How to Kill a Country: Australia's Devastating Trade Deal with the United States

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‘A frighteningly realistic account of the challenges Australian businesses will face under the FTA, and a must read for anyone concerned with the future of Australian industry, especially agriculture.’ John Corboy, Chair, Fireblight Task Force, Apple and Pear Australia Limited

’My four years as ambassador in Washington seeking better market access to the US for Australians gave me an acute awareness of how the power of US industry groups usually swamps the rhetoric about close friendship. This is a valuable book because it makes a challenging case against the FTA in terms accessible to the non-specialist. It will ensure that the implications of the agreement are subject to ongoing scrutiny and review.’ Rawdon Dalrymple, Australia’s former Ambassador to the United States of America

‘Like many lay citizens, my eyes glaze over whenever I read about the Australian–American FTA: so many issues, so technical, so complicated. This passionate and intelligent book is an eye-opener. It is lucidly instructive about the issues, and extremely disturbing about the consequences. It is, of course, bound (and intended) to generate controversy, at the end of which non-experts might still be uncertain what to support and what to denounce. But we will at least and at last be well-placed to understand what the controversy is about, and why it matters so.’ Professor Martin Krygier, University of New South Wales, 1997 Boyer Lecturer

‘This book, in clear and concise language, explains the bad deal that Australia has signed up to in the US–Australia Free Trade Agreement. Every Australian who wants to know the consequences should read it.’ Professor Peter Drahos, Australian National University

‘This book is a breath of fresh air. Punchy, cheeky certainly, and readable! Not scared to call a spade a spade and certainly not intimidated by the USA, our great and powerful friend. Enjoy it as I have and use it to start a debate with family, friends and your colleagues. This will not only help us understand how we should behave in entering into a free trade agreement with the US (if that is where we should go), but it also helps define some of the issues that need to be addressed in relation to any trade agreements we structure with other countries.’ Dr Keith Williams AM, CEO, Proteome Systems Ltd, and Warren Centre Innovation Hero 2004

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Linda Weiss is Professor of Government and International Relations at the University of Sydney. Her work in the comparative and international politics of economic development has been translated into several languages. She is the author of four books, including The Myth of the Powerless State. Elizabeth Thurbon is a Lecturer in the School of Politics and International Relations at the University of NSW. She has published on the financial systems of East Asia and is collaborating on a large comparative project, researching government–business relations in the global economy. John Mathews is Professor of Strategic Management in the Graduate School of Management at Macquarie University. He is the author of Tiger Technology and other studies on the rise of East Asia in the world economy. His new book will focus on monopoly power in civilizations old and new. Linda Weiss and Elizabeth Thurbon are creators of the website www.australianinterest.com a public forum dedicated to informed, non-partisan debate on all aspects of Australian foreign economic policy and with special regard to the FTA.

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HOW TO

KILL A COUNTRY Australia's Devastating Trade Deal with the UNITED States


Linda Weiss Elizabeth Thurbon John Mathews

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First published in 2004 Copyright © Linda Weiss, Elizabeth Thurbon, John Mathews, 2004 All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission in writing from the publisher. The Australian Copyright Act 1968 (the Act) allows a maximum of one chapter or 10% of this book, whichever is the greater, to be photocopied by any educational institution for its educational purposes provided that the educational institution (or body that adminsters it) has given a remuneration notice to Copyright Agency Limited (CAL) under the Act. Allen & Unwin 83 Alexander Street Crows Nest NSW 2065 Australia Phone (61 2) 8425 0100 Fax (61 2) 9906 2218 Email: [email protected] Web: www.allenandunwin.com National Library of Australia Cataloguing-in-Publication entry: Weiss, Linda (Linda M.). How to kill a country : Australia’s devastating trade deal with the United States ISBN 1 74114 585 6 1. Free trade—Australia. 2. Free trade—United States. 3. International trade. 4. Australia—Foreign economic relations— United States. 5. United States—Foreign economic relations— Australia. I. Thurbon, Elizabeth. II. Mathews, John. III. Title. 382.994073 Typeset in 10.5/12 Hiroshige by Midland Typesetters, Maryborough Printed by McPherson’s Printing Group, Maryborough, Victoria 10 9 8 7 6 5 4 3 2 1

