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Good advice, falling on deaf ears?

In these strange Howard years where policy failures prevail, we have become used to the sidelining of wisdom and experience of people like Malcolm Fraser, Paul Keating, former Department of Foreign Affairs and Trade (DFAT) head Richard Woolcott, and former Chief of the General Staff Peter Gration.
A less well-known case is Professor Ross Garnaut, author of The East Asian Ascendancy and visionary architect of the 1980s–1990s Hawke–Keating strategy which locked Australia securely into the east Asian economic miracle.

Garnaut is still a person of high standing in Asia, especially in China, and an ANU economics professor with a string of directorships. But these days he spends more time than he should working on his farm near Canberra. So far as the present government and DFAT are concerned, he is pretty much old news.

Garnaut testified two months ago as a private citizen (also representing Bill Carmichael, former Chairman of the Industries Assistance Commission) before the Joint Parliamentary Standing Committee on Treaties under its Australia–United States Free Trade Agreement (FTA) reference. His testimony on 3 May and supporting written submissions were the most substantive arguments yet presented, from an overall national interest viewpoint, against this proposed FTA.

The Committee completed 11 public hearings on 14 May and was due to report to Parliament by 23 June. It is not clear what impact Garnaut’s testimony, under-reported in national media, may have.

Garnaut’s testimony was important, discomfiting and sad. During the period of the Howard Government there has been such a loss of Australia’s formerly formidable expertise in international trade negotiations, that Garnaut, a committed trade multilateralist, basically had to guide members of the committee through International Economics 101. He introduced the written submission thus:

We [Garnaut and Carmichael] write as two Australians who have had substantial involvement in Australia’s trade liberalisation and in international discussion of trade policy. An important lesson of our experience is that the domestic process through which trade liberalisation is discussed and trade policy decisions are taken is critical to progress in liberalising world trade. Disinterested analysis and wide dissemination of information about the costs of protection was a critical element in persuading Australians that reducing our barriers was in our own interest.

Four years ago, when the idea of an Australia–US FTA was first mooted, Garnaut (Straw Polls, Paper Money by David Love, Viking, 2001) warned quietly that it raised real questions about Australia’s continued progress towards living in a productive relationship with its east Asian environment. He said that talk of a discriminatory FTA with the US was damaging. It could not be agreed to without significant concession, because the US was just not in a position to accept free trade in agriculture. But the fact that it was being discussed at all would negatively affect perceptions of Australia in Asia, at a time of the already damaging ‘deputy sheriff’ affair. Talk of discriminatory free trade with the US compounded emerging problems for Australia in east Asia, placing at risk important goodwill.

In his understated way, Garnaut suggested to Love that ‘we had put a lot of effort into building something that was a bit different in Australia’. Deeper identification with America would change many of the things we liked about being Australian. At best, we would become second-rate Americans. Breakdown in relations with other Asian countries [in 2000, Australia’s relations with Indonesia and Malaysia were glacial] would feed back into Australian fears, further driving an orientation towards the US. This would reinforce adverse perceptions of Australia in Asia. Through such a circular process, Australian sovereignty would be diminished.

These were accurate predictions,  well before the artificially confected Tampa border security crisis, the attacks of September 11 and Bali, and Australia’s insertion into the US-led invasion of Iraq.

Garnaut stuck strictly to economics in his 3 May committee testimony. In summary, he debunked estimates claiming $5.6 billion annual benefits to Australia after a ten year period. Fully $4 billion of this was an estimated benefit from the FTA granting preferential higher exemption limits to US-sourced investments, under Australia’s foreign investment review mechanism. If that were the nature of the main benefit, a much greater benefit—up to $30 billion—would come from raising the exemption limit of the Foreign Investment Review Board for all investment-source countries, or simply abolishing the Board.

The remaining $1 billion of claimed trade benefits was similarly specious. The report on which the government relied—hastily amended after the US finally ruled out Australia’s anticipated trade creation gains from improved access to US sugar, beef and dairy markets—actually showed in its data tables that under the final FTA, trade diversion effects (bad) would exceed trade creation effects (good).

To explain, trade diversion is when Australia, under pressure of a preferential tariff, buys a higher-cost Toyota from the US instead of a lower-cost same-model Toyota from Asia. Trade creation is when a new US market is opened such as that for Australian sugar. If trade diversion outweighs trade creation, the long-term dynamic effect on Australia’s economic welfare is also negative.

Garnaut concluded that, judged as a bilateral trade deal, the FTA had approximately zero net benefit to Australia. The economic modelling on which the government relied had failed to pass ‘the laugh test’; an economic model that would not make an economist who knows the real world laugh.
His political economy analysis was even more arresting. In terms of the multilateral trade negotiating process, this FTA sent all the wrong signals to Asia. Having accepted US exclusion of Australian sugar and disappointing beef and dairy outcomes, Australia in future bilateral negotiations with large Asian countries has no argument against them excluding industries they may wish to protect. Australia had sacrificed an important negotiating position here.

