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The implications of closer European integration for Australia and New Zealand.

This article is a companion piece to The External Implications of Closer European Integration' on pages 73-85 of this Review. It takes the ideas set out there and applies them to the case of Australia and New Zealand. It begins by exploring the structure of the links between the EC and the two countries and then examines how the changes have an effect. It concludes that current moves do not include the aspect of EC policy which hits Australasia hardest, namely the Common Agricultural Policy, indeed that closer integration with Eastern Europe may make the impact even worse. Consequently, the impact in total is likely to be small but individual firms, particularly those investing in Europe may be able to reap substantial benefits. Australia and New Zealand and their links with the European Community

The European Community is an important trade partner for Australia and New Zealand taking 15 per cent of Australian exports and 18.5 per cent of New Zealand exports, while supplying 23.5 per cent and 18 per cent respectively of their imports. However, there has been a dramatic transformation during the 1950s, 60s and 70s away from the UK as the dominant partner (tables 1 and 2) especially in the case of New Zealand where the UK's share of exports went from 66 per cent in 1950 to 13 per cent in 1980.

Japan is now the most important trading partner in both cases and the US also has a substantial trade share. Trade between the two countries is also important for New Zealand forming a fifth of the total (but only 5 per cent for Australia, reflecting the disparity in size of the two countries (3) ). There is thus no dominant role for a single country in these trade flows although the rapid rise of Japan including associated direct investment does pose problems of absorption.

However, this trade pattern is not the result of the free-play of market forces. The EC would form a much larger share of exports (and probably imports) if major exports were not subject to quota and tariff restraints. A third of Australian exports are manufactured products (table 3) but two thirds are agricultural products or raw materials. Even within manufacturing most of the products are processed foods or fairly simple products of the raw material (figure 1). Only a little over 10 per cent are manufactured in the complex sense of the word. EC restrictions on agricultural products are even more important in the case of New Zealand.

The two countries are by no means the same in structure. Australia has the benefit of vast mineral wealth. New Zealand by contrast, although it has been extremely successful in diversifying its markets as shown in table 2,(4) has been far less successful in diversifying its product range (with the possible exception of forest products).

Thus we observe a highly specialised pattern of exports from Australia and New Zealand to the EC, largely based on the agricultural and raw material resources of the two countries and a series of niches which have been developed in particular areas of manufacturing.

Services trade is equally focused. Almost 80 per cent of Australia's exports of services are transport and travel related compared with 55 per cent for OECD countries as a whole. This reflects the geographical isolation requiring heavier shipping costs to reach markets and a greater need for self reliance on other services. It is important to recall the geographical structure of Australia itself; although 5-6 times the size of New Zealand in terms of GDP (194 US dollar billion compared with 45 US dollar billion in 1987) in many respects it is represented by the capital cities of the main states. In these terms New Zealand, with its concentration on Auckland is not so unbalanced a competitor and transport costs from New Zealand to many Australian locations are actually lower than transport costs within Australia (table 7). Hence, the basic market for which any Australasian firm produces is smaller in purchasing power than any of the member states except Luxembourg and yet the geographical area as a whole is larger than the whole of Europe including European Russia put together. There is no hope that Australasian firms could gain the benefits of economies of scale from local markets that applied anywhere in Europe even before the 1992 programme. However, for most products transport costs are a fairly small percentage of the total cost so the absence of other barriers to trade within Australia means that the degree of fragmentation is by no means complete.

Routes of impact for Australia and New Zealand in Mayes (1990) we noted that both governments and firms in third countries can play a role in the development of integration in the EC. However, for governments to have much say they need bargaining power and that is very limited for Australia and New Zealand, outside the UK. it is not surprising therefore that they have sought strength from combining with others, particularly through the Cairns Group in the Uruguay Round negotiations and also with discussions about wider arrangements round the Pacific Rim. They have of course steadily developed their own closer relations, having had a single labour market for a long time, developing a free trade area and moving onto Closer Economic Relations (CER) which are now in their second phase.(5)

Firms also attain bargaining power from size, either from world size or from being an important firm within the EC as a result of direct investment. Australia has several such players, particularly in brewing, with, for example, Elders, in banking with National Australia Bank having a significant retail presence in the UK following the purchase of the Yorkshire Bank and Clydesdale Bank. However, in general Australasian companies lack power in Europe. Thus, as a result of this lack of national and firm bargaining power their response must be largely reactive, taking the opportunities in Europe as they see them and anticipating any increased competitiveness of European firms in Australasian and third country markets. Of course, in third country markets Australasian companies have the opportunity to gain market share both by exporting and by direct investment.

