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Summer 2005 cover

National Observer Home > No. 63 - Summer 2005 > Articles

The U.S.-Australia Free Trade Agreement

I.C.F. Spry Q.C.

In "How to Kill a Country: Australia's Devastating Trade Deal with the United States",1 Professors Linda Weiss and John Mathews, with Elizabeth Thurbon, present matters of grave concern in regard to the recently-negotiated U.S.-Australia Free Trade Agreement. They commence with the following summary of U.S. intentions:

"Propose a trade deal with the world's most powerful country, the one with the longest track record of negotiating Free Trade Agreements. This country must be equipped with a strong Congress that insists on debating and approving the country's initial negotiating position (i.e. what it wants from the deal, and what it will not give away). It must also have in place a well-developed system for comprehensively reviewing the agreement prior to Congressional approval. Your partner will thus have clear goals from the outset, and will not settle for anything less. You, on the other hand, should go into the negotiations with minimal preparation, armed only with the misguided belief that you have a ‘special relationship’ with your negotiating partner, and that your ‘best friend and ally’ will look after your interest. Forget about getting approval from your Parliament, or establishing a firm negotiating process with major stakeholders. Simply allow the Prime Minister responsible for the deal to sign it, then rush it through Parliament without meaningful public debate. Then cross your fingers and hope for the best. In no time at all, you will have an agreement just like ours: the Australia-U.S. Free Trade Agreement."

The authors give many examples of bad outcomes of the negotiations. For instance, in regard to agriculture, they state that Australia will completely open its markets without tariffs, quotas, restrictions and safeguards, but the United States will be entitled to retain many of its tariffs, quotas and enormous subsidies. For example, U.S. beef, dairy and cotton tariffs will remain for eighteen years. Further, "If Australian prices become too competitive against the exchange rate, the United States can slap their tariffs back on, no questions asked."

Certainly this agricultural outcome is unjustifiably one-sided. Therefore it is appropriate to look to other parts of the Agreement, to see whether countervailing benefits are received by Australia.

But in relation to manufacturing the authors set out a similarly pessimistic analysis. They state that on the one hand the Australian market for manufacturers will immediately be ninety-nine per cent open to the U.S. manufacturers, that Australia will abolish all procurement-linked industry development and "buy national" programmes and that U.S. firms will have unfettered access to the Australian government procurement market. But on the other hand the United States will keep a number of its manufacturing trade barriers in place including a ban on the import of Australia's highly competitive fast ferries and complex rules of origin laws for Australian manufacturers, including textiles and automobiles. Also the United States will be able to set aside procurement-linked funds mandating that suppliers source products that have a specified minimum proportion of U.S. content. And Australian firms will have only restricted access to the U.S. government procurement market, limited by numerous U.S. discriminatory "buy national" arrangements, and an entrenched "buy U.S." culture.

In regard to investments, the authors note:

"While the United States has managed to secure the free movement of its own business executives to Australia (the so-called ‘essential personnel’ necessary to make joint ventures and other forms of direct foreign investment work effectively), it has resolutely denied Australian investors the same rights in the United States."

The authors point out that over the past ten years "the vast majority of U.S. investment in Australia has been the take-over or purchase of Australian firms or assets — that is, for the simple transfer or wealth from Australian to U.S. firms. By comparison, U.S. ‘greenfield’ investment in this country — investment in new ventures which creates more jobs for Australians — is marginal." But under the Free Trade Agreement Australia will be removing all remaining conditions that require foreign investors to demonstrate some benefit to the Australian economy, and "we will give up screening any foreign investments under the value of A$800 million".

It appears that Australia's negotiators for the Free Trade Agreement were outclassed by their American opponents. In many instances the United States insisted on strict rules to protect its farmers, manufacturers and investors, but similar rules were not insisted upon by Australia.

