Trade Policy

There is no time for populism in Australia

Australian Financial Review March 29 2017 (with Tony Shepherd)

Australia's history is replete with good and bad examples of how to run public policy.

We have tried protectionism, we have tried state ownership, we have tried high taxes and centrally set wages and conditions.

Today we must choose again between good and bad.

The Senate is now a significant arbiter of policy. It is increasingly unpredictable and at times is driven by short-term populism. But complacency is our greatest enemy. The consequences of delay on the economy and the average Australian will be serious.

Indeed, the National Commission of Audit talked about a window of opportunity for Australia to get our budget back on track before the ageing population hits. That window is rapidly closing as the last of the baby boomers retire.

The review which Menzies Research Centre is conducting is designed to provide a framework for making these decisions and by community engagement give the Senate courage to make the right decisions.

Three of the big challenges we face reveal clear forks in the policy road: taxation, the operation of government, foreign investment and free trade.

We have a simple choice between maintaining competitive tax settings to boost investment in a highly competitive global environment, or navel gaze with our own self-selected rate. Capital is extremely mobile. During much of the period between 2011 and 2016, we lost 11 spots to rank just 28 in the World Economic Forum's assessment of our macroeconomic environment – with tax driving this collapse in rating.

The rate of tax is a major determinant in global investment decisions. Investment determines the rate of growth of Australia and its productivity. This in turn impacts the growth and quality of new jobs.

If the Senate fails to adopt the proposed company tax cuts, it will leave Australia as one of the only major OECD nations to have failed to cut company taxes in a period of intense global tax competition.

All the credible modelling of company tax reductions shows the big winners are workers, small to large business and their Australian shareholders who include millions of mums and dads directly or through their superannuation funds.

The operation of government in Australia is another big challenge. Australia is now 53rd in the global ratings of wastefulness of government spending.

State governments are responsible for 40 per cent of spending in Australia but raise around half of  their revenue, mainly through regressive and anti-employment taxes like Stamp Duty and Payroll Tax. The balance comes through Commonwealth grants and GST, which is effectively a State Tax.

The choice in federalism is to continue expanding the duplication of the Commonwealth, or try to establish a better match between revenue and expenditure. The latter will drive accountability whilst recognising the sovereignty and role of the states.

Throwing the federation into the too-hard basket guarantees we will never keep faith with our citizens. Until people are clear on who to fire when the school ratings are declining or the hospital waiting lines are too long, we will continue falling in the global rankings.

Crazy domestic forces are trying to surf the rising protectionist sentiment around the world. The choice here is between keeping foreign investment flowing or raising the drawbridge. Senator Hanson said in January: "[foreign investors] are buying [assets] to drive up profits at the expense of the people…" This is fake news. This logic sets aside the history of Australia which has relied upon foreign investment since 1788.

We have never had enough capital to develop this country and we continue to be poor savers. That's why we have $3 trillion of foreign investment stocks in Australia and a savings gap which has not moved over the past 35 years despite the introduction of compulsory superannuation in 1992.

Just to maintain our current standard of living, we will need to attract more foreign investment as our tax base and savings base shrinks with the ageing population. We have a small population and we are a high-cost country. We need to compete in world markets through export to survive.

As we stand at the crossroads, we must be anti-populist on all fronts, but unlike our protagonists we need to be armed with evidence.

The review will provide better options and evidence on tax, government accountability, foreign investment and trade. It will be informed by the community – and deal with their concerns.

 

Concealed Protectionism Threatens Australia's Trade

Quadrant April 2017

Following the seismic political events of 2016, including Brexit and the election of Donald Trump, we confront the most disruptive landscape in global trade policy in decades. Dozens of new bilateral trade agreements are expected to be agreed with the newly unrestrained United States and United Kingdom. The bookends of the Atlantic also have plans to formulate a trade deal between themselves following Theresa May’s visit to Washington after the US elections in November. A further consequence of Trump’s election is the uncertain future of the Trans-Pacific Partnership, which is dead according to Shinzo Abe but alive according to Justin Trudeau and Malcolm Turnbull. It is unclear where the enormous pan-Asian Regional Comprehensive Economic Partnership or the European Union-US Transatlantic Trade and Investment Partnership will land. Similarly, the fate of a renegotiated North American Free Trade Agreement remains murky.

One issue which is likely to feature heavily in the public debate on every new bilateral or regional trade deal is Investor State Dispute Settlement (ISDS). ISDS clauses provide companies with legal redress typically when unfavourable or unforeseen legislation is passed in a foreign jurisdiction. Unfortunately ISDS has become a damaging myth which gives contemporary cover to protectionism. It needs to be properly evaluated, given ISDS has been known to deprive nations of advantageous trade agreements.