There are clearly opportunities both for traders and investors but given the remarks about lack of bargaining strength it is no surprise that there have been some striking steps forward in investing in the European market by Australasian companies. Elders, AMP and National Australia Bank for example have proceeded by outright acquisition and Brierley Investments more by portfolio investment (although its holding in the Mount Charlotte Group has now reached overall control). However, such attempts to enter the market are subject to control by European competition authorities, in these cases those in the UK. Not all such attempts are successful, that by Goodman Fielder Wattie to take over Rank Hovis MacDougall failing when it was referred to the Monopolies and Mergers Commission. (6)

In Mayes (1990) the results quoted from Stoeckel et aL (1990) suggested that gains for Australia and New Zealand from trade (investment was not included) were likely to be small and that their sign was ambiguous, the ambiguity depending upon the extent to which European integration increased the size and growth of the EC market. The greater that increase then the greater the chance of a favourable outcome. Australia and New Zealand are still net importers of capital and want this pattern to continue, so in so far as this improvement for the EC results in greater direct investment overseas it would be viewed favourably. investments in Australia which bring new technologies with them are explicitly welcomed in Australian industry policy.

Given this structural pattern, it is not surprising to see the conclusion that even if Australia and the EC were to go far further than the 1992 programme and both actually abolish all remaining tariffs on manufactures the calculated gains for Australian manufacturers would, according to Higgs (1990), amount to only 35 million Australian dollars (0.01 per cent of GDP). (It would only amount to 1 00 million Australian dollars if Australia and the EC formed a free trade area and all other countries were excluded.)(7)

If Australia and New Zealand's major export categories are not included in any agreement then the 'benefits' from European integration largely pass them by. There may be some gain for the EC from substitution against other sources of manufactured imports in Australia and New Zealand. if agriculture is included in the tariff and quota removal Higgs' results change dramatically. The effect from increased Australian exports would be 2 billion Australian dollars (and between 4.5 billion Australian dollars and 18.5 billion Australian dollars in the implausible case of a free trade area) and a further 4 billion Australian dollars if coal 81 were also added. (More contr--or versially Higgs estimates a 2.5 billion Australian dollars gain to agriculture and resource exports from the unilateral removal of Australian tariffs and other protection on manufactures.)

Since none of the proposed steps in European integration include agriculture or coal(91 then the only vestige of hope for Australia and New Zealand lies in the increasing pressure on EC funds, which may emerge within the EC to offset the problems of convergence, forcing a relaxation of the CAP.

Mayes (1990) picked out the following measures in the 1992 programme which can have an impact on third countries.
Frontier restrictions:
 single country quotas
 voluntary restriction agreements
 removal of formalities
Technical barriers:
 common standards
 single certification and testing
Market entry:
 public procurement
 right of establishment
 takeover/merger
Freedom of movement of persons
Other market regulations
 e.g. transport, financial services
Fiscal (VA T, Corporation tax, etc)


Financial (state aids, capital markets, etc.)

On the whole these do not have a special impact for Australasian firms, although it was noted that the setting of health and phyto-sanitary standards could act as an effective means of protection where similar products were not grown or produced on a wide scale in Europe.

It is easy to consider these issues from only one direction. Once the concept of reciprocity' is raised then the bargaining position of Australia and New Zealand becomes more difficult because trade and other regulatory barriers have characterised their economies.

In particular openness of public procurement and indeed markets in general is a rather sensitive point for Australia and New Zealand. They have been among the most restrictive of all the OECD countries(10) (figure 2) but the trend has been steadily downwards during a period when the trend has been upwards elsewhere in the world (figure 3). Nevertheless, granting reciprocity would pose considerable problems for both countries. Public procurement restrictions run deep in Australia, particularly with the activities of the states. New Zealand has abandoned a wide range of these restrictions and not having a federal structure might find reciprocity easier to apply.