This FTA also sent a strong signal to the world that the multilateral Doha Round approach to international trade liberalisation was losing ground to bilateral FTA approaches. This has already influenced the negotiating stance of other major players. Over the past four years, Japan and China have moved away from their previously preferred multilateral approach in favour of a regional bilateral approach. Australia has helped drive this.

This was the heart of Garnaut’s argument. He pointed out that the east Asian trading region had already factored Australia’s four-year push for a discriminatory FTA with the US into its own trade policy development settings. The development of an east Asian economic community that excluded Australia was already well underway. For example, tariff preferences now being given by east Asian countries to south east Asian palm oil, tropical fruit and vegetable producers  are already disadvantaging Australia’s competing export products including canola oil. If Australia is to preference Toyota cars made in the US over Toyota cars made in Asia, why should Asian countries not do the same to Australian exports?

Garnaut said that there is already a process of withdrawal into discriminatory regional trade blocs. Australia as a world trader will be the loser.

Garnaut suggested respectfully that ten or eleven days of parliamentary committee hearings could not replace a thorough professional examination in the Productivity Commission of the net benefits and costs to Australia of the proposed FTA. The data provided by DFAT was inadequate. Insufficient credence had been given to the consumer interest and the general national economic interest. The process unduly weighted the voice of producers and exporters. (The Australian FTA negotiating team included the main producer and exporter groups, and the bulk of submissions and testimonies to the committee came from such groups.)

Garnaut argued that there was no need for Australia to rush its decision process before the Australian election, as the US legislature was unlikely to fast-track the FTA before the US presidential election in November. In this, Garnaut may be wrong. It looks now as if the Bush administration may try to rush the deal through the US Congress. This may be Bush’ s reward to Howard for Australia’s participation in Iraq. It may help Howard’s re-election chances if he can convince Australian electors that the FTA will benefit Australia, though this is still a big ‘if’.

Garnaut might have alluded in his testimony (but did not) to a well-sourced story by Christine Wallace, ‘Bush rebuff stunned negotiators’, (The Australian, 25 February 2004). Wallace reported that the Prime Minister (on broad political grounds) over-ruled the recommendation of Australia’s professional trade negotiating team led by Trade Minister Mark Vaile, who wanted to walk away from the final deal offered by the US team. Wallace’s story, which has not been officially denied, will be a reference point for future Australian historians.

Recently in Washington, US chief trade negotiator Robert Zoellick praised this deal in terms of its long-term export market-opening benefits to the US economy. This ought give Australian legislators pause.

Many Australian commentators opposed to this FTA have noted the inclusion of obligatory review and appeal procedures (which have hitherto been subject to Australian sovereign policy choice) like our pharmaceutical benefits scheme, quarantine matters, intellectual and cultural property, media ownership, even riparian water rights allocation. Everything that bears potentially on trade may be subject to review and appeal as part of the process obligations built into  this FTA treaty; deep US corporate pockets may thereby fund strong legal challenges to our social policies and our sovereignty. Also—and Garnaut alluded to this—if such issues become elevated to questions of alliance solidarity, will Australian governments have the strength to balance them? Such has been Canada’s experience of its trade agreement with the US—of constant, wearing-down, US corporate pressure, backed by US governments.

Paul Kelly in The Australian has suggested that opposition to the FTA comes from both multilateral free-traders and from economic nationalists. His implication, if I understood it correctly, was that this opposition was thereby in some way weakened because it was self-contradictory. Actually, there is no contradiction between those positions. One may be an economic nationalist in terms of wanting to try to protect Australian ownership and social control over our limited national resources, and a multilateralist in seeing the best hope for doing so being through upholding equitable multilateral global or regional trade, investment and environmental protection regimes where small countries are not overwhelmed by large ones.

Let me give Garnaut the last word. When Love asked for the optimum scenario for Australia’s international policy settings, Garnaut replied:

Well, the good scenario is the one we thought we were on. That is, maintaining a good relationship with the US, remaining in the US alliance, unlike New Zealand, but independent of the US; building a relationship of quality with nations in Asia—a relationship in which we are respected, in which we are a participant in regional affairs.

The question now is, can the Opposition parties which have the majority in the Senate find the common resolve to block the legislation necessary to implement this FTA, until such time as Australian voters elect a new government? It may be a close-run thing. Get ready for a lot of government spin.

Tony Kevin is a visiting fellow at the Research School of Pacific and Asian Studies ANU, and a former Australian diplomat 1968–98. He is the author of A certain maritime incident: The sinking of SIEV X (Scribe, 2004).



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