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October 30th 2013 print

Alan Oxley

A Contender for Australia’s Worst Law

The objective was to foil illegal Third World logging. The result is higher costs for businesses and consumers, increased building costs and less-competitive domestic timber producers

Some bad legislation has been adopted in the last five years. The right of tobacco companies to brand their products has been banned. Pay for transport drivers has been increased on the spurious grounds that it is a safety measure. The Environment Protection and Biodiversity Conservation Act has been amended to enable two ministers to rule against previous government advice that the “Super Trawler” should seek bigger quotas for fishing in the Southern Ocean.

These are bad laws because they implement bad policies. But a little-known Act adopted this year to ban imports of illegal timber may be the worst new law in Australia.

This law purports to contribute to global efforts to end illegal logging. As the Centre for International Economics (CIE) pointed out to the Department of Agriculture, Forests and Fisheries (DAFF) which commissioned advice on the Act, it will not. Trying to block the entry of the very small amount of illegal timber that comes into Australia will make little economic difference to illegal loggers in foreign countries. Eighty-five per cent of illegal timber produced in other countries is consumed domestically.

The Act instead will adversely impact 10,000 Australian businesses, raise costs to consumers, increase building costs and make small Australian timber producers even less competitive. This is shown by ABARES, DAFF’s own in-house research arm, in a report released late in 2012. It showed that in 2010, there were 20,000 imports valued at $4.9 billion of timber products (an increase of 50 per cent in three years). They were principally building materials, furniture and paper. Ten thousand small businesses were regular importers.

The Act places the onus on those importers as well as Australian timber producers to secure and provide authenticated evidence that the timber was produced in compliance with all national laws and to affirm that before imports are approved. (That includes payment of licence fees to governments of exporting countries and even establishing if the product originates from war zones.) The cost of compliance on importers and small Australian producers will be high. They will have to pass the cost onto consumers—that is, if it is still economic to remain in business. This Act will raise building, construction and housing costs in Australia and increase the cost of Australian timber. Procedures require preparation of a regulatory impact statement. The Act and the regulations need to be assessed together. This has not occurred.

The Act furthermore contradicts Australia’s trade policy of reducing the cost of imports and increasing the competitiveness of Australian producers so they can export. It makes Australia an aggressive trading partner using a threat to block access to the Australian market to pressure trading partners to enforce their own laws and apply standards set by Australia. This is directly contrary to the aim and spirit of Australia’s commitments as a member of the World Trade Organisation and its bilateral and regional commitments with twenty trading partners in the Asia-Pacific region. This position invites others to treat Australian exports in the same way.

Rescinding this Act will be one of the easiest measures available to a new government committed to lower the cost of regulation and improve productivity in Australia. It is a bad law.

What is the measure of a good law? Here are some standard yardsticks. Does it achieve its stated purpose? Is it based on technically sound data? Is it competently drafted? Are the procedures mandated to implement it effective for the declared purpose of the Act? Is its impact on the national interest positive? Is administration of it cost-effective? Does it add to regulatory overload? Is it constitutional? Is there a cheaper and more efficient way to advance the objectives sought?

The Illegal Logging Prohibition Act fails on all these scores. Before testing it against these criteria, a short review of the genesis of the Act will help explain why it is so bad.

It has been a campaign ambition by anti-forestry Greens for over a decade to have Australia ban imports of illegal timber.

Any significant restriction on timber imports which increases the price of timber warrants close examination. Australian domestic timber production is not high enough to meet Australian demand.

Activist anti-forestry groups like Greenpeace and the Wilderness Society have made it a litany for a decade that Australia was receiving large amounts of illegal timber. Actually the amount is small. The real purpose of the Green groups was to have Australia join a global campaign by those NGOs to build the case for a global convention to regulate forestry. This has been an ambition since 1992 when they failed to win support for such a convention at the first UN “Earth Summit”. There is still no global support for such a treaty.

During the 2004 election campaign environmentalists secured a promise from John Howard to “examine” the idea of a ban. In 2007, Forestry Minister Eric Abetz released a report by DAFF setting out strategies to help countries in the Asia-Pacific region to tackle illegal logging; but it ruled out trade bans, noting this would harm their economic development. In the lead-up to the 2007 election campaign, Greens secured a commitment from Labor to ban imports of illegal timber.

On the eve of the 2010 election, the Coalition announced that it supported a ban on imports of illegal timber products. Presumably the hope was that the announcement might swing some votes in a tight election.

Under the Rudd–Gillard government progress on the Bill was slow. The federal Department of Agriculture Forests and Fisheries led by Tony Burke finally produced an exposure draft of a Bill and commissioned the CIE in Canberra to prepare a regulatory impact statement. CIE did a cost-benefit analysis and found that the incidence of imports of illegal timber was so low that regulating imports would cost the Australian economy more than the possibility that cheaper “illegal” imports were harming Australian industry. The case for the ban was advanced by the Greens, unions, some Australian producers and two multinational paper manufacturers, who had their own reasons to support a ban. They had already tried to get anti-dumping duties imposed on Asian paper imports and failed. The clear interest of the labour and business interests was protectionist. They wanted to keep lower-priced product out of Australia.

