A matter of sovereignty (Part 2): Negotiating our future away

Australia's trade negotiators are "craven no-hopers" who have consistently sold Australia out in their eagerness to sign "free trade" deals. Dr Evan Jones looks at the history.

[Read Part One]

The Australian current account balance is permanently in deficit. The export of goods for which Australia supposedly has a “comparative advantage” is never adequate to pay for imports and the servicing of foreign debt. One would have thought that the national interest dictate an evaluation – and redressing – of this permanent deficit.

A resurgence of intelligence in trade policy — if temporary

Apart from the rising concern for a potential downside to substantial foreign investment in Australia, there was another dimension to the “nationalist” surge from the late 1960s. It was a bureaucratic element that replicated a hard-nosed mentality regarding trade policy and politics after the passing of the McEwen era in 1970. Its personnel were housed in Labor Minister Rex Connor’s Department of Minerals and Energy; then Doug Anthony’s Department of Trade & Resources under Fraser; then Lionel Bowen’s Department of Trade under Hawke.

A key impetus for an alternative approach to trade policy was the impasse that developed at the Tokyo Round of GATT. Trade Minister Anthony expressed the view that GATT was a joke and walked away from it. The institutional structure for delivering reduction of trade barriers at a multilateral level had run aground. It has never been recovered.

The bureaucratic group assembled noticed that the trade balance was languishing in the mid- to late-1970s, in spite of the resources flowing into the resources sector. The group proceeded to pick apart Australia’s trading structure, to detail changes, to compare with developments in global trade and to devise means of enhancing Australia’s trade performance, especially with Asian neighbours. The story is recounted in a 1994 unpublished paper of mine.

In Labor’s Department of Trade, after 1983, the group devised strategies to enhance trade with Japan and China. This was an innovative bilateralism, based on the enhancement of information flows, on diplomacy and on the development of mutual interests (with the emphasis on "mutual"). No complex, sacrifice-embodying treaties were involved. The strategy readily paid off.

That development and its momentum were not to last. In 1985, John Dawkins was brought in as trade minister, the diversity of intelligence and opinion curtailed, the strategists marginalised, and a new “vision” established. Policy was henceforth to be oriented towards the latest round of GATT negotiations – the Uruguay Round – then cranking up.

Orthodoxy entrenched

Unlike the McEwen-era personnel, the new breed had an unrelieved optimism that here was the chance to break down the entrenched barriers to agricultural trade. Australia duly initiated the creation of the Cairns Group of agricultural exporters in 1986, by which vehicle, it was said, Australia was now capable of “punching above its weight” in the Uruguay Round.

Australia was also a key player in the creation of the Asia-Pacific Economic Cooperation organisation in 1989, essentially oriented towards the same ends.

In the meantime, under Dawkins, the Department of Trade was soon abolished in mid 1987, its components spread to the four winds. Only the mulitateral section of Trade went into a new “combined” Department of Foreign Affairs and Trade (DFAT). A trade promotion body, Austrade, was created, replacing the previous Trade Commissioner Service, but its funding was inadequate and an appropriate staffing and structure not guaranteed.

Henceforth, a diversity of opinion, lateral thinking on trade policy, was not to be tolerated in DFAT. The new flavor of the month was the obiter dicta of one Ross Garnaut, manifest in his 1989 report for the Government — Australia and the Northeast Asian Ascendancy. Garnaut had been Bob Hawke’s jejune economic policy adviser during 1983-85 and was then, inappropriately, made Ambassador to China from 1985-88. Garnaut was a long way down from Whitlam’s China ambassador, Professor Stephen Fitzgerald.

