Australian agricultural trade and the populism of protectionism

Cheryl Kalisch Gordon – Former Trade & Economics Manager, GrainGrowers Ltd

Michael Finucan – General Manager of International Markets, Meat & Livestock Australia



Q1. Brexit and the election of Donald Trump as US President are events that are being interpreted as a desire by electors to retreat from globalisation, and to return to more protectionist and nationalistic policies that could signal the end of the period of rapid growth in international trade that has occurred since 2001, when China entered the WTO. Do you agree with this premise, and if so what does it mean for future Australian trade policy, and in particular Australian agricultural trade?

 

Cheryl Kalisch Gordon, GrainGrowers Ltd

Restrictions on trade, failure to continue to reduce barriers to trade and increases in domestic support provisions, will undeniably reduce trade volumes. Unfortunately, we may see these results make good on promises made in the US Presidential election, Brexit, and in other unfolding political campaigns in Europe and elsewhere. Breaking this down to a practical level – reduced trade possibilities and subsequent reduction in trade volumes lead to production of goods where they are not most efficiently produced, and ultimately nations will be using more resources to produce the same output leading to erosion of wealth, rather than economic growth. 

Should the United States (US) increase trade protection, retaliatory trade measures will likely open short- to medium-term opportunities – such as for Australian oat exports to Mexico or increased feedgrains into China. However, over the longer term, reduced growth in China – that would result from reduced exports to the US – will have an overwhelmingly negative effect on Australian exports because the Chinese economy will slow. Growth in Australian grain exports to China have been derived from growing demand for beer, a distilled liquor made from sorghum called Baijiu, increasing meat demand translating to increased demand for Australian feedgrains, and western style flour products. Almost entirely, these are luxury consumption items: the first to be impacted when economic growth falls and discretionary spending power is reduced. 

With most Australian agriculture sectors, including grains, trade exposed in the order of 70–75%, reduced growth internationally, reduced spending power in our markets, will have a disproportionately higher effect than some of our competitor nations in supply. It is in the interests of Australia, and Australian agriculture in particular, to ensure that Australian trade policy remains ambitious, that Australia capitalises on existing agreements, and that violations of trade agreement provisions are managed. There is no point having free trade agreements if technical access isn’t assured and negotiated rules aren’t followed. Re-elevation of Cairns Group collaboration to pursue favourable outcomes for agriculture is one avenue that Australia could pursue in this regard.

It’s hard to deny that voters are responding to champions for their disenchantment and potential panacea to their real and perceived economic disadvantage. The fact that we’re seeing rejection of free trade as a solution reflects:

  • failure to recognise the enormous consumer benefits that enhanced trade delivers. For example, have US voters considered the benefit of the average price of their car purchases in real terms falling from $29,000 in 1999 to $25,000 in 2016
  • failure to consider the enormous impact of automation on employment prospects (investment in automation and software has doubled in the US over the past two decades and accounted for more than 80% of manufacturing job losses) 
  • failure of governments to adequately couple outward facing free trade policies with domestic economy structural reform policies. 
  • The ease with which international trade of goods and services is lumped into the basket of ‘foreign threats’, along with threats to domestic safety from international threats, has only served to exacerbate the evil that free trade now is, in the eyes of some voters. 

The elevation of free trade to this disrepute suggests that Australian trade policy must, especially in negotiations with developing and less developed nations, encourage a dual approach to trade because only free trade coupled with domestic reform will deliver the benefits of free trade throughout economies.

 

Michael Finucan, Meat & Livestock Australia

The Australian red meat industry keeps a very close eye on the global political and trade agenda as approximately 70% of our beef, lamb and goatmeat production is exported.

The recent Trump election and the Brexit vote have certainly created a lot of discussion about global politics and the effects on trade. While there is currently an increased level of protectionist and nationalistic themes being played out in some parts of the global political arena, many nations are still looking to liberalise trade and seeking opportunities to progress free trade agendas. Even the recent developments in the US and United Kingdom (UK) present opportunities for the Australian red meat industry.

Brexit offers the Australian red meat industry a significant prospect to secure improved trade access to a large and lucrative market. The UK currently accounts for more than 65% of the Australian red meat destined for Europe. However, disproportionately low access via highly restrictive European Union (EU) import regimes has long constrained the ability of Australia to respond to EU consumer demand for high quality products and to compete equitably. Through the Brexit process, potential exists to position the Australian red meat industry for more competitive access to the UK. The EU is also now preparing to negotiate a free trade agreement (FTA) with Australia. A joint Australia-EU FTA scoping exercise was successfully concluded on 6 April 2017 and this signals a promising step towards launching Australia-EU FTA negotiations later this year.

