TRADE AND INVESTMENT TIES WITH EUROPE

Address by the Hon Tim Fischer, MP, Deputy Prime Minister and Minister for Trade, to the Australian Business in Europe Meeting, Sydney, 21 June 1996
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I am very pleased to have this opportunity to address this Australian Business in Europe luncheon today. I am especially pleased to be able to convey to you, first hand, the Coalition Government's commitment to strengthening and deepening Australia's relations with Europe, and our trade and investment links in particular.

This is an objective we made clear in our policy statements prior to the March Federal election. Our commitment has been given real substance and momentum over the past month with the successful visit to Australia of the Vice-President of the European Commission, Sir Leon Brittan, and the launch of a major study by my Department into the Australia-EU Trade and Investment relationship.

The Government is also preparing a comprehensive new platform for further development of the relationship through negotiations towards a Framework Trade and Cooperation Agreement with the European Commission and an accompanying Joint Political Declaration between Australia and the European Union. Both of these should be concluded by the end of this year.

The Framework Agreement will provide a formal basis for trade and economic cooperation in a wide range of areas. The Joint Political Declaration will set out a framework for dialogue and cooperation on international political issues. As well as boosting cooperation generally, the two documents will provide an early warning system to address potential trade concerns. They should also give Australia a constructive context in which to pursue the special interests we have with the EU, including the concerns we have on agricultural trade and market access issues.

Agriculture

Let me begin today by making some comments about Australia's special interest in the European Union's agricultural policy.

In this context, I would like to take this opportunity to launch a new paper produced by my Department entitled EU Agricultural Policy Towards 2000: An Australian Perspective.

For Australia, the agriculture sector continues to be a major priority in its relations with the European Union and its Member States.

The EU made a significant breakthrough in reinstrumenting and reforming aspects of its Common Agricultural Policy in its 1992 reform package. Those reforms were critical to ensuring a successful outcome for the Uruguay Round of trade negotiations that were completed in 1994.

But intervention in European and world markets by the EU under the Common Agricultural Policy (CAP) continues to have a prominent, distorting effect on agriculture markets.

For Australia, the value of the trade involved is substantial. In 1995, Australia exported $19 billion in agricultural products, 10 per cent of which went to the EU. Protection of European agriculture markets therefore has a significant negative impact on Australia, and further reform of the CAP will be critical to future bilateral, regional and multilateral trade negotiations.

Now that the 1992 reforms have run their course, an increasingly lively and substantial debate on the future of the CAP is now brewing in Europe.

And as the United Kingdom's CAP Review Group noted in 1995,

The Common Agriculture Policy....has created a high-cost agriculture so that European farmers cannot compete on world markets without subsidy. It disadvantages Europe's consumers and its food industry by obliging them to pay artificially high prices for their food supplies...[And it] has not halted the decline in rural employment.

The Towards 2000 Agriculture policy paper prepared by my Department provides an Australian contribution to the debate on the need for, and shape of, future reforms.

It identifies a range of factors which should impel the EU to consider further substantial reform of the CAP over the next few years. It argues that, politically and economically, the EU is now much more able to rise to the challenge of CAP reform than it may have been in the past.

At the same time, we must remember that powerful forces have vested interests in maintaining the EU's current subsidies and protection. These forces cannot be underestimated.

The policy paper notes that a principal issue for Australian agriculture continues to be the impact of the CAP on Australian exports to third countries.

The Government has welcomed the fact that the EU is currently not applying its export subsidies in a predatory way. Nevertheless, the level and range of the EU's agricultural subsidies continue to be part of an ongoing global problem in world trade that will require further attention in new multilateral negotiations under the auspices of the WTO.

As an example of the problems the CAP creates for world markets, we now face a situation where heavy subsidisation by the EU of its starch industry has seen world markets for wheat gluten undermined for competitive, non-subsidised producers like Australia, while high tariff walls are maintained for gluten into the EU market.

On top of this, we now have the extraordinary situation that has emerged recently of the EU levying taxes on its grain exports, which means EU producers now pay less than the international price for their raw material, wheat.

