ARPA: From payer to pawn: Howard’s trade legacy

In the aftermath of World War Two, Australia carved out a unique position in the international trade regime, developing an independence and influence that belied the size and structure of its economy (see Capling 2001). During the 1970s and 1980s, Australian governments capitalised on this position to vigorously promote a more inclusive, development-friendly multilateral trading order. This was a bold move in the face of the discriminatory bilateralism and aggressive unilateralism of the world’s largest economies, particularly the United States. With the election of the Howard Government in 1996, however, this proud historical trajectory was to change. We examine the systematic reversal of Australia’s fiercely independent stance, a reversal that symbolises the country’s shift from player to pawn—America’s pawn—in the international trade regime.

The sorry tale of trade policy under Howard begins with the reversal, in 1997, of Australia’s commitment to multilateralism as a primary trade policy priority—just two years after the establishment of the multilateral World Trade Organisation, the creation of which we had enthusiastically championed. This long-standing commitment, born of awareness of the unequal distribution of power in the international trading system, had represented a keen understanding of Australian interests and the risks of pursuing them alone. Because Australia’s core concerns—from agricultural liberalisation to the development of local industrial capabilities—often pitted it against the heavyweights of America, Japan, and Europe in international trade negotiations, a ‘strength in numbers’ approach with other like-minded countries seemed an obvious imperative. Howard’s decision to prioritise bilateralism over multilateralism in 1997 was thus surprising. The outcome, unfortunately, was not.

In 2001, Howard committed to negotiating a bilateral deal with the biggest kid on the block—the United States. In addition to its size and weight advantage, the United States brought to the table a clear set of negotiating objectives that went well beyond market access. Its aim was simple: to have Australia replace its domestic rules with American-friendly rules in a host of regulatory arenas—including intellectual property, public procurement, pharmaceutical prices, and quarantine. While this would help American firms capture Australian markets, this was not the primary goal; Australian markets are a relatively small prize for an economy the size of America. Rather, the deal with Australia would constitute an important piece in the emerging portrait of the new international trade regime—one painted in America’s reflection.

By having Australia—a developed economy and a close friend and ally—agree to controversial regulatory changes, the groundwork would be laid to push for the inclusion of such US-friendly concessions in ensuing bilateral agreements and, perhaps more importantly, multilateral rounds. Having already agreed to these changes at home, Australia—occasionally a thorn in the side of America in international trade negotiations—would have no grounds upon which to object, or to rally others to do so. Henceforth, by virtue of this agreement, Australia would be locked in to arguing America’s case, not its own, on a range of critical trade-related issues. This, we argue, will be Howard’s trade policy legacy.

While the picture just painted will take time to play out, it is clear that the results will not be in Australia’s interests. How do we know? Because the concessions granted by Howard to the Americans in 2004 had already been publicly debated and roundly rejected by Australian experts, many commissioned by the Government, during the 1990s. To illustrate the extent to which Howard has knowingly traded away Australian independence and interests—and thereby undermined the nation’s economic security—we focus on three key areas: government procurement, intellectual property, and quarantine.

GOVERNMENT PROCUREMENT

Like most countries, Australia has long experimented with government purchasing to promote local industry development. Our efforts have not always been successful—a fact driven home by a 1994 parliamentary enquiry into Australian procurement practices (Standing Committee on Industry, Science and Technology 1994). Indeed, Australia’s performance in this arena lags far behind other developed countries, particularly the United States, where government procurement has been successfully employed as a catalyst for the development of healthy high-tech sectors, particularly information and communications technologies (see Rolfstam 2005; Borrus 1997). Australia has failed miserably on this front, preferring to procure from foreign sources rather than provide a market for its own technologies—even those it has helped to develop with R&D (Stalker 1993). Nevertheless, far from recommending the abandonment of public purchasing efforts, the 1994 parliamentary committee advocated a more explicit link between public purchasing and techno-industry development—including the set-aside of a proportion of government contracts for Australian firms. The recommendation of a more coherent, procurement-linked industry policy was snapped up by the Liberal party and offered as an election promise in 1996, only to be thwarted by laissez-faire elements in Costello’s treasury and abandoned a year after the election win.

