Address by The Hon Tim Fischer MP, Deputy Prime Minister, Leader of the National Party, Minister for Trade, to the Committee for the Economic Development of Australia, Sydney, 16 May 1997

Introduction

I am delighted to be here today to launch this important study on the future of Australia's trade and investment relations with South America.

I particularly welcome Alister Maitland from ANZ, Leigh Hall from AMP and Bruce Vaughan from MIM. These three companies, which have sponsored this study, have been in the vanguard of our growing commercial links with South America. I welcome their excellent work which also paves the way for other Australian companies.

This is the first comprehensive review by any Australian Government of the trends and emerging prospects in two way trade and investment between Australia and this important region. It is a good example of what this Government's trade policy is all about.

Our trade policy is hard-headed, pragmatic and above all flexible, looking at opportunities wherever they may arise and using all the levers at our disposal to advance our trading interests.

While the Asia Pacific region continues to be our main focus, we are still looking energetically to extend our involvement in key markets outside the region.

We are committed to developing our relationship with South American countries primarily because of the potential for vastly increased trade and investment, but also because of our current and prospective political cooperation across a range of issues.

Of great importance has been the strong working relationship between Australia and South America in the Cairns Group, which has been instrumental in bringing about reform of world agricultural trade. And it is not only the Cairns Group -- in a number of other areas Australia and South America are cooperating to achieve our shared goals on the global stage.

My successful visit to the region last June and my planned visit to Brazil next month indicate my strong personal commitment - and that of the Government - to strengthening our links with South America.

South America: An Exciting Prospect

Let me now show you how this study, which highlights South America's exciting prospects, will improve our understanding, first, of the dramatic developments that have transformed the region in recent years and, second, of South America's potential as a commercial partner.

South America's economic scale can be put in perspective with a few numbers:

• Brazil's economy is about 80 per cent the size of China's, with about 15 per cent of the population, 40 per cent larger than Korea's and more than twice the size of Taiwan's;
• Argentina's economy is 50 per cent larger than Thailand's, 25 per cent larger than Indonesia's and nearly as large as Taiwan's;
• MERCOSUR - the trade arrangement comprising Brazil, Argentina, Uruguay and Paraguay - has more than 200 million consumers and a combined GDP of around $900 billion.

You'll agree that these figures are impressive. But they don't mean much without access to the market.

High trade barriers and inward-looking economic policies were a feature of the South American region in the 1960s and 70s, making it difficult for our economic relationship to reach its full potential.

But that is no longer the case. The political and economic landscape has been changing rapidly in South America over the past decade.

Only 20 years ago just four countries in South America had democratically-elected civilian governments and an almost equally small number had free market economic programs. Today, virtually every country in the region has both.

These markets are now among the fastest growing in the world. By 2010 the United States is expected to export more to Latin America and the Caribbean than to the European Union and Japan combined.

Also, South America is expected to emerge as a major trading partner for East Asia, one which could compete with us in that region, and in others.

A significant reduction in trade barriers has been one of the key factors underpinning South America's growth performance.

Tariffs have fallen from their previous high levels, the range and number of non-tariff barriers have been reduced and there are now more open and accessible regimes for foreign investors and trading companies.

In short, South America has embraced globalisation and is now a full and active participant in the international trading system.

That is not to say that South America is free of difficulties. The economic reform process has begun but it is not yet complete. In many cases, South American countries face tough hurdles if they are to continue down the path of building robust economies. I am pleased to say, though, that the policy direction is right.

Australia and South America

So, where is Australia amid all this action?

Well, the study indicates that the answer is something of a mixed bag.

Over the past five years, Australia's exports to South America have been growing at twice the rate of our total exports with a particularly good performance in high value-added manufactures and services.

At nearly the $1 billion mark, our exports to South America are in the same ballpark as our exports to other emerging markets like India and South Africa.

As with these other markets, although they each account for only 1% of our exports, the potential for growth is enormous. The challenge for Australian business is to tap into that potential.

A leg-in for exporters is the substantial and rapidly-growing direct investment in South America by Australian companies, largely in the mining sector. Australian direct investment in the region now exceeds $2 billion bringing with it the prospect of expanded trade flows.

It is the young sapling from which I hope a strong tree will grow.

Clearly, then, there is scope for Australia to expand its connections with South America. The study makes clear that there is potential for small and larger firms alike.

A survey of businesses currently active in the market - via exports or investment - revealed a highly positive response. Most were satisfied with their success to date and had done better in the market than they had expected at the outset.

And, importantly, much of the serious growth in South America is taking place in those sectors where Australia has real expertise, such as agribusiness, infrastructure construction, mining exploration equipment and services as well as telecommunications.

In each of these sectors the developments are substantial. And in each Australia has a genuine comparative advantage. Let's take a quick look at infrastructure.

It's been estimated that the region currently needs something like $1 billion a week to maintain and expand its electricity, water and sewerage systems, telephones, ports, airports, railways and roads.