The new Australian Government policy paper stakes a claim for the EU to allow fairer access for Australian farm exports which at present have a very low market penetration in the EU.

Our case is developed as part of an effort to ensure sustainable growth in two-way trade, given the "blow-out" in Australia's trade deficit with the EU that has occurred over the past five years. We also base our claims on the improved access to the Australian market that is now enjoyed by EU producers, and Australia's concern with current EU negotiations towards a new generation of preferential agreements.


Trade and Investment

Let me now turn to the trade and investment relationship more generally.

The report I launched during Sir Leon Brittan's visit to Australia last month - the "Australia-European Union Trade and Investment: Towards 2000" - is the first comprehensive study of its kind into Australia's trade and investment relations with the EU.

The study recognises the importance of Australia's increasing engagement in Asia and the Government's Asian trade priorities. Australia's exports to Asia have grown over the last decade from around 50 per cent of total exports to some 60 per cent. This is a shift of historic proportions and Asia's importance to Australia's economic future cannot be under-estimated.

The Towards 2000 study does, however, provide a timely reminder that Australia's trade and investment interests are multidimensional and complex. And it notes that there has been a tendency in both Australia and Europe to under-value the Australia-EU commercial relationship.

The aggregate picture of the commercial relationship is very impressive. The EU is Australia's largest source of foreign investment, its largest destination for outwards investment, its largest source of merchandise imports and its second largest market for exports of goods and services.

What is perhaps more interesting is the growth in the relationship, the prospects for growth and the linkages between trade and investment, including the stake that hundreds of European companies have in Australia and in Australia's success in the region.

The use of Australia by European companies as a base for operations in the region - whether it be for export, regional headquarters or for research and development - is quite striking.

This was, I think, one of the key messages Sir Leon Brittan took back to Europe. Like the European companies that have invested in Australia, Sir Leon appreciated that Australia's engagement with Asia makes us a more important and appealing partner for Europe business.

Some of the most remarkable conclusions in the study relate to the level of economic activity being generated by the two-way foreign investment relationship.

The extraordinary growth in Australian foreign direct investment in the EU since the mid-1980s - from around $A3 billion in mid-1985 to over $A23 billion in mid-1995 - has added an important new dimension to the Australia-EU relationship.

That growth compares favourably with the growth of our investment relationship with Asia. It also reflects the strong internationalisation of the Australian economy over the last decade. Investment has become a significant factor in the Australian economy, and Australia's stock of direct foreign investment in the EU is about one and a half times the global assets of our major company, BHP.

It is particularly instructive to look at the activities of the Australian companies involved in these overseas investments - the banks, insurance companies, media, transport and distribution and so on. As the Towards 2000 study concludes, international investment has often been the only way these companies can outgrow the limits of the Australian market and become global players.

The study estimates that the value of the sales being generated by Australian companies investing in the EU is significantly greater than the value of Australia's exports to the EU, or indeed of Australia's exports to South and South East Asia.

Similarly, the sales generated by EU direct investment in Australia substantially exceed annual EU exports of goods and services to Australia.

On the trade side, the study reports a mixed story. Good growth - and many success stories - are to be found in the areas of manufactures and services, and especially in Austrade-targetted sectors such as information technology, fast ferries and the automotive sector. The EU is also an important source of capital equipment and technology for Australian industry.

But, overall, Australia's merchandise exports to the EU have not performed well. As I mentioned earlier, over the last five years, Australia's trade deficit with the EU has "blown out". The Towards 2000 report examines the reasons for this and concludes that both sides need to take action to ensure that two-way trade growth continues to be sustainable.

The main reason for Australia's poor export performance has been slow economic growth in Europe over the first few years of this decade and the European recession of 1992/93. Growth prospects did pick up in 1994 and 1995. But more recently they have flattened out again - especially in Germany and France - and are not looking promising in the short term.

This cyclical situation is exacerbated by structural problems in Europe, particularly in industries that import Australia's raw materials. It is therefore difficult to see any substantial demand-led growth in our major exports to Europe over the next year or so, unless European growth rates pick up again.