Reciprocity over competitive conditions within Australia and New Zealand is rather easier to offer as both countries have strong legislation (the New Zealand Commerce Act and the Australian Trade Practices Act) and a leaning towards the active promotion of competition associated with the US. Their companies are therefore open to foreign investment although the degree of involvement may be limited. Even in the case of the sale of New Zealand's state owned enterprises there have been substantial foreign involvements

The second area of possible benefit comes in the form of state aids, which are heavily restricted in the Single Market to ensure equal treatment of companies from all member states. No such restrictions apply to third countries except those which might be caught under anti-dumping rules of the GATT. Although such aids have been widespread in Australia and New Zealand they are being rapidly reduced. indeed, New Zealand is clearly the most rapidly 'deregulating' country in OECD and little now remains of the previous intervention. Thus, if anything its companies lose support relative to those in the EC rather than vice-versa as might be expected for third country companies. (Of course, the whole point of deregulation is to increase economic efficiency and if successful this will be of far greater benefit to New Zealand exporters. This gain is qualified because it is not yet clear what non-traditional activities which do not benefit from a degree of natural monopoly can be undertaken efficiently within New Zealand because of its small size. There have been notable success stories in specific areas, such as vegetable peelers and scissors but the productive economy is yet to pick up from the recession of the second half of the 1980s and the landslide defeat of the government in the October election indicates the popular worries about economic policy.)

Adding these various factors together the net competitiveness effect of the Internal Market seems to be clearly negative for most Australian companies, although some like insurers and brewers will have improved access and those whose business is transport and distribution can benefit from market growth. insofar as reciprocal removal of restrictions cuts costs and removes distortions there will be further gains. The crucial question, however, is the extent to which the European market expands as it is this which provides the possibility of a clear net gain to third countries.

Further steps in widening the EC or indeed in assisting problems of convergence of member states under Economic and Monetary Union could provide problems for Australia and New Zealand insofar as they assist yet further countries to compete in their traditional product markets. The more direct the help and the more it is focused on agriculture then the greater the possible problem.

Concluding remarks

So what does this imply for Australia and New Zealand? What trade strategies should they follow? How should the EC react?

The current steps in closer European integration-the completion of the internal market, economic and monetary union and the broadening of the European Community to include members of EFTA and Eastern/Central European countries-are widely presented as an opportunity for all to gain. For major trade partners, those enjoying favourable treatment or having strong bargaining power this may well be true. But for Australia and New Zealand this is largely an irrelevance. A few, principally larger, firms may have an opportunity to expand but the net effect is likely to be small and it depends very much on the success of the European Community in increasing its growth rate. With its small domestic markets, developed economies and remoteness from Europe Australasia is worst placed to benefit.

In many respects it is investment which offers the way forward as much as trade, aided by the fact that the liberalisation of capital flows under the terms of the Single Market applies to all flows and not just those within the EC. Australasian investment in Europe will permit participation in the growth potential of Europe in the 1990s, while return investment would help develop the competitive industries that those countries need to continue to prosper in a discriminatory world.

However, from the point of view of Australia and New Zealand Europe is not tackling the relevant trade barriers which it has erected, namely those relating to agriculture and other resource based products. Indeed, widening of the Community may make matters worse. The extent of the harm these barriers have caused in Australasia and the welfare losses they also cause within the EC have featured little in the discussion of the external impact in the development of the EC in Europe.

There is one source of hope in that closer integration of existing members and widening to include Eastern European countries involves considerable use of structural and regional funds within the EC. Given a reluctance to increase the overall size of the Community Budget this will put increasing pressure on the CAP, as the major expenditure, to ease the problem. However, it is unlikely that any such steps will unwind more than a small proportion of the restrictions. Progress so far in the GATT negotiations on agriculture under the Uruguay Round has been limited although the EC does appear to have eased its position somewhat. Agreement, if it does occur, usually tends to come with a rush at the end of negotiating timetable so there may be some hope.

In turn Australia and New Zealand have highly protected manufacturing sectors. Indeed, both governments have realised that much of this protection has been excessive and are in the middle of a programme of reduction. There is, however, very considerable controversy over how far the reductions should go because many industries may not be viable in open competition and it is not clear where alternative sources of employment could come from. However, according to Alan Bollard, Director of the New Zealand institute of Economic Research, the main argument used in New Zealand against continuing the programme of protection reduction is not lack of viability of New Zealand industries but the observation that this process does not occur in competitor countries.@121 Since exports of the main products in which Australia and New Zealand have a comparative advantage are both price and quantity constrained there is limited scope for substitution. Nevertheless, there are industries for which small size and distance are not a great disadvantage, particularly those which involve substantial human skills and a high value to weight ratio. Both countries are in a good position to develop those skills.

The Australian Manufacturing Council (1990) has recently proposed a balanced programme of reduced protection, encouragement of efficient production and change and the fostering of industries which could become internationally competitive. All this argument over the particular inefficient second best solutions could be largely set aside if the main distortion were removed namely, the discrimination against Australian and New Zealand's main exports by the world's richest countries in Europe, North America and Japan.

