Asia Society AustralAsia Centre

Luncheon Panel Discussion on the:

Proposed Bilateral Free Trade Agreement between Australia and the United States and its impact on investment

Guest Speakers
Alan Oxley, Chairman, APEC Study Centre Monash University,
Meg McDonald, General Manager Corporate Affairs, Alcoa World Wide Alumina
John Edwards, Chief Economist, HSBC Australia

Moderator: H ugh Morgan AC, Chairman, Asia Society AustralAsia Centre and President, Business Council of Australia

Four Seasons Hotel, Sydney
Wednesday, 11 February 2004
Transcript

HUGH MORGAN: Three people are going to speak to us very shortly. The only comment I would like to make in preparation for this is to talk for a fraction of a moment about the people who have really been responsible for getting us to the start. When I jog back some years, people like Phil Scanlon have done a fantastic job in cementing and encouraging the relationship between United States and Australia. That is a fundamental part of nurturing and preparing the groundwork, whether it’s for government or industry, to be able to get together and work out the agreement that we have seen. People like Alan Oxley who has been very much intimately involved representing the corporations, some of the corporates and a major part of the corporate sector. Meg McDonald who was captured out of Washington having worked so importantly within the embassy, stolen by Alcoa who took her back into Perth for the Australian Alcoa Worldwide Alumina has been a fundamental part of the process. There have been lots of people who have assisted this process. It doesn’t come about just by accident. I’ve not mentioned of course many, many people who have been a catalyst for this—Michael Thawley who is our ambassador who has worked tirelessly on this project for some time. We are really very fortunate with the team of people who have collectively put their endeavours into making this agreement come about. It’s been a hair-raising adventure. For those of you like myself who have not previously been involved in the intensity of the lobby groups of Washington, it is an experience. Let me just say and I related this in a commentary this morning in a breakfast session. Dealing with somebody like Pharma, for example, is different. Now you’ve got members of Pharma like Johnson and Johnson who have the highest level of integrity in their operations, in their people, in their products, faultless. When you get into lobbying with Pharma that all goes to one side. When it’s in Washington lobbying is about winning. It has absolutely nothing to do with the truth or with principle. It’s all to do with winning. And they’re very good at it and of course Washington is dripping with lobbyists and money and it is very big money. For the Australian nation to get into that debate and bring about a successful outcome is remarkable having regard to the fact that there’s only been really two other comparatively minor free trade agreements that have been entered into the past both with Thailand and with Singapore. So the work that’s gone into this has been remarkable and I leave it to our three speakers today to encapsulate what they think have been the major outcomes from it and to encourage you to ask questions and we’ll have I hope about 20 minutes of Q and A. Alan Oxley will be first cab off the rank. Thank you.

ALAN OXLEY: Thank you, Hugh. There’s something about the United States that seems to bring out the best and the worst in us. We’ve seen political strategies designed to achieve public profile by attacking close relationships between heads of government. The very fact that it is thought that that has some public appeal tells you that there is an element in the community who thinks it’s okay to slag the Americans.

It is very Australian I think to say, “Well, they’re not going to treat us like that; even if it’s a bad result we’ll kick them in the ankles”. I used to find that as a trade negotiator. The number of times we would walk out of meetings having got no result but, “Boy, did we tell them off !” The highlight of this Australian trade negotiation technique was in 1982 when Australia walked out of a WTO conference that wasn’t going to achieve anything. Our protest was that agriculture wasn’t going to be on the table. The conference of course finished without us having any input but boy, were our blokes proud! We sure showed them!

Culture generates some other values and ideas. One of the more depressing ideas, as problems and anxieties were expressed about this whole process, was when people would say - you would hear from commentators in the media – “How can we cope with a gorilla like the United States? If you go into a room with a gorilla (John Button said this publicly) you’re only going to get crushed.” And therefore we shouldn’t try and engage with the United States. We’ll lose. “How can we possibly win?” I personally regarded that as unAustralian because it says you shouldn’t have a go at this: you’re not good enough to manage. And I must say from my experience in public life, when we’re at our best we’re very good indeed. We can make very significant attainments and achievements. Like the very fact that I think we have this trade agreement, which was negotiated at an unlikely time. Most people would say you should never try to negotiate a trade agreement with the United States in a presidential election year. Well, John Howard had such a relationship with President Bush that he and President Bush decided that they would try and do the unlikely and that’s really why I think we have this agreement.

