Secretary's Speech: Multilateral Trade Negotiations - The Challenges and Potential Rewards

Melbourne, 28 April 1999

Speech to the Fourth Annual Trade Lecture to the Melbourne Business School by
Dr Ashton Calvert Secretary Department of Foreign Affairs and Trade

I am delighted to have this opportunity to deliver the 1999 Trade Lecture at the Melbourne Business School.

Firstly, I'd like to endorse the comments made by those who have preceded me on this rostrum regarding the value of the Business School as a centre for education and training of future business leaders, and as a key focus for trade policy analysis in Australia. I congratulate the Director, Professor John Rose, Professor David Robertson, Director of the Centre of the Practice of International Trade, and the staff of the Melbourne Business School for their excellent work.

The topic for this year's lecture, "Multilateral trade negotiations - the Challenges and Potential Rewards" is, I think, appropriate and highly topical as we currently stand on the brink of a new round of global trade negotiations. The launch of a new round is not yet guaranteed, but there are growing indications that the Seattle Ministerial Conference, to be held from 30 November to 3 December this year, will achieve this - not least because the United States, which has provided the main momentum for previous trade rounds, is now publicly behind the push.

Australia's trade policy rests on three legs - bilateral, regional and multilateral - all of which support and reinforce each other, and all of which need to be employed as circumstances dictate. All three paths have their strengths and limitations. All three require patience, attention to detail, and resolve. My focus tonight is on multilateral trade negotiations. The Minister for Trade, Mr Fischer, has made very clear the Government's continued strong commitment to the multilateral path. Some of you will know that he was one of the first to support calls for a new trade round.

The Rationale for a Multilateral Approach

The multilateral path is a complex and lengthy process. The Kennedy Round took five years, the Tokyo Round went for seven and the Uruguay Round ran for almost eight - double the original target. Negotiations of this duration are a heavy commitment, but testify to the fact that the parties see the rewards as justifying the effort. This is not surprising when one looks at the history. The eight multilateral trade negotiating rounds over the past fifty years have transformed a protectionist post-war environment to a much freer trading world, with tariffs on manufactures alone cut by an average of 90 per cent. Through the development of contractual rules, the trading system is much less vulnerable to economic shocks. Global trade has expanded dramatically, increasing fifteen-fold since 1960. This helped quadruple world economic production and more than double world per capita income over that period. The GATT, now WTO, system has been a fundamental underpinning of post-war economic growth.

Uruguay Round: Results for Australia

The Uruguay Round, which ran from 1986 to 1994, was the largest and most complex to date, with market-opening outcomes estimated to contribute hundreds of billions of dollars to the world economy. It was a very difficult negotiation which had to be rescued from the brink of failure on more than one occasion. There were five key outcomes. Significantly, agricultural trade was brought under multilateral disciplines for the first time and the Cairns Group, led by Australia, played a key role in achieving that. It achieved a fundamental change of direction for agriculture - the converting of impenetrable non-tariff barriers, like quantitative restrictions and variable levies, into tariffs capable of negotiation; and the capping of previously uncontrolled export subsidies and production-linked domestic subsidies. It did not achieve the extent of actual protection cuts we sought - but the first steps were taken and a workable negotiating framework is now in place. Secondly, the Uruguay Round expanded GATT into services and intellectual property, which are both important and growing areas of international trade. Thirdly, it brought developing countries much more fully into the trading system. Fourthly, it expanded tariff bindings and developed rules which greatly strengthened the predictability of the system, including a greatly enhanced dispute-settlement process. Finally, it led to the establishment of a broader and stronger institution, the WTO, to succeed the GATT.