But while procurement-linked industry development was now off the Liberal agenda, a report by the Department of Foreign Affairs and Trade (DFAT) in 1997 argued that Australia should maintain an independent position on public purchasing and refrain from joining the World Trade Organization’s Government Procurement Agreement (GPA), at least until the benefits of membership had been adequately demonstrated (1997). The DFAT report highlighted the potential risk of signing up to the GPA—it might curtail Australia’s capacity to employ public purchasing for industry development in the future without guaranteeing better access for Australian firms to foreign markets, particularly the United States. For while America is a member of the GPA, and thus obliged to open its procurement markets unconditionally to foreign firms, it has managed to retain the world’s most entrenched ‘buy national’ policies through a variety of carefully crafted legislative mechanisms which provide escape routes from the rules requiring reciprocity (see Weiss & Thurbon 2006; Weiss, Thurbon & Mathews 2004, chapter 4). At the same time, America has used the GPA to aggressively pursue international market expansion for its firms, demanding that other countries accede to, and comply with, the Agreement. America’s coherent, procurement-linked industrial strategy, combining domestic defensiveness with aggressiveness abroad, bestows an enviable advantage upon its firms. No wonder DFAT was unwilling to recommend that Australia sign up to such a system.

In light of Australia’s well-considered refusal to join the WTO GPA, it is extraordinary that the Howard Government would agree to include government procurement in the Australia-United States Free Trade Agreement (AUSFTA). Under the deal, we win the right to compete for American procurement contracts alongside other GPA members. But, as we know, America’s peculiar buy-national system makes mockery of this concession. This might explain the Howard Government’s half-hearted attempt to ‘prepare’ Australian firms to take up this new ‘opportunity’; while the agreement came into force on 1 January 2005, it was only in July 2005 that the Government made any semblance of preparing a strategy for entering the American market. This boiled down to approaching a Canberra company for assistance on how to go about this, as we discovered in an interview with the CEO of the relevant consultancy firm in January 2005. The Americans, by contrast, had been preparing their Australian procurement base a year in advance. Not surprisingly, Australia’s ‘advance’ into the US government procurement market in 2005 fell far short of the expectations of various industry groups—some arguing they are now worse off thanks to the tightening of ‘back door’ market entry options under the deal (Connors & Woodhead 2006, p.7).

In exchange for ‘access’ to the US market, Australia agrees to forego any ‘buy Australian’ procurement policies for all but the smallest local firms. We have also forfeited the right to impose ‘source Australian’ obligations on American firms that win Australian procurement contracts. So what, one might say? The Liberal Party has eschewed meaningful buy local policies for the past decade. Surely the time for such policies has come and gone? Unfortunately this view ignores the international evidence to the contrary, which shows a revival of interest in such strategies thanks largely to the success of the US model, under which technology procurement has played a far greater role in commercial success than R&D (Branscomb 1993; Flamm 2002, p. 59, p. 130).

America’s mandatory ‘buy national’ system has been the source of considerable angst amongst other GPA members, given its obvious inconsistency with GPA norms of non-discrimination. But while critical of American hypocrisy on this issue, countries from the European region to China have also been looking to the United States for inspiration for their own procurement systems (Guangnan 2004). Even laissez-faire Britain is now debating the introduction of American-style compulsory set-asides for local firms (Cookson 2005; Eaglesham 2005). In view of the international recognition of its critical importance to technology development, the Australian Labor Party’s commitment to a procurement-linked development strategy was enlightened. Too bad that Howard’s AUSFTA has removed this option for Australia.

INTELLECTUAL PROPERTY

As a net importer of intellectual property (IP) protected goods, Australia has regarded warily the push by major IP-exporting countries to extend international copyright and patent protection terms. Since the extension of copyright in the US from the WTO standard of 50 years to 70 years, Australia has been under considerable pressure to increase its WTO-compliant protections. Until 2004, Australia resisted such pressure. It had done so on the advice of a government-commissioned review of Australia’s IP regime, conducted in 2000, the findings of which were conclusive: an extension of the copyright term would have adverse effects on our terms of trade without delivering any additional benefits to Australian consumers (Intellectual Property and Competition Review Committee 2000). These findings reinforced a 1999 Productivity Commission study which also found that IP term extensions would be financially detrimental to Australia (Revesz 1999, p. 27).

