National Observer Home > No. 46 - Spring 2000 > Articles

Trade Agreements and Business Impacts

Hugh Morgan

This article by Mr. H. M. Morgan is based upon an address given by him in Perth on 24 February 2000, as updated by the postscript at p. 21 hereunder.

At the end of November last year, television screens all around the world carried pictures from Seattle. We saw rampaging mobs in the streets, broken windows, looted shops, tear gas drifting in the air, a smorgasbord of placards condemning the World Trade Organisation (the W.T.O.); and confronting the rioters we saw the Seattle Police, dressed up in protective gear which made them look like characters out of Star Wars.

The occasion was the W.T.O. Ministerial meeting, and the plan was for that meeting to launch a new round of trade negotiations, a round which had been provisionally entitled the Millennium Round. In the event, the meeting broke up, in disarray, without reaching any decision. If we were inclined to look at Seattle as a wrestling match between the W.T.O. and the Green protesters, there is little doubt that the Greens and their allies won, and the W.T.O. lost.

My purpose in this article is to connect the failure of the W.T.O. Ministerial meeting in Seattle with concerns about the future prosperity of Australia, and of the Asian countries to our near north. What has the W.T.O. got to do with that and what, if anything, can we do to ensure that decisions taken at the W.T.O., and at other international fora, do not change our lives here in Australia, and the lives of those who live in our region, for the worse?

Since the Asian monetary crisis first struck in Bangkok in July 1997, and then spread rapidly throughout all of S.E. Asia, Korea, Japan and China, we seem to have forgotten just how dramatic has been the change in peoples' lives in these countries since the end of the Second World War. In 1949, the year of the Communist takeover in China, famine, grinding poverty, war, pestilence and sudden death, were commonplace throughout all of Asia.

Today Japan, Singapore, Hong Kong, Taiwan, Korea, Malaysia, Thailand and parts of China are prosperous, and busy making headway after the currency crisis. Indonesia is going through a momentous period of change, and President Wahid has done better, in managing the political problems which he inherited, than any observer dared to hope for only a year ago.

Every Asian country has its problems, but the change in the condition of life for the average citizen in these countries, over the last forty years, has been unprecedented in the history of the world.

The main factor in the rapid economic growth of this part of the world has been the commitment by Asian political leaders to engage in world trade, and to maximise the opportunities which the G.A.T.T. (now the W.T.O.) global trading regime offers. Some Asian countries engaged with the world more quickly than others, and there are still others which have yet to apply seriously the lessons of the post-war period; which is that open markets, with commitment to participation on the global economy, is the surest road to economic growth and increasing prosperity.

President Zedillo of Mexico, speaking at the World Economic Forum in Davos, earlier this year, said,"In every case where a poor nation has significantly overcome its poverty, this has been achieved while engaging in production for export markets, and opening itself to the influx of foreign goods, investment and technology; that is, by participating in globalisation."

However, without the protection and predictability which the G.A.T.T. regime in international trade offered to the countries, the companies and the people engaged in exporting and importing activity, the unprecedented economic progress which took place in Asia between 1950 and 1997, simply would not have taken place.

The implications for Australia have been immense, particularly if we consider the way in which Japan, Australia, and the United States have formed a triangular Pacific trading relationship from which we have all greatly benefitted. From a Western Australian perspective, for example, the iron ore business, a $6 billion per year industry, was built on this relationship; one which could not have been built outside the G.A.T.T. structure.

It is impossible to overstate the contribution which international trade has made to world prosperity since the G.A.T.T. came into effect. Alan Greenspan recently testified to the contribution which the G.A.T.T. has made in a speech given in Dallas in April last year:

"One of the most impressive and persistent trends of the last half century is the expansion of international trade. Adjusted for price change, trade across national borders has increased fourteenfold - far faster than the fivefold increase in world G.D.P.

The evidence is overwhelmingly persuasive that the massive increase in world competition - a consequence of broadening trade flows - has fostered markedly higher standards of living for almost all countries who have participated in cross-border trade. I include most especially the United States."

As a corollary to that we can say that the countries of Asia will not move forward to the next stage of rapid economic development unless they continue to receive the support, and enjoy the opportunities, which the W.T.O. system provides.

The G.A.T.T. has not been perfect; no human institution is; and every Australian farmer knows that agriculture has been a sticking point within the G.A.T.T./W.T.O. structure ever since the establishment of the G.A.T.T. in 1947.

The Western Australian wheat industry is a useful example to use in this context. Western Australia produces forty per cent of the Australian wheat crop. Ninety-five percent of that crop is exported and as a result all Australians benefit from the $1.8 billions earned abroad. Most people in Western Australia are related to someone, or know someone involved in, the Western Australian wheat industry.