By any yardstick, very impressive results were achieved. Industrialised countries reduced bound tariffs for manufactures by almost 40 per cent; and developing country tariffs declined by 30 per cent on average. Importantly, the percentage of developing country tariff lines bound against increase trebled - from less than 25 per cent to 72 per cent. Australia was also able to use fully the credit gained from unilateral tariff reforms, and in return gain substantial tariff cuts and other benefits. For example, 43 per cent of our industrials exports now face zero tariffs. For Australia, the outcome for industrial and agricultural products is estimated by the Productivity Commission to have added about $4.4 billion a year to real GDP. Putting services under WTO rules and onto the negotiating agenda was also important for Australia. At the beginning of the Uruguay Round, in 1986-87, our services trade amounted to $18.4 billion. A decade later, it had more than doubled to $47.1 billion, at a yearly growth rate of nine per cent. More than 8 out of every 10 jobs in Australia are now in the services sector. And the services sector accounts for more than two thirds of our GDP and almost a quarter of Australia's total exports. But although the benefits were of great value, we - like other countries - did not secure all our objectives. For Australia, the biggest disappointment is the extent of unfairness and distortion that still plagues agricultural markets. Another disappointment was the outcome on industrial tariffs which allowed our trading partners in South-East Asia to continue with high levels of tariff protection. These are major reasons we are so committed to further multilateral negotiations.

Looking ahead

Importantly, the Uruguay Round negotiators recognised that more liberalisation was needed in some sectors - and had the foresight to recognise that the multilateral trading system needs to keep moving with the times. A number of further negotiations and reviews of the Uruguay Round Agreements were mandated - the so-called "Built-in Agenda". The mandated negotiations cover agriculture, services and intellectual property and are scheduled to begin at the end of this year. For agriculture, our objectives are as outlined by Ministers of the fifteen-strong Cairns Group who met under Mr Fischer's chairmanship last year in Sydney. In short, we seek to have agriculture treated on the same basis as trade in manufactures. This means deep cuts to all tariffs, including peaks like Japan's rice tariff; substantial cuts to production-distorting domestic subsidies; and the elimination of export subsidies that disrupt trading patterns at huge cost to efficient producers. Our overriding priority for services is greater market access. We are consulting widely with Australian companies about the barriers they face. Mr Fischer has already convened two successful workshops with business in Melbourne and Sydney.

The re-badged Australian Services Network is a crucial ally in this work. We plan to negotiate on every services sector, and to work away at all the problems our companies face - problems like discriminatory licensing arrangements, punitive joint venture deals, unfair taxation rules, and constraints on accreditation of professions. In addition, we need to craft WTO rules for new areas of direct relevance to doing business where no rules now exist - such as the establishment of necessity tests for regulations, possible application of emergency safeguards to services, and actions in restraint of trade. On intellectual property, we need first of all to ensure that developing countries come into compliance with their obligations under the TRIPS Agreement (Trade-Related Aspects of Intellectual Property Rights) by the due date (January 2000). That step alone will substantially assist us in maintaining the competitive edge of Australian exports as diverse as wine, machine tools and electronic-funds-transfer equipment - in short, in all those areas where we add value to our exports. While the Built-In Agenda provides a framework for a resumption of negotiations in these three sectors, it is narrow in scope and lacks deadlines.

We and other supporters of a new Round - including the EU and Japan - consider that it needs to be supplemented by some other areas and to be time limited. A more comprehensive approach provides greater scope for assembling liberalisation packages which are attractive to most participants, thus improving the chances for, and size of, the outcome. Australia is seeking the inclusion of industrial products in the agenda for a new round. Manufactured goods have been the fastest growing area of Australia's merchandise exports this decade (increasing by an average 10 per cent per annum compared with 7.5 per cent for total goods exports) but face some high tariffs. We are hoping that APEC negotiations in eight sectors - the so-called Accelerated Tariff Liberalisation program - will be a helpful springboard to a full industrials agenda in the WTO. The WTO system needs to remain contemporary - there is a real challenge to keep pace with technology, with new issues and with public expectations. A new round gives us that opportunity.

In 1997, the WTO made good progress with a tariff-cutting agreement for the information technology (IT) sector which is assuming a central facilitating role in the globalisation of the world economy. Industry expects this to double IT services exports over three years and increase telecommunications exports by $400 million per year. Already Australian IT exports are worth more than $3 billion per annum, but more needs to be done in the IT sector, particularly on non-tariff measures. In the burgeoning area of electronic commerce, the WTO is facing up to new challenges. It now has a work program, but it has yet to decide on the basic approach it should take to the issue. Estimates of the size of global e-commerce trade vary. But its value by 2001 is expected to be between 1.3 and 3.3 per cent of global GDP - equivalent at a minimum to the size of Australia's national economy. Biotechnology also confronts the trading system with difficult new issues such as the treatment of genetically modified organisms. The importance for Australia of the agriculture and processed food sectors, where internationally the "genetic engineering revolution" is making fast headway, means that this will be a central economic and trade issue for us. We are open to negotiations in other areas - with the proviso that the new round not become so large and complex as to rule out a timely outcome. We, like others, are seeking no more than a 3-4 year timeframe.