But we’ve found, I’ll come shortly to business groups watching the debate, some fairly frustrating things. The big picture which is what Hugh Morgan has asked me to focus on. This has been the thing that we’ve had most trouble getting across, but I confess that we’ve always been confident that at the end of the day it is what would sell this agreement. I notice that the leaders are “now saying, “Well, do you want us to be associated with the world’s biggest, brightest, sharpest economy?,

I always like to add `and the economy which is actually leading the world economy into the new information era`. Because of the dotcom bust we’ve stopped talking about the information age, but the reality is that it’s steadily progressing and changing the economy. All of you are in areas where your business systems will be changing in one or two years time because of the new technology, because of some change. Work patterns are changing and of course we are only at the beginning of this. I often like to remind people that may be this is a decade that we’ve just been through which might be like the last decade at the end of the 18th century when Britain industrialised and began to embark on a process that led to a wave of change through Europe and North America with industrialisation. If you think the industrial revolution had about another 75 years to run and if we are only at the beginning of the information age how much further have we got to run? It seems to me the simple logic of saying to people—and people do understand this, they understand technology, they know the United States is a cutting edge economy—this agreement will tie us up to the cutting edge economy carries its own logic notwithstanding all the mumbling and grumbling. And indeed there has been a lot.

Populist frustrations about this FTA have appeared. The Australian film and television industry considered that it was going to be squashed. It wasn’t. Then the pharmaceutical issue got wound up. That was always a furphy but in fact that was probably the most difficult political issue and it was never really properly covered in the media here. I am not sure it’s completely finished. We got caught up in a big debate in the United States about how pharmaceutical pricing was to occur in what is one of the United States biggest industries. It just then turned out that the Australia free trade agreement was going to go to Congress around the same time as this and Pharma (the US Pharmaceutical lobby) took a position that their basic position – government’s should not set drug prices - had to be reflected in the Australian FTA . They had to be fended off by governments on both sides. Pharma are big enough not to worry about what the White House thinks; Pharma worries about what people in Congress and the Republican party think and they’re deeply plugged in. When Pharma finally moved (and it wasn’t until December) you should have seen the looks on our official’s faces. They were deeply concerned and their palms were sweating.

Then there was the farm dimension. When we put together the Australia business group we had a roundtable session asking each company what they wanted and what did we think at large the agreement would mean for us. The group at large said the important thing about this agreement is it should help make the Australian economy more competitive and the environment for business in Australia more competitive. To achieve that we wanted a removal of tariffs, we wanted greater freedom of flow of investments, we wanted the capacity to send businesspeople back and forth without constraints. We basically wanted it as easy to do business here as in the United States. We didn’t get all that but, unlike the farmers, we knew that business wasn’t in any position to threaten to bring the House down. We were not closely and intimately linked to the minor parties in a coalition and we knew at the end of the day that agriculture would be and always would determine the politics of this. What happened was pretty well predictable. It did not stop us still trying to talk up the big picture and, and we still think the big picture is actually what will carry the day.

Hugh Morgan mentioned we’ve done a free trade agreement with Thailand and Singapore. They’re very patchy agreements. They go nowhere near passing the basic test of what constitutes a comprehensive free trade agreement. But this suddenly has become common currency. Suddenly everybody is an expert on free trade agreements. People who I don’t think would have recognised one before, have said: “Oh, Free trade agreement: have to go to zero on every subject and, in particular, on agriculture.” And this appears to have been erected ( If you read the Sydney Morning Herald - I suppose you have to if you live here - I thought The Age was a bit of a hard read on free trade but I’ve changed my mind about that) as a golden principle that must be up there on the wall of the editorial section: ‘total free trade, all subjects, if not full free trade on agriculture: don’t talk about the agreement’. If you ran the same ruler over the Thai and Singapore agreements, you would say these are poor agreements. What is interesting is that no­one has said that in public debate.

So what is our debate about? It’s about the relationship with the US and it seems to me to explain a lot of the body language around some of the issues which in their own terms actually reduce to little. Take the farming deal. Sugar was never really going to produce a significant result. Everybody knew that, even if sugar was in, there wouldn’t have been much. It still wouldn’t have fixed the problem. The political response would have been the same as we have now now. The beef deal is very good. Our beef growers have actually panned the deal. But if you speak to the beef processors who do the actual exporting, they say this is a very significant result. And it is. Tom Schieffer, the US Ambassador must be scratching his head at the fact that our farmers are running around and saying we’re not going to cop this. It is almost as if they are saying: “Well, there might be an agreement on the table, but by golly we are going to give these guys a kick in the ankle regardless of what is actually in the agreement.”

Now the big picture really is I think a lasting, cultural one. Free trade agreements can actually be looked at time spans of almost 50 years. That is how much impact these agreements can have. Looking at the next 50 years is pretty hard going but one thing we know in Australia is that we face two quite significant problems like other advanced countries: can we keep our economy on the right side of the information divide and can we manage the impact of the ageing population? And while these may seem a million miles away from free trade agreements, there are some things I think that are interesting.

I put a simple question: what model should Australia follow to secure economic growth? You can say there are three options: the direction in which the US is running, the direction in which Europe is going and the direction being taken in Asia, whatever quite that means because there’s really not one coherent model there. Asia fades pretty quickly because there are not advanced industrialised economies like ours. You are really talking about Europe and the United States. Europe is basically on the wrong side of the information divide, with the exception of the Scandinavians. It is quite peculiar how slow European countries have been to adapt IT systems and models. We are quite close to the Canadians in tracking application and use of IT like the US and it seems to me it is vital we stay there.

