Speech

17 July 2003

Trade Negotiations and the Auto Sector

to the Federation of Automotive Products Manufacturers

Introduction

Thank you, Barry (Barry Comben, FAPM President), ladies and gentlemen.

It is a pleasure for me to address this 45th Annual Convention of the Federation of Automotive Products Manufacturers.

The Automotive industry is vitally important to our nation and the Government is committed to supporting a vibrant and dynamic Australian automotive industry that competes with the world's best.

I will concentrate today on how trade and trade policies are contributing to that goal.

But first - a few words about other policy settings.

Getting the domestic settings right

A sound economy is vital to the automotive sector. Not only because it helps keep up domestic sales in the automotive sector, but also because it helps convince global vehicle makers that Australia is an attractive place to invest.

As a result of our reform agenda, the Australian economy is one of the most competitive economies in the world.

We've completely revamped an outdated and plainly unfair tax system. The new tax system removes annually a $3.5 billion burden off the back of exporting businesses.

Allowing business purchasers of vehicles to claim full input tax credits has also provided a valuable impetus to the industry.

We've reformed the labour market and industrial relations. We have taken a hide-bound waterfront and through a determined reform process lifted productivity to international standards.

We've restrained government spending and retired public sector debt. In fact we've paid off almost $60 billion of debt - which sees us with one of the lowest debt to GDP ratios in the OECD.

Our record is clear: lower interest rates, lower inflation, lower unemployment and through debt reduction, $4b in savings annually.

We have introduced specific policies for the automotive sector, aimed at promoting competitiveness.

After a long period of steady reductions, tariffs are now at 15 per cent. As you all know, they will fall to 10% in 2005, and then to 5% in 2010.

We have provided the automotive industry with a decade of certainty through our decisions on post 2005 assistance arrangements.

The Automotive Competitiveness and Investment Scheme (ACIS) will be extended for ten years to 2015, providing an additional $4.2 billion in assistance, to help the industry adjust to the lower tariff regime.

The importance of the trade agenda to the automotive sector

The industry has achieved very impressive export growth with exports of automotive products now worth almost $5 billion annually.

One third of the vehicles produced in Australia - some 112,000 units last year - are now exported, helping the industry achieve economies of scale that would not be possible if it were to rely only on the domestic market.

Automotive exports are now the biggest category of elaborately transformed manufactured exports. They rank ahead of traditional commodity exports such as beef, wheat and wool and just behind gold and iron ore.

The "take-off" in exports of vehicles can be traced back to the mid 1990's when sales started in earnest to the Middle East, a market that now accounts for 60% of our vehicle exports.

Growth in sales to the United States - our second biggest market - has also been impressive, with exports regularly topping $1 billion, almost half of which is accounted for by the components industry.

Indeed your industry is a major success story with almost $1.7 billion in component exports last year - an increase of one third since 1998.

I am pleased to note the major export business undertaken by FAPM members, including

• the export of braking systems by PBR International to General Motors
• mirrors by Schefenacker to Ford and Mazda
• and propeller shafts (more commonly known as drive shafts) by Unidrive to the USA.

Looking ahead, it will be important for the industry to create additional high-volume export markets for vehicles and components - and thereby reduce dependence on exports to existing markets.

And with tariffs coming down, it will be important for the automotive companies that are focused on the domestic market to compete with foreign companies on their own turf.

As you know the Government is working hard to prise open markets for Australia's exports.

We have adopted a strategy of competitive liberalisation - a strategy that sees multilateral, regional and bilateral trade policy approaches as complementary and mutually reinforcing.

It is a strategy to maximise our trading opportunities with individual countries, to ensure that our exporters achieve greater access to overseas markets as quickly, as broadly and as deeply as possible.

Free Trade Agreements

Our efforts to reach free trade agreements with some of our major trading partners is a good example of this pragmatic approach.

We are open to such deals if we consider they will deliver high quality trade-liberalising results and will do so more quickly than is possible in the WTO system.

