Joint Standing Committee on Foreign Affairs, Defence and Trade

Australia's Trade and Investment Relationship with South America

Issues paper

Issues raised by the inquiry into Australia's trade and investment relationship with South America

Background

South America is emerging as a region of considerable economic significance. Virtually all South American countries have introduced market-oriented reforms and reduced tariff levels. If this reform process continues, it will lead to sustainable levels of economic growth in the years ahead.

These developments mean that there is great scope for Australia and South America to expand their trade and investment partnership. The Government is committed to working with business to best position Australia to take full advantage of these opportunities.1

In May 1997, the Department of Foreign Affairs and Trade, in conjunction with Austrade, launched a report on The Future of Australia's Trade and Investment Relations with South America, as part of its efforts to create greater awareness among Australian business of opportunities in South America. Workshops in Sydney, Melbourne and Brisbane attracted almost 400 companies. Austrade followed up to convert this interest into business, focusing on infrastructure, mining and telecommunications.2

In the first Trade Outcomes and Objectives Statement, tabled in 1997 (TOOS 97), Chile and the Mercosur3 countries were identified as important emerging markets for Australia. This importance continues today despite the difficult world economic conditions. Over the last two years Australia has made significant progress towards expanding its trade and investment relationship with the countries of South America and in particular Chile and the Mercosur countries.

Australian exports to Mercosur grew from a small base at a trend rate of 4.9 percent between 1992-93 and 1997-98. Between 1996-97 and 1997-98, exports rose by 13.9 percent to $522.9 million, with notable increases in exports of coal, food and live animals, chemicals, leather, manufactures of base metals and computer parts.4 Between 1993 and 1997 Mercosur experienced average annual growth in real GDP of 3.7 percent. Basic services, such as utilities, transport and communications, have been the fastest growing sector in all Mercosur economies. Good prospects have been identified in the medium term in these sectors where substantial investment is already underway. Further prospects for investment in telecommunications, power generation and distribution, and transport infrastructure have been identified.5

The priority objectives for Mercosur, outlined in TOOS 97,6 included achieving substantial progress on measures to facilitate trade and investment between Australia and Mercosur and to assist Australian exporters in the Mercosur market with a focus on the infrastructure, mining, agribusiness, information technology and telecommunications (IT&T) and marine sectors. Some of the outcomes that have been achieved have been the first CER7-Mercosur Ministerial-level meeting held in June 1997 and agreement to three new areas of cooperation – investment, business involvement and tourism. The CER-Mercosur dialogue is the central mechanism for progressing Australia's trade and economic relationship with Mercosur. An ad referendum agreement on a CER-Mercosur Declaration on Investment Principles was reached at a Senior Officials' meeting in November 1998. In assisting Australian exporters, on the infrastructure side for example, Austrade has presented more than 200 Australian companies with opportunities with particular emphasis on water, power and aviation projects.8

Growth in Mercosur countries is expected to slow over the next year or so as a result of the Asian and Russian economic crises of 1997-98. The Inquiry will examine the impact of financial instability, particularly in Brazil. Brazil's economic performance is of considerable significance because of its size and the importance of its economy to regional economic growth. In response to significant capital outflows, the Brazilian Government floated the Real on 15 January 1999 with the result that the Real depreciated by over 30 percent against the US dollar compared to the level at the beginning of January. The forecast is that Brazil is expected to enter recession in 1999.9

A constraint on trade between Australia and Mercosur has been the high cost of liner shipping and the lack of direct air links. The commencement of a regular Qantas service to Buenos Aires on 20 November 1998 – the first direct Qantas service to any South American country – and various bilateral air services agreements are expected to help improve the regularity and diffusion of air links with South America.10

Mercosur is developing closer ties with the European Union (EU), the USA and other South American countries and is placing a high priority on the further development of Mercosur itself. According to TOOS 99, the key mechanisms involved are Mercosur's association agreement with Chile, its preferential agreement with Bolivia, negotiations with other Andean Community members and Mexico, the Free Trade Area of the Americas (FTAA) process and the framework agreement with the EU. Until the 1997 Asian economic downturn the Mercosur countries were seeking to increase their engagement with Asia.11

Key export and investment opportunities in the Mercosur countries have been identified in infrastructure, agricultural technology, resources and mining and IT&T.

