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Research Note no. 30 2002-03
Conflict in Iraq and Australian Trade
Jeffrey Robertson
Foreign Affairs, Defence and Trade Group
26 March 2003
The effect of conflict in Iraq on Australian trade is dependent
upon many variables including, but not limited to, the duration and intensity
of conflict, international opinion on the humanitarian cost and the design
of any post-conflict administration.
The three arguments below explore a range of views on the
effect of limited conflict on trade, from an Australian perspective.
1. Conflict negatively affects trade
The argument that limited conflict negatively affects trade
is based upon tangible and intangible costs incurred as a result of disruption
to trade in the lead-up to, during and after conflict.
Tangible costs include the cancellation of contracts, the
inability to continue current trade due to wartime restrictions, and the
increased cost of shipping and insurance in regions affected by conflict.
To date there have been no reported cancellations of Australian contracts
as a result of the conflict in Iraq. A report by the Business Review Weekly
(BRW) in February, in which major Australian companies dealing with the
Middle East were contacted, found that there were no negative tangible
effects on Australian trade with the region.(1)
The conflict in Iraq has impeded the Australian Wheat Board's (AWB) delivery
of two shipments of wheat (approximately 100 000 tons) to Iraq under the
United Nations 'oil for food' program. On 17 March 2003 the UN Secretary-General,
Kofi Annan issued a statement on the withdrawal of all personnel from
Iraq effectively suspending the oil for food program. Since that statement
the Australian Government has announced its decision to purchase the wheat
as part of its contribution to the humanitarian effort in post-war Iraq.
Australia has been Iraq's major traditional supplier of wheat, with AWB
sales totalling approximately $840 million in 200102.
In post-war Iraq this dominance could be challenged, with
the US already announcing plans for the release of 600 000 tons of grain
from the government grain reserves. The US Department of Agriculture stated
that 200 000 tons would be released immediately. Critics see this move
as strategically placing US wheat exports into a prime position for post-war
Iraq. US farm lobby groups, such as the Washington Wheat Commission, have
already initiated campaigns to seek greater access to the Iraqi market
that has been inaccessible to them since the 1991 Gulf War.
Conflict can also increase costs, making exporting to the
region a less viable option. There has already been a significant increase
in shipping costs to the MiddleEast due to higher freight charges, risk
assurance premiums and security screening delays.
The intangible costs to Australian trade of conflict in
Iraq are potentially more harmful in the long term than the immediate
tangible costs, but remain near impossible to calculate. These costs could
include the negative impact on Australia's image in the Middle East and
the wider Islamic world or the loss of confidence and/or desire of Australian
business to engage in the Middle East market.
A survey carried out by the Holden company, referenced in the February
BRW report, found only negligible levels anti-American or anti-Australian
sentiment in the region. However, the global rise in anti-Americanism
may have a more deleterious effect in the long term. One of Australia's
fastest growing exports to the Middle East, passenger motor vehicles (PMV),
currently relies upon the appeal of American brands, such as the Holden
Monaro which on export is re-badged as the Chevrolet Lumina.
The Middle East is a promising market for Australian exports.
The region has shown a five year (199697 to 200001) trend growth rate
of 19.6 per cent, far exceeding more traditional markets. Given the maintenance
of stability, the region holds strong potential for Australia, including
opportunities in auto and agribusiness exports and education, tourism,
mining and health services.
One alarmingly negative consequence of conflict in the region
would be a loss of Australian business confidence in the region as a market
for exports. The Australian Trade Commission has already temporarily closed
offices in Amman, Riyadh and Tel Aviv. Travel advisory warnings currently
advise the immediate departure of Australians from Kuwait, Israel,
Jordan, Syria and Oman, and advise the deferment of non-essential travel
to Lebanon, Saudi Arabia, Yemen, Bahrain, Iran, Qatar and the United Arab
Emirates. While advisory warnings may be lifted at the end of conflict,
hesitancy on the part of Australian small to medium-size enterprise (SME)
exporters may remain much longer.
2. Conflict does not affect trade
This argument is based on the maxim 'companies trade, countries
do not'. Once the physical restraints on trade as a result of conflict
are over, the argument assumes normal trade will resume rapidly. It relies
on the fact that companies seek profit, irrespective of politics.
Australia maintained its dominant position as a supplier of wheat to
Iraq despite direct Australian involvement in the 1991 Gulf War and government
support for US and British strikes on Iraq throughout the 1990s (Table
3).
However the argument does not take into account the potential
expansion of trade that may have occurred in the absence of conflict,
nor the legitimacy of that war in which a number of key regional trading
partners participated.
3. Conflict positively affects trade
This argument focuses on the expectation that after conflict
the impediments to trade imposed under current circumstances will be removed,
thus positively affecting future trade.
In the context of Iraq this would include the lifting of
restrictions imposed under UN Security Council resolutions, and the cessation
of regime influence on trading relations, such as the recent politicisation
of Australian wheat purchases in the lead up to the current conflict.
Regime change in Iraq would allow an expansion of trade
with immediate reconstruction creating opportunities in infrastructure,
energy, education, agribusiness and mining. Estimates of the cost of reconstruction
range from US$25 billion to US$100 billion. However, Australian participation
in the reconstruction may prove to be limited, with the majority of contracts
to be awarded to US contractors for security reasons. This has already
caused international and non-governmental organisation (NGO) concern over
the handling of reconstruction contracts by the United States Agency for
International Development (USAID).(2)
Comment
The arguments presented do not take into consideration the
many unknowns that invariably occur as a result of conflict. The inability
of even modern commanders to see through what the 19th century soldier
and theorist, Carl Von Clausewitz called the 'fog of war', applies just
as strongly to the effect of conflict on trade.
A majority of commentators agree, however, that Australian
trade will be least affected if there is a rapid cessation of hostilities
and a favourable post-conflict environment. Also essential will be increased
overseas and domestic export promotion to alleviate any possible long
term effects.
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'On the eve of war: the trade implications', BRW, 6 February
2003.
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Paul Blustein, 'US set to award 7 contracts for rebuilding of Iraq',
Washington Post, 21 March 2003.
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