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Contents

Preface Acknowledgments Acronyms 1 The lopsided deal

vi vii ix 1

2 Quarantine: Open season for pests and diseases

28

3 Medicines: Undermining our Pharmaceutical Benefits Scheme

58

4 Government procurement: Trading ‘buy Australian’ for ‘buy American’

84

5 Intellectual property rights: Suppressing our own knowledge economy

113

6 The end of the ‘lucky country’?

139

Endnotes Select bibliography

158 183

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Preface As this book goes to press, the political debate over whether Australia should sign up for the Free Trade Agreement with the United States appears to be over. The Labor Party, which was the last line of defence, decided to support the FTA—even before the Senate Inquiry (which it initiated) had reported. The most important test of an effective opposition is to stand for the national interest when the government of the day abandons it. And this they failed. So whoever wins the federal election will, in practice, be implementing the FTA. The days of being the ‘lucky country’—even with the phrase’s ironic overtones—are over. The FTA changes everything: our economic and social policy options, our international economic and political constraints and, ultimately, our sense of place that helps define who we are. We make our own position clear. We offer compelling evidence for our conviction that this FTA will turn us into an appendage of the United States—not a potential ‘fifty-first state’ (because that is not, and never will be, on offer) but a kind of Pacific Puerto Rico. This is not the future that we would have hoped for. And it is not the future we had to have. There was a time in the 1990s when it looked as if Australia might have a different—and certainly more independent—future, carving out a series of strategic goals for itself. Instead, we have chosen a military and economic alliance with the United States so all-embracing that our government cannot distinguish pro-Australian sentiment from anti-American. In signing away the capacity to shape our economic prospects we have also destroyed our capacity to act internationally as an independent player. This we see as the real ‘price’ to be paid for the FTA. vi

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AUSTRALIA’S DEVASTATING TRADE DEAL WITH THE UNITED STATES

The reader will find that this book is not anti-American so much as pro-Australian. As we worked our way through the chapters of the deal, we were impressed by the businesslike way in which the Americans go around the world systematically securing their interests. They are not the ones to let a woolly aspiration to have a ‘special relationship’ stand in the way of a good business deal. It is the Australians who have been the naïve, even duplicitous, partners in this process, casually—and apparently willingly—selling out the nation’s institutions such as the Pharmaceutical Benefits Scheme, all the while protesting their innocence. We intend this book to be a permanent reminder of the duplicity involved in this process. But just as importantly, we see it as the first word in a new debate about what kind of country Australia is to be in the light of this trade deal. Linda Weiss, Elizabeth Thurbon, John Mathews August 2004

Acknowledgments This book was written under great pressure in order to coincide with the 2004 federal election, as a wake-up call to the newly elected government—the government that will be forced to confront the massive changes of the FTA era. We wanted the government, and the Australian people, to be aware of the enormity of these challenges, and of how they might be negotiated. We have been extraordinarily fortunate in being able to call on a wide range of professional and academic assistance and support in the short time available to us, so making our task that much easier. For generously sharing their insights with us, we would like to thank our academic colleagues: Peter Drahos, Ken Harvey, Joel Lexchin, Luigi Palombi and Susan Sell. vii

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The idea for this book evolved while two of us (ET and LW) testified before the Senate Inquiry into the FTA. We thank most Committee members for their patience in debating the issues, and for the tolerant attitude they displayed, in the best spirit of Australian democracy. We acknowledge others for demonstrating the absence of ‘truth in politics’, and thus motivating us to write this book. For their professional assistance, we would like to thank Tom Brennan, John Corboy, David Hodges, John Lamont, David Peasley and, not least, Oliver Yates, as well as those Australian industry and government representatives who were willing to share their views so frankly but were reluctant to be named herein. For providing two of us with special insight into the workings of Biosecurity Australia, we would like to thank Mary Harwood and Virginia Greville. For valuable research assistance, we would like to thank Angela Cummine and Ben Austin. And for their proofreading efforts, we are grateful to Carolyn and Tony Thurbon. For accepting this proposal in the first place, and then for their unstinting efforts in shepherding the book through the publishing process in record time, we would like to thank our publisher at Allen & Unwin, Elizabeth Weiss, and our editor, Emma Cotter. All of us, but especially ET, would like to give Kenneth Wallace our warmest thanks for his ideas, inspiration and the soundtrack to which we wrote this book.

