ADMIT WHEN YOU ARE WRONG / TAKING AUSTRALIA SERIOUSLY / FREE TRADE: A GOOD OR BAD THING? / by Adam Howard

Right, first things first.  I need to note an error and make a correction.  Last week I discussed the BRIC emerging economies of Brazil, Russia, Indonesia and China.  An old friend from my younger days spent crawling the pool bars of the western suburbs whom we will call The Hustler touched base not long after I published to let me know the “I” in BRIC is actually India.

Of course it is…..thanks mate.

So, just following up on last week, India’s Standard & Poors credit rating fits into our table of nations as follows.

I am going to kick off this week with a quick discussion of the new Free Trade Agreements (FTAs) between Australia and South Korea, Japan and most notably, China that have been penned over the past 12 months.  This means these nations join the following list of nations with whom we already have FTAs:

-          New Zealand

-          USA

-          Chile

-          Malaysia

-          Thailand

-          Singapore

And the Dep’t of Foreign Affairs and Trade (DFAT) is also negotiating potential FTAs with the following nations:

-          Gulf States

-          India

-          Indonesia

-          Pacific Islands

-          Trans Pacific Nations

A pretty solid reflection of the growing global interconnected economy, huh?  I guess it’s also a shot in the arm for Australia that we are taken seriously as a developed economy that we are able to seriously negotiate with so many diverse nations.

That said, being an Australian and having inherited the standard Australian dose of humility and irony, I can’t help but feel we are still punching a bit above our weight and that someone is taking the piss….

It seems obvious though that others have a different opinion.

Anyway, much ado was made of the 3 FTAs mentioned above with glory heaped on the Federal Minster for Trade, Andrew Robb.  Never mind the fact the FTA with Japan had been under negotiation for 7 years, and the FTA with China for 10 years.

But then, why let the facts and context get in the way of a good session of back slapping?  You know my feelings regarding the media and the facts that are presented.

But what does an FTA do?  Probably best to look at one that’s already in place.

The North Atlantic Free Trade Agreement (NAFTA) involving Canada, the USA and Mexico is the world’s largest FTA, accounting for approx. $17 Trillion in trade. 

FTAs are meant to see the gradual removal of tariffs, quotas, taxes and other tools which control the amount or price of imports and exports.

Before we go on, let’s get some of the jargon out of the way with dictionary definitions of three of these terms:

Quota: “a limited quantity of a particular product which under official controls can be produced, exported or imported.”
Tariff:  “a tax to be paid on a particular class of imports or exports.”
Subsidy:  “a sum of money granted by the state or a public body to help an industry or business keep the price of a commodity or service low.  It is often considered to be in the public interest to do so.”

So, you can see, a quota will limit the amount of a product that one country could sell to another country, even if the first country had the capacity to sell much more.

And a tariff will add an extra margin onto the cost of production and shipping of a product in order to make it more expensive to consumers, and hence less competitive.

While a subsidy can make an unprofitable business or industry quite competitive by giving it another form of revenue.  This is what the problem was with our domestic car manufacturing industry.  Without the subsidies there was no way the companies would keep making cars here.

For instance, the new FTA with Japan will see the Japanese quota on Australian beef reduced by half over 20 years, making our beef a lot more competitive in Japan.  That’s important for the Australian livestock industry as Japan is a wealthy nation in our time zone with a population of 127 million.

On the flip side, we will be reducing tariffs on electronics, white goods and cars, with new car buyers in Australia set to pay about $1,500 less on average for a new Japanese car.

Supporters of FTAs are obviously fans of the free market and deregulation, and we know where that took the finance industry…GFC anyone???

Their argument is that FTAs should lead to more products on shelves, greater competition and potentially, lower prices. 

Critics argue that the dominant economy ends up bullying the weaker party to the FTA, giving up relatively little and flooding the weaker economy’s market with their goods.

The lessons from NAFTA appear pretty stark.  20 years on from its 1994 launch and Mexico’s economy has flat lined with GDP growth averaging 1.2% pa, unemployment up and increasing social problems as some 2 million farmers were forced off the land and into urban areas as their market was flooded with subsidized US primary produce.

There have been and continue to be a number of large law suits where corporations are suing various states and provincial governments, primarily with US corporate plaintiffs and Canadian municipal respondents, for decisions that they deem are contrary to NAFTA.

But, the empirical data does support the position that it has lowered wages and increased competition.

Unfortunately the data also supports the position that the winners are corporates and the losers appear to be lower paid individuals.  Operations and jobs are exported to the lowest cost environment.

I wonder what our new FTAs might mean?  One thing to keep in mind is that the Trans Pacific FTA noted above as being currently under negotiation involves almost all the nations bordering or within the Pacific Ocean, and if it proceeds will be the world’s largest, potentially capturing trade worth $28 Trillion.

Whoa, that’s big….

Specifically, the Chinese FTA, colloquially known as ChAFTA, could be huge for Australia.  As noted in past Updates, since 2000 China has become critically important to Australia.

In 2013 of our $350 Billion in exports, approx. $100 Billion’s worth went to China.  In fact, according to the Export Finance Industry Corporation (EFIC, the Federal Government’s lender to exporters), of our major trading partners including the US, Korea, Japan, China, India and the rest of the world, the rest of the world makes up the largest proportion at about 40%, followed by China.

And it’s no surprise the largest export sector are resources and fuels, BUT, and it’s a growing but, agricultural exports to China have tripled in the past 3 years to just under $10 Billion.

Not only that, but services exports have also grown to $7 Billion.