An immediate challenge is presented by the ageing population. European countries faces some terrifying prospects as many of you probably well know. Some of them have national superannuation schemes from unfunded systems. They face significant falls in population. Italy’s population is supposed to fall by 30 per cent by 2030. Their capacity to manage these at a time when the European community seems more interested in political integration than economic growth is I think a major problem.

At the end of the day the importance of this agreement is that it underpins the importance of our maintaining an open society. Part of the impact of this agreement could actually mean it will force this government to liberalise more than it would have otherwise done. Finally some areas have gone to zero tariffs in manufacturing. Our government has been putting that off for a long time. We have made it easier for foreign investment to flow, the positives which will be quite important. They will keep our economy open and people may complain, as Doug Cameron does, that the result of this agreement might be to make us like a 51st state. But in fact we are more advantageously placed than that. As one commentator wrote in the media the other day, we don’t have to cop the political liabilities of being part of the United States by being a 51st state but what we can do is enjoy the benefits of an economic underpinning to stay an open society. This is the only sure success model for growth for us in the future. To me that is the real historic significance of this agreement. Thank you.

Thank you, Alan.

MEG McDONALD: Thank you very much, Hugh. Welcome to you all. It’s certainly been a significant last couple of weeks to see this Australia-US Free Trade Agreement brought to successful conclusion. Whilst in Washington I worked hard to bring this negotiation about and to build a constituency for it in Congress, within business and within the Administration. I have had a dual perspective on the negotiations first from inside the government and then from the private sector. These perspectives have underlined for me how fundamentally important this agreement is for the economic relationship. It has been gratifying being able to see that the sorts of rationale that persuaded both Governments that this agreement was a good idea also hold true for business. The agreement actually has practical and far reaching impacts into the future. From that point of view, I too have been rather surprised by the tone and the negative reception in some quarters for an historic agreement, which links Australia into the largest fastest growing and the most dynamic developed economy in the world. We’re only just starting to see what some of the benefits could be. We really ought to be looking at the future and over the long term.

I’ve been involved on trade issues over many years. We have always had periods where there are differences on trade and aspects of the economic relationship with the United States. We invariably encountered difficulties getting the right priority and timely attention in the right political circles in Washington on sensitive trade issues. This has been a recurring experience over the years. I believe that this agreement overcomes these hurdles by providing a formal government-to-government framework for the bilateral economic relationship. Even without seeing the text we have enough information to make these sorts of conclusions. There are many areas in which this agreement provides a base for us to avoid some of the frictions we have had in the commercial relationship in the past.

John is going to take you through the nature of the impact on the investment relationship. It’s a central feature of growing importance in the economic relationship with the United States for a number of years. This agreement achieves balance in the economic relationship and sits alongside the strength of the security alliance and is a reflection also of the strength of the cultural and people-to-people ties. This was something we used to build interest and support for the agreement in the US Congress, for instance, by being able to demonstrate the size of the Australian stake in the US economy and the US stake and the stake of the US companies in the Australian economy and the mutual benefit that that brings to both. That is something that it seems has been harder to get recognised here in Australia than it has been in Washington and across the broader United States. It was one of the primary reasons why we have been able to generate a strong level of support in Congress for concluding an agreement with Australia. So many members of Congress not only recognise the strength of the existing bilateral relationship but began to understand how in their districts and constituencies there was an interest in the relationship. This was both in terms of US exporters, US investors and Australian investors into the United States.

The objectives of Australian business going into the agreement were very ambitious ones. The result hasn’t achieved everything we wanted. The important achievement is establishment of framework where over time we will be able to continue to press for improvements on issues of interest and trade impediments to us.

National treatment for investment is enshrined in this agreement. The FIRB increases also are very important and John’s going to go through those. A fundamental facet so far over looked with conclusion of this FTA is the importance of achievement of an extensive government-to-government framework to manage the economic and investment relationship. The documentation that we have been able to see to date, lists establishment of a committee on Trade in Goods which will be able to consider any issues relating to tariffs, non-tariff measures, rules of origin, customs administration. That is a very important forum. As I have already said, one of the frustrations of governments over many years has been trying to find a forum in which we could raise at Cabinet level issues where there were irritants in the trade relationship. We have always lacked a means by which we could automatically command the attention of the United States Administration to actually deal with them. I have had a number of experiences with those while I was in Washington, and a trade negotiator. So having that framework in place will be very, very important for the future. It’s something the business community will see should work very much to its benefit.

There’s also going to be a joint working group and a framework for consultations to examine competition laws and policy. Again, this should be an important forum that we’ve not had in the past and which will be a very important vehicle for business. There are side letters which set out that there will be consultations on issues and developments in the Communications and IT sectors.

