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Backgrounder #1450 on Asia

June 18, 2001

Time to Strengthen U.S.-Australian Relations in Trade and Defense

By , and

President George Bush recently announced that he will meet with Prime Minister John Howard of Australia on September 10 in Washington to discuss trade, regional security, and the future of U.S.-Australian relations.1 Australia is one of America's most durable and dependable allies and an important trading partner.2 Indeed, Americans and Australians have fought side by side in every major war of the last century. Although their defense alliance with New Zealand, the ANZUS Treaty, is marking its 50th anniversary this year, concerns about regional security are growing, and Australia is seeking a bilateral trade agreement with the United States.

Trade not only strengthens the economies of trading partners, but also enhances the defense and security ties of allies. In other words, promoting trade is both good economic policy and good foreign policy. A bilateral agreement should be promoted. Regarding security, Australia is one of America's most supportive allies. Strengthening the interoperability of U.S. and Australian forces to further buttress the alliance should be a policy objective. In addition, although the United States has not yet approached the Australian government about a direct involvement in its missile defense efforts, there may be a role for Australia to consider. The Bush Administration has signaled its desire to establish closer relations with Canberra, and the opportunity to do so is clearly at hand.

STRENGTHENING TRADE WITH AUSTRALIA

Australia is a pluralistic society that is strongly democratic and relatively open economically. While possessing its own unique and vibrant culture, no other country in the Asia-Pacific region is more like the United States in its political and economic values. Australia, a long-time ally, is clearly a strong candidate for closer relations with the United States, including a bilateral trade agreement. The reason: As noted above, open trade between allies not only strengthens their economies, but also enhances their defense and security ties. In other words, promoting trade is both good economic policy and good foreign policy.

The United States has advanced global free trade as a key component of its foreign policy since World War II. It has found that economies that are open to trade and capital flows prosper over time. Moreover, as countries liberalize economically, conditions are created for them to do so politically. Thus, economically open nations often transform themselves into politically open societies.

In Asia, that process occurred notably in Taiwan and South Korea, and it is everyone's hope that it will occur in the People's Republic of China as well. In the Americas, economic liberalization has transformed Chile and Mexico. Regarding Mexico, Mary O'Grady, editor of the "Americas" column in The Wall Street Journal, explains the effects that opening an economy has on the political system: "[I]t was NAFTA that brought Vicente Fox to power because it weakened the grip of the PRI."3

In the 2001 Index of Economic Freedom, an examination of 161 economies published by The Heritage Foundation and The Wall Street Journal, Australia achieved the ranking of the world's ninth freest economy. According to the analysts who examined Australia,

With the election of a Labor Party government in 1983, Australia began to shed its traditional protectionist, regulatory practices by deregulating financial markets, removing substantial trade barriers, improving ties with its Asian neighbors, and privatizing many federally owned firms.4

TRADE ISSUES

This year, the government in Canberra, a coalition of the Liberal and National parties, proposed a bilateral trade agreement with the United States. It also secured the support of the opposition Labor Party. The issue of more open trade with America has clear bipartisan support in Australia, and it merits similar support in the United States. Good trade agreements come from such bipartisan efforts. Negotiating the final agreement will, however, require a concerted effort by trade representatives from both the United States and Australia.

All trade agreements must confront the special concerns of sectors in each country that would be particularly affected by greater openness. The United States remains protectionist in many areas of agricultural trade and in ways that are particularly detrimental to Australian farmers and ranchers. For instance, in July 1999, the Clinton Administration imposed special quotas on lamb imports, which have been found to violate the rules of the World Trade Organization (WTO).5 These objectionable barriers to trade should be removed regardless of the progress of trade negotiations with Australia. American consumers prefer choices and should be able to choose from both Australian lamb and American lamb. Such competition would lead to lower prices and increased availability of high-quality lamb. The United States can hardly take up the mantle of trade leadership globally while it is violating WTO rules with its agricultural quotas.

