AFR - Apple Ruling Makes Sense

Apple Ruling Makes Sense, Australian Financial Review, 23 August 2011

In 1995, Japan accepted imported rice for the first time. A nation whose politicians had sometimes claimed that foreign rice was unfit for Japanese consumption yielded – thanks to a World Trade Organization deal. Within a few years, Australian rice exports to Japan were worth over $200 million.

Yet today, the Liberal and National parties are calling for Australia to thumb its nose at the WTO’s finding that our apple quarantine system was not based on solid science. Rather than allowing New Zealand apple imports, the Coalition would prefer to see Australia start a trade war.

To see how we got here, it’s worth briefly recapping the development of the world’s trade rules. In the first few decades after World War II, global trade agreements focused on reducing the tariffs that had spiked upwards during the interwar period. As quotas were scrapped and tariffs fell, trade negotiators turned their attention to more subtle forms of protectionism. They realised that if formal trade barriers were removed, there was a risk that non-trade measures might be used to the same effect.

In fact, just about every trade barrier can be rewritten as a quarantine rule or a consumer protection law. Suppose Californian wine producers are complaining about competition from French Bordeaux. Left unchecked, US authorities could simply raise health concerns about Phylloxera, and ban French wines on quarantine grounds. Or imagine that British carmakers are struggling to compete with Malaysian hatchbacks. Without any international guidelines, there would be nothing to stop the UK from banning Malaysian small cars for reasons of safety.

To prevent competition laws and environmental rules from being used as backdoor protectionism, the WTO has two new treaties that require health, consumer and environmental regulations to be scientifically based. National regulations cannot discriminate against particular countries, and must not impede trade any more than necessary.

If a WTO member thinks that another country is breaking the global trade rules, it can take a case to the dispute panel. Australia has complained to the WTO on seven occasions (against the European Union, Hungary, India, Korea, and the United States). We’ve won five of these cases, including decisions in favour of our beef exporters to Korea and our lamb exporters to the US.

On the flipside, we’ve had ten cases brought against us (by Canada, the EU, New Zealand, the Philippines, Switzerland, and the US). We’ve lost three of these cases, including the New Zealand apples decision (the other two losses related to imports of salmon and automotive leather).

Once a country loses a case, it usually complies pretty quickly. That’s because WTO rules allow the victor to impose retaliatory tariffs. When the WTO found in 2003 that the United States had illegally imposed a tariff on steel, it authorised the European Union to impose $2 billion tariffs on any products it chose. The EU announced a set of tariffs – from oranges in Florida to vehicles in Michigan – that targeted the battleground states for the following year’s presidential election. President Bush swiftly capitulated.

Being part of a rules-based trading system means that you can’t just comply when you like the decision. Just as we hand over the Ashes to England when the umpire rules in their favour, so the international trading system is based on respect for the science and the decision-making panel.

It may feel good for the Coalition to rail against the WTO, but to many observers, it is a worrying signal that protectionism is resurgent in the Liberal and National parties. Under Trade Ministers such as Tim Fischer and Mark Vaile, there was at least some indication that the Coalition was committed to open markets.

But these days, populism seems to have supplanted sound economic judgment. Earlier this year, the Coalition called for an inquiry into foreign investment in agriculture. When Tony Abbott can’t find an economist to back his policies, he attacks the economics profession. At this rate, it won’t be long before the Liberal and National parties are harking fondly back to the days of John ‘Blackjack’ McEwen and ‘protectionism all round’.

Opposing open markets might draw a cheer from the mob, but it misses the fact that Australia’s success has been built on good economic management. If we are to continue to raise living standards, we need to keep engaging in economic reforms like pricing carbon, investing in skills, and shifting to a profit-based minerals tax. No nation ever prospered by turning its back on the world economy.