Senate debates

Tuesday, 13 October 2015


Trans-Pacific Partnership Agreement

8:45 pm

Photo of Matthew CanavanMatthew Canavan (Queensland, Liberal National Party) Share this | | Hansard source

The Trans-Pacific Partnership agreement, concluded in Atlanta this week, is a historic deal. It is the first major multilateral trade deal to be concluded in more than 20 years. The Minister for Trade, Andrew Robb, should be congratulated for bringing this deal to a conclusion, and he is right to say that it is the biggest trade deal since the Uruguay Round. Indeed, Australia was a significant contributor to the delivery of the TPP. Negotiations first began in Melbourne in March 2010.

Still, we should not get carried away with the benefits of just this one trade agreement. The last 20 years have been a drought for multilateral trade reform and we should not call one oasis in that desert a forest. The Trans-Pacific Partnership is a missed opportunity to deliver genuine reform of agricultural markets in particular. As The Economist said this week of the Trans-Pacific Partnership:

The sealing of a Pacific trade deal is welcome. But spare the cheers.

Until this week, the world had not seen a big multilateral trade pact for over 20 years. The deal that has broken the drought—the Trans-Pacific Partnership (TPP), which comprises 12 countries in Asia and the Americas, including the United States and Japan—is welcome. But those who believe in free trade, and the benefits it brings, ought not to miss the bigger picture. The backdrop to this week’s deal is a bleak one.

That was a more deflated tone than The Economist struck when the TPP was being negotiated in 2013. The Economist went as far as to say:

Trade talks are threatening to become sexy again.

Some commentators even view the TPP as some sort of the sequel to the WTO multilateral trade negotiations that had become stalled in the Doha Round. A few years ago the Financial Times referred to the TPP as the trade equivalent of Ocean's 12. Unfortunately, at least for some sectors like sugar, the TPP has not turned out to be a good sequel to the Uruguay Round but more like a much hyped but ultimately an underwhelming one—like the Phantom Menace, for example. The key problem with the Phantom Menace as a movie was that while other Star Wars episodes had princesses in distress, planets destroying death stars, a battle between father and son, a lovable cast of eccentric robots and a 900-year-old guru, the plot of the Phantom Menace revolved around trade disputes, Senate negotiations and a very annoying Jar Jar Binks.

I do not share optimism of The Economist. I do not think trade disputes can ever be sexy and Senate negotiations, perhaps, even less so. But I do not want to give up. Just because they cannot be sexy does not mean that they are not important, and they are particularly important for Australia. I want to propose that Australia should not give up and cannot afford to give up on the greater gains that can be made from true multilateral trade reform of agricultural markets. It remains the case that the greatest gains from trade liberalisation will come from the removal of trade barriers and subsidies in agriculture and food.

Before I do that, I want to briefly give the TPP its due. As I said, it is a welcome agreement and it does have considerable benefits for the world, notwithstanding some shortcomings in particular areas. The TPP is an agreement between 12 countries that between them have a population of more than 800 million people and a combined gross domestic product of around $28 trillion. These 12 countries represent around 11 per cent of the world's population and about 40 per cent of the world's GDP. Overall, the TPP will eliminate tariffs on more than $4 billion of Australia's dutiable exports of agricultural goods to TPP countries, and an additional $2 billion of Australia's exports will receive preferential access through new quotas and tariff reductions.

There have been reductions in tariffs and improved access for beef, sheep meat, wool, pork, cereal and grains, dairy, rice, cotton, wine, horticulture and seafood. So there clearly are some beneficial outcomes here. Of course, we have previously concluded many trade deals with the TPP countries, so good access had already been achieved in many of these areas—again, often thanks to the work of the Minister for Trade, Andrew Robb.

There are also some broader missed opportunities in the agreement. The US Department of Agriculture had assessed the benefits of the elimination of tariffs and protections on agricultural products in a potential TPP, before the deal was settled. The US Department of Agriculture found that:

By commodity, the percentage increases in the value of intraregional trade due to eliminating tariffs and TRQs among TPP members will be largest for rice, sugar, and 'other meat' (which includes animal fats and oils and offals).

Sugar was estimated to deliver the second-highest increase in trade—of $569 million over 10 years to 2025, delivering a whopping 48 per cent increase in the value of trade in sugar between TPP countries. Unfortunately, that outcome will not be delivered because tariffs and protections in sugar will be far from eliminated under the proposed TPP deal.

While the full text of the agreement is yet to be released, it would appear that the United States has not delivered a substantial increase on its sugar quota, as agreed in the Uruguay Round 20 years ago. This is a regrettable outcome. It is a regrettable outcome to the Australian sugar industry and to the broader world because the significant gains that would have otherwise flowed from increased world trade in sugar have been ignored and neglected.