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Acronyms ACCI ACMF AFFA AMA APHIS AQIS BAA CFBF CIE CSIRO CTEA DFAT DMCA EU FASTS FDA FTA FTAA GATT GPA ICT IFAC-3

IGPAC

Australian Chamber of Commerce and Industry Australian Chicken Meat Federation Department of Agriculture Fishery and Forestry Australia Australian Medical Association Animal and Plant Health Inspection Service (US) Australian Quarantine Inspection Service Buy American Act California Farm Bureau Federation Centre for International Economics (Aus) Commonwealth Scientific & Industrial Research Organisation (Aus) Copyright Term Extension Act Department of Foreign Affairs and Trade (Aus) Digital Millennium Copyright Act 1998 (US implementation of WCT and WPPT) European Union Federation of Australian Scientific and Technological Societies Food and Drugs Administration Free Trade Agreement Free Trade Agreement of the Americas General Agreement on Tariffs and Trade (superseded by WTO in 1995) Government Procurement Agreement (WTO plurilateral agreement, 1995) Information and Communication Technology Industry Functional Advisory Committee on Intellectual Property Rights for Trade Policy Matters (established under USTR to review the provisions of the FTA) Inter-Government Policy Advisory Group (established under USTR also to review provisions of the FTA) ix

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IPPC IPRs IRA JSCOT METI MPAA NAFTA NIH NPPC OECD

International Plant Protection Convention Intellectual Property Rights Import Risk Assessment (Biosecurity Australia) Joint Standing Committee on Treaties (Aus) Ministry for Economy Trade and Industry (Japan) Motion Picture Association of America North Amercian Free Trade Agreement National Institutes of Health (US) National Pork Producers Council (Aus) Organisation for Economic Co-operation and Development PBAC Pharmaceutical Benefits Advisory Committee (Aus) PBPA Pharmaceutical Benefits Pricing Authority (Aus) PBS Pharmaceutical Benefits Scheme (Aus) PhRMA Pharmaceuticals Research and Manufacturers of America SME Small and Medium-sized Enterprise SPS Sanitary and Phytosanitary measures TGA Therapeutic Goods Administration (Aus) TSA Transport Security Administration (US) TRIPS Trade-Related aspects of Intellectual Property Rights (WTO) 1995 UNCTAD United Nations Conference on Trade and Development USPTO US Patent and Trademark Office USTR US Trade Representative WIPO World Intellectual Property Organization WCT WIPO Copyright Treaty WPPT WIPO Performances and Phonograms Treaty WTO World Trade Organization (created 1 January 1995)

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1

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The lopsided deal

How to kill a country with a Free Trade Agreement—Step 1 Propose a trade deal with the world’s most powerful country, the one with the longest track record of negotiating favourable Free Trade Agreements. This country must be equipped with a strong Congress that insists on debating and approving the country’s initial negotiating position (i.e. what it wants from the deal, and what it won’t give away). It must also have in place a welldeveloped system for comprehensively reviewing the agreement prior to Congressional approval. Your partner will thus have clear goals from the outset, and won’t settle for anything less. You, on the other hand, should go into the negotiations with minimal preparation, armed only with the misguided belief that you have a ‘special relationship’ with your negotiating partner, and that your ‘best friend and ally’ will look after your interests. Forget about getting approval from your Parliament, or establishing a firm negotiating position with major stakeholders. And don’t bother about a comprehensive process for approving the outcomes of negotiations. Simply allow the Prime Minister responsible for the deal to sign it, then rush it through Parliament without meaningful public debate. Then cross your fingers and hope for the best. In no time at all, you’ll have an agreement just like ours: the Australia–US FTA. 1

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‘How to kill a country’ is obviously a strong way to open a book. It runs the risk of being dismissed as an overstatement. It runs the risk of sounding extremist. Yet we are neither prone to overstatement, nor are we extremist. When the prospect of a Free Trade Agreement between Australia and the United States was announced by the Prime Minister on 14 November 2002, we were—like the rest of Australia— sceptical, but openminded as to the outcome. We could see the benefits of being linked to the world’s largest economy, as long as it didn’t preclude us from being linked to our many other trading partners as well. When successive statements were issued as to the progress of the negotiations, we were dismayed to find so little being publicly released by the Australian side, in contrast with the very public and accountable approach taken by the Americans. Our confidence was not raised by the release of phoney econometric estimates of the ‘benefits’ of the deal that were likely to flow to Australia, all of which took a very narrow approach to estimating such costs and benefits, purely in terms of market access (what we sell to the US, and what they sell to us). We knew—again, like most Australians—that there would be more involved in the Agreement than such market access issues. But we were completely taken by surprise when we discovered just how ‘comprehensive’ was the deal announced on February 8 this year, and how comprehensively the Australian negotiators (or, more precisely, their political masters in government) had betrayed their own country. When the text of the agreement—all 1000 pages of it—was finally released, it was immediately apparent that the ‘trade’ part of the deal is anything but free—in so far as large areas of Australia’s most competitive exports, from sugar to fast ferries, continue to be banned or severely restricted in the US market. This is bad enough. But far worse is the fact that the agreement goes a very long way to dismantling some of Australia’s most precious national institutions, especially Quarantine and our Pharmaceutical Benefits Scheme. It goes a long way to abandoning the means of protecting and consolidating our own assets and resources, through removing virtually all barriers to US investment (read: mergers and acquisitions of local assets). 2