Australia restricts the importation of certain agricultural products due to legitimate environmental concerns about its unique flora and fauna. Australia is an island continent whose isolation has protected it over the years from many destructive agricultural diseases and pests. For instance, it has never experienced an outbreak of hoof-and-mouth disease. Nor have its vineyards suffered infestations of Phylloxera, a louse that attacks the roots and leaves of vines.

The Australian government applies science-based rules to prevent the importation of disease and organisms that would be destructive to their flora and fauna. Such a process also enables the government and trading partners to distinguish its legitimate health concerns from protectionist impulses. Still, from time to time, countries have questioned whether Australia's quarantine system has been used for protectionist rather than public health purposes. U.S. trade representatives should raise issues related to this regulatory process during trade negotiations.

Both the United States and Australia restrict foreign investment in some sectors that are viewed as vital to national security. During trade negotiations, both sides should reconsider their foreign investment regimes. For example, they should liberalize investment in the telecommunications sector. The need to do so was demonstrated on April 23 when the Australian government decided to block the purchase of Woodside Petroleum by the Royal Dutch/Shell Group. Canberra "stunned" the markets when it rejected the takeover as "contrary to the national interest."6 (Shell had already purchased an energy company in New Zealand without encountering difficulty.) Particularly for Australia and the United States, there are no serious national security issues to justify such restrictions in this sector.

Air travelers in both countries would benefit from an "open skies" agreement, including cabotage, the legal restriction to domestic carriers of air transport between points within a country's borders. At a time of consolidation among U.S. airlines and concerns about diminished competition in the U.S. airline industry, Americans would welcome and benefit from the choice of another carrier on domestic routes. So too would Australian travelers.

Finally, the two countries must address anti-dumping measures, characterized by Brink Lindsey, Director of the Cato Institute's Center for Trade Policy Studies, as the most intellectually disreputable but politically popular trade measures in the United States. It is also one of America's trade practices that other countries find most objectionable. U.S. trade representatives who attempt to negotiate a trade deal, whether bilateral, regional, or multilateral, without showing a willingness to discuss U.S. anti-dumping practices often find themselves mired in fruitless efforts.

The only intellectual justification for anti-dumping duties, such as it may be, is that some countries unfairly subsidize their exports (covertly or overtly). Possessing a substantially open economy, Australia is an unlikely candidate for applying such duties. Rather, negotiators on a trade agreement between the United States and Australia should directly tackle issues of unfair trade practices when such exist and settle them to their mutual satisfaction within the bilateral agreement. The partners should then waive the unilateral application of such duties.

Certainly, there is a need for a dispute resolution process for the disagreements that inevitably will arise over the trade agreement's language and implementation. The resolution of disputes between these two allies, however, should take place through the kind of friendly negotiations that have long defined their relationship, not through unilateral actions.

Many Americans believe that their jobs are threatened by expanding international trade, and they think that the only solution is to include worker-protection clauses in trade agreements. They do not understand that a strong, vibrant entrepreneurial economy offers the best job protection. History is proving Ross Perot's well-known prognostication wrong; the North American Free Trade Agreement (NAFTA) did not force U.S. jobs to flee to Mexico and result in "a giant sucking sound." Between 1994 and September 2000, the Bureau of Labor Statistics reported that there were 14 million new American jobs, the unemployment rate had fallen from 6 percent to 3.9 percent, and the number of workers in manufacturing jobs had leveled off at around 14 percent of the total American workforce.7

The issue of "workers' rights" is irrelevant to negotiating a bilateral trade deal with Australia, because Australia already has enacted strong labor laws and cannot be characterized as having cheap, low-wage labor. Anyone who opposes a trade deal with Australia on grounds of "workers' rights" is a protectionist.

AUSTRALIA'S REMARKABLE REFORMS

Over the course of the past decade, Australia has emerged as an open and vibrant economy, achieving a 3.9 percent average rate of annual growth during the 1990s.8 At the same time, its average inflation rate was a mere 2.5 percent,9 lower than that of both the United States (2.8)10 and the European Union (2.83).11 Australia can trace much of its success to economic reforms enacted by successive governments, which raised the overall level of economic freedom and, correspondingly, the level of prosperity.