By comparison, Asia's relatively strong economic growth, together with the more favourable transport situation for our trade with Asia, mean that we are likely to see continued strong growth in Australia's exports there.

Nevertheless, Europe is a massive market and one which Australian exporters should not neglect. Prospects for our manufactured exports and services continue to be good and warrant continuing support by Austrade, Chambers of Commerce and groups like ABIE.

One of the challenges identified in the Towards 2000 study is for the Australian Government to ensure continued improvement in the international competitiveness of the Australian business environment. This challenge has become increasingly significant given the recent strengthening of the Australian dollar which, of course, works against Australia's export competitiveness.

I was pleased to be in a position to advise Sir Leon, during his visit, of the Coalition Government's commitment to re-invigorating microeconomic reform in Australia, particularly on the waterfront, in the labour market and in key sectors like telecommunications.

This commitment, together with the improving access to the Australian market being enjoyed by EU exporters as a result of Australia's unilateral tariff cuts since 1988, gives legitimacy to the challenges issued in the Towards 2000 study to the European Union. That is, that the European Union should work to match the APEC developed countries' commitment to establish free trade by the year 2010 and, in the meantime, provide fairer access to Australia's exports of agricultural products and coal to the EU.

These were points that I raised with Sir Leon.

And while I got no real sense of optimism that the EU would give Australia more favourable access outside the next round of multilateral negotiations, we will continue to work on these issues.

I was, however, very pleased with Sir Leon's response to my interventions on two matters.

First, I was very pleased to hear Sir Leon reiterate his commitment to an ambitious, balanced and comprehensive new round of multilateral trade negotiations by 1999, and his expressed hope that December's WTO Ministerial Meeting in Singapore would launch the preparatory work for the new round.

Secondly, I was encouraged by Sir Leon' response to the APEC trade liberalisation challenge, when he acknowledged the need for the EU to give "serious and sympathetic consideration" to matching the commitment to trade liberalisation given by APEC's developed countries. If APEC can show the way forward and table genuine and ambitious Individual Action Plans later this year, Sir Leon and the EU will feel the pressure to come up with a "balanced and comparable response".

Of course, it is unlikely that Sir Leon carries the whole of the European Union with him on these points. But it is heartening that he - and indeed other leaders in Europe - are taking such positions.

I very much welcome Europe's strong leadership on these issues and would like to acknowledge that on many multilateral trade issues we are working constructively with our European friends.

Overall, I think the Towards 2000 study makes a very positive contribution to understanding the complexities of the Australia-EU relationship.

It highlights the importance of the EU market for Australian exporters. And it promotes the attractions of Australia as a commercial partner in the Asia Pacific region and as a destination for investment.

The study also underlines the importance of the Australia-EU Trade and Cooperation Agreement and Joint Political Declaration as vehicles for further development of the broad relationship.

It poses challenges for business and for business organisations in Australia and in Europe. On at least one of those challenges, Australian Business in Europe can play a significant role. That is, in developing better networks between Australian/European business organisations and the Australian Government.

Such networks - and particularly the ABIE network - can play an important role in the development of our trade and investment relations with the EU. The Towards 2000 study, for example, identifies the fact that some Australian exporters and investors find the changing regulatory environment in the EU more complex and difficult than that of the business environment in Asia. Business-Government networks, such as those generated by the ABIE, can be especially helpful on issues like this.

Conclusion

As momentum for a new multilateral round builds and as the preparatory work begins, it will be important that the EU, the Australian Government and industry leaders work constructively on the full range of issues I have discussed today.

We must be active on trade, investment and, of course, agricultural issues.

Both the Trade and Investment Study and the Agriculture policy paper are intended as constructive contributions to that dialogue.

Our diplomatic missions in Europe have been tasked to promote the messages in these studies with government and business leaders, and I would welcome any initiatives ABIE can take to promote these messages in Europe.

I hope we can work together in addressing challenges and generating opportunities for Australian business in Europe.