In the meantime, it is clearly a sensible strategy to continue to develop the Closer Economic Relations between the two countries to eliminate unnecessary barriers in their own markets and exploit what local economies of scale and cost reductions they can. It is also sensible for them to continue to seek international support for their trading interests from countries round the Pacific as those countries together form an economic force that even an enlarged European Community has to take notice of. Whether such agreements will also lead directly to great gains for Australia and New Zealand from intra-area trade is more debatable. It is their external impact which is of prime importance, particularly if the Uruguay Round achieves little to help and there is move back towards the bilateral deals between the major trading areas which became increasingly popular in the late 1980s.

REFERENCES

Australian Manufacturing Council (1990) The Global Challenge; Australian Manufacturing in the 1990s, Melbourne.

Bates, W and White, E (1988) Industry Assistance Reform in New Zealand, Wellington.

Burridge, M et al. (1990) 'Oxford Economics Forecasting's System of Models', Economic Modelling (forthcoming).

Cecchini, P (1988) 1992: The European Challenge, Aldershot: Wildwood House.

Higgs, PJ (1990) Australia's foreign trade strategy', Working Paper 12, University of Melbourne School of Management. industries Assistance Commission (1988) Annual Report, Canberra.

Stoeckel, A, Pearce, D and Banks, G (1990) Western Trade Blocs, Centre for international Economics, Canberra.

NOTES

(1) I am grateful to Albert Meyer for research assistance and to Alan Bollard, Andrew Britton, Geoff Mason and Bob Webb for comments and advice.

(2) Figures are available on the EC share between 1950 and 1970 from T. Liesner, One Hundred Years of Economic Statistics, The Economist Publications, but they are not consistent with the rest of the data shown in the table. They imply a falling share of exports to the rest of the EC over the period and a rising share of imports.

(3) The combination of difference in product structure and the much greater importance of the Australian market to New Zealand than vice-versa has a consequent impact on trade policy.

(4) It was smart enough to anticipate the highly adverse impact of UK membership of the EC on its agricultural exports and sought new markets in the 1960s, not just in the 1970s when change was forced upon it.

(5) These arrangements fall a long way short of the degree of integration proposed in Europe. Attempts to extend CER into services have been difficult, non-tariff barriers abound and although currency union has been raised as an issue it is a long way off serious negotiation.

(6) This emphasis on the UK is not, of course, coincidental and represents a sensible strategy because entry is easiest in the UK, first because of the openness of the system which makes acquisition of companies rather easier but second, because the use of English in running the company which is acquired means that the most appropriate staff can be sent from head office or other operations to run the new enterprise, without regard to language. It also tends to reduce the degree of culture clash between the two parties.

(7) Our own simulations with the Oxford Economic Forecasting model of the Australian economy (Burridge et aL, 1990) suggest that the Australian economy is much more sensitive to changes in EC manufacturing demand and competitiveness. Nevertheless, the changes involved at around 1 billion Australian dollars are well short of the shifts quoted for agriculture.

(8) These gains come entirely from ending protection for German and UK coal suppliers.

(9) It remains to be seen how much privatisation of the UK electricity industry is going to affect imports of coal into the UK. Currently National Power and PowerGen have agreed contracts with British Coal over the next three years but the position could change thereafter as imported coal can not only be cheaper but of a lower sulphur content, thus enabling emissions targets to be met with less need for expensive investment in desulphurisation equipment. However, this is all largely separate from the main thrust of European integration.

(10) The protection is heavily concentrated in Australia, with effective rates of 190 percent on motor vehicles, 168 percent on clothing and footwear and 74 per cent on textiles, compared with nearer 15 per cent as an average (AMC, 1990). The figures shown in figure 2 for New Zealand refer just to manufacturing and to trade barriers alone. Other forms of industry assistance are not included so the effective rates were actually higher than those shown.

(11) For example, Telecom has been sold to American interests, around half the forests to Japanese, Hong Kong and Malaysian interests, State Insurance to British, the Post Off ice Savings Bank and New Zealand Steel to Australian and Air New Zealand to a consortium including Australian, American and Japanese owners.

(12) This may not of course be logical as unilateral tariff reduction may still be the optimal policy from the point of view of resource allocation.
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Author:Mayes, David G.
Publication:National Institute Economic Review
Date:Nov 1, 1990
Words:3795
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