The international wheat market is, to put it politely, greatly distorted. The Europeans are the worst offenders in that, through their C.A.P., they subsidise their wheat growers to the tune of many tens of billions of U.S. dollars per annum. Having paid their wheat growers to produce more wheat than they can consume domestically, they dump the surplus onto world markets at give-away prices. Current E.U. wheat stocks (the European wheat mountain) are 29 million tonnes, and are predicted to rise to 45 million tonnes by 2006.

This is anti-social behaviour of the most harmful kind. It hurts the consumers of Europe, who have to pay far more than world prices for food. It particularly hurts the producers of developing countries, who cannot begin to build up a market system of production and consumption which is consonant with the realities of the global market. And, of course, it hurts the wheat growers of Australia, Canada and, significantly, Poland.

The Americans, who are very competitive grain-growers, dislike intensely what the Europeans do in international grain markets and, being very rich, and not wanting to allow their own wheat-growers to be disadvantaged, they in turn subsidise their wheat producers in order, as it were, to "level the playing field".

Australia cannot afford to subsidise wheat exports and under these circumstances it is a miracle that the Australian wheat producers can survive. But that they have survived (or at least that some of them have), and that they produce against all the odds 20 million tonnes or so annually, is testimony to the ingenuity, the capacity for innovation, the determination, the readiness to work long and hard, of our wheat growers.

So, in effect, the Europeans and the Americans collaborated to prevent the G.A.T.T. rules governing international trade from applying to agriculture.

The Cairns Group was established in the mid-1980s precisely to bring agriculture within the G.A.T.T./W.T.O. umbrella. In the Uruguay Round an important start to move agriculture fully into the W.T.O. system was made. Limits were imposed on how much money the European Union and the United States could commit to export subsidies. That was a major breakthrough on an important principle.

When we succeed in bringing agriculture fully into the W.T.O. system the benefits will be enormous. Australia will be able to earn billions of dollars more in exports, and the agricultural and pastoral industries will become far more significant than they are today.

Seattle was to have been the next step. At Seattle the Cairns Group had made huge progress towards this goal, and two days before the meeting collapsed, Australian officials believed we were on the verge of an historic breakthrough. But the collapse of the Seattle meeting has put us in a "Go Back To Start" situation.

If it were not for some other dark clouds on the horizon, it would be a reasonable thing to argue that the fiasco at Seattle was only a temporary aberration; that the bargaining processes that are an integral part of the G.A.T.T./W.T.O. structure would soon resume; and negotiations aimed at implementing the far-reaching Uruguay decisions, particularly with respect to agriculture, and textiles, would soon begin.

Well, they may begin, perhaps soon, but there is one particularly ominous development which could negate all the benefits which progress within the W.T.O., on agriculture, would yield. This black cloud is the recently negotiated text of the Biosafety Protocol, known as the Cartagena Protocol, which is now open for signature and eventual ratification. This text was agreed to at Montreal early this year, and Australia, which last year had been in the front line of those countries who were refusing to go along with provisions being pushed by the Europeans designed to restrict trade and undermine the W.T.O. system, capitulated at Montreal without firing a shot.

In order to understand the implications of the Cartegena Protocol we have to visit, briefly, how the W.T.O. allows countries to restrict imports of products which threaten human health and safety, or flora and fauna, but at the same time controls abuses of these rights for protectionist purposes. The Sanitary and Phyto-Sanitary (S.P.S.) Agreement was negotiated during the Uruguay Round in order to bring to an end abuses of the quarantine and customs controls. Under the old rules a country could impose a ban on imports of, for example, fresh salmon, or pork, to protect health and safety and domestic flora and fauna. The scientific reasonableness, or otherwise, of such a decision, was beyond challenge by the exporting country, and so it became easy to use quarantine regulations as a method of protecting domestic industries.

The new rules of the S.P.S. Agreement now require members of the W.T.O. to demonstrate before a W.T.O. Disputes Panel, if challenged, that the bans are based on scientific grounds. In effect, W.T.O. members all agreed that these disputes would be decided on the science of the case, not on unsubstantiated sentiment, or press beat-ups, or on scenarios taken from horror movies.

The United States has taken the European Union to W.T.O. Disputes Panels twice, over the E.U.'s refusal to allow imports of beef which has been produced with food supplements containing hormone growth additives. There is no scientific test which can ascertain if beef has been come from cows fed with these supplements, or not fed with them. In other words, the beef from the hormone-encouraged cow is indistinguishable from one that has not been thus encouraged. However, the Europeans have set their collective face against such food supplements and refuse to allow U.S. beef into Europe unless it is guaranteed to have been grown without such supplements. The situation in this case now is that the E.U. has agreed to pay the U.S. $200 millions in fines, rather than allow this beef into Europe.

So the W.T.O. rules about these matters are based four-square on sound science.