Garnaut’s 1989 report is centred on the claim that Australia can hitch its wagon to rising Asia. It desirably recommended that Australia’s education system needs to be "Asian-ised" (replicating the 1960s’ imperative when Fitzgerald became a Sinophile). But it was crude on everything — freer trade made post-World War II Australia and Asia boom (no it didn’t); multilateralist trade diplomacy abroad and ‘microeconomic reform’ domestically (deregulate everything); will provide the means to substantial and inclusive regional economic growth (no again); and Australia should stick predominantly to its “innate” comparative advantage in the export to Asia of unprocessed or little processed resources, food and fibre. The Australian media universally gave unstinting praise to the report.

Garnaut’s pedestrian mainstream vision became institutionalised in DFAT in the resourcing of the East Asian Analytical Unit, from which various “sons of Garnaut” reports were issued.

Simultaneously, there continued a strong domestic push to unilaterally reduce manufacturing sector tariffs and agricultural sector subsidies — regardless of continuing trade restrictions abroad for Australian exporters). This push was driven by the official "think tank", the Industries Assistance Commission (after 1989, the Industry Commission), which found a sympathetic ear in the Hawke/Keating Labor Governments. Garnaut’s report and its favourable treatment enhanced the push. This push was independent of trade policy determination, but it was indirectly hailed as demonstrating to the world Australia’s bona fides regarding Australia’s willingness to “give way” in trade negotiations.

Unilateralism –and its domestic ‘microeconomic reform’ complement – continued on, making Australia globally unique (perhaps with New Zealand then tagging along) in its purist commitment to abstract “free market” tenets.

As for the bets being placed on multilateralist negotiations, optimism failed to produce the expected benefits. It was more of the same, exposed during the Tokyo Round. APEC was and is a talking shop, not least given the dead weight of having the American giant as a member. The Uruguay Round ended in a fizzer, with the superpowers (U.S., Europe and Japan — all agricultural protectionists) as per usual running the show. Utterly predictable.

From trade to control of investment and intellectual property

But something happened at the Uruguay Round that the key Australian players failed to recognise. After 40 years of GATT rounds of negotiations, they had reached the pointy end in which restrictions on trade in manufactures had been dramatically lowered and agriculture now loomed large. It now become obvious that none of the major players were prepared to take the rhetoric seriously, so the goal posts had to be shifted. The U.S. led the way in moving the emphasis to services, investment, public procurement, intellectual property and so on.

Thus was the World Trade Organization created to oversee the pursuit of the new agenda. Formally, the WTO apparatus included an adjudication tribunal for disputes, but the WTO remained essentially a vehicle for the powerful states and their corporate interests.

Remarkably, the WTO is now consigned to irrelevance, courtesy of popular dissent and the collective resistance of lesser countries. The Doha Round, begun in 2001, is at a permanent impasse, predictably impaled on first world agricultural protectionism.

With WTO negotiations bogged down, the U.S. state and its corporate sector established a separate front to pursue the same objectives — to liberalise and regularise foreign investment procedures in their interest. This new front took form as the Multilateral Agreement on Investment. But the MAI thrust also ran aground under pressure worldwide from social protests. The failure was a spectacular success for the democratic impulse and a frustrating impasse for the global corporate elites and their political flunkeys.

The scene had also moved to bilateral negotiations, initiated by the impatient Americans, used to getting their own way. Even during the drawn-out Uruguay Round negotiations, the U.S. began negotiations with Canada — the forerunner to the 1993 North American Free Trade Agreement between the U.S., Canada and Mexico.

NAFTA has been a disaster for the populations and economic integrity of all three countries (see here, here and here, for example).

More, NAFTA was the first to institutionalise what is now known as ‘investor-state dispute settlement’ procedures (ISDS). Corporate litigation against nation states has since exploded and national sovereignty dramatically diminished as a direct consequence.

In addition, U.S. FTAs with individual minor countries implant specific deregulatory conditions (with respect to labour rights, the environment and so on) that are then used as a beachhead in FTAs with other countries, where restrictions in those fields may be of substantial importance to the national interest of the lesser countries. I covered this dimension, little commented on, in a 2004 article.