The Canadian Example

In How to Kill a Country much attention is given to the experience of Canada, which entered into a free trade agreement with the United States in 1989. Canada accordingly abolished its Foreign Investment Review Agency, and there ensued a massive influx of U.S. investment – U.S.$487 billion from June 1985 to June 2002. Fully 96.6 per cent of this total was for U.S. takeovers of existing Canadian assets and companies, "while a miniscule 3.4 per cent was for investment into new businesses". The authors note:

"By the mid 1980s about half of the major U.S. corporations in Canada were 100 per cent American-owned. Ten years later, some 85 per cent had no Canadian shareholders. And in the latest "Financial Post" list of the fifty largest foreign-controlled corporations in Canada, forty-six were 100 per cent foreign owned. As Canadian shareholders were eliminated, there was no longer a force to influence policy decisions which would be beneficial to Canada. Gone too was the ability to scrutinise the payment of dividends, management fees, and content costs paid to the parent company. Increasingly, local advertising, insurance, travel agencies, and many other companies are bypassed as head offices in the U.S make purchasing decisions . . . These new arrangements increase the likelihood that . . . corporate decisions will be made without particular regard for Canadian law, conventions of business behaviour or the sensibilities of local communities or governments."

In the 1990s, the unemployment rate in Canada rose to 9.5 per cent, and average increases in personal income fell from 9.7 per cent in the preceding decade to 3.2 per cent. Further, between 1995 and 2000, for example, U.S. productivity increased at three times the rate of Canada's productivity. The authors quote U.S. Trade Representative Yeutter, who on the day that the U.S.-Canada agreement was signed boasted:

"We’ve signed a stunning new trade pact with Canada. The Canadians don’t understand what they’ve signed. In twenty years, they will be sucked into the U.S. economy."

The Canadian experience must provide a basis for extreme concern on the part of informed Australians.

Quarantine Rules

Australia has enjoyed substantial trade advantages by maintaining strict quarantine procedures so as to protect Australian agriculture from such devastating diseases as foot-and-mouth disease, mad cow disease and bird flu. Australia's position is viewed jealously by other trading and importing nations. If, for example, foot-and-mouth disease became endemic in Australia, American suppliers would benefit: they would not be competed with by Australian meat sales in America, and American meat exports would obtain increased access to Australia.

Hence the authors’ comment in regard to worrying reductions in the Australian quarantine regime:

"Take one of your most valuable export sectors and undermine its key competitive advantage. Agriculture is an obvous choice in the Australian context. As a clean, green image is the jewel in the crown of this thriving export machine, destroying its viability is easy. Simply dismantle our stringent quarantine controls and invite in the world's most devastating pests and diseases. Then stand back as these pests and diseases infest and infect our clean, green export industries, from pork and chicken to apples and citrus. Countries still wary of pests and diseases will then reject our tainted exports to protect the health of their own plants, animals and people. As imports build up and our export industry dies away, thousands of jobs will be lost and the trade deficit will balloon. So this sure-fire way of eroding export earnings and putting thousands of people out of work will have the added impact of blowing out the trade deficit. Unfortunately this is an all-too-accurate picture of what the Australian government has done with quarantine issues in the Free Trade Agreement."

The authors note the role of Biosecurity Australia, which has had responsibility for quarantine decisions, and ask why Australia is now agreeing to create new committees and working groups "which give U.S. trade representatives the power to influence our nation's scientific assessments of risks, when it is well known that the United States adopts an aggressive stance on such matters, and has publicly queried – time and again — the ‘objective’ and ‘science-based’ character of Australia's quarantine assessments".

Allowing U.S.-representatives to participate in relevant committees will permit U.S. commercial interests to place ongoing pressure on Australian procedures. Here also it appears that Australia has been let down badly by its negotiators and by an undue haste to enter into an agreement at disproportionate cost.