I wish to briefly outline the details of the TPP with regard to sugar for Australia. Total Australian exports of sugar at the moment vary between around $1.5 billion and $2 billion, and around one third of these exports, or around $500 million, often go to TPP countries. TPP market access gains for Australian sugar producers and exporters include an additional 65,000 tonnes of access to the United States. The US will also provide Australia with 23 per cent of future additional WTO quota allocations

Australia's exports are likely to grow from around 100,000 tonnes a year at the moment, which includes 87,000 tonnes of a base allocation and the extra allocations from the US, to around just over 200,000 tonnes, based on historical US demands for sugar.

There are other benefits I want to mention for Australia, for other countries, in regard to sugar as well. There will be an elimination of Japan's tariffs and a reduction in the levy of high-polarity sugar exports under the TPP. There is an elimination of Canada's tariffs on refined sugar, currently at around C$30 a tonne, within five years of entry into force. And Australia already has duty-free access for raw sugar into Canada. In Mexico, a guaranteed seven per cent of any tariff rate quota for raw sugar in the years in which it is offered has been given to Australia. Australia is only the sixth country that Mexico has offered such an outcome. There will be an elimination of in-quota tariffs on Vietnam's WTO sugar quota, although not an increase in the quotas overall. And Malaysia will allow Australia to access the wholesale distribution of refined sugar for the food and beverage industries.

While all of these changes are welcome, they are far from the potential gains that could have been achieved, and they do little to amend the distorting impact in particular of the US sugar program. The United States has a long history of protecting its sugar industry. It introduced its first tax on the import of foreign sugar in 1789. Those taxes lasted more than 100 years before they were removed in 1890. What followed, however, was the introduction of subsidies just four years later and another almost 100 years of various subsidies and other import taxes for the US sugar industry. In 1974, the US sugar act expired, but President Ford played politics with the issue, tripling the sugar tariff in an attempt to win the state of Louisiana in the US presidential election.

Over the past 30 years, the US Congress has made its sugar program even more complex and more distortionary. The policy now consists of various planks, not just import tariffs or quotas. There are loans to maintain floor prices for sugar in domestic US markets. There is an allocation of tariff rate quotas for overseas countries, including the allocation of the minimum 1.2 million tonnes of raw sugar that the US must import under the commitments it made in the Uruguay Round. There is a process to allocate upward adjustments to the US sugar quotas in the event that US sugar production cannot be met and a sugar-to-ethanol program where the government purchases excess production of domestic US sugar for eventual conversion to ethanol.

These changes to the US program have been made despite presidential disapproval over the last few decades. Former President Ronald Reagan mentioned that the sugar program was one of the three 'objectionable features that must be changed' in the 1985 farm bill when he signed it into law. President George W Bush vetoed a farm bill in 2008, only to have Congress override his veto.

The upshot of the United States' interventions in its sugar market means that the price of sugar in the US is higher than the rest of the world. In effect, the non-US sugar producers receive a lower price, and US sugar producers receive a higher price, thanks to the US sugar program. Right now, the US sugar price is around 9c per pound higher than the rest of the world.

Using some very simplistic maths, we can work out the potential benefits to Australian producers of the increased quota. As I said previously, under the TPP, Australian sugar producers stand to benefit from an increased 100,000 tonnes to the US. That would mean that it would benefit Australian producers by around $20 million in additional export revenue, before assuming any increase in Australian sugar production. These calculations also, of course, assume no reduction in the US sugar price due to increased US imports of sugar. They are very simplistic, but they are in the order of the benefits that would flow to Australian producers. Clearly, they are benefits—$20 million is not to be sneezed at—but they are also not game-changing for a sector that regularly exports more than 1.5 billion tonnes of raw sugar a year. As Yoda would say, 'Been missed, an opportunity has.'

The United States often prides itself on its defence and promotion of free trade and open markets. For example, Jon Huntsman, the recently departed US Ambassador to China, once said:

When America closes its doors, so does everybody else. We are the primary engine of growth in the world and we are the only beacon of free trade left …

And it is true that the US's position on trade negotiations and trade deals often does have a remarkable impact on the actual outcomes achieved in those negotiating processes. Unfortunately, in this case, the US has not met its own lofty and worth principles when it comes to sugar. I recognise that Australia's negotiating team did all they could to get the best outcome for our country and for our sugar producers. But, in the overall scheme of things, the gains for our sugar industry were not nearly as large as we would have hoped.

Global trade in agriculture is the most distorted and remains the most distorted sector in world trade. And, because of this, it is also the sector with the greatest potential gains to be had from multilateral trade reform. These distortions in world agricultural and food markets mean that Australian farmers, as well as those in developing countries, are unfairly disadvantaged.