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It also goes far towards destroying our system for enhancing innovation and industry development through our use of government procurement to favour local suppliers—a practice long embedded in the US approach to nation-building. In complete defiance of free trade principles, it goes a long way towards substituting Australia’s institutions for protecting the rights of patent-holders with a US system designed to cement and embed protection of American monopoly rights, and to make life as difficult as possible for any competition with such monopoly-protected products. The more we examined this agreement, the more we were convinced that it carried a death sentence for Australia as an independent country, able to hold its own in international forums. As we examined the fine print, we found that whole passages had been lifted from US legislation such as the Digital Millennium Copyright Act, mandating a huge increase in copyright terms (from 50 to 70 years), as well as clauses from the Act which impose criminal penalties on people who knowingly or unknowingly breach copyright-holders’ technological gizmos used to protect their movies, music or software. Criminal sanctions! This would take us back to the days of debtor’s prison. The US Digital Millennium Copyright Act has attracted enormous controversy in the United States, and in world forums linked to the World Trade Organization, and yet here we found Australia agreeing to detailed provisions seemingly cut and pasted from the Act, without the slightest public discussion being encouraged or even allowed. But worse is the implication of adopting such swathes of US legislation—for how can it be changed other than through the US Congress or the US courts? The Australian Parliament would become a mere spectator in such processes, unable to have any but the slightest impact on the law that regulates commerce in its own country. In this way, it was clear that we were well on the way to becoming an appendage state. So this is how we came to our own conclusion that the Australia–United States FTA threatens to ‘kill’ a country: in the sense that it threatens the core institutions of our country, and begins a process where they will be relentlessly 3

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substituted with the institutions of a foreign power. In reaching this conclusion, we realised that we had to write this book. It is our task to convince you—the reader—that our title is not an overstatement, or alarmist. We want to take you on the same journey we ourselves have travelled, examining the devastating implications of this deal for the independence and integrity of our national institutions. We started the book hoping that it might be able to influence national debate in the lead-up to the federal election of late 2004, but that hope was crushed as the Senate Inquiry was rushed through (the Senate standing as the only power able to enforce some kind of national debate on the FTA), and as the Labor Opposition announced qualified support for the deal, in August of this year. So now we see this book as the first ‘post-FTA’ analysis of the state of the country’s institutions, or as a kind of update to Donald Horne’s memorable Lucky Country.1 All Australians will be familiar with Horne’s 1964 classic, but not all will realise the ironic twist to the title (‘Australia is a lucky country run mainly by second-rate people who share its luck.’). Horne was of course appraising the state of the country at the end of the Menzies era. But the parallels with what is happening today seem stark. Four decades on, as our government steers relentlessly ahead with the FTA, Australia’s luck would seem to have run out. In most major respects, we will no longer be in charge of our own destiny— at least to the extent that any self-governing country can be in an interdependent world. The FTA sounds the death knell for the lucky country. That is our sad conclusion. But now we have to convince you that our reasoning is sound.

The ‘lucky country’s’ luck runs out The starting point for this book is the extraordinarily lopsided nature of our free trade agreement with the USA (the AUSFTA, hereafter the FTA), and the unprecedented concessions made by Australia. Some of the more obvious aspects of this lopsided deal have received plentiful coverage in the media, while a number of the less obvious, but surely more 4