For agriculture, a committee is going to be set up on Sanitary and Phytosanitary provisions and a Standing Technical Working Group on Animal and Plant Health Measures. Given the vexed history of SPS issues in the past, having that sort of a forum is going to be incredibly important in managing this aspect of the relationship. It should greatly assist in dealing more effectively a lot of the access problems on this sector. There is going to be a bilateral mechanism to address issues raised by either party in the development, application or enforcement of standards. Again, this has been very vexed area. In services there’s going to be a framework for promotion of mutual recognition of qualifications. This is a work in progress. This has the potential to bring huge benefits to anyone doing business between Australia and the United States. A new financial services committee will address regulatory issues in that sector. Two highlighted already are Australian foreign securities trading screens and collective investment schemes. There is a timetable for work on those to be reported back within two years. This is something that has been on the agenda for a considerable period of time. Now with the agreement we have a vehicle for progressing these.

There is a mandate for work to address intellectual property issues and to reduce differences in laws and practices in patents, trademarks and designs. There’s also an undertaking to introduce transparent procedures for marketing and approval processes for pharmaceutical products. Again, this is another area expected to further ongoing benefits for business.

All of this now puts a new responsibility on business for engagement with these processes. If business wants to see results then business must engage and make this work for us. This opportunity wasn’t there previously. We in business need to make sure that we use those forums to deliver the outcomes we want. For companies like mine this is an opportunity we can take advantage of with the United States Government as well as with the Australian authorities.

It also puts new responsibility on Government. In the past it’s been more a matter of trade ministers and other ministers going to Washington and trying to knock on the door of the USTR, Department of Agriculture and Commerce or others to try and get problems resolved which really were the responsibility of a whole range of domestic regulatory departments. This framework will assist Australia business and the Government to secure the attention to issues of importance to us. The FTA gives Australia a status as equal economic partner and a place at the table with Government counterparts in the United States when we need to and dispute settlement mechanisms to draw upon as necessary. This is a very significant step forward.

What is next? To those of you who have to read through the Trade Promotion Authority Act, there are very detailed procedures that have to be gone through now in the United States to bring the FTA into force. The President has to submit to Congress within 60 days of signing a description of the changes to existing US law that are required to comply. Then the agreement has to be submitted to Congress for approval along with an implementing bill. Congress will then vote on the package. That timetable is to be expedited. That will put a sharp focus in the next three months on the effort in Congress to make sure that the agreement passes and that it passes with a significant majority. The AAFTAC business coalition in Washington will be fully engaged in this effort. Alan Oxley who was there through the course of the negotiations can attest how all of these forces have to be marshalled. Here in Australia, we understand that there will be a Senate committee to examine the agreement and its affect on Australia. This means that we in business who believe we have a stake in seeing this agreement come into force will need to be ready to articulate the benefits of the agreement and its value to us. Alcoa has been a supporter at both ends of the agreement, both in Washington and here in Canberra, and we intend to continue to do that.

So, in concluding I think one of the most important lessons from this negotiation is for business to get much more practically engaged. There will be many more bilateral negotiations to come.

Disappointment expressed about the agriculture outcome is understandable. But we should not forget that agriculture remains one of the biggest stumbling blocks to being able to progress multilaterally in the WTO. While ever we can get to the sorts of early results that you can see from this bilateral agreement there will be an incentive to pursue more bilateral deals. I don’t believe Australia should be not stepping back from that. The trade scene is very dynamic and won’t wait for us. We’ll see ultimately a new framework in the WTO for successful multilateral trade negotiations. In the meantime the rest of us are going to get a significant benefit out of those bilaterals that we are able to enter into. This will keep the momentum for both domestic reform as well as improved access to foreign markets.

This puts a big responsibility on business to be much more active and much more engaged. It also puts a big responsibility on government to be actively engaging with business to be able to best pursue economic interest in what is a very much more detailed and complex environment for both sides to engage in.

As we explore what we can get out of the United States agreement both sides, both government and business are going to need to move together along that path. Thank you very much.

John, thank you.

JOHN EDWARDS: The Australian US FTA has been negotiated in a context in which things have changed in respect of Australian foreign investment both our investment abroad and investment here in quite dramatic ways over the last few years - and in ways most of us are unaware of. I could illustrate it this way. Twelve years ago the stock of foreign direct investment in Australia—that’s where 10 per cent or more of the company is owned offshore—totaled about the $110 billion. At the end 2002, the most recent period for which I have data, it was $230 billion - so that is an increase of 110 per cent. At the same time something quite remarkable was happening to Australian direct investment offshore. In 1992 it was worth only $50 billion, the entire stock of Australian foreign direct investment offshore was worth only $50 billion in 1992; and in 2002 it had grown to $160 billion - a 320 per cent increase in in our foreign direct investment offshore compared to 110 per cent increase in foreign direct investment in Australia. We had become a very substantial investor offshore ourselves. After several hundred years of mainly receiving investment we had become an exporter of investment.