Chile's principal importance to Australia derives from significant investment links particularly in the mining sector.12 Chile, ranked 43rd among Australia's export markets in 1997-98, is a growing destination for Australian exports. Australian exports have averaged 16 percent growth over the past five years, but the level of growth slowed to 2 percent in 1997-98 as a result of the impact of the Asian economic crisis on Chile's growth rate. Trade between Australia and Chile was valued at $260 million in 1997-98, with Australian exports accounting for $178 million.13

The priority objectives for Chile, outlined in TOOS 97, included the protection and promotion of Australian export and investment interests in the light of Chile's free-trade agreements and its expected accession to NAFTA14 and bringing specific opportunities to the attention of Australian suppliers to the mining sector in Chile. An outcome of these objectives has been the signing in May 1998 of a bilateral trade and investment agreement and the first meeting of the Bilateral Trade and Investment Commission (BTIC) in November 1998. Furthermore in August 1998 there was agreement to increase significantly the capacity and provide greater flexibility for Australian airlines on routes between Australia and Chile and beyond, including unlimited cargo flights on specified routes. Other outcomes were the signing of a MOU on Beef Grading and Certification allowing exports of Australian beef to Chile and the establishment of a technical dialogue between the Australian Quarantine and Inspection Service (AQIS) and SAG (Chilean quarantine agency) to facilitate cooperation on quarantine matters. On the provision of assistance to Australian suppliers to the mining sector in Chile, in May 1998 Austrade organised a National Pavilion at Expomin '98 which featured 64 Australian exporters of mining supplies and services with half being new to the market.

Chile is a member economy of APEC (Asia Pacific Economic Cooperation), a forum which remains central to Australia's regional trade policy. As part of its commitment under APEC to trade liberalisation, Chile will reduce its general applied tariff rates from 11 percent to 6 percent by 2003.

The Chilean market offers considerable potential for increased export flows although Chile's increasing interest in regional preferential trade arrangements is putting Australia's export trade under pressure. The Mercosur association agreement and the Canada-Chile Free Trade Agreement have the potential to impact negatively on Australia's elaborately transformed manufactures (ETM) exports to Chile which is the export that is exhibiting the strongest growth.15

Key export and investment opportunities in Chile have been identified in mining including equipment, services and technology, telecommunications equipment, infrastructure, wine and beef.

Australia, as a medium-sized trading nation, depends heavily on the multilateral framework of trading rules provided under the WTO (World Trade Organisation) system. Under the last multilateral round of trade negotiations, the Uruguay Round, which concluded in 1994, agriculture was brought under the WTO system and border protection levels were converted to tariffs. As part of the Uruguay Round agreements negotiations on agriculture are mandated to commence by the end of 1999. The WTO Ministerial Meeting will be held in Seattle at the end of November. These negotiations will provide a major focus for pursuing the cause of world agricultural trade liberalisation. Such reform would be worth around $10 billion annually to Australia.16 The Cairns Group of Agricultural Fair Traders, chaired by Australia, of which the South American countries of Argentina, Brazil, Chile, Colombia and Uruguay are members, will play a pivotal role in the push for reform in a climate of powerful vested interests that are resisting reform of agricultural trade.

The Trade Sub-Committee is looking for input to the Inquiry that will assist in identifying the opportunities, including services, for expanding Australia's trade and investment relationship with the economies of South America and the impediments to such expansion.

The Inquiry will not be confined to the key emerging markets of Chile and Mercosur but will examine the other economies of South America for future business opportunities. Furthermore the impact of regional trading arrangements on expanding Australia's trade and investment relationship will considered.

1. Foreword by the Hon Tim Fischer MP, Deputy Prime Minister and Minister for Trade, in The Future of Australia's Trade & Investment Relations with South America, Department of Foreign Affairs and Trade – Austrade, Commonwealth of Australia, May 1997.

2. Trade Outcomes and Objectives Statement 1998 (TOOS 98), Commonwealth of Australia, March 1998, p. 12.

3. Common Market of the Southern Cone – involving Argentina, Brazil, Paraguay, Uruguay (Bolivia and Chile are associate members).

4. TOOS 99, p. 191.

5. ibid. p. 187.

6. See TOOS 97, p. 154.

7. Australia-New Zealand Closer Economic Relations Trade Agreement.

8. See TOOS 99, p. 190.

9. ibid. p. 187.

10. ibid. p. 191.

11. ibid. p. 192.

12. ibid. p. 181.

13. ibid. p. 183.

14. North American Free Trade Agreement.

15. TOOS 99, pp. 184-185.

16. Rural Industries Research & Development Corporation (RIRDC), World Agricultural Products Trade, Towards a Strategy for Australia, by Andrew Stoeckel, Centre for International Economics, RIRDC Publication No. 98/127, p.vii.