The debate on ISDS in Australia, a nation with a deep history of participation in the international trading system, has been distorted by dogma, few stakeholders taking the time to examine ISDS coolly and methodically. Supporters of mutually beneficial free-trade deals will be forced to consider ISDS in coming years as a coalition of unions and Centre-Left political parties campaign to stop trade deals which contain ISDS.

It is important to get the facts on ISDS on the table so it cannot be used as a reason to block otherwise productive trade agreements between nations. Like most relatively new legal mechanisms, it can be improved. Improvement should be the focus, not using ISDS as a blocking excuse.

There are three pivotal points which are rarely aired on ISDS: one, it supports the rule of law and is a conscious act of sovereignty. Two, investor companies benefit from ISDS protection and it is often a precondition for investment. Three, the tribunals used in relevant cases are not murky bastions of secrecy.

First, a report by Australia’s Centre for Independent Studies says ISDS mechanisms support the rule of law by reinforcing a legal framework that has been a cornerstone of free markets since Magna Carta in 1215. The report states that, to date, just 30 per cent of the 362 ISDS cases have been ruled in favour of foreign investors. In keeping with the averages, only one of the three Australian-initiated cases was successful.

The Australian Greens cite Philip Morris’s attempt to overturn Australia’s landmark plain-packaging cigarette laws in the Permanent Court of Arbitration in Hong Kong as evidence of a loss of sovereignty—even though Philip Morris lost the case. Australia’s former trade minister Andrew Robb describes the threat of ISDS as “dogma”. He told me last year: “We’ve had [them] for thirty years, we’ve got ISDS clauses with over twenty countries and we’ve won the only case brought against us.”

Another test of plain-packaging laws in July 2016 between Uruguay and Philip Morris was also resolved in Uruguay’s favour. But even if the cigarette makers had won, it wouldn’t be a transfer of sovereignty or the overturning of an Australian law—it would be reparation that any company might similarly expect on outbound foreign investment. This is the very reason ISDS emerged in investment and trade agreements in the decades after the Second World War, when commercial interests were nationalised in nations such as Cuba, Egypt and Iran.

Many globalists believe in the value of multilateralism through the WTO and United Nations but do not value international law reflected in ISDS. For instance, Australian Greens Senator Peter Whish-Wilson said in 2014 on the Australia–Korea free-trade agreement: “Including ISDS provisions in our trade deals leaves us vulnerable to being sued by foreign corporations for simply legislating to protect the environment or internet use, if those laws affect corporate profits.” The use of the word vulnerable ignores the fact that agreeing to ISDS clauses is a consciously sovereign act.

Another group, the Australian Fair Trade and Investment Network, argues: “governments should have the right to regulate in the public interest without being sued by global corporations”. The Network is suggesting governments should have rights which are beyond legal reproach—a form of absolutism. Thankfully the liberal grounding of Western civilisation dating back to Magna Carta has abhorred absolutism.

The bottom line on sovereignty is the absence of evidence. No advocate against ISDS can point to a single example where a nation has lost a health, environmental or welfare law in an ISDS case.

Second, the ISDS mechanism provides valuable legal protection and promotes investment. Alan Oxley, a former chairman of the General Agreement on Tariffs and Trade, said:

For one of [Australia’s] big shopping centre businesses establishing in Chicago or Michigan, where in the United States state authorities do intervene, and I can envision a circumstance where they would erode the right in the free trade agreement for that investment to take place, then the natural response would be to use the ISDS system of arbitration to address that.

Companies investing offshore value a legal mechanism that protects their interests. The Chief Operating Officer of Australia’s Servcorp, Marcus Moufarrige, told me: “the role [of government], at a diplomatic level, is to ensure Australian businesses are protected overseas”.

As a former trade minister and adviser to global businesses, Andrew Robb reinforced:

[ISDS has] given confidence to our companies to go into countries where they are not familiar with the legal system. It allows Australian companies to access a framework where a local court would probably never find in their favour. The arguments against ISDS are wrong.

Alan Oxley told me last year, “ISDS is a good idea. It is in the interests of Australian business, which we need to support.”

Very few businesses have the capacity or wherewithal to enter the debate against activists. One of Australia’s umbrella business groups, the Australian Chamber of Commerce and Industry, has presented a clear view with useful examples:

ISDS provides protection for Australian firms when they invest in mines, factories, infrastructure and intellectual property in other countries. It means they can defend their commercial rights and the investment of their shareholders from expropriation by governments that are not on fair and just terms.