The Pharmaceutical Benefits Scheme

There is an assumption by some unthinking people that the large drug companies are concerned merely to set "fair" prices for their products. The reality is entirely different. The drug companies view their products in the same way as any other manufacturer: they wish to maximise their profits. And because their drugs are commonly monopoly products — protected by patents — the prices that they seek are often enormous.

In these circumstances Australia has been partly protected by the Pharmaceutical Benefits Scheme, under which lower prices for pharmaceuticals are paid in Australia. It is not surprising that immensely wealthy drug companies have long been attempting to undermine this Scheme.

Hence the analysis by the authors of U.S. purposes is a matter of political concern:

"Take a world-renowned institution that delivers affordable medicines to those most in need and undermine it from within. Start by giving multinational pharmaceutical companies a voice in decisions about which drugs will be subsidised with taxpayers’ money. Then increase external pressures on national health-policy decisions by creating a joint Medicines Working Group with a foreign power, forcing existing national bodies into subsidiary roles. Finish off the job by toughening intellectual property laws to strangle your country's own generics-based pharmaceuticals industry.

Such steps will not only reduce a once-proud health care institution to a pawn of multinational pharmaceutical companies, but will also push up the price of drugs, placing them out of reach for many of your citizens, regardless of need. Eventually, your equitable and affordable drug delivery system will be replaced with a replica of the type of high-cost, high-price open-market system found in the United States. Unfortunately, this is an all too accurate picture of what the Australian government has agreed to deliver under the Australia-U.S. Free Trade Agreement."

The power of the U.S. drug companies is evidenced by the fact that in 2002 the profits of the top 10 U.S. drug companies exceeded the profits of all the other 490 members of the Fortune 500 list for that year. Their vast financial resources will be able to be used under the Free Trade Agreement to influence Australian committees from within.

There has been debate in Australia as to the extent to which the Free Trade Agreement enables U.S. drug companies to promote their agenda. But in How to Kill a Country the authors’ analysis is convincing. The groundwork has been laid for a sustained and effective attack upon the protection that Australians have been accorded by the Pharmaceutical Benefits Scheme.

Trading "Buy Australian" for "Buy American"

U.S. commercial interests have long been concerned to increase their sales to foreign governments. One of the purposes of the U.S.-Australia Free Trade Agreement is to achieve this purpose for Australian government and semi-government purchases of materials and services.

Thus the authors comment of the U.S. purpose:

"Start by doing away with a tried and tested method of domestic industry promotion — public purchasing policy (where governments support local firms by purchasing their goods and services wherever possible).

This will make it harder for local companies to gain a foothold in the domestic or international market. At the same time, replace your ‘buy national’ programmes with a ‘buy foreign’ preference, throwing open your government procurement market to the world's largest foreign suppliers – especially in the most wealth-creating, knowledge-intensive industries like those based on information and communications technology (I.C.T.). This will force many of your smaller I.C.T. companies, unable to compete with such massive players, into bankruptcy. Strike a final blow to local firms by removing all performance requirements on foreign contract-winners, such as the requirement to use local goods, services and skills, or to license technology to domestic companies. In short, discard the key measures that have linked public purchasing with economic improvement, industry development and support for local excellence in the past. And do all this in exchange for the promise of access to a very large foreign procurement market. But ignore the fact that the promised market is one which remains highly protected by its own ‘buy national’ laws, cultural norms and other discriminatory arrangments – the very things you have agreed to abandon. In no time at all, domestic I.C.T. firms (along with many others) will have fallen by the wayside, and your taxpayers’ funds will be filling the coffers of prospering foreign suppliers."

The authors point out that the Agreement prevents Australian governments and local government from preferring local suppliers, but that in America a number of legal or non-transparent devices keep out foreign contractors. In the United States "government agencies restrict foreign access to procurement contracts through a variety of means, including longstanding ‘buy American’ laws that shape purchasing practices, discriminatory offset arrangements for ‘small’ businesses, local preference arrangements and other non-transparent barriers (including the elastic use of ‘national security’ exemptions)".