A Challenging Context

On the verge of a new round, the global trading system faces a changing environment, one which in many respects is an uncomfortable and challenging one. Last year, the world economy grew by about 2.3 per cent and this year, it is forecast to grow at much the same rate (2.4 per cent) - barely half the historical growth pattern of the past few years. Internationally, political will for liberalisation, particularly in the area which is still most distorted - agriculture - is limited. Agricultural subsidies by OECD countries still total some US$280 billion annually. EU ambitions for agriculture reform are minimalist: witness, for example, the disappointing outcome of the recent "Agenda 2000" package which had been intended to reform the EU's Common Agriculture Policy or CAP. No-one can seriously depict it as the Community's contribution to renewed agriculture negotiations. Mr Fischer and his fellow Cairns Group ministers made clear in a joint message last week that further substantial reform of the CAP will be necessary. In a Japan grappling with financial and structural weaknesses, negative growth and entrenched domestic lobbies, the appetite for further trade liberalisation seems limited indeed - as we have seen both in APEC last year and in our recent discussions with them on their 390 per cent tariff for rice. Even closer to home, the financial crisis will have sapped some of the political will for further reform - even if, paradoxically, it has pointed as clearly as ever to the need for it. We can expect continuing resistance in South-East Asia to reductions of key industrial tariffs, such as for motor vehicles and components, which remain unjustifiably high - up to 200 per cent in some ASEAN countries. In many developed countries, including Australia, some degree of liberalisation fatigue and globalisation anxiety has taken hold. A related challenge is how to handle a raft of issues, grouped under the rubric of "the civil society". These include trade and environment, trade and labour standards, access by the public to the WTO system, and the wider issue of national sovereignty.

The premature death of the Multilateral Agreement on Investment, or MAI, in the face of a public campaign that was at times excited and ill-informed has sharpened the discussion of these issues. The WTO will find it difficult to stay on the front foot. But we must help keep it there in our own national interest. Another complex area is that of regional trading arrangements, or RTAs. Some 40 percent of international trade is now being conducted under preferential arrangements - by far the bulk of this taking place within the EU and NAFTA. More than 100 RTA's have been notified to the GATT and the WTO - and more are on the way. The greater the proliferation of such arrangements, the greater the risk of their undercutting the most-favoured-nation principle and global comparative advantage, detracting from predictability and making the system opaque and unwieldy. Conversely, to the extent that RTA's can push out liberalisation and domestic reform envelopes and their benefits can then be multilateralised, they can be beneficial to the wider system. Tightening the rules and multilateralising preferential arrangements are key challenges for a new round. There is also a major leadership challenge. The success so far of the global trading system owes much to the drive and example of the United States over the last fifty years. As the world's largest economy, it has a disproportionate influence on the WTO.

While the Clinton Administration now formally supports a round, US intellectual and political leadership is somewhat untested. There is no current Congressional "fast track" negotiating authority, and it is not clear whether one will be sought this year. American worries about a growing trade deficit and sectoral pressures are mounting. There is a lack of clarity over US views about the scope of a new round. There are protectionist pressures at large - in the Congress, in industry and within NGOs - on steel and lamb imports, for example. But, there are also signs that efficient US business and agriculture are getting their act together. We remain hopeful that as the Seattle Ministerial Conference looms closer, the Congressional climate and the Administration's engagement will be increasingly positive.