 

Q2. Some have suggested that Australia should retreat from trying to negotiate large-scale multilateral trade agreements, and instead concentrate on the gains that might be available from bilateral negotiations with current trade partners such as China. Do you agree or disagree with this, and why?


Cheryl Kalisch Gordon, GrainGrowers Ltd

On the whole, the benefits of free trade increase as the number of partners in free trade increase and with greater variability in the endowments of partners. This is because there are more options from which to choose the production of goods and so achieve greater efficiencies across a greater number of goods and services, and to a larger collective market. However, above and beyond this, there are supply chain efficiencies from the treatment of all inputs to a final good or service, within a trade group with the same import and export conditions, and so avoiding the ‘spaghetti bowl’ inefficiencies created by multiple bilateral trade agreements, compounded by the addition of each new preferential trade agreement. The Regional Comprehensive Economic Partnership (RCEP) for example provides the opportunity for common and transparent approaches to sanitary and phytosanitary trade conditions across 16 nations, if the grains annex to the agreement that GrainGrowers have been advocating for is included. 

However, while plurilateral and multilateral possibilities should remain the ultimate aim, a small, highly trade exposed nation like Australia must prioritise building on existing and pursuit of new bilateral opportunities. Deepening Australia’s grain trading relationship with Indonesia through technical cooperation in the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) is one such example which will have a targeted pay-off for Australian farmers. Another example is bolstering and extending protocol access for Australian grains to China to underpin tariff reductions gained under the China-Australia Free Trade Agreement (ChAFTA). 

In summary, while pursuing multilateral approaches to trade and reduction in domestic support as an ultimate aim, Australia should continue to concentrate immediate efforts on expanding the opportunity for the direct sale of agricultural goods through bilateral trade relationships. With the current low prices of Australian grains these bilateral efforts are important, now more than ever.

 

Michael Finucan, Meat & Livestock Australia

Australia’s reliance on exports means we need to continually strive for unimpeded global access to ensure we have the opportunities to market our product to as many customers as possible. Australia needs to be at the table pushing for reduced trade barriers through all available avenues – at the World Trade Organization (WTO) level, and through larger multilateral trade negotiations and bilateral trade negotiations.

The Australian red meat industry has already received some significant gains from the recent trifecta of free trade agreements completed with South Korea, Japan and China. These FTAs ensure we remain competitive or gain preferential advantages in these markets. However, the red meat industry is not resting on its laurels and is still looking to make further access gains. There are a number of regional and bilateral trade agreements currently on the negotiating table and the red meat industry is looking for gains in all of them. For the Australian red meat industry, priorities for trade negotiations include:

  • Regional Comprehensive Economic Partnership (RCEP)
  • Australia-Indonesia Closer Economic Partnership Agreement
  • Australia-Gulf Cooperative Council (GCC) Free Trade Agreement
  • Australia-India Comprehensive Economic Cooperation Agreement
  • Australia-European Union Free Trade Agreement
  • Brexit/potential future UK FTA.

With respect to the Trans-Pacific Partnership (TPP) agreement, while it is disappointing that the US has withdrawn, there is still interest in TPP-11 amongst the remaining participants. For Australia, the TPP offers new access opportunities in markets such as Canada, Mexico and Peru while improving the existing economic partnership agreement outcomes secured with Japan. On the flip side of the US withdrawal from the TPP, Australia’s tariff advantage on beef in Japan will continue to grow while the US doesn’t have a free trade agreement in place. Currently, Australia has about an 11% tariff advantage over the US through the Japan-Australia Economic Partnership Agreement. Japan is a large and important beef market and the US beef industry is putting pressure on the US Government to negotiate a bilateral agreement with Japan to ensure it can compete on an even playing field – something the TPP would have given them.

In addition to reducing economic ‘tariff and quota’ barriers there is significant impetus from industry to address non-tariff (or technical) barriers to trade (NTBs). Recent research has estimated that the annual impact value of trade restrictive NTBs for Australian beef, sheepmeat and offal destined for export markets is around A$4.3 billion. The effect of an NTB can include a stifling or reduction in trade volumes or reduced product returns from higher supply costs or lower market prices. In essence NTBs erode the global competitive position of Australian products.

Australia therefore needs to continue actively engaging with our trading partners in seeking for alleviation of these barriers – in order to further reduce supply chain costs and in order to maximise product value opportunities. Without a significant effort in this area, Australia risks becoming uncompetitive and losing market share to cheaper competitors.