EFIC also advise that, as an example, since 2009 when New Zealand signed its FTA with China its exports to China have increased by 450%, compared with exports to China from the rest of the world which grew by 50% over the same period.

Now, you all know that I spend a lot of time listening to people’s stories and in the context of international trade and FTAs, a few spring to mind, some of which involve characters from past Updates.

First, the Distinguished Gent.  You may recall he specialises in the manufacture, packing and shipping of granulated products like potting mix, fertiliser and dynamic lifter.

The Distinguished Gent was in the market for a 65 metre wide single span roof, with no supporting pillars, to house his business.  He uses a lot of forklifts and bobcats, and has a lot of enormous trucks coming through his 8,000 square metre warehouse every day and those pillars get in the way.

He was told by no fewer than 4 mid-tier engineering firms in Perth that what he wanted to do was impossible.  And then when it was possible he was quoted a minimum of $6 million for the steel alone.

Our hero then found himself speaking with an Aussie expat in Vietnam who said yes where others had said no.  The Distinguished Gent got his roof structure, engineered to Australian standards, and paid $1 Million for the steel, installed.

So, that’s obviously a win for the globalisation, and there isn’t even an FTA in place between Vietnam and Australia.

Another couple of old friends whom we will call The Boss and The Fisherman, tell me that since China’s rise their export market has changed completely.  Where it used to be 85% exports as frozen product to the US and Japan, it is now 99% fresh live export to China. 

This has seen their business cash-flow change from requiring a huge overdraft to carry them until the frozen product was all sold, to being cash rich where product is sold weekly and paid for in cash.

Now, that sounds awesome, doesn’t it?

Well, it is, but a lot of that cash is paid in USD, not the Chinese trade currency Renminbi (RMB), and flows through the enormous Chinese grey economy.  Unregulated, untaxed, largely untraceable, and the current Chinese leadership appears fairly keen to shed some light on this economy. 

That might not be great for The Boss and The Fisherman…and they know it.

So, this scenario might require a video reply to determine if it is a win or a loss for globalisation and the end users.

Finally, I mentioned the export of labour to low cost environments earlier, and I am pretty sure everyone is aware of the practices of Target, Country Road, Nike and other clothing manufacturers outsourcing their labour to initially Thailand or Vietnam, then China and now Bangladesh.

But was anyone aware that professional services were/are being outsourced?  Administrative and compliance functions in the banking, legal and accounting industries are now being given to teams in India and Asia for completion.

They are faster, able to follow good instructions, more inclined to follow compliance requirements and obviously, cheaper.

ANZ has large teams in Bangalore and Manila who I had to and still have to liaise with almost daily.

I also have the anecdotes to back my claims up as two old friends whom we will call The Boatie and The Lawyer confirm these practices.

The Boatie works for one of the Big Four accounting firms and The Lawyer for one of Australia’s largest law firms and both have confirmed their firms are also using offshore teams.

Once again, good for the firms and good for the offshore workforce, but not necessarily good for the workers in Australia as those entry level jobs disappear.

It’s not really any cause for concern for WA’s workers though as only the largest firms are offshoring these tasks, and with the majority of these firms having head offices or major hubs in cities other than Perth, these jobs weren’t in Perth to begin with anyway.

So, a win for the offshore workforce, a win for the large corporate, but a loss for the workers in the city that used to house these jobs.

Briefly back to our newly minted FTAs with China, Japan and Korea, and most importantly, the looming FTA with Trans Pacific nations and the one subsidised industry we should all care about….a lot.

The healthcare industry, and specifically the Pharmaceutical Benefits Scheme (PBS).

Not sure if any, some or all readers are aware of the PBS and what it does, so here goes.  The PBS is a Federal healthcare program that regulates and subsidises prescription medication.

In layman’s terms the PBS, around since 1948, lists what prescription medicines have been approved by the Feds and also provides funding to meet a portion of the cost of these medicines so that the maximum any patient will pay for a single dose of a listed medicine is $37.

I’ll provide an example.  Skin cancer is an Australian scourge, with metastatic melanoma one of the most virulent and potentially fatal.  There is only one medicine that can be used to treat this disease, and it can provide sufferers with potentially another 10 years of life. 

But there’s a catch; it costs $30,000 for an infusion and you need 4 infusions, 3 weeks apart and then you need to wait to see if you respond.

It’s a slim hope, but worth taking a punt if you are really sick.

And under the PBS those 4 infusions will cost a patient 4 x $37, or $148.  Not $120,000, but $148.

It’s a pretty good system.

Just go ask a chronically ill person in the US where there is no public funding of prescription medicines and pharma companies are allowed to set the sale prices how they would feel about paying $37 for their medicine….

It’s an acknowledged phenomenon in the US that patients travel over the border to Canada to fill their prescriptions as the cost at home is simply too great.

Anyway, the Feds in Australia have stated that the one thing they will exclude from any FTA is the PBS.

Phew, that’s a relief….

Have I ever told you about my theory on political promises?  The easiest way to table an issue for discussion is to say it’s something you are never going to do.

Like Julia Gillard, our erstwhile PM, stating emphatically that we would never sell uranium to India as they are not signatories to the Nuclear Non-proliferation Treaty.

Guess what?  We now sell yellowcake to India.

So, a statement that the PBS is safe from any FTA doesn’t exactly fill me with confidence.

Given the healthcare system is fairly important to us all, and following a suggestion from another old friend we will call The Player, I think a series on the economics of the Healthcare industry is in the “public interest”.

Food for thought….