Until recently, the Howard Government appeared wedded to this expert advice. Even during the negotiation of the AUSFTA, Minister for Trade Mark Vaile argued against the inclusion of a 20-year copyright term extension, acknowledging ‘there is a whole constituency out there with a strong view against copyright term extension and we [the Government] are arguing that case’ (cited in Richardson 2004, p. 14). Whatever changed the Government’s position and led it to concede to a 20-year extension in the AUSFTA is a mystery. But one thing is certain: it was not hard evidence of the benefits of such a move. The government-commissioned impact study of the agreement conducted by the Centre for International Economics did not even attempt to quantify the benefits or losses of this aspect of the deal.

In addition to the copyright term extension, the FTA introduced to Australia tough new enforcement mechanisms for preventing ‘piracy’. These include criminalising digital circumvention, the act of overriding regional codes that prevent someone who legitimately purchased a CD or DVD overseas from enjoying their purchase back home. Again, this change flies in the face of objections by the Australian Competition and Consumer Commission, and explicit recommendations of the 2004 government-commissioned Digital Agenda Review (DAR 2004). Add to this the new restrictions on parallel importation—reversing a decade long trend in Australia away from the monopoly-protecting practice of preventing cheaper (parallel) imports (such as pharmaceuticals)—and one is bound to ask whose interests the Government had in mind when negotiating the deal.

The Government’s most remarkable subversion of the national interest in this arena, however, was its agreement to prioritise the profit-oriented goals of US pharmaceutical companies over the health-oriented goal of providing affordable medicines to all Australians. In Annex 2-C of the AUSFTA, the Government committed itself to recognising and rewarding the ‘innovation’ and ‘research and development’ of pharmaceutical companies—without a single mention of the need to preserve affordable medicine prices. Since increasing the amount we pay for drugs is the most obvious means of ‘rewarding innovation’, policies aimed at lowering drug prices in Australia can now be interpreted as a violation of the spirit of the free trade agreement. This is precisely what occurred in April 2005, when the Howard Government announced plans to introduce a 12.5 per cent cut in the price of certain drugs each time a generic equivalent came on to the market. The American administration’s immediate response was that this would violate the spirit of the Free Trade Agreement. The Government thus abandoned its ambitious price-cut plans for more modest goals. Two revised options are now being seriously considered by Cabinet, one favoured by the Department of Industry which is sensitive to the interests of ‘Big Pharma’, the other favoured by the Department of Health, which would bring greater cost savings (Stafford 2005).

Moreover, far from ‘rewarding innovation’, IP changes agreed to under the deal serve primarily to entrench the monopolies of large pharmaceutical companies by facilitating their generics-busting strategies (strategies designed to delay the entry of cheaper competitors and to extend monopoly profits). Generics-busting is a global game that has emerged over the past decade, thanks to the foundering interest of Big Pharma in genuine, therapeutically significant innovation. For many years, the world’s largest pharmaceutical companies have reaped their biggest rewards not from genuine breakthroughs, but rather from the royalties earned on a few ‘blockbuster’ drugs, and from tinkering at the margins with existing drugs (changing their size, mode of delivery etcetera) so as to extend patent life and royalty flows. This lucrative line of business has been recently threatened, with the expiry of patents on some of the most profitable drugs looming large. Big Pharma’s answer has not been to get busy innovating, but rather to lobby for tougher patent laws, particularly those which make life difficult—even impossible—for cheaper generics competitors.

Playing right into the hands of the beneficiaries of this dubious strategy, the IP chapter of the FTA introduces protections for pharmaceutical company patents that go far beyond those prescribed by the WTO and even by the US government, helping to thwart competition and prop up drug prices—hardly in Australia’s economic or social interest. These include evergreening clauses (to allow unlimited patent extensions for trivial modifications of an existing patent for the same drug), and a five-year ban on access to test data (to exclude lower-cost generics from the market) (see Weiss, Thurbon & Mathews 2004, chapter 3). The path is now clear for the United States to use AUSFTA provisions as a benchmark with future bilateral partners, making the world a safer place for the monopolistic activities of large pharmaceutical companies.

QUARANTINE

The case of quarantine arguably represents the starkest example of Australia’s shift from player to pawn in the international trading arena. We focus here on one small aspect of the AUSFTA—the side-letter on mad cow disease—to illustrate our point. While only two pages long, this unassuming attachment to the deal will see Australia willingly destroy its competitive advantage and cede to the United States its dominant market share in two of the most profitable beef industries in the world, Japan and Korea, in addition to risking the lives of Australians by exposing them to the deadly human variant of ‘mad cow disease’, technically bovine spongiform encephalopathy (BSE).