Tax System Reform.
The most recent of these reforms, which has garnered the most attention, is the overhaul of the nation's tax system that took effect on July 1, 2000. The Howard government, which retained power in the 1998 elections on a promise of tax reform, followed through on its pledge and shifted the tax regime to a consumption-based system based on a 10 percent goods and services tax (GST). The value-added tax replaced inefficient indirect taxes, such as wholesale sales taxes, which effectively amounted to a tariff on exporters and manufacturers.

The government also lowered personal and corporate income tax rates so that 80 percent of Australians today face a tax burden of 30 percent of their income or less. The change most benefits middle-income earners (whose incomes fall in the A$38,000 to A$50,000 range), although the government has enacted significant tax breaks for single-income families as well. Business tax rates were reduced to 34 percent, which should fall to 30 percent in the future. All of these reforms are boosting Australians' incentive to work by reducing the penalty for doing so, while increasing Australia's overall productivity as well.12

Openness to Trade and Investment.
Australia's limited restrictions on trade and investment likewise have contributed to the country's economic success. Australia maintains an average tariff rate of just over 3 percent, which is quite low by global standards. Its export base has diversified in recent years (manufacturing and service exports have surpassed the traditional mineral and rural exports), thus providing the country with greater protection against the economic shocks that plague nations whose economic well-being depends on a few sectors.

The government is continuing to reduce restrictions on foreign investment, a policy that also has raised the level of economic freedom in Australia. In 1999, for instance, it opened its long-protected domestic airline industry to foreign investment. Foreign airlines may now purchase 100 percent equity in a domestic carrier and 49 percent in an international Australian airline (although the former restrictions still apply to the national airline, Qantas). Moreover, in the 1990s, the government partially privatized the main telecommunications firm, Telstra, thereby facilitating private participation in that booming sector. The fall of these remaining barriers to foreign involvement allows increased participation by private citizens in lucrative and expanding industries and encourages more investment in the economy.13

Labor Market Reform.
Over the past several years, labor regulation reforms have been a central element of the government's structural reform program. Australia's Workplace Relations Act of 1996 replaced mandatory, centralized wage-fixing with enterprise bargaining in which wage-setting takes place at the firm level through bilateral negotiations. This reform allows private companies more leeway in determining what economic course is best suited to their circumstances. Wage flexibility has made the labor pool more elastic, better able to adapt to the vagaries of the global economy, and this in turn has contributed to the remarkable rise in productivity in Australia over the past decade: Labor productivity in Australia averaged an annual growth rate of nearly 2.5 percent from 1990 to 1998.14

In this latest quarter, the International Monetary Fund (IMF) revised the 2001 economic growth forecast downward for both the Australian and U.S. economies. In Australia's case, it forecast growth of from 3.4 percent to less than 2 percent.15 Certainly, the slowdown in the United States and elsewhere has had an impact on Australia, but Australia is not entirely at the mercy of the ebbs and flows of globalization: Australia's domestic policies ultimately determine whether its people can turn globalization to their advantage or must suffer its caprice.

Regulation.
Like many other countries, Australia falls short in regulation. Excessive regulation stagnates economic activity; makes it harder for businesses, be they domestic or foreign, to operate; and discourages investment. Continuing government control of the telecommunications industry through Telstra as well as the maintenance of commodity boards to manage such agricultural markets as the wheat industry remain a concern.16

Nevertheless, Australia has come a long way in deregulating its economy since the Hawke Labor government began reforms in 1983. These reforms and those of the subsequent Keating and Howard governments--including controlling inflation, increasing labor market flexibility, privatizing government businesses, and income and business tax reforms--have engendered a far more dynamic, flexible economy. The benefits of instituting those free-market reforms are clear in the overall success with which Australia fared the 1997 Asian financial crisis. By continuing the habit of economic reform that it has practiced so diligently over the past decade, Canberra has virtually assured itself of continued prosperity in the future.