Australia has reduced its own tariff levels and other trade-distorting protections on agricultural and food products since the early 1970s. Australia's simple average applied tariff on agriculture is just 1.2 per cent of revenues. Australia is recognised internationally as one of the most efficient agricultural producers. According to the OECD's estimates of producer support, Australia's support for agricultural producers was the third lowest in OECD countries and only behind New Zealand and Ukraine, with support levels of between one and two per cent of gross farm receipts, compared to an OECD average of 17.3 per cent of gross farm receipts. The producer support estimates for many other countries that we compete with were much higher, including Japan, at 49 per cent; Indonesia, at 23 per cent; China, at 20 per cent; the United States, at 10 per cent; and Canada, at nine per cent.

Trade- and production-distorting measures can increase price volatility and create disincentives for farmers to improve productivity. They can also encourage wasteful surplus production that in turn weakens commodity prices and lowers returns at the farm gate.

It is disappointing that the TPP has not made more progress in reducing agricultural barriers, because it is these barriers that represent the greatest distortion to world trade. That was clear in the work that was done to assess the potential benefits of the Doha Development Agenda, the original successor to the Uruguay Round. At least more than half—more than half—of the potential benefits of the Uruguay Round were likely to come from the agricultural sector.

Economists Will Martin and Kym Anderson, from the World Bank, looked at the potential benefits of the Doha round. They found that the full liberalisation of global merchandise trade would increase world income by around $287 billion. A full 62 per cent, or $182 billion, of these gains were to come from the increased trade of agriculture and food. This was a similar result to that of other research done by economists Hertel and Keeney which put agriculture and food's share of the total gains from liberalisation even higher, at around two-thirds of the total gains. They went on to say:

This is consistent with the high tariffs in agriculture and food (17 percent global average) versus other sectors, but is nonetheless remarkable given the low shares of agriculture in global GDP (4 percent) and global merchandise trade (9 percent). Three-quarters of those gains are accounted for by the farm policies of high-income countries. Notice too that as much of that gain from farm reform is due to South-South agricultural liberalization as would come from developing countries' unrestricted access to high-income country markets.

It is a remarkable result that almost two-thirds of the gains from multilateral trade reform can come from trade that represents just 10 per cent or just a little bit less than 10 per cent of global trade and flows, but that is simply reflective of the high level of distortion and protection that occurs in the sector. Unfortunately the figures that I have quoted here in terms of the potential benefits of the Doha Round are kind of moot because the Doha Round is probably about as dead as disco.

Doha was a big idea. As Fredrick Erixon pointed out, the Doha Round rested on the big idea of an all-inclusive grand bargain. Developing countries would get better access to rich-country markets for agricultural and semi-industrial products; developed countries would get better access to other rich-country markets and to developing country markets for services and advanced industrial and consumer goods. The approach did not work. The reach of Doha probably was beyond the grasp of international trade politics.

I would like to suggest a different approach. I believe that we should return to a renewed focus on achieving progress in discreet areas of trade reform at the multilateral level, not shooting for the stars or the grand bargain. A more focussed approach would concentrate the minds on the specific gains to be had in particular areas. I believe that we should start in agriculture because that is where the largest potential gains lie and that is where the developed countries have the most to gain—including Australia. Some may call this approach too simplistic and naive but I would argue that it would return the WTO to a successful model that delivered results previously in telecommunications, intellectual property and biosecurity. Indeed, it could be argued that the big post Second World War trade agreements like Kennedy and Uruguay were actually focused agreements that largely tackled protections in discreet areas of manufacturing.

However, the real template for this approach is the agreement on textiles and clothing. For many decades, trade in textiles was marked by distortionary quantitative restrictions used to protect the domestic textile industries of the United States, the European Union, Canada, and Norway. Quantitative restrictions, or quotas, tend to be much worse than tariffs in distorting markets and increase efficiency costs and losses to consumers. Reform, however, seemed impossible despite these large distortions. Textiles and clothing industries are highly labour intensive and are often concentrated in a few industrial areas in particular regional locations within countries, making them quite politically powerful. Even in Australia the subsidies on the textiles and clothing sector were some of the last to be removed. But during the Uruguay Round, WTO Members signed an agreement on textiles and clothing. The agreement established multilateral rules and subjected the textiles trade to the basic WTO principles of non-discrimination and national treatment.

The upshot was a staged removal of quantitative restrictions over time, a successful removal that went to exactly the timetable as spelt out. At the end of the agreement, trade in textile and clothing products is no longer subject to quotas under a special regime outside normal WTO-GATT rules and is now governed by the general rules and disciplines embodied in the multilateral trading system. These changes have been of great benefit, particularly to developing countries, which often make their first moves in clothing and textiles while they transition from primary production to secondary production economies.

This focused approach has worked in the past, and I argue: why can't we make it work again for industries like sugar, which is so important to our national and particularly to my state of Queensland? Once again, I do congratulate the Australian negotiators on bringing the TPP negotiations to a conclusion. But while the sun sets on these negotiations, we should already be looking for a new dawn. And we should face towards the protections and distortions in agricultural trade markets for those new opportunities.