, but why would they want to
destroy Australia’s beef export market?
John Mathews: That’s an extremely good and relevant question and I can
tell you we’re working on it right now. Have me back in a few months and
I’ll say more on that.
Michael Duffy: The senator and pastoralist Bill Heffernan has said that
the side letter ’binds us to bloody nothing’, his words used in
parliament. You would disagree with that?
John Mathews: Yes. Senator Heffernan is a fine figure and he’s a very good
farmer, but there he’s simply astray of the truth. The side letter
explicitly says in the text of the letter that it forms part and parcel of
Michael Duffy: And essentially we’re committed to helping the US water
down these international standards.
John Mathews: That’s effectively what the side letter on BSE is doing.
Michael Duffy: I understand the Cattle Council of Australia went along
with this. Why would they?
John Mathews: Why would they? Well, again, a very interesting question.
Why would the Cattle Council, why would the National Farmers Federation go
along with these actions? And I think to answer that question you have to
look at the structure of those organisations, you have to look at the way
that rural interests have been carefully structured in a kind of
corporatist process in Australia so that effectively...we were arguing in
this paper that published in the Australian Journal of International
Affairs, effectively the Cattle Council of Australia has become an
extension of the government rather than an independent voice for cattle
Michael Duffy: How binding is this agreement? What happens if Australia or
indeed America wants to break one of its conditions at some point in the
future? You talked before about how we don’t have access to certain US
markets for 18 years, so what happens if, come 18 years, they say no?
John Mathews: The point is it’s a trade agreement and therefore there are
strict enforcement provisions. There’s a provision for taking disputes to
a process where they can be arbitrated, and if the Americans find us to be
in breach of the agreement then trade sanctions will be imposed, so it’s a
serious agreement. But how long is it? Well, it’s an open-ended one. The
two countries can have a free trade agreement for ever and it’s binding,
but if a government were to come in in future and say, ’well, looking at
this agreement we can’t see where the advantages for Australia lie, why
don’t we disassociate ourselves from this’, then under the agreement you
can actually give six months notice to terminate in writing and then that
process would go from there.
Michael Duffy: John, what about blood, what’s going on there?
John Mathews: Blood’s an interesting one. You might have noticed over the
weekend the health minister Tony Abbott put out a press release that was
carried in the press over last weekend; Abbot may lift Mad Cow blood ban.
This is an interesting kind of story that’s sourced actually from the
minister’s office. He’s effectively saying, ’Well, we’d like to be able to
have self-sufficiency in blood supplies in Australia, it looks as though
we might be a bit short, so we might have to, if we want to maintain that
policy of self-reliance, we might have to extend the net a little bit,
maybe bring people in as blood donors who had been exposed to certain
conditions in the past such as Mad Cow.’
And he says, kind of ingenuously, that that’s one way of going ahead. What
he doesn’t say, of course, is that there is another option which is to
import blood products. The fact is that the government has been pushing as
hard as it can for that second option. It’s been pushing to open up the
Australian blood market to foreign imports, particularly from American
blood products supplying companies. But that’s not stated in this press
release from the minister, it’s not stated in the stories that are carried
in the weekend press, it’s not even stated in the ABC news. So how is
anybody, listening to that or reading that, to make sense of it? In fact
they can’t make sense of it.
Michael Duffy: But why shouldn’t they just open it up? What’s the problem
John Mathews: The point is, you see, we have an excellent blood supply
system in Australia. We collect blood from our own citizens through the
Red Cross, it’s then passed to the Commonwealth Serum Laboratories, CSL,
who fractionate the blood and produce blood products. It’s an excellent
system, it works extremely well. Why on earth would we want to change it?
Well, you have to go back to the Free Trade Agreement to find another side
letter, a side letter this time on blood supply and American firms like
Baxter International saying to their government, the US government, ’This
blood supply contract that the Australian government has with CSL is a
trade barrier, why don’t you see if you can get it taken down under the
Free Trade Agreement?’ So under the chapter on government procurement they
exclude blood products, and then they re-include it under the table
through a side letter. This is what it turns out the government has been
pushing for, even before this Free Trade Agreement came in. So you need to
understand the implications of the Free Trade Agreement to make sense of a
story like this one that Tony Abbott has put into the press over the
Michael Duffy: So it seems like one of the things you’re suggesting is
that the government has used aspects of the Free Trade Agreement as an
instrument of domestic economic policy.
John Mathews: Absolutely correct, yes, and again you wouldn’t know that
that’s the real issue involved in this blood supply issue just by reading
these stories where Tony Abbott says, hand on heart, ’We’d like to
maintain the policy of self-sufficiency,’ when in fact the reality is that
under the Free Trade Agreement they have already given undertakings to
open up the Australian blood market. They’ve put an inquiry into place to
look into that and much to their discomfort, that inquiry, the Flood
Report, actually said thanks but no thanks, we’ve got a very good system
in Australia, thanks very much, and we’d like to keep it.
Michael Duffy: I think the agreement was to make it potentially easier for
Americans to invest in Australia. Have we seen much sign of that yet?
John Mathews: Yes, we have. The agreement raised the bar from just $50
million to $800 million for an acquisition that would need to be sent
across to the Foreign Investment Review Board for review. Believe it or
not, one of the first American investments in Australia after the
agreement came into effect was in the resource sector. An American
company, Cleveland-Cliffs, came in and bought an Australian iron ore
exporter, Portman in Western Australia. Portman has lots of contracts to
supply iron ore to China. Indeed, the trade minister Mark Vaile was
involved in negotiating those contracts. He came back after that series of
Michael Duffy: And that’s the most substantial one to date, is it?
John Mathews: Yes, he said that’s how we’re supporting iron ore exports
from Australia, and boom, that’s the first company snapped up by an
American company under the FTA.
Michael Duffy: We’re out of time, but Professor John Mathews, thank you
very much for joining us.
John Mathews: Thank you very much, Michael, for the time.
Michael Duffy: John Mathews is Professor of Strategic Management at the
Macquarie Graduate School of Management, and he’s co-author of How to Kill
a Country, along with Linda Weiss and Elizabeth Thurbon, and that’s
published by Allen & Unwin back in 2004.
Professor of Strategic Management
Macquarie Graduate School of Management
Title: How to Kill a Country
Author: Linda Weiss Elizabeth Thurbon John Mathews
Publisher: Allen & Unwin