To appreciate why the FTA would include a side letter on such a topic, it is necessary to understand the international politics of trade in beef over the past decade or so. In the 1980s, international trade in beef came to a standstill with the discovery in Britain of a brain-wasting disease affecting cattle. Within months, the disease had been detected in a number of other European countries. Then the killer news broke: this fatal disease could be transmitted to humans through the consumption of infected meat. The resulting hysteria saw thousands of cattle slaughtered across the United Kingdom and Europe, and the erection of trade barriers against beef from infected countries.

Few countries managed to remain insulated from this unfolding disaster. Australia, which had maintained stringent controls on animal and animal feed imports since the 1960s, was one of them. So Australia experienced a boom in exports to countries like Japan and the United States, which refused to buy beef from infected nations, regardless of the screening and control measures in place. Until recently, it appeared that the United States would also escape unscathed, until the detection of its first mad cow in 2003, and a second case in 2004. America was immediately exposed to the same treatment it had exacted upon infected countries: its beef exports suddenly rejected by most importing nations.

With the shoe now firmly on the other foot, the United States began a campaign to relax international guidelines on trade in beef from BSE-affected countries. Its argument was that countries exposed to the disease should not automatically be discriminated against by trading partners. The irony of America’s about face on this issue was not lost on its trading partners, many of which continued to refuse US beef, including Australia. As we argue elsewhere, Australia’s decision to continue its ban was well founded, given the gross inadequacy of America’s screening and control measures, and the risk of BSE-infected meat finding its way to Australia’s pristine shores (Weiss, Thurbon & Mathews, forthcoming). Freedom from BSE has made Australia’s beef industry one of the most profitable in the world. A BSE outbreak here, then, would undermine our competitive advantage in the world’s most lucrative beef markets—Japan and Korea—both which have refused beef from BSE affected countries. It would also entail a serious public health risk—one considered great enough for the government to enforce an ‘all beef off the shelves’ policy in the event of the discovery of a case of BSE in Australia.

This was the climate in which the AUSFTA was negotiated. In an astonishing concession to the United States, the side-letter commits Australia to promoting US-designed international guidelines on trade in beef with BSE affected countries—guidelines that Australia had previously reserved the right to ignore on the basis of our unique, clean, green status. In one fell swoop, Australia’s ability to pursue an independent approach to quarantine policy on this deadly disease was undermined, paving the way for beef imports from the United States—a country with one of the weakest BSE testing and control regimes in the developed world—far below international standards.

But access to Australia’s small beef market was not America’s final goal. It was just one (albeit important) step in a much larger strategy designed to compel larger, more lucrative players, particularly Japan, to reopen their markets to American beef. If Australia—a BSE free country—would abandon its blanket ban on beef from BSE affected countries, then surely Japan, which has already been exposed to BSE, would be compelled to do the same. Perhaps not surprisingly, US Trade Representative Robert Zoellick has described the BSE side letter as constituting one of the most significant wins for the American side: probably the best news for us [America] in the [quarantine] area is the co-operation on [BSE] so that we can open up some of our markets to beef globally, particularly in Japan and Korea (Zoellick 2004).

Just why Australia would agree to work with America to help them re-enter our most profitable markets—especially by risking our own disease-free status—is a question we must take up elsewhere, since it involves not only John Howard’s political agenda, but also a personal trajectory. Our aim here is to highlight this as yet another indicator of the extent to which the Prime Minister has traded away Australia’s independence and economic security in important international trade arenas and, we must assume, ‘knowingly’ accepted the role of pawn in America’s efforts to re-shape the international rules of the game in a US-friendly fashion.

CONCLUSION

Prior to John Howard’s election in 1996, Australian trade policy was guided by a clear sense of national economic interests and of the risks of pursuing those interests alone in a world economy dominated by larger, more powerful players. But Howard chose a different path to that of his predecessors, throwing his support behind bilateralism and actively pursuing a trade agreement with the United States. In this paper we have concerned ourselves not with the ‘why’ of this bilateral shift, or even its results—as parlous as they are. Rather, it is the ‘how’—or the execution of this shift that tells us most about Howard’s legacy.