From Australia's perspective, there are four key criteria that such free trade agreements need to meet if they are to contribute positively to the global trade reform effort.

First, they must free virtually all two-way trade in goods as soon as possible.

Second, they must eliminate to the maximum extent feasible barriers to expansion of trade in services.

Third, they must establish a transparent and predictable environment for investment.

And fourth, they must establish a legally-binding framework for resolving differences and allowing the overall trade and economic relationship to develop into new areas.

AUSFTA

As you know, we see strong returns in negotiating a Free Trade Agreement with the United States.

The negotiations with the US are the most significant bilateral negotiations in Australia's history. They represent a unique opportunity to integrate Australia more closely with the world's biggest and most innovative economy.

The Federal Government strongly rejects repeated scaremongering by trade unions and the Labor Party that a Free Trade Agreement with the United States would threaten the Australian auto industry and the jobs of workers in that industry.

The ALP's claim that the entire Australian auto industry was under threat is a further demonstration of its lack of credibility within Australian manufacturing.

The Government has held intensive consultations with the automotive sector as part of its continuing dialogue with Australian industry over the US FTA.

I recognise that there are different views in the industry about the FTA with the US.

Some can see clear advantages in terms of export and import opportunities if we have zero tariffs on autos. Others are more worried about the increased import competition from US industry.

But I do believe the industry overall will benefit from a deeper economic relationship with Australia's biggest export market for automotive parts and second biggest market for vehicles.

In particular, Australian car and component makers would benefit greatly from the removal of the 25 per cent tariff that restricts Australia's potential exports of utility vehicles to the US - particularly at a time when Australian industry is developing a new range of commercial vehicles including four wheel drives.

I noted that, in its Submission to my department, FAPM made a "best- guest estimate" that an FTA with the US would increase the value of Australian production of automotive components by around 2% .

FAPM has also said that it does not expect a surge in imports of vehicles or components from the United States under an FTA.

In addition, the Federal Chamber of Automotive Industries (FCAI) believes that - and I quote - "the prospect of an FTA between Australia and the US may offer worthwhile net gains to both countries."

However, the FCAI notes that the implications of sensitive issues "will need to be carefully examined and resolved".

We recognise that some automotive companies are concerned about the potential for increased import competition under a free trade agreement.

The Government will work closely with the automotive industry over the coming months to ensure that the outcome from the free trade agreement with the US is in the best interests of the industry and the Australian economy as a whole.

Going into these negotiations, the Government made it clear that it would pursue a wide-ranging and comprehensive Agreement with the US. This includes seeking to eliminate tariffs on the broadest possible basis from day one of the Agreement.

Our aim is to build a big package that will make the agreement truly worthwhile. When our negotiators sit down with their US counterparts next week, our initial tariff offer will be ambitious and we will be looking to the US to match this level of ambition.

By October we shall have a much clearer idea of whether the two sides can meet the objective we share with President Bush of completing the agreement by the end of the year.

I am both optimistic and realistic about the negotiations. They will be tough, but both sides are committed to a high quality result.

Thai FTA negotiations

As you know, we are also negotiating an FTA with Thailand. Good progress has been made, and I would like to see an agreement in time for the APEC Leaders' meeting in October.

But the key for Australia is a strong agreement and we are prepared to take the time to achieve that outcome.

Current Thai import tariffs on vehicles and parts are very high: 80% on passenger cars and up to 42% for parts.

We have proposed a sectoral zero-for-zero tariff package in this area, meaning that we would preferentially eliminate our automotive tariffs for products of Thai origin, on the condition that Thailand reciprocates by eliminating all of its tariffs in the sector for Australian products.

Thailand's initial response has been to offer to cut its 80% car tariff to 20% at the outset of an FTA, and then eliminate this tariff through phased reductions until 2010.

Thailand would also immediately eliminate its tariffs on commercial vehicles and most specialised vehicles, as well as on some automotive parts, and phase out all remaining tariffs in this sector by 2010.