This did not suit the Europeans. They argued that the W.T.O. was deficient; that there should be new, wider grounds to restrict trade; in particular they said that consumer preferences and environmental preferences should be recognised as legitimate grounds for discrimination. Given the history of European protectionism, particularly in agriculture, we have reasonable grounds to believe that they are looking for new ways to restrict imports of food.

The environment is a very attractive instrument for this purpose. Since 1995 the European Union has been arguing that the G.A.T.T. should be amended to give members the right to restrict trade on environmental grounds. In 1996 they were rebuffed by the developing countries within the W.T.O., at the time led by Indonesia's President Suharto.

More recently, having seen the W.T.O. rebuff their bans on hormone fed beef, the Europeans played their trump card, in the form of the Precautionary Principle (the P.P.) They created new rights to restrict trade in the Cartagena Protocol, making the P.P. the core doctrine to justify restrictions on imports of living genetically modified organisms (G.M.O.s) such as soy beans, canola or wheat. It brings that Protocol to the centre stage of the debates over the future of the W.T.O., the future of international trade in agricultural products, and the role of science in determining what is acceptable and what is not acceptable in trade restrictions legitimised under the W.T.O. rules.

In brief, the Cartagena Protocol claims to trump the W.T.O.'s S.P.S. Agreement, with respect to Genetically Modified Organisms (G.M.O.s). That Protocol empowers countries to ban the import of G.M. foods such as soya beans or canola, or any other product, by reference to the P.P. It is cited in the Protocol as follows:

"Lack of scientific certainty due to insufficient relevant scientific information and knowledge regarding the extent of the potential adverse effects of a living modified organism (that is, a G.M.O.) on the conservation and sustainable use of biological diversity in the Party of import, taking also into account risks to human health, shall not prevent that Party from taking a decision, as appropriate, with regard to the import of that living modified organism intended for direct use as food or feed, or for processing to avoid or minimise such potential adverse effects."

The Precautionary Principle is the central core of the Cartegena Protocol. The P.P. seems to most people at first sight to be nothing more than a long-winded way of saying, "Look before you leap". However, it creates very wide grounds for governments to decide, without virtually any scientific justification, that a particular import is too risky to allow into the country. It replaces risk management with unbounded risk aversion.

The logical structure of the P.P. strikes at the heart of the intellectual and entrepreneurial movement which began in Europe twenty-five hundred years ago, and has transformed the lives of everyone touched by it since. If the P.P. had commanded, in 1492, the power which it does today, Colombus could never have sailed west into the Atlantic; Magellan could never have circumnavigated the globe; we could never had had the steam engine, or the motor car, or the aeroplane, and we could certainly never have gone to the moon.

Australian wheat growers have always been at the forefront of plant technology, and unless the Europeans win this battle and shut down G.M. research around the world, the use of G.M. technology in the Australian wheat industry can only be a few years away. The Australian Wheat Board has committed $18 millions into G.M.O. research over the next three years.

There are some Australian wheat-growers who see the current state of G.M.-free Australian wheat as an advantage in selling into world markets, and would be happy to see the Europeans succeed in their attempts to kill G.M. technology. That is a point of view. If there is a profitable market for non-G.M. product then farmers should produce for that market. But it would be a grievous mistake to foreclose the opportunity to use biotechnology, given the benefits this technology offers and the prospects that Australians could develop new strains of grains which might be extremely profitable. Imagine what would have happened to the Australian wheat industry if a ban on cross breeding had been imposed, just as William Farrer began his experiments.

The overriding issue is that the weapon which the Europeans have chosen to achieve their ambition of legitimising trade restrictions will, at the same time, effectively undermine the progress that has been made in the last fifteen years or so in bringing agriculture within the W.T.O. rules. And that has been, quite rightly, a primary aim of Australian policy for many decades.

The critical fact, one which gives the game away, is that G.M. pharmaceutical products are specifically exempted from the Cartagena Protocol. G.M. technology in drugs is welcomed by the Europeans, but G.M. technology is unacceptable in agriculture.

One cannot get a clearer message than that. It is agriculture which is their target, not G.M.O. technology, and their goal is, first, closing their markets to agricultural imports, and second, shutting down a technology in which the Americans have left them far behind.

So while some may see a market opportunity for Australian wheat exports in freezing the present state of wheat technology and research in Australia,those of us in other industries must consider what the implications of the Cartagena Protocol are for their exports, and for the W.T.O. as an institution which is central to the hopes of billions of people for a better life.

The P.P. as set out in Article 11 (8) is about the "potential adverse effects of a living modified organism on the conservation and sustainable use of biological diversity in the Party of import."