The Howard Government’s approach to trade policy over the past decade reveals a pattern consistently at odds with the pursuit of national economic security. Two aspects of that approach in particular leap to the eye. One is a striking disregard for the expert advice and outcomes of government-commissioned research in a range of important trade-related policy arenas. The other is a remarkable willingness to prioritise the economic interests of a foreign power over and above those of Australia, and to accept an active role in advancing that foreign nation’s interests in the international arena. Howard will be remembered for initiating and cementing Australia’s shift from player to pawn in the international trade regime.

REFERENCES

Connors, E. & Woodhead, B. 2006, ‘Trade Pact fails to open doors’, Australian Financial Review, 4 January, p.7.

Branscomb, L. M. 1993, ‘U.S. Science and Technology Policy: Issues for the 1990s’, Kennedy School of Government, Harvard.

Borrus, M. 1997, ‘Technology policy and economic growth: Why it is vital to US interests to expand support for ATP and MEP’, Testimony before the US Congress, House of Representatives, Committee on Science, Subcommittee on Technology, April 10.

Capling, A. 2001, Australia and the Global Trade System: from Havana to Seattle, Cambridge University Press, Melbourne.

Cookson, C. 2005, ‘MP seeks more aid for high-tech start-ups’, Financial Times, 22 March, p. 5.

Department of Foreign Affairs and Trade 1997, WTO Agreement on Government Procurement: Review of Membership Implications, AGPS, Canberra.

Eaglesham, J. 2005, ‘Campaign calls for 100m Pounds towards small technology businesses’, Financial Times, 19 October, p. 5.

Flamm, K. 2002, Government Industry Partnerships for Development of New Technologies, The National Academy of Sciences, National Academy Press, Washington, D.C.

Guangnan, N. 2004, ‘Domestic computer programmes bring special value’, China Daily, 20 September, p. 5.

Revesz, J. 1999, ‘Trade-related aspects of intellectual property rights’, Staff Research Paper, Productivity Commission, Melbourne [Online], Available: http://www.pc.gov.au/research/staffres/trips/trips.pdf [2006, Jan 30].

Richardson, D. 2004, Intellectual property rights and the Australia-US Free Trade Agreement, Research Paper No. 13 2003–4, Information and Research Services, Parliamentary Library, Department of Parliamentary Services, Canberra.

Rolfstam, M. 2005, ‘Public technology procurement as a demand-side innovation policy instrument—an overview of recent literature and events’, Summary Document, Lund Institute of Technology, Lund [Online], Available: http://www.druid.dk/ocs/viewpaper.php?id=329&cf=2 [2006, Jan 30].

Standing Committee on Industry, Science and Technology 1994, Australian Government Purchasing Policies: Buying our Future, Report, Commonwealth of Australia, Canberra, March.

Stafford, A. 2005, ‘Another dose of salts planned for PBS’, Australian Financial Review, 6 Dec, p. 3.

Stalker, R. J. 1993, ‘Australian technology: Folly steals a march?’, Australian Journal of Public Administration, vol. 52, no. 1, pp. 34–39.

Weiss, L. & Thurbon, E. 2006 (forthcoming), ‘The business of buying American: Public procurement as trade strategy’, Review of International Political Economy.

Weiss, L., Thurbon, E. & Mathews, J. 2004, How to Kill a Country: Australia’s Devastating Trade Deal with the United States, Allen and Unwin, Sydney.

Weiss, L., Thurbon E., & Mathews J. (forthcoming), ‘Free trade in mad cows: How to kill a beef industry’.

Elizabeth Thurbon is a Senior Lecturer in the School of Politics and International Relations at The University of New South Wales. Linda Weiss is Professor in Government and International Relations at The University of Sydney.

View other articles in this symposium:

Howard's ‘Choice’: The Ideology and Politics of Work and Family Policy 1996–2006 Elizabeth Hill
The Evolution of Industry Policy under Howard Evan Jones
The Howard Government, Australian Aid and the Consequences Tim Anderson
The Uses of Fiscal Policy and the Role of Monetary Policy Tony Aspromourgos
After Howard’s Decade, is Australia More Conservative? Gabrielle Meagher and Shaun Wilson
The Geoffrey Boycott of Australian Politics Rodney Tiffen

From player to pawn: Howard’s trade legacy

GOVERNMENT PROCUREMENT

INTELLECTUAL PROPERTY

QUARANTINE

CONCLUSION

REFERENCES