Now this is particularly striking in our investment relationship with the US. The US accounts for about half of our foreign investment abroad and so huge has been the flow of Australian foreign investment abroad in recent years that, on the numbers of the Australian Bureau of Statistics in 2001­02, US foreign direct investment in Australia was worth $58 billion and Australian direct investment in the US was worth $73.7 billion. It was more - and not a little bit more but a lot more in value of Australian investment offshore in the US compared to US investment here. There are a lot of very big Australian business names, companies we are very proud of, which account for that change. They certainly include News Limited but there are of course Westfields. Brambles, Boral, Rinker and James Hardie, very important niches in the US building materials market and companies like Resmed and CSL.

The reason I make the point is this. I myself have never met an American I didn’t like, but however likeable they are we cannot indefinitely expect to invest in the US with no scrutiny and expect US investment in Australia to be scrutinised when we already have more investments there than they do here. All we’ve done with this agreement in respect of investment provisions is do what we inevitably would have to do, which is to lighten the regulatory scrutiny of US investment proposals in Australia to be congruent with the scrutiny applied to Australian investment proposals in the US. In my view, we had no choice.

Well, let me come to the crucial issue: What is the change, and is it significant in terms of US investment in Australia, US direct investment in Australia? Well, I think it is very significant indeed. First of all, new US investment other than in the industries reserved in this agreement, and where there is no takeover, is going to be completely free of scrutiny by the Foreign Investment Review Board. It is the case today that any investment over $10 million is scrutinised—that is where it’s not looking to a takeover. So this is a very big change indeed. It means that we have in this case given up the right to use the FIRB process to influence the location of new US investment in Australia or the industry in which it is located or timing. It is now completely free. I think that is quite a big change.

In respect of circumstances where a takeover is proposed, the threshold has been lifted from $50 million to $800 million and it’s possible, according to what we have seen so far of the agreement, that passive agreements—that is where there is no attempt to control intended—maybe excluded entirely. We also understand there are going to be strong investor protection provisions, but the detail of that is not yet clear.

Let me immediately say a couple of reasons why this may be not such a big thing and then go on to say why I think it should be a big thing.

First of all the reservations which currently exist in terms of industries are going to continue to apply. That is Telecom, media, transport, CSL is reserved, and defence, plus specifically Qantas, CSL, airports and shipping are all going to be preserved so no change in that respect and they are important exclusions.

Also screening is going to continue for urban land and for government investment as it does today. Plus of course that National Interest test continues to apply above $800 million, which means decisions like Woodside, were Woodside’s prediator to have been US, could still be made by the Treasurer and those kinds of applications still have to be notified. And it is also the case that though it was sought by a great many people, there’s no investor state process. That is the investing company cannot seek an appeal process; it has to be government to government. It’s also the case and it’s been made several times that in 2002­03, of 4,747 proposals to FIRB, only 79 were rejected.

So your immediate conclusion is: who cares what change we have made now to give the US better access?

I want to make a couple of points to say it matters and it matters a great deal. First of all, of those 4,747 proposals, it is true that only 79 were rejected but 3,400 or 75 per cent had conditions attached. So long as these proposals are now under $800 million they are not going to have conditions attached because they are not even going to be notified. I think that is an important change. There’s going to be no notification and that means there’s going to be no delay. Now this is important. I invite you to consider this case which is a typical strategy used in a hostile takeover. From the moment a hostile takeover is announced from a foreign predator, the defending company goes to FIRB. They know they can’t win. They know that a national interest defence will probably not be accepted—although in some cases like Woodside it is. But an appeal to FIRB means that they can prolong the process of consideration and give themselves time to think up some other more effective defences. Well, this is no longer going to work because there doesn’t have to be an appeal at all and there doesn’t have to be notification. So you might say, well, look, there’s no target in the country that is under $800 million, but this is not actually true. It’s true that the top 20 companies on the ASX are beyond $800 million in market cap. It is true that the top 100 are beyond it. But there are 1400 listed domestic companies on the ASX and their average market cap therefore is $600 million. If you take out the top 20 companies, of the average market cap of the remaining 1400 is $250 million. If you take out the top 200, which comes to 90 per cent of the market cap, the average market cap of the remaining 1200 companies as listed on the ASX is $70 million. In other words, it’s above the existing threshold notification and wildly below the new cap of $800 million. By way of illustration, to get into the MSCI Australian equities index, the minimum cap is $480m, nearly half, a little over half of this new threshold.

Thus the overwhelming majority of listed Australian companies are now subject to hostile foreign takeover without FIRB scrutiny. I think that is a good thing. It occurs to me too—and I am subject to correction by the lawyers in the audience—that this is not however all that it means. Let’s say currently it is the case that you can by up to 19 per cent of the target company without—before you need to proceed to a formal takeover. I would imagine under this rule, so long as that 19 per cent costs $800 million or less, you could when this FTA is agreed make that share purchase acquisition without notification to FIRB, which you can’t do today. You can establish a very significant position in a company which is very much bigger than $800 million—it would in fact be $3.2 billion—at which point you are beginning to include not just the tail of the ASX but a very good deal of the head as well.