Not only is ISDS a protective mechanism, it also drives investment. In recent years, research on the connection between ISDS or investment treaties and foreign investment has emerged. Neumayer and Spess of the London School of Economics found that “developing countries that sign more bilateral investment treaties receive more FDI inflows”. Unsurprisingly, higher investment levels are linked to a desire for legal enforceability: “[treaties] guarantee certain standards of treatment that can be enforced via binding investor to state dispute settlement outside the domestic judicial system”.

A similar point is made by Asian Development Bank research fellow Alisa DiCaprio, who argues that the Asian region has long accepted ISDS as a mechanism of investment promotion. According to DiCaprio, “it is telling that all ASEAN countries have multiple bilateral investment treaties” and many Asian nations see “an ISDS clause is likely to promote foreign investment”.

More outbound investment is occurring into rapidly growing Asian nations, some of which is into recently signed free-trade agreements or countries with less familiar legal systems. As at 2015, Australia had $542.6 billion in foreign direct investments overseas. This more than doubles the amount of foreign investment overseas in 2001, which stood at $230 billion. China has emerged as Australia’s fifth-largest direct investment destination. In 2001, foreign direct investment stood at $395 million. In 2014, Australia has $14.6 billion invested in China—approximately 2.6 per cent of our total investment. Investment into ASEAN economies has grown from 6.3 billion in 2001 to 37.6 billion in 2015. ASEAN economies make up 7 per cent of Australian FDI investment abroad as at 2015. These countries have less familiar legal structures than the traditional destinations of outbound investment which has usually been into the “Anglosphere” nations such as the UK and USA.

Yet one of Australia’s major political parties is wedded to a view that ISDS has none of these benefits. Labor’s last trade minister, Craig Emerson, said in 2012:

We do not and will not support investor-state dispute settlement provisions … This is government policy … It’s the result of a cabinet decision in April last year, reaffirmed at the [Labor Party’s] national conference.

Labor has maintained this position since in its years in opposition. Launching the Labor Party’s trade policy during the 2016 federal election campaign, the shadow minister for trade Penny Wong said:

There are also ISDS provisions in four of Australia’s earlier free trade agreements and in 21 bilateral investment treaties. Some of these provisions were drafted many years ago and do not contain the safeguards, carve-outs and tighter definitions of more contemporary ISDS provisions. A [future] Labor Government will develop a negotiating plan to remove ISDS provisions in these agreements.

If future Australian governments seek removal of ISDS from existing trade agreements, it would be a large and controversial body of work which would necessitate the review of almost every Australian trade and investment agreement. Any ISDS removal project would require a significant investment of diplomatic resources. Foreign governments might use the opportunity to negotiate further changes. It is unlikely all governments will agree to removing ISDS, and therefore whole trade agreements and export opportunities will be lost. Removing ISDS would also send a message to the domestic business community that the government will not pursue legal mechanisms to protect or encourage outbound investment.

Third, its opponents argue that the tribunals and processes of ISDS are secret. Yet the plain-packaging case against Australia was heard by the Permanent Court of Arbitration, which was set up by the Hague Convention, hardly a flimsy or discredited heritage. The second test of plain-packaging laws occurred between Uruguay and Philip Morris in July 2016, which was resolved in Uruguay’s favour in the International Centre for Settlement of Investment Disputes. The Centre is part of the World Bank—an institution established following the Second World War and the Bretton Woods conference of 1944. The Centre itself was established in 1965 and its enabling treaty has been ratified by 151 nations.

There is always room for improvement, and the UN Conference on Trade and Development has recommended “tailoring of the ISDS system”, including the creation of a standing international investment tribunal. This is a sensible suggestion which would provide more confidence that the legal processes will be clear and consistent. At least, it might stop Centre-Left parties such as Labor from needlessly blocking or changing trade agreements.

Before Donald Trump scuttled the TPP, many citizens of the Pacific Rim may have heard of the TPP only when mentioned in conjunction with ISDS. To formalise the established convention that governments do not give away rights under ISDS, the TPP exhaustively protects legislators’ rights to legislate for public welfare, health, safety and environmental reasons. As Dartmouth trade expert Douglas Irwin wrote in Foreign Affairs in 2016:

And despite populist claims to the contrary, the TPP’s provisions for settling disputes between investors and governments and dealing with intellectual property rights are reasonable. In the early 1990s, similar fears about such provisions in the WTO were just as exaggerated and ultimately proved baseless.

In other words, we have seen this film before. We just have to remember the scenes and call out concealed protectionism as necessary.