"Biological diversity" is a most elusive concept. Let us consider what would happen if we replaced the words "living modified organism" with the words "heavy metals". Doubtless someone in Sweden or Denmark has already gone through this exercise, and given some thought as to where a Heavy Metals Protocol to the Biodiversity Convention might be negotiated. A Protocol giving the right to countries to ban arbitrarily the imports of heavy metals would give the Nordics an enormous sense of satisfaction. If the principle gets established with respect to G.M.O.s, it is difficult to see how such a principle could be avoided if heavy metals became the next target. Western Australia, as we all know, is a significant producer of heavy metals.

What does all this mean, for Australian business, for Australian voters, for all those involved in the complex political processes by which decisions are arrived at? The acceptance of the text of the Cartagena Protocol this year means we now have a serious problem with the democratic process in this country.

It is true that Australia has not signed the Protocol and has not yet even considered ratification. But we have been down this same road with the Basel Convention on the Transboundary Movement of Hazardous Wastes. Under pressure from environmental groups, Australia ratified a treaty which sought to protect developing countries from illegal imports of hazardous waste. The problem they had was a lack of capacity to control illegal imports. The Basel Convention required the ratifying countries to legislate to make exporters make up for the deficiencies of border protection in the developing countries. The Australian Government inadvertently gave extra-territorial reach to Australian law and at the same time restricted trade in scrap metals and other useful products.

We have been assured that the lessons learned from the Basel fiasco have been well learned, and we have been solemnly assured that such mistakes will not happen again. So it is deeply disturbing to find that we are back on the same road, and that in order to derail the Cartagena cart, a lot of time and energy is going to have be devoted to the derailment process.

Now it is obvious that very few people in Australia have heard of the Cartagena Protocol. Hardly anyone has connected this Protocol with the future of the Australian wheat industry particularly, and Australian agriculture generally. But in accepting the Cartagena text we are now on a course which will seriously endanger the future of all Australian agricultural exports, and we are at the same time establishing a precedent which is aimed squarely at the integrity of the W.T.O. and the coherence of its legal structure. This is very serious. As they say in the movies: "Be Afraid - Be Very Afraid".

We have to ask - how has this come about? Further, we need to consider what institutional changes are necessary to ensure that before we commit to a course of action as harmful as this, there is a formal opportunity to draw back, and say, "Thanks, but no thanks".

Our friends in the Department of Foreign Affairs and Trade will respond by saying,

"We do consult with business and with other groups and N.G.O.s who have concerns in what we do. And there is a formal process of consultation with the States before ratification of international treaties."

Those people who have been on the other end of such consultations refer knowingly to Sir Humphrey, and speak of "designing for failure".

Whatever procedures and consultations are now in place, the Cartagena fiasco means that they are seriously inadequate. Something far more effective has to be put in place.

In the United States, the executive branch cannot ratify an international treaty without the consent of the Senate. One consequence is that the United States has ratified far fewer treaties than any other country. The United States, for example, has not ratified the Basel Convention, or the Biodiversity Convention, amongst many others. Because the Clinton Administration knows full well that the Senate will refuse, by a huge margin, to accept the Kyoto Protocol, the Administration has refused to submit Kyoto to the Senate.

I believe we need some mechanism of a similar kind in Australia. Maybe a two-thirds vote of the Senate, prior to ratification, would provide us with the protective procedures we now so clearly need.

No one can claim that the United States is disadvantaged by this constitutional requirement of Senatorial approval of international treaties. The fact that we have a serious problem in this field of treaty-making can no longer be denied. In many Australian States, particularly where the distance from Canberra makes it all the more difficult for State problems to receive proper attention and the use of the external affairs power to override State authority is a pressing concern, one would expect to see considerable support for such a reform.

The problems I have outlined are not confined to Australia. Many developing countries, including countries from the Asian region, have great difficulty in reacting to proposals for international treaties in a way which takes account of their national interest. The capacity of single interest groups, often funded from abroad, to set government agendas in these countries is often astonishing.

Australia could set an important example in the region through institutionalising due process in this vital matter of international treaty-making.

Our Asian neighbours are making a good recovery from the Asian crisis. But that recovery will be short-lived if the integrity and coherence of the W.T.O. structure is destroyed by the creation of rival trade dispute machinery, based on science fiction and protectionist ambitions.

Regardless of the particular industry we work in, we all have a very big stake in these issues. I urge all Australians to get involved, get informed, and make their voices heard.

Postscript

Recently the Commonwealth Government has announced that Australia will not sign the Cartagena Protocol until it is entirely satisfied that our W.T.O. rights will not be impaired in any way. It is important to note that the Federal Opposition has not contested this decision at all, and this, given the controversy surrounding G.M. food, indicates that it is in broad agreement with the Government on this issue. The National Farmers Federation, which lobbied vigorously on this issue, is to be congratulated for having convinced the Government that Australia should resile from the text which our representatives had accepted at Montreal in January 2000.

National Observer No. 46 - Spring 2000