DAFF then commissioned a report by another consultant which argued that the social harm in third countries being caused by illegal logging was serious and an Australian ban would have a positive effect. This was a political endorsement, not an economic assessment. The Bill was passed to a Senate committee which recommended its adoption.

At this point, timber and paper product exporters to Australia began to complain that they had not been consulted. The Indonesian Trade Minister observed that even the EU had been more solicitous with Indonesia, which had a legality standard under development, and that Indonesia considered the measures in the Bill put Australia in breach of its WTO obligations. This further soured Indonesia’s view about the reliability of Australia as a trading partner, coming hard on the heels of Australia’s ban of live cattle exports to Indonesia.

Legal opinion by Australian WTO legal experts concurred with the Indonesian Trade Minister. Officials in four other timber-exporting countries—New Zealand, Canada, Malaysia and Papua New Guinea—held the same opinion. Australia also had regional or bilateral free trade agreements with all those countries which prohibited such wilful trade restrictions. The Bill was then passed to a Lower House committee, which invited submissions from foreign governments and then recommended adoption of the Bill.

When the final version of the Bill was presented to the House, there was a Coalition backbench outcry (lead by Dan Tehan, first-term member for Wannon and a former DFAT trade official) against the protectionist and anti-forestry flavour of the Bill and the damage it did to Australia’s relations in the region as well as to Australian timber producers. The Coalition invited the government to address their differences.

The government stuck to its text. At this point the key regulations had still not been produced. Given the Bill posited criminal offences for any business that imported illegal timber, they were very important. It was not known at that point that the government planned to impose on business a costly and onerous requirement to demonstrate the exports were “legal”. ABARES had observed in the report DAFF commissioned from it that it was impractical to expect business to secure the sort of evidence of legality in foreign markets that the government was considering.

The Opposition recommended the Bill be deferred. Coalition Deputy Leader and shadow Foreign Affairs and Trade Minister, Julie Bishop, warned the Bill put Australia’s trade interests in the region at stake. The shadow Environment Minister, Greg Hunt, said the Opposition would amend the Bill. With the support of Greens and independents, the Bill was adopted.

Several months later, the government released the bulk of the regulations detailing how the Act would be implemented. (They are still not complete.) The release was just after the relevant Senate Estimates Committee finished considering forest policy, further denying parliamentary scrutiny of the measures developed by the government.

So much for the history. How does the Act measure up against the good/bad legislation criteria?

Will it achieve its stated purpose? The Act will not. It will make almost no contribution to the campaign to halt illegal logging in other countries. It advances other objectives.

The first objective was to consolidate Green support for the minority government.

The second is to build a global hue and cry about illegal logging to pressure governments to negotiate a global convention to restrict forestry. Environmentalists are now writing approvingly how the EU, the USA and Australia are acting to halt illegal logging. There is no global support for such a convention. The communiqué of the UN Conference on Sustainable Development held in Rio de Janeiro in December 2013 to commemorate two decades since the 1992 “Earth Summit” does not even refer to illegal logging as a global problem.

The third objective is further regulation of forestry in Australia. The Act also obliges Australian forestry producers to comply with additional regulations to demonstrate Australian forestry is legal before timber is released on the market. This absurd, costly and unnecessary regulation (all Australian forestry is legal) follows the same approach of the EU officials. They have taken erroneous advice that if the importers and domestic producers face the same regulations, the trade controls are allowable under WTO rules. This is wrong. This regulatory obligation will increase the cost of production by smallholder foresters and feed into the continuing campaign of anti-forestry NGOs to end timber-harvesting in natural forests in Australia.

The fourth objective is to commit Australia to regulate trade in forestry according to environ­mental, not economic principles. When presenting the Bill to parliament, the minister and the parliamentary secretary said the Bill paved the way for controlling global trade in forest products if forestry in producer countries was not sustainable. This ambition had never been stated before as Australian policy. This turns trade policy into a tool of coercion to advance environmental objectives, not trade objectives.

Is it based on technically sound data? The Act is not. CIE’s cost-benefit analysis was set aside. There is also no dependable empirical assessment of the global extent of illegal logging. All assessments depend on an analysis by the US consultants Seneca Creek, who were commissioned by the US industry in 2004 to assess illegal logging. They posited that maybe 9 per cent of US timber imports were illegal, but they warned that most assessments were by anti-forestry NGOs. Chatham House in the UK produced a model to assess illegal logging but it was not underpinned by empirical analysis. Green activists regularly point to illegal logging as a major driver of deforestation and label it international crime, like the smuggling of weapons and people. In citing deforestation rates, activists routinely fail to mention that most forested developing countries have set aside between 20 and 50 per cent of land mass for forest. Nor do they mention the efforts taken in the last few years by the governments of Brazil and Indonesia, two countries where illegal logging was significant, to curtail the incidence.