STRENGTHENING DEFENSE AND SECURITY RELATIONS

Without peer, Australia has been America's most reliable ally and most valuable security partner in the Pacific basin for many years. Australia fought beside the United States in every war during the past century, including the less popular conflicts such as Vietnam when many of its people objected to its involvement. Already, in the new millennium, Canberra has outlined a view of regional and global security that demonstrates Australia's commitment to a broad strategic partnership with America and has supplied detailed plans to support mutual interests in the region. From the South Pacific to the South China Sea, both Australia and the United States share the principles of promoting freedom of navigation, political stability, and the peaceful settlement of border disputes, although there still are areas of disagreement, such as military funding to increase interoperability between American and Australian military forces and approaches to regional security problems.

On the issue of ballistic missile defense, Australia is perhaps America's most supportive ally. In an interview with the U.S. trade journal Defense News, the Australian Minister for Defense, Peter Reith, said of President Bush's plan to move forward on missile defense, "We [Australians] understand that the U.S. government will take whatever steps it thinks is in its national interest in defending its territory."17 So far, the United States has not approached the Australian government about direct involvement in its missile defense effort. The Bush Administration should start now to determine whether there is a role for direct Australian involvement. This way, President Bush will be prepared to discuss such a role for Australia when the Australian Prime Minister visits Washington this fall.

How the Howard Doctrine Buttresses the Alliance.
In September 1999, Prime Minister John Howard outlined his vision of Australia's role in the next century in what has become known as the "Howard Doctrine."18 In his statement, Howard attempted to articulate a new concept of mutual security. He asserted that since the United States and Australia share significant security interests regionally and globally, they should be more than simple alliance partners committed to the defense of each other's borders. The Howard Doctrine proposes that Australia and the United States protect their shared interests beyond the nominal commitments of a defense alliance. Regrettably, the Prime Minister referred to Australia's relationship with the United States as a "deputy." His domestic rivals pounced on his unfortunate choice of word to blur the substance of the doctrine. Howard had used the word "deputy" to recognize America's regional influence, not to indicate the subordination of Australia's responsibility to the United States. In fact, Australia is committed to acting independently in the Asia-Pacific region and has the full support and confidence of the United States.

To understand how this new concept differs from normal alliance relationships, consider the military operations in the former Yugoslavia and East Timor. In the former Yugoslavia, the North Atlantic Treaty Organization (NATO) allies failed to initiate resolute actions until they secured substantive U.S. involvement. Even after Washington provided leadership along with large military forces to its European allies, the most important events required continued U.S. military commitment and supervision. American forces remain there today, and the Europeans quail at any mention that the United States could someday withdraw its troops. By contrast, Canberra took bold and decisive action in East Timor without waiting for the United States to jump in, and had only minimal U.S. military participation and diplomatic support; there are no U.S. forces in East Timor today.

The yawning gap between Australia and America's European allies is further demonstrated by the differences in risk they accept. Australia took a far greater risk in entering East Timor than Europe did in intervening in the former Yugoslavia. Yugoslavia is an underdeveloped and strategically irrelevant country that poses no real threat to a rich and powerful Europe. Indonesia, on the other hand, is the fourth most populous country in the world, lying only a few miles north of Australia and astride critical sea lines of communication. Because of its size and location, Australia's security is very dependent on good relations with Indonesia.

By taking action in East Timor, Australia risked antagonizing its giant neighbor. In fact, relations between the two countries soured after the East Timor crisis and are only now beginning to heal. In this case, Canberra did not act as a deputy to the Washington sheriff, but stepped in where it was stronger and more familiar than its ally. Canberra did not act at Washington's behest; rather, it acted independently but in the greater interest of both countries. A lesser nation could easily be excused had it chosen to stand on the sidelines rather than taking action in this case, or could have criticized American inaction rather than accepting the obligations and risks of an alliance. But Australia demonstrated its worth as an ally and a friend in East Timor.