An underlying premise of free trade agreement negotiations involves communicating with our trading partners about Australia’s superior quality and integrity systems. A recent example of this is industry and government conveying Australia’s capabilities to deliver high quality chilled product to China. Australia is currently the only country that can supply this market with chilled product and we are expecting this access to expand. Similar work is being conducted in markets such as the Middle East where local authorities are being appraised of Australia’s cold chain systems and thus our ability to provide a high quality product.

 

Q3. What do you think current global trade developments mean for Australian meat, grain, dairy and sugar exporters (for example)? If any of these were preparing a five-year strategic plan, what assumptions should they adopt about their likely future export opportunities?

 

Cheryl Kalisch Gordon, GrainGrowers Ltd

The growing possibility of increased trade protection underscores the need for exporters to have a diversified set of markets. While always an important strategic consideration, ensuring a range of market options are available is more important in the face of the possibility of the changeable trade rules/conditions. The slowing of international economic growth which would occur in this event, highlights the case for Australian agriculture to have a strong presence in the market to ensure that when choices become more important (as they will inevitably be as purchasing power declines), brand Australia stacks up best. 

In the case of Australian grains, exporters should recognise the value of in-market understanding of how best to extract value from Australian grains. Commercial trade in grains will be enhanced and stand the best chance to stave off international competition if underpinned by a whole of industry coordinated and effective technical market support and pre-competitive promotion efforts.

 

Michael Finucan, Meat & Livestock Australia

With the ongoing changing political dynamics across the globe, it is critical for the Australian red meat industry to retain a mix of market options. While some of the current political rhetoric raises concern, our core markets remain stable and global demand is solid, especially into developing and emerging economies. Australia trades red meat to over 100 countries and we have longstanding stable trading relationships around the globe.

Over the past 15 years the red meat industry has developed a diverse range of markets which helps protect and insulate it from a significant change in any one market. For example, in 2004 approximately 90% of beef exports were destined to three core markets (Japan, Korea and the US). Now that figure sits at around 65% with a much larger mix of countries taking more products.

As well as diversifying the range of markets Australia exports to, the industry is also pursuing opportunities within those markets. Working together with industry, Meat & Livestock Australia (MLA) applies a portfolio strategy approach to global markets where we segment markets based on the risks and opportunities they represent. We work with producers and exporters to assist them develop global strategies that help market and promote their product. This involves segmenting customers and consumers and developing a deeper understanding of market trends and the needs of customers.

 

Q4. If you were currently the owner of an Australian farm business producing one of the major export commodities, would you be making any changes to your future business plans in response to the changes occurring in global trade? If so, what changes would you make?

 

Cheryl Kalisch Gordon, GrainGrowers Ltd

Ensuring competitiveness into the future is a necessity, regardless of global trade eventualities. Adoption of best practise management and new technologies will be increasingly non-negotiable for those seeking a sustainable future in Australian agricultural production.

An evidence-based and methodical approach to reducing the cost of production will continue to be a cornerstone of any farm business, irrespective of commodities produced. Supporting this, and recognising the inherent production risks that are part of Australian agriculture, it is also important that multiple risk management measures are in place to allow capture of new market opportunities while not putting the business at undue solvency or sustainability risk.

Overwhelmingly however it must be remembered that competitiveness is much more than being able to offer the lowest price. Capturing the value per tonne of Australian grain being exported to the world must be the aim. So alongside sound farm business fundamentals, adoption of, and adherence to, industry and business supply assurance initiatives in relation to chemical use, land management, disease, pest and weed management, storage and quality should be part of business plans if they are not already.With an increasingly challenging international market, it is more important than ever that Australian agricultural products have the competitive edge that superior customer confidence can provide.

 

Michael Finucan, Meat & Livestock Australia

Australia is currently well positioned in the global market place to capitalise on some of the recent global political uncertainty. There is still a healthy appetite by many global partners for trade liberalisation. There are new markets, new segments and new customers waiting to be secured. Capturing this new business means our industry needs to continue approaching it from many fronts:

  • presenting a single united industry voice and working collaboratively with the Australian Government to advocate for reduced tariff and non-tariff barriers to trade
  • demonstrating Australia’s superior integrity and quality systems to governments, customers and consumers
  • extracting deep insights about global markets to understand the consumers in these markets and the opportunities for red meat – and marketing Australian red meat accordingly.

It’s a big job – one which the entire value chain has a role to play in – from individual farm businesses who demonstrate Australian red meat’s quality and integrity in the way they raise their livestock, through to exporters who work with MLA to develop targeted strategies that help market and promote their product in global markets.

Image:  USDA