Let me conclude with this point, and it is I think perhaps the most important one: let’s think of a situation where a US firm makes a hostile takeover over offer and the target, an Australian company, looks to a white knight which is European, Japanese or New Zealand. The US firm doesn’t have to make a FIRB application at all but all those other firms do. In my view this is not a sustainable situation. It’s not sustainable for us to reach an agreement with the US which discriminates so powerfully against companies registered in other jurisdictions. It’s particularly not so because we have an informal understanding with New Zealand that New Zealand would be extended the same—the most favourable investment arrangements we have with any other country and so far as I know, this is also part of the treaty we now have with Japan. We have an obligation already to extend this to Japan and extend it to New Zealand. And if we’re going to extend it to New Zealand and we are going to extend it to Japan, then it seems to me we should be extending it universally and as soon as possible.

QUESTION & ANSWER

Transcript of Q&A

HUGH MORGAN: Thank you, John. Just to restate the case, there is no doubt - what all of us would like is a comprehensive multilateral agreement. Let’s get that absolutely clear. But quite clearly the chairs are not set out and the music is not playing right now for that, and there are approximately 240 bilateral agreements either in place or in negotiation right now. Almost all the countries are engaged in them and we can’t afford to be absent from that game. This is the most important of the bilateral agreements that we’ve ever been engaged in. You have heard from our three speakers today and they have dealt with both the macro picture of how this might affect us down to some of the particularities that have to be sussed out and how it might apply to some of our businesses. I think the key issues that should come from this is that business needs to get engaged to understand the agreement and the opportunities. However it will be up to us to take up these opportunities. Getting access to markets like the federal procurement program of some $3300 billion—it is up to us to get engaged in it. It has implications for the rest of the trading relationships in our state and at national levels. There are all sorts of implications and positives that come out of that. We are the ones who have to grasp the opportunity that comes with it. Hopefully you have a number of questions to put to us. What I would like you to do is state your name, your affiliation and direct your question to one of the panellists. Can I have the first question?

QUESTION: Thank you. First could I just congratulate you and your committee on organising today’s function the day after the agreement. I was wondering last week what we were going to talk about today, but obviously you’ve had some inside information so congratulations. My question is probably directed more to John than Alan and Meg but I would welcome comments from them. Years ago I was involved in the fringes of the free trade agreement with New Zealand on the banking side. That was in the mid-eighties and Doug Anthony was the responsible minister. I have been informed that since that agreement was entered into, trade between Australia and New Zealand has grown dramatically and one figure I heard was 500 times what it used to be which seems with our cultural and historical background an incredible figure. What I would like to know from the panel is do agreements such as this concentrate the mind of corporations to the extent that they generate more and more growth with the trading agreements and is that why the Australian and New Zealand agreement has grown in trade so dramatically over that 15 year period. Is something similar likely to happen with this agreement?

JOHN EDWARDS: I’m not sure what the New Zealand numbers are but it’s certainly been an incredibly successful agreement and I suppose one would have to make the point that the CER agreement is very much more comprehensive and far reaching than the agreement we now have with the US. But I think your point is absolutely correct. There is almost no econometric modelling that we are aware of that has been able to predict the actual growth in trade which does occur as a result of liberalisation; it’s always much more than people expect and for the reasons you mentioned and that may very well be the case too in respect of the US.

CHAIR: Next question, thank you.

QUESTION: Both countries are facing election year: (a) how likely is it that the trade agreement will be passed and (b) that it will look the way it does today.

MEG McDONALD: Who would actually predict what the US Congress would do or say? But certainly the undertaking that I understand has been given, the expectation is that the agreement will be notified and that they are seeking an early vote in Congress. Under the trade promotion authority the Congress doesn’t get to actually amend any agreement; it just gets to vote it up or down. That’s one of the beauties of the trade promotion authority and why the administration fought so hard for it. And so the question will be, while the administration has to demonstrate what the impact of the agreement would be on the US economy and what the benefits would be for the United States, it really comes down to an up or down vote and I think the strength of the lobbying so far—and Alan’s been much closer to that more recently than I have—but certainly the level of support for Australia has been very, very strong in Congress and so there is however you can never say that anything is a foregone conclusion and it will be a hard fight because there are still a number of sectors that would see themselves as being impacted negatively by this. And one of the other factors is that there are a number of other trade agreements around, in particular the agreement that the administration has concluded with the Caribbean countries which did include some provisions on sugar for instance, and which the sugar lobby has vowed never will pass. So there are some formidable forces that will have to be overcome in the US Congress and that’s one of the reasons why I said that for the next three months that’s where the effort will really have to be directed for those of us who want to see this agreement come into force. I don’t know whether Alan wants to add anything.