Influencing Opinion - At Home and Abroad

The Government is working hard, in the WTO, in the Cairns Group and bilaterally, to convince those countries who remain undecided about the merits of a round. The Minister for Trade, Mr Fischer will launch in May a major new study on the prospective economic benefits of a new round which is designed not only for these countries, but also for the domestic audience here in Australia. A key message which we and others are trying to get across is the contribution that a robust and expanding trading system can make to sustainable economic growth. In these difficult times, we are driving home that trade is part of the solution, rather than a cause, of current problems. The launch of a new round will do much to keep markets open, hold protectionist forces at bay, and give those affected the opportunity to trade their way out of their difficulties in a measured way. International negotiations are ultimately defined by the quality of political commitment and support they receive. Building and maintaining solid support for a national negotiating position - while accepting that the consequences of a fair-trading system may not be 100 per cent to our liking - is a task ahead of us here in Australia too. We need to generate and sustain enthusiasm for liberalisation, and bring home the disadvantages of continued distortion and protection. And for credibility and maximum impact, the Government needs to bring with it as much active and visible industry and public support as it can muster. This is a particular area where the work of the Melbourne Business School is valuable - in contributing to informed public debate on trade policy and educating future decision-makers for both the private and public sector. For the first time ever, the Government is seeking public submissions to help refine our negotiating agenda. The Government has encouraged all interested parties to put their views forward.

An Expanding WTO

Let me add that the Government's multilateral trade objectives and our work in the Department of Foreign Affairs and Trade, are not confined to global trade rounds. We are negotiating for market access worth a potential $9 billion a year from countries currently seeking membership of the WTO. There are currently 31 aspirants - including China, Taiwan, Vietnam, Russia, Saudi Arabia and Jordan. Many are traditionally state-dominated economies which will require a great deal of adaptation before they can meet WTO disciplines. But I believe this challenge can be overcome - and in any case the alternative to it would be grim. Consider, for a moment, an international trading environment in the twenty-first century which has not harnessed such a potentially enormous and dynamic economy as China's - leaving it outside WTO rules and disciplines.

Happily, the emerging outcomes from negotiations on China's accession are very positive for Australia. To take just some examples, China's latest offers for access of wheat, rice and cotton far exceed its current import levels. China has also offered to reduce tariffs dramatically on other key commodities and across industrial products. It would greatly open its market to services on terms which amount to significant deregulation of both the conditions of entry and the scope of operation for foreign businesses. We are hopeful that negotiations between China and WTO members will be completed in time for it to join this year. I shall be accompanying Mr Fischer on his visit to China next month and we hope to conclude our bilateral negotiation with the Chinese Government at that time.

Another area of particular focus for us is the WTO dispute-settlement system. Established in 1995, it is significantly superior to its GATT predecessor because its procedures cannot be blocked and implementation is binding on a losing respondent. Australia has been involved in 17 disputes to date: 3 as a complainant, 4 as a respondent (1 withdrawn) and in a further 10 disputes as a third party because our access or policy interests were at stake. In less than five years of operation, the WTO dispute-settlement system has demonstrated powerful leverage in bilateral resolution of trade problems. We have had some successes - for example, against India's quantitative restrictions, worth about $30 million to us, and in reducing Hungary's capacity to use agricultural export subsidies. And we have recently begun proceedings against certain impediments in Korea to the sale of imported beef. We have also been on the receiving end as far as our quarantine measures on salmon are concerned.

The essential point here is that our domestic policy settings are more than ever under scrutiny and possible challenge. But at the same time we have a heightened capacity to pursue and resolve the legitimate complaints of Australian industry and exporters. Overall, the system provides advantage and protection to smaller trading countries like Australia - so long as we can cooperate with business in utilising it.

Conclusion

In conclusion, let me acknowledge that the international trading environment is very tough, with real risks of increased protectionism. Australian exporters will continue to face considerable challenges in 1999 with an uncertain global economic and trading outlook. But Australia's sound economic fundamentals will continue to stand exporters in good stead. The OECD, among other commentators, has rated Australia's economic performance as one of the best of the industrialised countries. Our national interest is best served by making every effort to nurture and harness the multilateral trading system - and by working hard to secure a new round of multilateral trade negotiations at Seattle later this year. At stake are potential market-access rewards for us, and the broader contribution a new round can make toward a return to positive and stable world economic growth. I wish the Melbourne Business School every success in the future and would welcome any questions or comments you might have tonight.

Thank you.