Concern over Incompatible Defenses.
Notwithstanding this performance, Canberra could do more to improve its security position both as an alliance partner and as an independent actor in the region. Australia has committed to increases in defense spending, somewhat commensurate with its perceptions of increased instability in the region; but it still spends less per capita than the United States does on defense: Australia spends about 1.9 percent of GDP per annum on defense while the United States spends about 3.1 percent. Canberra has committed to a 3 percent increase per year for the next 10 years, but that additional spending is below the expected growth rate of the Australian economy. Therefore, spending on defense will remain below 2 percent of GDP.

A more significant increase in defense funding would address critical deficiencies in Australia's military establishment. Australia's newest warships, the ANZAC class, lack a defense against anti-ship missiles, and the navy's fleet in general is incapable of long-range defense against air attack. The air force needs to upgrade almost all of its systems, and its aging air-to-air refueling fleet needs to be replaced. Without these upgrades, Australia's military will not be able to operate with U.S. forces in a conflict involving a moderately capable enemy. This task needs to be accomplished in the near term so that Americans and Australians do not face the need to fix interoperability problems during a crisis against a strong opponent.

Australia's Other Commitments.
Australia maintains defense commitments in the region and the world as well. Canberra has retained its ANZUS commitment to New Zealand despite Washington's suspension of its obligation when New Zealand imposed a ban on nuclear-armed or -powered vessels. This bilateral assurance is a burden to Australia, as New Zealand's defense spending is low enough to appear as unilateral disarmament.

Australia is also committed to the defense of Papua New Guinea, East Timor, and the island countries of the Southwest Pacific. It is a member of the Five-Power Defense Agreement involving the United Kingdom, Australia, Malaysia, Singapore, and New Zealand. It participates in the ASEAN Regional Forum, and it maintains bilateral security relationships with almost every country in Southeast Asia. Finally, Australia supports the United Nations in a wide variety of peacekeeping missions.

A NEW U.S.-AUSTRALIAN RELATIONSHIP

Because Australia is both a strategic U.S. ally in the Asia-Pacific region and an important trading partner, the Bush Administration should waste no time in working to strengthen the ties that bind these two countries. As a first step, U.S. Trade Representative (USTR) Robert Zoellick should not only heed Canberra's call for formal trade negotiations, but initiate them. These negotiations could be conducted as part of a stand-alone deal with Australia or bundled with other trade deals, such as those involving Chile and Singapore. What is most important is that the Administration move forward on trade, particularly with countries like Australia that are both democratic and capitalist.

The Bush Administration has signaled its desire to move forward on many trade fronts, to pursue "free trade by any means." Bilateral trade deals, such as that proposed between the United States and Australia, do not stand in the way of more comprehensive multilateral trade negotiations--such as those, for example, that would involve a new WTO round. Indeed, bilateral trade deals could help establish a new "bar" for a WTO round. Nations with open economies like Australia and the United States are in a position to raise the standard for future WTO rounds by moving beyond the current boundaries in trade in services and foreign investment codes.

The Bush Administration should also encourage Australia to increase its investment in defense to ensure that its forces are interoperable with U.S. forces in any future conflict. To strengthen the trade and defense ties between the United States and Australia, the Bush Administration should take steps to:

Resolve expeditiously the dispute over lamb quotas in accordance with the WTO ruling against the United States. This would enable the Administration to re-assume the mantle of global trade leadership.

Ensure that all Australian restrictions on the importation of U.S. animal and plant products are science-based and consistent with applicable WTO rules. This would ensure that protectionist impulses do not masquerade as environmental concern.

Negotiate a comprehensive bilateral trade agreement with Australia covering such issues as agriculture and services. The more comprehensive the agreement, the more it enhances trade and contributes to the prospects for a meaningful WTO round.

Continue to support Australia's economic and security leadership in Southeast Asia and the South Pacific in protecting its interests and those of its allies. This would buttress a dependable ally in this important region.

Determine whether there is a role for direct Australian involvement with respect to ballistic missile defense. This will allow President Bush to discuss such a role for Australia when the Australian Prime Minister visits Washington this fall.

Encourage Australia to increase funding for defense modernization in order to make its forces fully interoperable with U.S. forces.