Meanwhile, DFAT, denuded of lateral thinking capacity, made much noise but displayed little collective intelligence on the dramatic transformation in strategies on trade and investment negotiations by the major players. The adverse experience of NAFTA – and rapacious ISDS-based law suits by multinational companies against countries pursuing domestic social agendas – have not registered on the DFAT mindset.

The rise of bilateral trade treaties in Australia

Then along comes the proposed bilateral FTA with the United States, with John Howard in office and the National Party’s Mark Vaile as Trade Minister. How Howard was pulled into this schmozzle is unclear. Like Bob Hawke before him, Howard was dazzled by the Big Smoke.

A crucial factor in the initiative was Australian-born Phil Scanlan. Scanlan, sometime CEO of Coca-Cola Amatil Australia, created, with his American wife, the Australian American Leadership Dialogue in 1992.

Scanlan is feted for his networking skills, but he seems to have been missing in action in rooting for the home team. Scanlan is centrally interested in the U.S.-Australia-China relationship, but the impression is that Australia is merely seen as a vehicle to enhance the U.S.-China trading and investment relationship. It is instructive that Scanlan has a master’s degree from Harvard’s Kennedy School of Government. The Kennedy School is primarily a vehicle for the projection of American "soft power’; Scanlan seems to have imbibed the ambience.

It is not curious, then, to find an editorial in the Australian Financial Review, 6 June 1996, on the occasion of the fourth annual meeting of Scanlan’s AALD. There is nothing in the editorial about mutual commercial interests (save for the claim that McDonalds and Coca-Cola have dramatically rescued us from becoming a cultural backwater). Rather, it is all about Australia having moved too far from American tutelage, flirting with dangerous China.

The inequality of the Australia-US relationship was and is immense.

A 2006 article by Canadians Elizabeth Blackwood and Stephen McBride (with a background in the NAFTA experience) highlights the American negotiators’ key interests: the undermining of Australia’s world standard Pharmaceutical Benefits Scheme; the further enhancement of U.S. capital’s “intellectual property” rights; the undermining of Australia’s biosecurity regime, that protects the integrity of the rural sector; and the dismantling of government procurement programs that assist Australian industry.

I am not au fait with the details of the ultimate deal, albeit expert and public pressure quarantined the PBS from total emasculation. But there was one close observer who was disgusted by the outcome.

US FTA: benefits from free trade haven't quite gone the distance http://t.co/jgxqrPh7K5 Hi compliance costs make FTA a dud #auspol #qanda
— Reggie (@reggie2408) March 23, 2015

Oliver Yates was then a senior executive of Macquarie Bank’s New York office; in an article in the Australian Financial Review, 16 February 2004, he had this to say:

No one believed that a mouse could negotiate with an elephant, but in true Australian spirit you can't knock a bloke for having a go, and Mark Vaile [then Trade Minister] was our brave fighter. Most of us were expecting the talks to break down and for Mark Vaile to get a pat on the back for giving it a go. …

Mark Vaile, assisted by the Department of Foreign Affairs and Trade, organised a breakfast meeting of Australian business leaders in New York last year to enlist our support for the FTA and AAFTAC [the American-Australian Free Trade Agreement Coalition]. I was highly sceptical that the government could achieve a comprehensive FTA, having experienced the US political system for six years. I actually asked Mark to stop calling the negotiations a "free-trade" agreement as it never would be "free". The government needed to avoid overselling it to the Australian public, otherwise they would make Americans look disingenuous. The Americans had no intention of granting full "free trade".

We were assured at this breakfast by Mark that given the "special" relationship the two governments had, there was a real chance to conclude a comprehensive agreement and we should do all we could to support it.

We concluded that if the government was right and it had this "special" relationship, a comprehensive agreement really would be a significant achievement. If the government was incorrect, as the business community suspected, they would find out and back away, opting for traditional multilateral approaches. These were the two options. Mark found a third and signed an agreement that was not under consideration by the community and was outside the mandate as we understood it and betrayed many of us.