Is the drafting competent for its purpose? No. The Act is dependent entirely on the content of the regulations and was adopted before the details of the regulations were made available.

A Regulatory Impact Statement assessing the Act and the Regulations should have been undertaken together. This has not occurred.

The regulations presented to date leave importers very unclear about what is acceptable and what is not.

One of the dismal features of this legislation is that Australian officials have justified its content on the grounds that it follows the procedures of similar legislation adopted by the European Parliament, which is now internationally notorious for over-regulation.

Is its administration cost-effective? No. Officials may think it is, because the bulk of the cost of compliance falls on business.

Major trading partners (Indonesia, Malaysia and Papua New Guinea) have systems which demonstrate legality. Their requests for automatic recognition have been ignored.

The regulations make it an obligation of Australian businesses to assess compliance by foreign officials with their own laws. Importers are required to implement an incredibly complex system of “due diligence” to demonstrate that in the exporting nation, timber producers have complied with their own laws. They are also to ascertain if timber comes from war zones. They are to acquire certified documentary evidence and prepare and hold a copy of the report for five years. The Secretary of the DAFF can at any time ask to see the report. It is an offence not to have a report.

This is a very business-unfriendly approach. Assessing performance of foreign governments is normally the responsibility of officials.

Discretion to decide if reports from importers are acceptable is left in the hands of officials. This is incompetent and inefficient regulation. Efficient regulation has fixed criteria for approval and minimises the exercise of discretion. The regulations stipulate what importers should try to achieve. The acceptability of the report depends on assessment of an official that the importer “tried hard enough”. Some importers trialled their compliance procedures and could not envisage a process that did not demand an excessive amount of time and resources.

The regulations also mandate creation of a new system for policing compliance. This would effectively be a federal forest police force. This will entail another federal intrusion into state jurisdiction.

This system will increase the cost of importing and imported product. Domestic timber producers are also to apply similar processes when putting product on the Australian market. This will increase the cost of domestic timber production.

Is its impact on the national interest positive? No. This Act undermines the core of Australia’s international trade interests.

First, it mandates diplomatic coercion. It creates the precedent of using controls on imports to leverage other countries to apply policies preferred by the Australian government. This is a high-risk strategy for a middle-sized global trading economy like Australia. If we apply such tools, we set a precedent for bigger trading partners like the USA, China, the EU and Japan to do the same against Australian imports. US greens and labour groups are already pressing the USA to achieve such rights in the Trans-Pacific Partnership trade agreement which is under negotiation. Reportedly, Australian trade officials in the negotiations are resisting this measure.

Second, it harms Australia’s economic interests. Some of the backers of this Bill are doing so because they want to halt entry into the Australian market of lower-priced products. The Act is protectionist.

Third, it puts Australia in breach of its obligations under the WTO and bilateral and regional free-trade agreements. This has been attested to by leading international trade lawyers.

Indonesia’s Trade Minister has already indicated that Indonesia will consider challenging the measures in the WTO unless the terms of the Act are altered so that it is Indonesian authorities, not Australian officials, who will attest to the legality of product produced in Indonesia.

Is it constitutional? Apparently not. An opinion submitted to the parliamentary inquiries on the Bill by Gavan Griffith QC and Arnold Block Leibler pointed out that legislation which required Australian authorities to hold Australian citizens accountable for the failure of entities in foreign jurisdictions to ensure their nationals had complied with their laws was unconstitutional.

Is there a cheaper and more efficient way to advance the objectives sought? Yes. It was identified by the 2007 review of the issue for the Howard government. Providing development assistance to developing countries where there was an incidence of illegal logging to improve laws and compliance and raise standards of living was far more cost-effective.

Is it the worst law? Yes. This Act (and its regulations) cannot achieve its stated purpose. The content of both instruments shows it manifestly meets the interests of specific minority interest groups and serves their narrow purposes at significant cost, not just to one industry but also to consumers at large. It creates a regulatory jungle of which any reputable civil servant should be ashamed and makes a mockery of proper processes for making laws and regulations. To cap it off, it appears to be unconstitutional.

Worse, this Act sets an abominable precedent for Australian trade policy. It overturns a bipartisan approach to trade policy that has underpinned Australia’s prosperity for nearly thirty years. That was to reduce trade barriers to increase economic growth, to promote increased productivity to make Australian enterprises competitive in global markets, and to promote policies of open markets with trading partners.

This Act moves contrarily to that fundamental consensus. It erects trade barriers and increases costs. It is deliberately protectionist. It will not serve the environmental objective adduced as justification. And it creates a justification for others to treat Australia in the same way in which this Act disregards the economic interests of trading partners. It undermines the national interest.

Alan Oxley is principal of ITS Global, consultants on trade, competitiveness and sustainability. He is a former Australian Ambassador to, and Chairman of, the GATT, the predecessor of the WTO. ITS Global has worked for forest industries in Australia, Asia and the Pacific.