ALAN OXLEY: Anne Wexler, who organised the US­Australia business coalition in the states, she is an ex-Clinton White House lobbyist, told me two weeks ago they believed they had the numbers in the Congress. She said they would get the agreement and the numbers to pass. On our side since local content is not affected, since it doesn’t look like there’s going to be anything that will affect prices in the PBS, since the sugar industry and the National Farmers Federation will support this agreement, I can’t see it being politically effective for any group in the Australian parliament to try and block any legislation which would implement any treaty. Our treaties don’t have to be adopted by a parliament. But if the treaty has obligations that require changes to law, that will require some change, maybe a new regulation or a law and maybe that could be a hook, but I would have thought most Australians will support this agreement and whoever would try and stop that I think would put themselves in a position where they would not appeal to any more than 20 per cent of the population.

CHAIR: Alan is nothing but direct.

QUESTION: Andy McDougall, ABNAmro. I’m just wondering if the panel could give me an indication of what our major trading partners in North East Asia particularly will be doing at the moment with respect to the deal that we have struck with the US and particularly Korea and China and Japan.

CHAIR: It’s very clear: all of them are engaged in like negotiations. There is no sacred turf or being off anybody else’s turf. Japan has been struggling with a free trade agreement with Mexico. China and Japan have both made overtures to ASEAN and ASEAN plus 3. They are struggling with Japan and Thailand. There’s a spaghetti like set of relationships all over the place. So there’s no sacred turf and nobody should have their nose out of joint. We’re just doing what everybody else is doing in our own legitimate self-interest. With Japan we have sought very strongly to have a free trade agreement first with them but they were unable to move on it and they were advised beforehand that we would be doing something with the United States and don’t get upset about it. We have China right now in a scoping study about a free trade agreement right now concurrently; if it’s not this week it’s next week. We have negotiations with Japan on a comprehensive trading arrangement which is not a FTA and that is on next week. So the point is that there’s a lot going on concurrently with the endeavour to have a comprehensive multilateral deal which is stalled. So everywhere these agreements are taking place with each other and we are not necessarily the higher authority with some of the Asian countries to have agreements with us. So it’s in our interests to make sure we are into the act early in the game and make sure we have plan B well and truly in place and cemented.

ALAN OXLEY: There’s been a view argued through the media that our doing this agreement would lead the Asians to not wanting to do deals with us. I think Hugh has explained to you that the evidence is to the contrary. It has another effect as well. Korea would love to have a trade agreement with the United States but wouldn’t dare to try because of agriculture. Their agriculture sector is worse than the Americans. Japanese business would love to have a deal with the United States on bilaterals—they have been talking about it for decades—but they can’t because of agriculture. China has a deal as part of the lead­up to the accession to the WTO and Malaysia, Philippines, Thailand and Indonesia because of the deal that Singapore did with the United States and now because of our deal are all actively working out how they can have one with the US as well.

CHAIR: Some of the argument is that this is actually a wedge to open up some of the multilateral issues. The counter to that of course is that it’s hard to stick all of the bilaterals together consistent with a multilateral later. But you can’t stand still; that’s the problem.

MEG McDONALD: Can I just add something to that? This whole dynamic has actually been termed competitive liberalisation by Bob Zoellick. It is true that there are any number of countries coming daily to the White House seeking agreement to negotiate a bilateral deal and it is also quite clear that our concluding this agreement with the United States makes us a much more attractive partner to actually do that sort of a deal, and I believe that the kind of model—it’s not so difficult to actually multilateralise a number of the sorts of patterns that are developing in these bilaterals and I do believe that it will be the aggressive dynamic that these bilaterals build up which will actually break the logjam in the WTO. It certainly won’t be broken by anything else I think in the short term.

CHAIR: Thank you. Next question. In the meantime, one of the points that has been made is that this financial agreement goes much deeper than you would expect in a multilateral anyway, so that deals with other issues that are beneficial.

QUESTION: My question is to Alan Oxley. Rod Sims from Port Jackson and partners. Alan, you mentioned that sugar, if it had been in the deal, would not have been much anyway. That prompts the question, relative to your expectations going into the deal and you must have had them pretty well developed, what was the one thing that exceeded your expectations and what was the one thing you were most disappointed in terms of the deal that was taken out?