Intellectual Property Rights

An additional U.S. objective under the Agreement is to extend U.S.-favouring patent and copyright laws so as to increase payments to U.S. companies and prevent cheaper generic drugs, for example, from becoming available.

In How to Kill a Country the authors note the U.S. objective:

"Take your own national system for recognising and protecting Intellectual Property Rights (I.P.Rs) – which is already fully compliant with international standards — and give it a major ‘transfusion’ from the system of a dominant foreign power.

This will offer much stronger protection for the patents and copyrights held by this foreign power, and will dramatically increase your royalty payments to the foreign country, putting a major strain on your balance of payments (especially if — like Australia — you are already a net importer of I.P.-protected goods). Buttressing foreign patent and copyright claims will also help throttle your remaining innovative industries, forcing them to navigate around the patent claims of foreign corporations rather than staking fresh claims themselves. You can also suppress competition for I.P.-protected goods by making it impossibly hard for generic versions of these products to be introduced, for instance by allowing the ‘evergreening’ of existing patented pharmaceuticals. But why stop there when you can drastically ratchet up sanctions against I.P. ‘violators’? You could even send your own citizens to jail for interfering — wittingly or not — with the technological gizmos of foreign I.P. holders (like the devices they use to stop you enjoying a digital video-disc you bought in the United States, or Europe, back home in Australia). This is an excellent way for an appendage country to appease its foreign master. The pity is, this is exactly what Australian negotiators have signed off on in the Free Trade Agreement."

Needless to say, this outcome of the Agreement was designed to benefit the United States to the detriment of Australia. Australians will pay more in regard to films, television programmes, home video, digital video-discs, business and entertainment software, games, books, music and sound recordings. Further, the availability of generic drugs will be reduced.

Was it appropriate to have these matters inserted in the Free Trade Agreement? Surely not. They involve pro-U.S. extensions of existing laws, and Australia has no need to agree to them. This is a yet further example of the way in which Australia has been let down by its negotiators – and by its Parliament, which favours an Agreement that few of its members understand.

The Future

In How to Kill a Country the authors pose the issue:

"The question that remains at the end of this analysis is: why would a government and a country accede to a deal that is so flagrantly at odds with their interests?"

The answer is simple. The present position has arisen for two reasons. First, the very concept of a "Free Trade Agreement with the United States" is impressive. Indeed, a true free trade agreement would have much to commend it. As a primary producer Australia would gain substantially. Hence when the concept of a U.S.-Australia Free Trade Agreement was developed there was initial euphoria and self-congratulation. Those supporting the concept did not understand that what would emerge would be a one-sided and partial agreement: a coup for the United States, and a blow to the Australian economy.

The second reason why the present position has arisen has been found in the almost criminal incompetence of the Australian negotiators, who have been out-manoeuvred and out-classed. Further, unfortunately the Parliament is not a body that can be relied on to provide proper scrutiny. For a time it appeared that the Labor Party would oppose the Agreement in the Senate, but Mr. Mark Latham backed down in order to avoid being seen as anti-American. The Prime Minister, Mr. John Howard, appears to have let himself be swayed unduly by American pressure and by a naïve and misguided belief that the United States means Australia well economically. The Nationals (who purport to represent farmers) let down their electorate yet again, but with incompetent senators like Mr. Julian McLauran they have ceased to be effective, and are now viewed generally as merely tagging along with the Liberal Party.

The Free Trade Agreement contains a provision by which either party may terminate it by giving the other party six months’ notice in writing. It appears to be highly desirable that notice of termination be given, if the Agreement has meanwhile taken effect. The Agreement is not a genuine free trade agreement; it contains many provisions that are unduly damaging to Australia but beneficial to the United States. It is improper that Australia should be bound by an Agreement that will act greatly to its substantial net detriment.

NOTES

1. Sydney, Allen & Unwin, 2004.

National Observer No. 63 - Summer 2005