Australia provides a great case in point of the impact of anti-ISDS sentiment on executive government, trade policy and a nation’s economic opportunities. ISDS is one of the reasons Australia’s trifecta of North Asian bilateral agreements were not concluded during the Labor administration of 2007 to 2013. Yet it is more likely to be the result of poor research rather than ideological obsession. Australia’s governments did not understand ISDS clauses particularly well and their concerns about ISDS were overblown. Similarly, the potential benefits and protections Australian investors stood to receive were not considered. During this malaise New Zealand was able to conclude an agreement with China which delivered transformational benefits to the New Zealand dairy industry, partly at Australia’s expense.

The benefits of a bilateral agreement during this disruptive period of trade policy should not be overlooked. Once Australia’s new trade agreement with China was agreed, in the first three quarters of 2016 (the first nine months of operation) the value of Australian exports to China more than doubled for cherries, abalone, medicaments, grapes, wine and oranges. Australia also gained ground against New Zealand’s dairy industry with a 28 per cent increase in fresh cheese exports.

ISDS should be retained, supported and improved in future trade agreements. At the very least if national leaders want to go down the discredited protectionist route, let them do it transparently, not by using the fig leaf of ISDS.

Andrew Bragg is the Director of Policy and Research at the Menzies Research Centre.

Free trade is the best protection

Daily Telegraph 27 January 2017

Australia is a trading nation. As President Trump removes the United States from the Trans Pacific Partnership, or TPP, we must remain committed to free trade. 

Free trade fuels Australian jobs and families, gives us better products and underwrites the national budget. Free and open markets allow Australians to export beyond our small domestic market. Frighteningly, our economy would be 25 per cent smaller without exports.

Now is the time to think global not local. The opportunities surrounding us have never been greater. By 2030, the Asian middle class will be three billion strong. 

We should not be fooled by Trump who probably still believes in free trade. He is a deal maker and he just wants the sort of trade deals we already have with China, Korea and Japan.

There are four reasons why we must remain committed to free trade, with or without the TPP:

First, free trade is more important to Australia than the USA.  

Trade as a share of GDP is 28 per cent in the US, but 41 per cent in Australia.   

Second, trade creates a better life with more options. 

Trade opens up markets for our exporters, puts downward pressure on the cost of living, expands the variety of goods and services that are available to consumers, and lowers input costs for Australian businesses.

For example a Toyota Yaris is now $800 cheaper and a Subaru Forester is $1000 cheaper because of our trade deal with Japan.

Third, trade delivers more jobs and opportunities for Australia. That's why the farmers, sugar cane growers and winemakers want the TPP deal regardless of Trump’s actions

For example, under the deal tariffs on red meat in Japan and Mexico would be reduced. We'd have better access for sheep meat, wool, cotton, wine and dairy into Pacific countries such as Mexico and Canada where we have no trade agreement today. 

As Mitchell Taylor of Taylor’s Wines said: “Taylors Wines supports the TPP and all (free trade agreements) as they enable us as a family business to access key export markets.” 

Where we already have trade deals, there are great examples of Australian products landing on tables in Beijing and Tokyo.  

Australian exports of fresh table grapes to China doubled in the first six months of the China deal. Fresh table grapes had a tariff of 13 per cent heading in to China - that tariff has been reduced to 7.8 per cent and will be abolished by 2019. 

Our exports of fresh oranges to China increased twofold over the same period. Fresh oranges faced a tariff of 11 per cent heading in to China - that tariff has been reduced to 8.6 per cent and disappears in 2023.

Fourth, we have tried protectionism. It doesn't work. It leads to less choice and higher prices. In the 1970s, Australia’s economy was almost crippled by protection.

Australia cannot afford to wait for great and powerful friends such as the US to show the way. We have to row our own boat. Whatever happens with the TPP, we have to continue pursuing bilateral trade deals with our major trading partners. In dismissing the significance of Trump’s actions yesterday, the Canegrowers Association CEO Dan Galligan said:

"We are waiting to see what opportunities Brexit might give us to reinvigorate the old trade alliance with the UK. In trade, when one door shuts another opens."

With or without the US, free trade is our future.

CHINA FTA MUST NOT BE DELAYED

Financial Standard 24 August 2015

Andrew Robb's China free trade deal provides vast opportunities for Australia's financial services industry. It builds on strong foundations set by former Prime Ministers - Whitlam, Hawke, Howard and Gillard and puts Australia ahead of the USA, Japan and most of Europe in signing an agreement with China.

Make no mistake, the China Australia Free Trade Agreement (CHAFTA) will lead to new jobs, tax collection and economic growth.

In the shrill and misleading debate of recent weeks on free trade, we have barely heard about these considerable benefits.