Privatisation has been radical in some countries, such as Chile, Peru and Argentina, and is an expanding trend throughout the region. Moreover, most South American governments are also showing a commitment to creating stable regulatory environments, aimed at attracting private capital for the long haul.

For Australia, that opens up major opportunities.

Areas of interest to Australian firms include highways and bridges in Chile and Argentina, railway privatisations and upgrades in Chile, Peru, Argentina and Brazil, airport privatisations and upgrades in Chile and Colombia, ports in Chile and Brazil, and gas pipelines in Chile, Argentina, Bolivia and Brazil.

We have the talent, the products and the services to turn these opportunities into a reality. And Austrade has put in place region-wide teams to help Australian companies win business.

And it is a similar story in the other sectors. It is worth noting too that we have great potential in niche sectors such as financial services.

Regional Trade Policy Developments

I mentioned earlier that South America's historically high trade barriers and protective investment policies have come down, creating opportunities for imports, intra-regional exports and investment.

These reforms have been accompanied by efforts in South America to build trading arrangements to consolidate this trend.

MERCOSUR, the largest regional trade arrangement, became official on 1 January 1995 and the Andean Pact set a common external tariff that year as well.

And in December 1994 at the Summit of the Americas in Miami, the Leaders of the Americas committed themselves to negotiate a Free Trade Area of the Americas, or FTAA - stretching from Alaska to Tierra del Fuego - by 2005. The second Summit in Santiago in March next year is expected to agree on the way forward to the FTAA.

These developments toward regional economic integration have the great advantage of locking in trade and investment liberalising policies and practices. That guards against any major reversals in policy directions.

But these developments also involve some risks for Australia and others outside the region.

The study shows that all of these arrangements are preferential - their benefits are limited to member countries. There is the potential for non-member trade and investment to be diverted.

Although there is no evidence yet of major trade diversion to Australia's disadvantage, we obviously need to be aware of the risks and work together - business and government - to address the issue as creatively as we can. But these developments again point to the value of moving quickly to establish a foothold in the region.

How Government and Business can work together

This brings me to the study's challenges to policy-makers on how business and government can work together to improve Australia's performance in the region. I would like to highlight some of the more important of these.

First, we should continue to address impediments to bilateral trade and investment, such as high tariffs or non-tariff barriers. Business input will be important in identifying problem areas and bringing them to the attention of my Department which is able in a number of ways to address these issues with South American governments.

And, of course, you will all agree with me that aviation links have to be improved. The recent aviation agreements with Chile and Argentina are a start, but we are still hopeful that carriers will put in place expanded - and more direct - services between Australia and South America.

After all, it is a fact that now 40 per cent of world trade, by value, travels by air. And 40 per cent of people crossing national borders do so by air. So it is clear that improved air links can play a strong role in facilitating growth in trade.

Second, Austrade should continue to promote the capabilities of Australian businesses in South America and provide support to individual businesses, particularly to small and medium -sized exporters who most need tailored information and advice.

Third, the study also recommends increased attention be given to the opportunities in the Brazilian market.

In this context, Austrade will shortly be moving its South American sub-regional headquarters to Sao Paulo, Brazil. This is a further demonstration of the Government's determination to focus our efforts where we can show leadership and add most value.

This brings me to an important point and a challenge I would like to issue to you all and to the Australian exporting sector.

By the year 2005 -- that's eight years away -- we should strive for exports of $2.5 billion to South America. That would involve more than doubling our current exports by increasing our market share. While this might seem ambitious, I believe it is an achievable goal.

A concerted effort on all fronts by government and business will be needed to progress the commercial relationship to this level.

Another key challenge for the government is to maintain its efforts to put in place the right architecture for enhanced trade and investment, for example in areas such as investment and taxation regulations.

The dialogue between Australia's and New Zealand's CER trading arrangement and MERCOSUR is a key element in this overall strategy of building institutions which will contribute to opening trade and investment channels. The CER/MERCOSUR dialogue is still in its infancy, but it has good potential.

Early next month, when in Rio de Janeiro, I will attend the first ministerial-level meeting of the CER/MERCOSUR dialogue.

I expect that meeting to do two things:

• it will continue the established work program in areas such as customs cooperation, educational and professional qualifications;
• it will also set longer term directions in the dialogue.

I am hopeful the meeting can agree to work towards the further development of a CER/MERCOSUR dialogue, to cement existing ties and put in place a solid core for future commercial and trade policy cooperation in key areas such as investment.

Finally, the study also highlights the value of further deepening our relationship with Chile, already a major partner in the region. I am delighted to accept this recommendation and with my colleague, the Minister for Foreign Affairs, I will examine options over the next few months to decide how it might be implemented.

Conclusion

To conclude, I think it is now very clear why I regard South America as a very exciting prospect for Australian business.

I commend the study to you all. It is a detailed and thorough document which contains valuable information on South America, including how to get into the market and the challenges ahead.

Barriers to trade have been falling rapidly in the South American region. This Government and Australian business have been keen to seize the opportunities presented by the more liberal trading environment.

I can assure you that this Government will continue to work closely with you to maximise our opportunities in this increasingly important part of the world.