My sense of betrayal, I am sure, is shared by many others. In the November 2003 update, AAFTAC informed us that "the negotiating teams discussed all aspects of the agriculture negotiations, including phase-in periods for Australian sugar, dairy and beef".

In the newsletter issued by the Australian government to those interested in the progress of the negotiations in November, we were informed that a "comprehensive package on agriculture needs to be in the final agreement. Improved access for Australian beef, sugar and dairy will be essential elements of the agriculture package. Australia has signalled to the US that it was prepared to consider phase-in periods for the most sensitive agriculture products".

Never was it contemplated or signalled that these essential elements would not be in the FTA. Instead, the agreement grants nothing to the sugar industry and retains quotas on beef and dairy. Furthermore, never was it contemplated that Australia would grant (as the US trade representative said) "unprecedented provisions to improve market access for US films and television programs over cable or satellite".

That the government signed the agreement, knowing it is economically damaging to Australians, smacks of disrespect and desperation. One is left wondering if we need laws to prevent a government making agreements it knows are economically disadvantageous to Australians.

Quite.

One has to confront what a cavernous distance there is between John McEwen as Trade Minister and Mark Vaile as Trade Minister. McEwen’s reputation has been comprehensively trounced by the “global integrationists”, his achievements ignored, and the hapless and hopeless Vaile (with his appalling failure as National Party leader left unremarked) has gone off to work for the mining sector, leaving the national interest in the pits.

One has also to confront what a fairytale land the agricultural sector’s representatives have lived in for decades. They keep imagining that barriers to all Australian agricultural exports can be broken down, in spite of decades of previous adverse experience. They may as well bay at the moon.

The doleful figures on two bilateral trade treaties

What has happened to the Australia-U.S. trade relationship since the treaty came into effect in January 2005? For financial year 2005-06, Australian merchandise exports totalled $9.785 billion and merchandise imports $22.762 billion, with a deficit of $12.977 billion. For financial year 2013-14, Australian merchandise exports totaled $10.632 billion and merchandise imports totalled $27.971 billion — a deficit of $17.338 billion (the deficit for 2011-12 was $21.176 billion).

Adding services trade to the equation (which includes the massive bounty captured by Hollywood from the Australian cinema dominance, as well as "intellectual property"), the evolving imbalance is even greater:

(Source: Composition of Trade Australia, 2013-14)

Relevant here is a concluding paragraph in Yates’ article cited above:

The final act of betrayal is about to play out with AAFTAC proposing to issue this week a letter to Congress hailing "American manufacturing workers as big winners in the deal with Australia. America stands to gain $2 billion a year, our $9 billion surplus in bilateral trade with Australia will grow". This is the same organisation that many in the Australian business community supported and represented to us that it was focused on securing a comprehensive agreement.

The increase in the merchandise trade deficit with the U.S. is not an accident, but the natural product of a dramatically asymmetric relationship between a powerful country with strategically-driven negotiators and a weak country with craven no-hopers as negotiators.

A “special relationship” between the two governments indeed.

If Australia is a minnow facing the American shark, what about the Australia-Thailand relationship? The trade treaty with Thailand went into effect at the same time as that with the U.S. — January 2005.

For financial year 2005-06, Australian merchandise exports to Thailand totalled $4.230 billion and imports from Thailand totalled $5.388 billion, with a deficit of $1.158 billion. For financial year 2013-14, Australian merchandise exports to Thailand totalled $4.758 billion and imports from Thailand totalled $11.059 billion — a deficit of $6.301 billion.

Adding services to the equation, the evolving imbalance is shown in the following graph:

(Source: Composition of Trade Australia, 2013-14)

Clearly a case of Australia “punching below its weight” — perhaps a metaphor for Australian trade and investment negotiations in general.

Part Three coming soon.

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia License