John Howard’s Pro-American Trade Legacy

The Free Trade Agreement with the USA was the key trade policy achievement of the Howard government. The simple point is that it delivered a major result for Australia when the established international trade forums for Australia (the World Trade Organisation (WTO) and the Asia-Pacific Economic Co-operation (APEC) forum) could not. The more substantive point was that it set a strategic reference point from which Australia could drive the ambition set by its predecessors to build an economic community across the Asia Pacific which would deliver Australia prosperity and security.

Yet the agreement is poorly regarded, criticised as doing little for Australia. That is not true, but this is not unusual in politics. The poor regard for the agreement was to a considerable measure attributable to the result of relentless criticism by Mark Latham, the then Labor leader, that it demeaned Australia.

Latham was no expert on trade, but that was beside the point. His target and interest were political. He besmirched the close relationship Howard built with President George W. Bush, memorably denouncing Howard as an “arselicker”. Was this just Latham playing the oppositionist game our two-party parliamentary system fosters, or was there a deep difference between Labor and the Coalition about how close Australia should be to the USA?

Another criticism was that the FTA would lead Australia away from the pro-Asian stance of Howard’s Labor predecessors. Given the turn of events, was that another manifestation of anti-American sentiment? By the end of his terms, the complaint that John Howard would weaken relations with Asia was quieted. He had rebuilt the relationship with Indonesia (severely soured when Australian troops led the international intervention against Indonesian irregulars in East Timor), completed an FTA with Thailand and instigated negotiations over FTAs with the Association of South-East Asian Nations (ASEAN) and China.

Trade policy under Howard seemed different because of the strong focus on FTAs: the Hawke and Keating governments concentrated on advancing trade goals through the WTO and APEC. The criticisms of the Howard policy implied the Labor governments didn’t like FTAs: that was wrong. The Hawke government negotiated an important FTA with New Zealand and the Keating government sought an FTA with ASEAN. The greater focus on FTAs in the Howard term was less a swing away from the focus of its predecessors than an adjustment to a change in the global trade policy environment; one a Labor administration was as likely to have made as well.

There is no evidence John Howard came to office intending to secure an FTA with the USA; but he evidently wanted to strengthen the relationship with the USA, and it is likely this is what attracted him to an FTA.

That said, the agreement also served a major strategic interest of Australia’s, albeit indirectly, which had been a preoccupation of officials in Canberra since the Bush administration came to office—to secure US policy engagement in the affairs of East Asia. In this way it also significantly advanced the closely related interest that impelled the Hawke and Keating governments to promote APEC—building a regional economic architecture which strengthened integrated markets in East (and South-East) Asia and the Pacific.

The importance of engaging the USA in regional economic affairs has become more obvious since China’s role in the world economy has grown over the Howard period. In today’s globalised world, economic weight creates political influence. Towards the end of the Howard era, China started to exercise that weight, proposing FTAs with Japan, South Korea and ASEAN. But China had not yet qualified to lead the shaping of the region’s economic architecture, not at least in the way both sides of politics in Australia want—to foster integration of open economies. China’s primary interest is political leadership. This may change if the free market system in China consolidates. At this point in the first decade of the twenty-first century, the only state capable of providing the leadership to build the regional policy architecture to foster open economies and integrate them is the United States.

When the US FTA was completed, Labor endorsed it, but lukewarmly. Senior Labor figures supported it, but Latham used it in an effort to demonstrate Howard’s supineness to the Americans over engagement in Iraq. In the end he was obliged to support the agreement because it was a measure of support for the relationship with the USA, which most Australians and the Labor Party strongly supported.

The Challenge of the Hawke–Keating Legacy

The Coalition came to office in 1996, like all new governments, showcasing its differences from its predecessor. In the case of trade policy that was small. Like Labor it supported multilateral trade liberalisation through the WTO and APEC. A sub-theme was less focus on Asia. It showed willingness to consider trade agreements with the USA and the EU, perhaps to highlight that emphasis. But as often happens when governments change, the momentum of established programs carries into the new administration, especially if it offers the chance to secure kudos for politicians, as did the trade policy programs of the Hawke and Keating governments.

Tim Fischer would have found a tantalising agenda when he walked into his new office as Trade Minister. It also included an initiative in APEC which was to go horribly wrong and diminish APEC’s authority to promote trade liberalisation. But that was not to happen for two years.

Tim Fischer was one of Australia’s most popular politicians and best-remembered Trade Ministers. In the first Howard government he become Australia’s super-trade-commissioner, using his Akubra to become the most fervent advocate for exporters. It worked.

Trade is a difficult portfolio to connect to voters. The Hawke government did it by taking grand international initiatives. It formed and led the first international coalition of agricultural exporters (the Cairns Group), which gave the Australian Trade Minister a globally prominent role in launching and then negotiating in the “Uruguay Round”, the international negotiations to reduce trade barriers in the GATT (the predecessor of the WTO) and thereby presented itself as tangibly acting in the interests of Australian farmers, long locked out of markets in Europe and the USA by high trade barriers.

It also forged APEC, the first regional economic body to include Taiwan, South Korea, Hong Kong, China and the USA as well as Australia. This created a new regional grouping for Trade and Foreign Ministers and a new annual Summit for Heads of Government, creating a new opportunity for international diplomacy for the Australian government.

The Howard government inherited key roles in these new and fully functioning international activities. Although the Uruguay Round of trade negotiations had concluded two years before, by 1996 there was still a large program of action to implement the commitments made in those agreements, including a commitment in the WTO for negotiations to achieve further global reductions in agricultural trade barriers. This was a fresh global campaign for Coalition politicians to lead on the world stage.

The Hawke government’s economic reforms had initiated a sea change in Australian trade policy. The greatest external impediments to expansion of Australian exports were the high tariff barriers on agricultural imports in Europe and the USA. Almost since the inception of the GATT in 1948, the Europeans and Americans had kept agriculture off the table. Australia’s resolute retention of high tariff barriers through the sixties and seventies while other industrial nations (New Zealand apart) reduced them, severely limited Australia’s room to move.

The negotiating principle in the GATT was reciprocity—a request to a trading partner to reduce a tariff triggered an invitation to reciprocate. Demands by Australia that the USA and the EU cut barriers to agricultural imports inevitably drew the counter that Australia reduce its protection of manufacturing, the highest in the industrialised world. Unwilling to do this, Australia’s room for manoeuvre in the GATT was limited.

The decision of the Hawke government to open the economy by reducing tariffs and protection of the manufacturing and agricultural sectors, as well as liberalising the financial and services sectors, gave it the room to pursue an offensive trade policy against American and European agricultural protection in the GATT, and then WTO. The result was that the Howard government inherited an Australia with a new global reputation and ready global and regional agenda in which to trade on it. Nothing in Coalition policy conflicted with those inbuilt programs.

While global interest in negotiating bilateral FTAs was rising, they were not prominent on the trade agenda of the Howard government. Opportunities to consider them were in fact set aside. Yet FTAs would become more attractive to Australian Trade Ministers following two significant international trade policy failures which were yet to occur. One was well known—the failure of the WTO at Seattle to initiate fresh negotiations; the other was less publicised, but for the Asia-Pacific region was probably no less important—the failure of APEC to initiate a regional program to reduce trade barriers.

Another, unrelated development influenced attitudes. The USA began to randomly impose import controls on Australian exports to the USA. American trade law had been set up by Congress over the years to enable lobby groups to trigger controls on trade, regardless of the attitude or policy of the US administration. In 2000, the draconian powers under Section 301 of the US Trade Act to block trade unless measures harming US companies were removed was invoked for the first time against Australia—stop subsidising automotive parts exporter, Howe Leather, was the injunction. Then restrictions on imports of lamb were imposed and controls threatened on steel imports. The question of legal right and the economic impact of these measures varied[1], but it raised interest among Australian officials and politicians in securing some legal discipline on the use of such measures which was prospectively obtainable through a bilateral free trade agreement.

A Focus on Exports, Not Policy

 Tim Fischer was a good parish-pump politician and found a way to tie trade, a rather dry subject, to the ordinary things voters think about. He found local focus, then publicly endorsed export successes by regions, towns and businesses. There was plenty of opportunity. By 1996, the reforms of the Australian economy initiated by Labor had started to show up in improving export trade statistics.

Australia’s export base was diversifying rapidly. No longer principally dependent on agriculture and mining, the revival of manufacturing (with a smaller share of GDP but a bigger share of exports) and the rise of the exports by services industries (tourism and education) meant for the first time each sector was producing around 25 per cent each of Australia’s exports. The steady decline in value of the dollar also helped. So a large part of the Coalition’s trade policy program during its first term was advocacy of the benefits of greater exports.

At no point did this development mean that Australia’s historic predominance of imports over exports looked like being turned around (that did not happen until the prices of mineral exports spiked towards the end of Howard’s third term). Trade performance should not anyway be measured by this. The only important measure is how much the combined activity of exports and imports contribute to economic growth. External financial balances are more important than the trade balance.

Two opportunities to consider bilateral trade agreements with the USA and the EU arose during that term. Neither was taken up. The EU proposed a bilateral agreement, although not a full free trade agreement. It was rejected by Alexander Downer on the grounds the EU wanted to include a right to comment on human rights policies in Australia. This occasioned almost no public comment. It remains an oddity about the politics of Australian trade policy that collectively the EU is still Australia’s largest trading and investment partner yet receives the least attention, except when its agricultural trade barriers are attacked.

Charlene Barshefsky, the US Special Trade Representative, had shown interest in the possibility of the USA’s concluding FTAs with a handful of economies in APEC who supported open markets, including Australia. (The others were Brunei, Chile, Singapore and New Zealand.) The New Zealanders were particularly keen[2]. The official response in Canberra was cool— Australia’s trade priorities were to achieve liberalisation through the WTO and APEC and that the trade agenda was already overloaded. Canberra was approached by other countries (Canada, Chile and Argentina) to consider FTAs and the answers were the same.

Agenda overload was not the whole story. The matter of an FTA with the USA had been debated regularly inside government at least since the second Hawke ministry. Trade was separated from Industry and Dawkins was appointed Trade Minister. He re-energised the trade portfolio, setting it up to take a more proactive role, particularly in international trade negotiations. Dawkins raised the possibility with Clayton Yeutter, the then US Special Trade Representative. Professor Richard Snape was commissioned to examine the question of an FTA with the USA in 1986. He advised giving priority to multilateral liberalisation through the GATT.

The question of an FTA with the USA was also central to a debate inside the Department of Foreign Affairs and Trade (DFAT) and among the small international economic policy community in Australia about how Australia should pursue trade liberalisation. Adam Smith had demonstrated that trade barriers inhibited productivity. The wisest course was to remove them unilaterally without regard to how trading partners used trade barriers. This philosophy informed the push long exerted by the Tariff Board (carried principally by Alf Rattigan and Bill Carmichael) and its successors[3] to eliminate protection in Australia. It was accepted by Hawke and his economic ministers and pushed by officials in the Treasury, then led by John Stone and Des Moore, and by Ross Garnaut, the economic adviser in Hawke’s private office. It had strong support as well at the Crawford School at ANU from which Garnaut came.

Unilateralists considered multilateral trade liberalisation (through GATT) as a second-best form of liberalisation because it tied reduction of barriers to the preparedness of others to do so. This narrow view overlooked the capacity of parties to the GATT to act unilaterally and then make their reductions legally binding under GATT (and later WTO) rules. The case for multilateral trade liberalisation was strong: the economic impacts were better and international rules were durable. They also gave governments political cover to cut trade barriers: other governments were doing it was well.

According to this orthodoxy, free trade agreements (bilateral or regional) were regarded as the worst vehicle for liberalisation. They imposed higher trade barriers against imports from economies outside the FTA which served as incentives to invest in industries inside the FTA which may be globally inefficient. But this is not automatic. Governments can implement policies to militate against such results. This was demonstrated in the Australia–New Zealand Closer Economic Relations and Free Trade Agreement which was revised and extended by the Hawke government (Michael Duffy was then Trade Minister) in 1988. The risk of distorting trade and investment flows was mitigated by decisions by both governments to reduce all trade barriers with all trading partners at around the same time.

There were practical objections about an FTA with the USA as well. Some trade officials believed the chances of getting a substantive result on agriculture from a US administration in a bilateral FTA would be small.

A complicating element was the intertwining within that debate of a less overtly discussed issue, namely whether or not Australia’s new engagement with Asia, forged by the Hawke government and symbolised by APEC, should include the USA or not. This has been something of a continuing debate inside DFAT for several years; those with trade policy and security backgrounds regard the USA as an essential element and those with Asian policy backgrounds do not.[4]

By the time Howard came to office, the dominant policy orthodoxy inside DFAT was preference for multilateral liberalisation in the WTO and pursuit of regionalism through APEC. Tim Fischer told this author he wasn’t convinced the idea of an FTA with the USA had been properly considered. The terms for moving to negotiate an FTA with the USA were reportedly set out in a cabinet decision, one of which was the likelihood of a satisfactory result on agriculture.[5] This seemed reminiscent of French or British foreign policy—a formal policy with terms that seemed reasonable, but with the effect of thwarting the unwanted result.

It may however have also suited the Howard government not to generate further argument that it was turning its back on Asia, as the Asianists and former Hawke and Keating advisers claimed. The delay in the Howard government’s response to Pauline Hanson’s attacks on Asian migrants had generated concern in the region about its attitudes to Asia. As well Beijing had misread (or maybe it didn’t) statements about closer military relations with the USA and froze ministerial visits between the two countries. Howard swiftly corrected that with a rushed visit to Beijing; nevertheless, it would have been natural to be sensitive to the point.

Turning Points—Seattle and Kuala Lumpur

The DFAT orthodoxy took a hammering at the APEC summit in 1998 and at the WTO ministerial meeting in Seattle in 1999, although this is one of those judgments easier to make with the benefit of hindsight.

APEC made an enthusiastic beginning on trade policy with a commitment by leaders in 1993 to reduce all barriers to trade for developed economies by 2010 and developing economies by 2020. This was good policy. There was a general move to open markets in East Asia and Latin America; and this was a key reason the Uruguay Round produced its successful result, refurbishing the GATT institutions and significantly broadening commitments by all countries to reduce trade barriers. Most were enjoying good economic growth. The APEC commitment gave political momentum to the general goal of opening markets.

Officials in leading APEC economies then made a mistake. Instead of leaving the commitment as a political one—logically the institution to advance it would have been the WTO once China joined—they attempted to develop a program whereby members of APEC would act in concert and unilaterally reduce trade barriers. It was enthusiastically backed by the trade liberalisation unilateralists at the Crawford School whose influence in DFAT was strong. The idea was virtually still-born. It was politically unrealistic.

Most Trade Ministers and all Finance Ministers, and their officials, know that the most important economic benefit of trade liberalisation is the reduction in one’s own trade barriers. They face the political problem that the justification for tariffs is always to support national industries and that most voters consider that worthy. The reason GATT and other trade agreements are created is to provide a political justification for governments to reduce protection. If others liberalise as well, everybody is taking some pain (reducing their own barriers) for a greater common good.

Invariably, and unfortunately, Trade Ministers typically sell trade liberalisation as winning more access for domestic producers in foreign markets. That was the crusade of Tim Fischer and his Coalition successors. It meshed with the evident disposition the Howard government brought to office to go quietly on the politics of domestic economic reform. Polling told them the public had had enough in the Labor years. The lack of argument about the benefits of economic reform, absent GST, by government economic ministers during the Howard era, compared to how Hawke and Keating proselytised the case, is striking.

Since Australia had already committed to substantially reduce its barriers, its officials had no difficulty proposing a trade liberalising model requiring other APEC members to meet the Bogor targets to remove all trade and investment barriers—by 2010 for industrialised economies and 2020 for developing economies. The program was in trouble from the start. Most APEC members were unwilling to go beyond the commitments they had made in the recently concluded Uruguay Round negotiations.

Instead of recognising the impracticalities of this, a pastiche of measures was stitched together and called the “Early Voluntary Sectoral Liberalisation” (EVSL) program. Ideal trade liberalisation means reduction of all barriers at the same rate and towards the same target in all sectors of the economy. It is rarely achieved. But the less that standard is met, the more likely the result will be economically illiberal. The EVSL package excluded most of the agricultural sector, had very few commitments to reduce barriers in services and even had commitments to reduce barriers on just products instead of sectors. The economic value of this package was poor. Econometricians in Australia, New Zealand and Taiwan modelled the economic result and found it negative for all except the USA.

Japan warned it would not support the package (not because it thought it a poor standard—it was simply not prepared to make binding commitments to liberalise in APEC), yet the boosters of the program, Australia, New Zealand, Chile and the USA, pressed on and APEC experienced the ignominy of the Japanese Prime Minister vetoing it formally at the APEC summit in Kuala Lumpur in 1998. This was a solid failure. It was not widely covered by the media (which focused instead on the public spat between Vice-President al Gore and Dr Mahathir, Malaysia’s Prime Minister and summit host, over the incarceration of Deputy Prime Minister Anwar Ibrahim). APEC’s trade liberalisation credentials were permanently undermined. This was an important failure. But a bigger one was to follow.

In 1999, Tim Fischer retired from politics. John Anderson replaced him as National Party leader and Mark Vaile became Trade Minister. Business groups would have preferred a Liberal. Fischer had raised the focus in trade policy on agricultural issues—that was politically relevant to the National Party—but the new game in trade was manufacturing and services, and national industry groups felt the profile in trade policy did not reflect the new economy.

At the end of 1999, Mark Vaile found himself at the Seattle WTO meeting which failed publicly after four days of global television coverage of a city under siege from demonstrators and choking with tear gas. The meeting was a disaster waiting to happen, regardless of what the demonstrators did. The WTO had been without a director until three months before the meeting and the required level of consensus to get agreement among ministers at Seattle had not been struck. It would have failed no matter where it was held.

It was Mark Vaile’s first experience of a major WTO conference. It would have been unpleasant. No politician likes association with failure. The option to secure tangible results in trade which the prospect of negotiation of Free Trade Agreements offered would have been attractive. And the clear message for the WTO was that there was no global consensus about how to advance the work to follow up the Uruguay Round, particularly to reduce barriers in trade in agriculture and services.

No one in international trade officialdom wanted to admit the seriousness of the setback. But the move to liberalise through regional and bilateral agreements already had significant momentum and these were political deliverables. The EU had made new commitments to liberalise services and investment. The North American Free Trade Agreement and the ASEAN Free Trade area had been negotiated; the USA had proposed a free trade agreement to cover North and South America; and Brazil, Argentina and Uruguay had decided to create a customs union. As well, governments started to announce they would negotiate bilateral free trade agreements with neighbours. The DFAT orthodoxy against FTAs was now a political hindrance.

The Howard Government Embraces FTAs

Mark Vaile had experienced the realpolitik of trade policy politics three months before the Seattle meeting. One of his first duties as Trade Minister was to attend the APEC summit in Auckland in September 1999. He was invited to a meeting with Charlene Barshefsky, and invited to join an effort to promote a “P5” free trade agreement between Singapore, Chile, New Zealand, Brunei and the USA, which these governments had been discussing with Fischer. Vaile was unprepared for this.

Then to the surprise of the Australians, Singapore and New Zealand announced at the meeting that they would negotiate a bilateral FTA. Ordinarily, there would have been trans-Tasman consultation about such a move. A senior New Zealand official told this author this was a deliberate ploy to challenge the Australians to get involved. It galvanised the Australians into action, but not quite as officials in Wellington had hoped. Canberra quickly secured an agreement to negotiate an FTA with Singapore as well and responded with alacrity to a proposal from the Thaksin government to negotiate an FTA with Thailand.

It showed the DFAT orthodoxy did not apply to FTAs in Asia. And similarly, while the pro-Asian community, largely based at the Crawford School at ANU which had had significant influence on Labor trade policy in Asia, argued the principle that FTAs should not be pursued because they were inferior trade policy, they seemed mute when FTAs with Asian neighbours were proposed.

Officials in government, however, had another concern. The ASEAN group had recently completed an FTA which contained measures which discriminated against Australian exporters in favour of exports from other ASEAN economies. This was illustrated in the study of the ASEAN FTA which the Labor government also commissioned from Professor Richard Snape. The amount of Australian trade involved was small but as ASEAN economies grew, the discrimination may have become significant and costly. Snape had advised that in such circumstances an FTA with ASEAN economies to provide access to their markets was an effective, albeit second-best solution. Thailand proposed Australia and New Zealand form a common free trade area with ASEAN and this was endorsed by the Keating government, but vetoed by Dr Mahathir. Negotiating FTAs with individual members of ASEAN—Singapore and Thailand—was good insurance for guaranteeing access for Australian exporters to those important ASEAN markets.

Then in December 2000, Paul Kelly reported in the Australian that the Howard government would seek an FTA with the USA. He speculated that this would generate a major debate about how Australia would build its relations with Asia, anticipating the position that Garnaut, who emerged as the leading academic opponent of the FTA, would consistently make. The risk was that they would consider this a turning away from the broad strategy of engagement with Asia because Australia would be giving preference to the USA over Asian trading partners. They didn’t, and the FTA did not have that effect. It was never going to.

The FTA with the USA

It was one thing to act to shore up access to ASEAN markets in the future by negotiating FTAs with individual members, but quite another to decide to use FTAs as a major tool of trade diplomacy. What changed in Howard government policy, particularly given the policy orthodoxy?

There was a change of personnel in key positions in the second Howard term. Michael Thawley, a trusted Howard adviser—a DFAT professional, but a political hard-head and formerly Howard’s international affairs adviser in his private office—had taken up the position as Australian Ambassador in Washington. Embassy staff had always argued the case for an FTA with the USA. As his deputy he had Meg McDonald, who was a seasoned negotiator following a posting in Geneva to the GATT mission and a stint as Environment Ambassador. Mark Vaile demonstrated an open mind, presumably influenced by his experience in Auckland and Seattle. DFAT was now run by Dr Ashton Calvert, a supreme rationalist who had had postings in Washington and Tokyo.

The unofficial announcement of the decision by the Howard government through the media indicated careful media management, perhaps to test the reaction. Whatever the purpose of Canberra-style political finessing, it was clear a decision had been taken to seek the FTA, and that it was endorsed, if not directed, by John Howard.

Why did Howard want it? This was before 9/11 and war in Afghanistan and Iraq. It was a clear and easy way to deepen the relationship with the USA, a goal of Howard’s since he was elected. There was little down side. Most Australians favoured closer ties with the USA; the political challenge in seeking an FTA was to increase access for Australian farm producers to the US market. The risk was that that might not be secured.

The first task of the government was to crash an Australian FTA onto the work program of Bob Zoellick, the US Special Trade Representative. He was an old friend of Australia, a long-term participant in the backdoor Australia–US dialogue built by Phil Scanlan, a former Coca Cola chief executive. Yet, an Australian FTA meant trouble for Zoellick. He already had a full agenda of other FTAs to negotiate and he needed to secure the approval of Congress to submit FTAs for “fast track” approval.[6] Congress was traditionally niggardly about granting this power. He did not need increased opposition from agricultural interests who would be wary about the prospect of an FTA with Australia, a country that had traditionally demanded greater access to US agricultural markets.

The Australian strategy was to get George W. Bush, with whom Howard had established an early rapport, to agree to an FTA. John Howard was in the United States when the World Trade Center was attacked. He secured agreement that Vaile and Zoellick should explore the feasibility of an agreement and this enabled trade officials to begin consultations. Howard revisited the USA three months later and won Bush’s support to negotiate the FTA. Australia’s FTA was now on Zoellick’s list. The second leg of the strategy was to build support in Congress.

Except for agriculture, this FTA was not particularly difficult to negotiate. The average tariff in two-way trade between both countries was less than 3 per cent. This was a modern FTA: the focus was to be on reducing barriers to trade in services, investment and government procurement. The USA wanted changes on intellectual property laws, which some activists insisted were seriously deficient.

The challenge was agriculture. This was always going to be tough. US farm groups had entrenched interests in Congress. External events intensified opposition among them to the FTA, and the Howard government fumbled the politics at home.

The politics of trade liberalisation suggested Australia could secure increased access for agricultural exports, but in areas where US trade barriers were not high. Beef was most likely—Australia was already a supplier (but only of 2 per cent of the market) and further access would be politically saleable. Australia was least likely to win increased exports of sugar. The politics of sugar in the USA are controlled by two companies in Florida who reportedly spend tens of millions of dollars a year lobbying Congress to restrict imports. No Australian government would be able to countermand that. From the beginning, the Americans told the Australians not to expect a result on sugar.

Sugar was an Australian domestic political problem, not a trade problem. The industry has too many small producers who are uncompetitive when world sugar prices fall. They are obdurate about remaining on the land and concentrated in electorates in Queensland important to the Coalition. Instead of dampening down expectations about a result on sugar, John Anderson, the Deputy Prime Minister and Leader of the National Party declared as the negotiation moved to conclusion that the agreement would not be worthwhile if there was not a good deal on sugar. This created a public expectation that could not be satisfied and a ready political standard for critics to attack the agreement, which they used with glee.

Both sides agreed the negotiations should wrap up in early 2004 to provide the time to get the agreement through Congress in the last year of the Bush administration’s first term. Australian officials believed passage of an FTA would be much more difficult if a Democratic administration won office. At the end of 2003 agricultural trade politics in the USA made negotiation over increased access of agricultural products more difficult. A cow with mad cow disease was detected in the USA. It came from Canada, but this enabled US farm groups to argue against opening US agricultural markets to imports. Then it was revealed that the Bush administration had agreed to increase sugar exports in the Central American Free Trade Agreement. Responding to the pressure from the US sugar industry, Zoellick stated that sugar would be excluded from the Australian FTA, and the US dairy and beef industries protested they should not be included as well in the Australian FTA. This turned up the political heat in negotiations.

Australian business strongly supported the FTA, forming a coalition to argue the case[7] initiated by the Australian wine producer Southcorp. The USA was under pressure to consider trade retaliation if Canberra did not remove subsidies to Howe Leather, and the wine industry picked up rumours that holding up wine exports was under consideration. It initiated formation of business coalitions on both sides of the Pacific, and major businesses with trade and investment in both countries supported them. In the USA the focus was on building support for the FTA in Congress[8], and in Australia arguing the case for an FTA. Business in Australia perceived instantly the importance of aligning the public policy framework for trade and investment policy in Australia as closely a possible to the USA. In most spheres of business worldwide, US companies set the standard. If Australian business was to be successful in global markets, it needed to understand and heed the reference points for US business.

The strongest opposition to the FTA in Australia was from the Amalgamated Metal Workers Union. This was ironic, since it had members in two industries, steel and automobiles, whose jobs would be made more secure by the protection of access to the US market that an FTA could provide for exports from those industries. The debate demonstrated there was no significant pro-protectionist sentiment in the Australian community or concern about increased foreign investment, another area the agreement would liberalise.

The agreement significantly eased restrictions on foreign investment from the USA, set up mechanisms to make it easier for Australian services industries to operate in the USA, increased access to US government procurement markets, removed tariffs on Australian utility vehicles to the US market, provided significant increases over time for Australian beef exports to the USA, and increased access for dairy and horticultural products. There was no increase in sugar exports. The USA required changes to Australian intellectual property law about which some IP experts complained, but which were not of great moment, and wanted rights to scrutinise how decisions were taken on quarantine restrictions and the listing of drugs eligible for government subsidy.

The Australians also wanted to ease travel restrictions to the USA. The general tightening of travel to the USA after 9/11 ruled that out, but two years after the agreement was concluded, provisions were enacted in the USA enabling young Australian professionals to work and study in the USA.

Polling suggested about 20 per cent of the community, the general share of the population who are uncomfortable about closer relations with the USA, did not support an FTA. The Australian film industry mounted a bogus campaign that the Americans would demand removal of requirements on broadcasters to air a certain percentage of Australian-made material (they didn’t) and this probably helped fuel a fashionable view in Sydney, prominently reflected by the Fairfax media and the ABC, that the FTA was a bad thing. Sydney was also the locus of anti-globalisation academics whose views were ultimately crystallised in an anti-American tract titled How to Kill a Country.

Sydney-based media also gave the widest airing to the case from academe, principally at ANU, that the agreement would damage Australia’s standing in Asia. A trivial[9] case was made that it would, yet there was no evidence of this when the FTA was completed.

The Howard government developed a strategy to deal with the sugar industry. It was offered $350 million in restructuring assistance. As well, sugar aside, commitments were achieved to open the market for dairy products (access was already small, but the increases were significant) as well as beef. (The market was worth around $2 billion and barriers were to be progressively removed over a twenty-year period, albeit with a right to restrict some imports.) This was a good result under the circumstances.

But the media run on the FTA was that it failed on agriculture because nothing was achieved on sugar, resulting in an erroneous public view that the agreement was not a good one. By the usual standards by which an FTA is measured, it was good public policy. It set an important standard for Australia’s other FTAs as well as other FTAs in the region. More importantly, it anchored into Australian trade policy the idea that engagement of the USA was a vital element in broader strategies to promote economic integration. This was very important because the big picture for economic integration in the Asia-Pacific region changed during the Howard era.

The Big Picture

Whereas the Hawke and Keating governments rode the high tide of globalisation and trade liberalisation in the eighties and early nineties, epitomised by the completion of the Uruguay Round and the overhaul of global architecture for multilateral trade liberalisation, the Howard government caught the ebb tide. The WTO endured recurring failure during its entire rule, beginning with the Seattle riots, the restart to begin a new round of global trade negotiations at Doha in 2001, then the failure to complete the Doha Round eight years later. The one, very important, success story was the eventual accession of China to the WTO, moving China’s evolution as a leading player in global economic affairs a critical step forward.

The Cairns Group also lost its influence in the WTO negotiations. Its place as the voice of the third party set of agricultural exporters (after the EU and the USA) in the negotiations was to a significant degree usurped by the emergence of the Group of 20, led by Brazil and including China. Nevertheless, as chair of the Cairns Group, the Australian minister of the day remained a key figure in the negotiations.

Critics of the FTA, including Labor politicians, claimed that the focus of the Howard government on FTAs meant it neglected negotiations in the WTO, the imputation being that it could have done something to change the circumstances in the WTO. That was outside the reach of Australia.

Increasingly the realisation grew in Canberra towards the end of the Howard era, as in trade ministries in other capitals, that there is something wrong with the WTO system. While anti-globalisation groups like Oxfam, WWF and Médecins sans Frontières propagandise that this is the end of the era of globalisation, the evidence to the contrary is that governments seemed as keen as ever to pursue trade liberalisation through bilateral and regional agreements. In the last decade over 300 have been recorded at the WTO Secretariat. Only 124 agreements were recorded in the previous thirty-five years.

As the Howard period ended, trade officials in major trade capitals began to ask what should be done in the WTO. The problem was that with just over 150 members, most of whom are not significant trading nations, it is easy for nations who give priority to politics over trade to hold up those who wish to engage in multilateral trade liberalisation. Most nations with major traded services sectors, developed and developing, for example, want to pursuer further liberalisation through the WTO. But the negotiating principle in the WTO is that liberalisation must proceed in all sectors in harness—blockage over agriculture means no progress in services.

While APEC may have lost its urge to advance trade liberalisation programs, the interest in regional economic integration among APEC members also rose, in retrospect almost in inverse relation to the failure to bring the Doha Round to conclusion.

One measure was the increase in negotiation of FTAs among APEC members—it seemed to be more intense than in any other region. Smaller economies such as Singapore, Chile and New Zealand sought FTAs with many countries. Then China, the ASEAN group, Japan and South Korea started seeking bilateral and regional FTAs. If the Howard government had not started to initiate FTAs when it did, Australia would have looked out of touch.

The US FTA evidently did not damage Howard government relations in Asia. Negotiations of FTAs with Malaysia and ASEAN were initiated, negotiations began with China, Japan was pressed for an FTA and discussions began with South Korea. The ASEAN economies resuscitated FTA negotiations with Australia and New Zealand.

On the other hand, this upsurge in interest in FTAs was not all good. Some FTAs are negotiated for purely political reasons, and this seemed to be the primary Chinese motive. Australia worked hard in APEC during the Howard years to advance best-practice principles to apply when negotiating FTAs in an effort to obviate that risk. But the political interest in forging new institutions for regional economic integration generated something much more difficult.

Beijing discovered, as Bonn and Tokyo did in the eighties, that economic strength creates influence. Having quickly emerged as everybody’s second or third most important trading partner, Beijing decided to bid for leadership. It breathed life into an ASEAN proposal to build an economic community comprising ASEAN, China, Japan and South Korea. It also proposed bilateral FTAs with Thailand, ASEAN and even Japan.

The Howard government found its own challenge with China. It proposed an FTA to China which responded promptly. China was interested in FTAs with Chile, Australia, South Africa and Peru—all mineral exporters to China. Its condition was that Australia agree to treat China as a market economy as a precondition for entering negotiations. The USA has reserved the right under the terms of China’s accession to the WTO to treat China not as a free market economy when considering anti-dumping action against China. Canberra agreed, to the bemusement of business. With virtually no protection against Chinese imports to trade in FTA negotiations, business considered recognition of China as a market economy one of the few negotiating cards Canberra had to play. Once negotiations began, the Howard government found that China had little interest in reducing barriers to Australian exports and the negotiations accordingly stalled.

China’s strategic trade policy in the region confronted the Howard government in its last term with another challenge. In response to China’s assertion of leadership, Tokyo proposed an FTA embracing the ASEAN-plus-three grouping, as well as Australia, New Zealand and India. While Alexander Downer endorsed the Japanese idea and even secured funding to support activity within it, there was some tension inside DFAT. Officials responsible for APEC did not consider a regional agreement without US participation a good idea.

Washington also became anxious and responded by endorsing the idea of an APEC-wide FTA, which had been promoted by Chile, Singapore and New Zealand. Trade officials in Canberra had been cool on the idea because of the political difficulty of bringing the USA, Japan and China into a common agreement. Confronted with the Japanese proposal and the emergence of a form of US assent to the idea of an APEC FTA, it then formally endorsed that idea in the lead-up to the APEC summit in Sydney, and the proposal was included in the APEC work program.

While concerns about trade and economic integration were what inspired APEC, John Howard found, as did all APEC chairs, that when the annual summit is held, the leading issue of the day is what drives headline focus at the summit. For him it was climate change, since the polls had swung badly against his government over its position on global warming. Other APEC members, particularly China and the developing economies, were not keen on APEC taking on climate change, but as usual gave the host the right to set the leading subject.

A potentially more relevant development to economic integration among APEC economies was fostered by Peter Costello, the Treasurer, with the support of DFAT and Treasury. This was a proposal to strengthen the capacity of APEC to address questions of economic structural change. This was out of recognition that further economic integration among APEC economies required more than trade liberalisation—domestic measures to open economies were required as well. The Economic Committee of APEC was strengthened, to be led by a meeting of Economic Affairs Ministers, and a special unit, funded by Australia, to support it was established at the APEC Secretariat.

This is the sort of unspectacular enterprise that can effectively promote good public policy. However, as the Howard government left office, it had also lent support to competing ideas for regional free trade agreements which did not sit well together.

The Howard government left the Rudd government an even bigger trade agenda than that left it by the Keating government.

How Liberal was the Howard Government?

A full review of performance on trade policy is not complete without considering what actions were taken to deliver the benefits of reductions of trade barriers to the domestic economy. First it can be concluded the Howard government did not increase protection, although recent work suggests that regulation of foreign investment under the Foreign Investment Review Board processes increased.[10]

When Howard became Prime Minister, Australia had few trade restrictions. However, in an increasingly competitive global economy, the small percentages often determine if business is competitive. Tax rates, low tariffs, regulatory costs—they all count. As observed earlier, though, it was not in the policy make-up of the Howard government to proselytise free market reform inside Australia. The only time it took up the cause was when it was required to defend the FTA with the USA.

It undertook no unilateral liberalisation. When required by legislation to review continuation of protection of manufacturing in 2000 (the average tariff on most production was 5 per cent; on garments and textiles it ranged from 10 to 15 per cent with a general commitment to bring those levels down to 5 per cent) it extended the protection of the garment and textile and automotive industries and elected not to reduce the general tariff below 5 per cent. The Productivity Commission advised that reducing the tariff to zero would over time increase annual GDP by 0.8 per cent. The joint statement by Senator Minchin and Peter Costello stated that there was plenty of time to make those cuts, and tariff cuts should be considered in the context of negotiating trade agreements.

APEC leaders invited all members to indicate how they intended to meet the commitment to reduce tariffs—to zero for industrialised economies by 2010. New Zealand submitted a timetable showing how it would do this. Australia has never done so. There is no policy showing how Australia will meet that commitment.

In retrospect, the US FTA was probably the most important trade liberalisation the Howard government undertook. It liberalised the terms for US foreign investors and access for services industries into Australian markets. These standards will ultimately flow to suppliers from other major service economies and improve the competitiveness of the Australian economy.

Business wanted it to go further. When restrictions on US foreign investment were liberalised in the US FTA, business groups requested the government to extend the same policy to foreign investors in other countries. It was not to Australia’s advantage to maintain impediments to foreign investment. Peter Costello ruled that any such action should be reserved for trading in negotiations with other countries.

Howard’s Trade Legacy

John Howard’s commitment to the importance of an FTA with the USA is his leading legacy in trade policy. His original aim was to broaden the bilateral relationship beyond defence, which time will demonstrate he did.

Developments since the signing of the ANZUS Treaty demonstrate that that treaty alone does not guarantee continuous close co-operation with the USA. That is influenced more by the security environment. When common security interests are threatened, such as by the War on Terror, co-operation is close in military and political affairs. When they are not, Australia strains to be heard in Washington.

The globalised world where economic affairs now register higher on political agenda is now a reality. Institutionalising the economic relationship with the USA is an appropriate step to adjust the pertinence of the relationship between Australia and the USA to this new environment.

The FTA has done this, registering Australian trade and investment interests now as an integral part of formal US economic policy. Institutions have been established by the FTA which institutionalise regular consultation between Australian and US officials in ways that did not exist before. Whereas the political relationship will strengthen and weaken with the rise and fall of tension in the security environment, the economic relationship will remain constant. The FTA strengthens the bilateral relationship.

The USA is Australia’s most important economic partner. This is not measured only by the size of two-way flows of investment and trade, although for a long time they are likely to among the largest, but also by the influence of US business in global commerce and the role of the USA in shaping global economic institutions. Over the last half-decade, US administrations, Republican and Democrat alike, have associated the US national interest with the promotion of open economies, notwithstanding their occasional deference to national vested economic interests through their supporters in Congress.

The FTA has also helped to steer US attention to a strategic question of great importance to Australia over the next half-century: our regional economic architecture. This is intimately linked to the question of great power rivalry in the Asia-Pacific region. A key issue is creation of a system which accommodates the economic interests of China, the USA and Japan. China is using its economic weight to secure leadership.

The challenge for policy makers in responding to this is to recognise that the solution which will serve Australia’s interests must institutionalise economic integration of open economies. China’s membership of the WTO demonstrates why. China has accepted internationally binding rules about how it conducts its trade relationship with other WTO members. However, the real test of China’s adoption of market principles to govern trade is whether it treats WTO rules as tools to advance its political interests or tools to advance economic interests by opening its economy as trading partners open theirs.

To date, China’s trade policy as reflected by its actions in the Asia-Pacific region appears more driven by mercantilism. It has engaged in little effective liberalisation in its bilateral and regional agreements.

US policy during the Bush administration was not focused much on East Asia (except when concerned about North Korea’s nuclear intentions and friction between China and Taiwan) until towards the end when Treasury Secretary Paulson institutionalised regular bilateral consultations with Beijing over bilateral economic issues. Otherwise its approach to economic regionalism was reactive.

The Bush administration elected to consider the idea of an APEC-wide FTA only after Japan proposed a region-wide FTA without the USA as a counter to China’s proposal for an FTA covering it, ASEAN, Japan and South Korea.

Instead of isolating itself from Asia, as suggested by critics, the Australian FTA with the USA appears to have had the effect of encouraging Asian economies to seek US FTAs for themselves. Thailand, Malaysia and South Korea all initiated negotiations. After Australia’s, the South Korean FTA is the most substantive. There are two important consequences of this.

Whereas China will negotiate politically efficacious FTAs (as it did with Thailand and ASEAN) the USA will insist on important commitments that strengthen domestic measures to open economies. US FTAs require commitments to liberalise services sectors, something regional economies have been slow to move on. The FTA with Singapore resulted in Singapore introducing effective domestic competition policy.

The second consequence is that the USA is now engaged in a set of activities which require it to address the nature of its economic policy with East Asian economies and in a common framework which inevitably will come together and require it to address the key question—what sort of economic architecture should apply in the Asia-Pacific region in the future. To date no coherent picture for this has been painted by the Republicans or the Democrats. The negotiation of the FTA with Australia was an important step in that process, although there is little to suggest that, at the time, the Howard government articulated that as a strategic objective.