ALAN OXLEY: I guess I was surprised at how readily Treasury seemed to move to lift the FIRB levels so high. In terms of disappointments, I think there would really be disappointment with the agreement and history was against us in this, was to be able to put into the agreement freedom of movement of people between the two countries. And because of September 11 it meant dealing with US immigration policy. But you ask any young Australians would they like the opportunity to work and study in the United States as it suited them and they would all say yes. It would have had a very big appeal and would have been very beneficial. What’s been agreed has been a process of just continuing to talk about that. Bob Zoellick didn’t help. The other bilateral trade agreements got provision for temporary movement and Zoellick had them in the Chile and Singapore agreement, but he’s not great with his politics in dealing with Congress and that was the jurisdiction of the House judiciary committee and he didn’t talk to them. There was a group of republican senators and they said to Zoellick you do that again in a bilateral agreement and we’ll cut the funding for USTR. So that I think was the big disappointment. Secondly we were quite disappointed that investor state was not given more prominence and we’re a bit disappointed that the government didn’t fight back more on the environmental provisions because there’s a history of interference in trade by the Democrats in the Congress. I mean there are environmental provisions and each country will implement its own laws. Why would you have that in a trade agreement? Well, it’s a consequence of having to negotiate TPA through the Democrats. You have all sorts of traditions, conditions, judicial duties and activism in the state there. There’s a tradition there of interest groups suing the government to act to implement obligations and we can see that as being a route to attack companies by Green NGOs. But they’re my comments, Rod.

CHAIR: Next question? I can take another one. I’ll take two in fact. One for the back and two and that’s it.

QUESTION: Thank you. Peter Ryan from the ABC’s PM program. This is a question for anyone on the panel. There’s been a lot of discussion particularly in Canberra about the quantification for the value of the FTA and I just want to know what your views are on that and it also goes to a comment earlier I think by Mr Morgan about whether or not Australia is being naive about the significance of the agreement.

ALAN OXLEY: Can I start quickly: John I think made a very pertinent comment about econometric modelling. It’s death by a thousand cuts. You want to clear the room do you by asking me to talk about econometric modelling? When the government started out on the FTA I rang Ashton Calvert and said whatever you do don’t get an econometric model to show the benefits—and he said it’s too late, we’ve done it. And as John has said they are static they don’t show dynamic gain. The $4 billion—it was always going to be difficult to argue because both economies are relatively open. In fact probably the numbers ultimately get them to be small. I prefer the numbers about increasing investment in trade in which case you can talk about billion dollars because of the trends we are seeing and that’s much more important. So there must be a shortage of news if people occupy themselves about the numbers. I get the feeling, I heard the interview this morning on AM about whether politicians are sticking to numbers and they don’t know what they are talking about. I understand that game but there’s never going to be a satisfactory answer because Costello this morning on AM was quite right: there’s actually no way of doing a proper calculation. You can’t get a decent number. It’s probably an even less exact science than calculating greenhouse gas warming.

QUESTION: Mark Phelan, Dairy Farmers Group. If I can say I was in Japan last week and the Japanese were vitally interested. They’re one of our biggest trading partners in dairy and they were more inclined to back up to us to secure their supply and anything else and I think that’s a good thing in its own right. But my question is basically the safeguard provision on beef and the possible implications that might have in future bilateral negotiations.

Well, in terms of mind numbing technicalities—one of the complaints of the beef industry—a safeguard mechanism is a device by which the government can say yes, we agreed to open the market; if certain conditions aren’t met we’ll stop the imports and it’s meant to safeguard the trade. Technically it should be on the grounds of the surges of trade which damage your industry. The Americans use them and they’ve been using Japan quite cynically as just another weapon of control. What our beef industry wanted was after the 18 years when all quotas are removed and all tariffs are removed then there would be no constraints on imports and the Americans said we would like a safeguard. The safeguard does not apply to all trade. The safeguard applies to the additional trade that has come from opening the market over the time and it’s to work on the basis that if prices fall by six per cent below what is the previous two-year average a safeguard can be imposed for up to a quarter. The government model how they thought that would work and said they thought if that model had been used over the last 10 years of trade it would have cut in six times over 10 years. I guess the best answer to the significance, it would have been better without it but the beef processors have looked at it and said it is a much better market for us to deal in than the one we currently have because we can see clearly what the cut­off points are, we know clearly what the measures are for affecting trade, and they have a lot more predictability than they’ve currently got. So the view of the processors is that it does not significantly diminish the commercial value of the deal.

QUESTION: The other bilateral agreements?

ALAN OXLEY: When you come to negotiating with agriculture you grab what you can get. I should make the point: and this is what I don’t understand about this standard that has been erected about what is good agricultural liberalisation or not. There’s never been an agreement anywhere in the WTO which formally in its rules takes a market to zero with trade barriers at any period of time. So this peak deal on WTO standard is very good indeed. If we look at what the WTO has done on agriculture, they finally bit the bullet in `86. The previous 35 years of history they didn’t want to talk about agriculture. They did the agriculture deal in the Uruguay Round which ran for six years. At the end of that six­year period which expired in 1999, world agricultural levels of protection of agriculture have not changed. They changed instruments but the actual level of protection has not changed. So from `86 to today, what, nearly 20 years, that’s the result we have got out of the WTO on agricultural liberalisation. I mean, against that background can you say that even your additional gains in dairy are not worthwhile or your gains in beef? There are really no fixed rules. Whatever you get is a gain, really.

CHAIR: Okay. Thank you very much for that. I would like you to join with me in thanking our panel. I’m conscious that the time is 2 o’clock. Thank you very much for coming.

ENDS