CONCLUSION

The Bush Administration has signaled its desire to move forward on many trade fronts, to pursue "free trade by any means." Bilateral trade deals, such as that proposed between the United States and Australia, would not stand in the way of more comprehensive multilateral trade negotiations, such as those that would be involved in another WTO round. Indeed, they can help to "raise the bar" in such negotiations. Nations with open economies like Australia and the United States are in a position to do just that by advancing trade in services and improving foreign investment codes.

Australia is a strategic ally in the Asia-Pacific region and an important trading partner. It is time to strengthen even further the ties that bind these two countries. As a first step, the USTR should heed the Australian government's call for formal trade negotiations and initiate them. Ambassador Zoellick could do so as part of a stand-alone deal or "bundled" as a package with others, such as Singapore and Chile. What is most important is that the Administration move forward on trade, particularly with countries like Australia that embody democratic capitalism.

Dana Robert Dillon is Policy Analyst for Southeast Asia in the Asian Studies Center; Denise H. Froning is a former Trade Policy Analyst in, and Gerald P. O'Driscoll, Jr., Ph.D., is Director of, the Center for International Trade and Economics at The Heritage Foundation.

 

Endnotes

1. Associated Press, "Bush to Host Australian Official," wire report, June 11, 2001.

2. In 2000, nearly 10 percent of Australia's exports went to the United States, while 21 percent of its imports originated in the United States. See Economist Intelligence Unit, EIU Country Report, April 2001.

3. Mary Anastasia O'Grady, "First, Open Markets," in Gerald P. O'Driscoll, Jr., Kim R. Holmes, and Melanie Kirkpatrick, 2001 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2001), p. 25.

4. Ibid., p. 77.

5. On May 16, 2001, the Dispute Settlement Body of the World Trade Organization adopted the Appellate Body Report, which found that the U.S. measures taken against imports of lamb from Australia and New Zealand (the complaining parties) were inconsistent with the country's WTO obligations.

6. "Shell Shocked," The Economist (London edition), April 28, 2001, p. 64.

7. As found at U.S. Department of Labor, Bureau of Labor Statistics, Web site at www.bls.gov/eag/eag/us.htm (October 17, 2000). For further discussion, see Denise H. Froning, "A New Trade Agenda for America," in Stuart M. Butler and Kim R. Holmes, eds., Priorities for the President (Washington, D.C.: The Heritage Foundation, 2001), p. 326. In the current global economic slowdown, the unemployment rate has risen to 4.4 percent.

8. Organisation for Economic Co-operation and Development, at /static/reportimages/6A26A0E5F860F07CB3B67262A7607A14.pdf

9. Australia Department of Foreign Affairs and Trade, at /static/reportimages/EB90273D2B79F32646FEAB2FDE109795.pdf

10. International Monetary Fund, International Financial Statistics on CD-ROM, June 2001.

11. Economist Intelligence Unit, Country Report EU, May 2001.

12. See generally Economist Intelligence Unit, Country Commerce Australia, various years. Data also from conversations with Australian government officials.

13. See "Australia," in O'Driscoll et al., 2001 Index of Economic Freedom, pp. 77-78.

14. See U.S. Federal Reserve Bulletin, October 2000.

15. Paul Cleary and Miranda McLachlan, "IMF Downgrades Growth Forecast," Australian Financial Review, April 27, 2001, at http://afr.com/marketwrap/money/2001/04/27/FFXO5XV50MC.html

16. Excessive regulation is the reason that Australia would not qualify for membership in the global free trade association (GFTA), a Heritage Foundation free trade plan. See John C. Hulsman, Ph.D., and Aaron Schavey, "The Global Free Trade Association: A New Trade Agenda," Heritage Foundation Backgrounder No. 1441, May 16, 2001.

17. "Peter Reith, Leader of the House and Minister for Defense, Australia," Defense News, June 4-10, 2001, p. 30.

18. Gerard Henderson, "Timor: Canberra's Unfinished Business," Sydney Morning Herald, August 29, 2000.

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