This initial offer by Thailand - while a step in the right direction - does not match the ambition of our zero-for-zero proposal, and we will be strongly pressing for improvements in the Thai offer.

Our focus for the remainder of these negotiations will be on maximising the immediate commercial benefits for Australian industry of the tariff elimination package.

Australian vehicle manufacturers have been strong supporters of these FTA negotiations due to the complementary nature of the respective vehicle manufacturing industries of Australia and Thailand. Australia produces medium-to-large passenger cars and the Thai industry is mainly based on small passenger cars, pickups and commercial vehicles.

Free trade in vehicles and parts between the two countries would thus further consolidate the position of Australian carmakers in the international market and in the strategies of their parent companies.

What is good for Australian carmakers is good for their suppliers. So the FTA will also be of general benefit to Australia's automotive products manufacturers.

I understand that direct opportunities in that market for Australian automotive products suppliers have been limited until now, given the high tariff walls and the complex web of incentive schemes and intra-company relationships common in the Thai industry.

But as Thai tariffs fall to zero over the first few years of an FTA, there will be greater opportunities for Australia parts makers to break directly into what is the region's most dynamic car industry.

We will look to dynamic and outward-looking Australian companies such as yourselves to exploit these opportunities.

The rest of the Asian market: tackling high tariffs

This brings me to the rest of the Asian market.

Other Asian countries are an obvious target for increased exports of auto products, but tariff and non-tariff barriers are keeping our vehicles and components out of these markets, particularly in South East Asia -

This is despite the fact that the most advanced industry in South East Asia, Thailand, has been very successful in the Australian market for light commercial vehicles.

We have used the APEC Auto Dialogue to promote the benefits of trade liberalization with our Asian trading partners.

A constant refrain from the South East Asian countries is that they need more time to adjust because of the developing status of their industries.

But they are slowly coming to realize that high tariffs are obstacles to integrating their industries to the global automotive markets, and that industries based on small national markets are at risk of being left behind.

A major factor is competition from China - especially now that China has joined the WTO. The competitive landscape in the Asian automotive market is being transformed.

Realistically, however, this process of change, will only be achieved gradually.

But the message is clear - liberalise or be left behind.

The Doha WTO Round

Of course, our activity on bilateral agreements and in APEC does not detract from the main game - global trade negotiations in the WTO.

There is considerable unfinished business in autos left over from the last round of trade negotiations - the Uruguay Round.

Whether our trading partners will be prepared to negotiate on their high auto barriers remains to be seen.

But a multilateral round does have the advantage of allowing trade-offs between sectors - thereby opening up greater possibilities for trade liberalisation.

Now that the new Round is underway, we are developing our negotiating positions on tariffs and non-tariff measures.

Our primary focus is to agree on how we can reduce tariffs and deal with non-tariff barriers that will provide real export opportunities for Australian industry.

The approach of using a formula to reduce all tariffs seems to be finding the most favour with WTO members. This approach could also be supplemented by harmonising or eliminating tariffs in particular sectors.

We are consulting closely with Australian industry, including FAPM, and we will maintain this productive working relationship as the negotiations progress.

Conclusion

The automotive story in Australia is one of adjustment into the intensely competitive world market.

Success in export markets represents a very strong vote of confidence in Australian automotive products and demonstrates that the relatively small size of the Australian market need not be a barrier to international competitiveness.

The Government will continue to back the Australian industry in its quest for closer integration into the global automotive market.

Australia is very much on the front foot in gaining better market access for industries such as yours, bilaterally, regionally and globally.

I salute the contribution that the automotive components industry makes to our export performance, as well as to the Australian economy as a whole.

You face many challenges, and I know that you will be discussing a number of them at this Convention. But the fact that you have already engaged in competition globally and proven that you can succeed positions you well for the future.

I am sure that if we are successful in achieving further trade liberalisation, you will be able to build on this success and meet the target that you have set yourselves of exceeding $10 billion worth of exports by the year 2010.