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damaging, features of the agreement have scarcely been noticed or else given only fleeting attention. Public debate has focused mainly on the sectors excluded from the deal— such as sugar and fast ferries—and on the paltry concessions in others, including beef, wine and dairy (which we will wait up to 18 years for all tariffs to be removed). So, by now, Australians are well aware that our negotiators did not get what they had hoped for in terms of ‘market access’ (what we can sell to the United States and when). Deeply disappointing as these market access concessions are, however, we show that the real sacrifices will come from trading away our core national institutions under the deal. These institutions underpin our economic prosperity and social wellbeing, our ability to choose among alternative goals, and the values that distinguish us as Australians. In this book, we have chosen four of the most significant institutional arrangements that will be transformed as a result of the FTA, with devastating consequences for Australia. As this shift of focus suggests, our primary purpose in this book is to go beyond the market access ‘wins and losses’ to expose the dramatic undoing of Australian institutions under the FTA, and the inevitable loss of prosperity and sense of ‘who we are’ that this will entail. At the same time, we aim to illustrate the almost casual manner in which the deal was done, and to explain how our government has brought the country to this parlous position. Of course, listening to our federal government representatives talk about the deal, you could be forgiven for concluding that it is a momentous achievement. The deal has been variously described by our Prime Minister as: ‘a once in a generation opportunity for Australia’;2 ‘an historic agreement [that] will add enormous long-term benefits to the Australian economy’;3 ‘a no-brainer for us to sign . . . because it will bring benefit to Australia’;4 and (most poetically) ‘a coming together of the planets . . . which we won’t again have in a generation or more’.5 5

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Never mind that the US has sought to involve us in a bilateral FTA on two previous occasions (most recently in 1997), and that we declined on both occasions on the grounds that it would not serve the Australian interest. How quickly things change! Reading the government’s summary of the deal’s major outcomes, one is compelled to ask why we rejected this remarkable opportunity the last time it was offered (and the time before that . . .).6 So before we shift gear to examine the institutiondestroying features of the deal—which will occupy us in the chapters to follow—let us pause for a moment to examine more closely the government’s claims about our ‘wins’ under the deal, looking with two eyes rather than one.

The real deal We focus our attention here on agriculture, manufacturing and investment, since these were areas where it was claimed we would make the biggest gains. Institution-destroying concessions governing other areas such as pharmaceuticals, quarantine concessions, government procurement and intellectual property rights are covered in the succeeding chapters. Agriculture was the area where we had most to gain. Australia is one of the world’s freest agricultural traders, with zero or low tariffs and subsidies across the board. The United States on the other hand is one of the world’s most protected agricultural traders, employing massive tariffs, quotas and, above all, subsidies to keep foreign agricultural imports out and give its exports an unfair competitive advantage. So what did our negotiators manage in this area? What did we get, and what did we give away? How does the government spiel tally with the real deal? As Table 1 reveals, not very well. And this is what we managed to achieve in the area in which we had most to gain. To give further insight into just how little we walked away with in agriculture, let’s take a closer look at our beef industry—one of the industries targeted by our negotiators as a ‘priority’ for major concessions. 6

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Table 1: The real deal in agriculture Australia

United States

We will completely open our market to all US agricultural exports, removing all tariffs, quotas, seasonal restrictions and subsidies from day one.

The US is allowed to keep many of its tariffs, quotas, seasonal restrictions and (enormous) subsidies in place.

No tariffs remain.

Tariffs remain in place for key sectors like wool (10 years), wine (11 years), steel, as well as beef, dairy, horticulture and cotton (18 years).

No safeguards negotiated.

If Australian exports to the US rise ‘too quickly’, or Australian prices become too competitive against the exchange rate, the US can slap their tariffs back on, no questions asked.

No seasonal restrictions.

During Australia’s peak production times of certain horticultural products (like avocados) Australia is allowed to export only a limited amount to the US.

No restrictions on US sugar imports.

Severe restrictions on the importation of Australian sugar will remain in place.

Agricultural ‘wins’: Have (half) a cow, man The puny nature of the concessions that the government has tried to sell as big ‘wins’ for Australia is well illustrated by the case of beef. By any objective criterion, beef ‘gains’ are minuscule, and clearly designed to have minimal impact on 7

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the US economy. A point overlooked in the debate is that we will be allowed to sell more at the bottom end of the market, i.e ‘cheap cuts’—largely hamburger mince and pet food—not our higher quality, higher value-added produce. Because the increased exports will encourage producers at the cheaper end of the market, industry analysts believe this could actually make the industry worse off in the longer run, reversing a hard-won upgrading effort.7 In the Cattle Council’s own judgement, the outcome of the deal was also deeply disappointing for three main reasons.

1 The maintenance of restrictive quotas for beef exports over an 18-year period For years, Australian exports of beef to the United States have been limited by a quota system (which includes a tariff of US4.4 cents/kg). Once our farmers reach their export quota, a bigger tariff kicks in for any additional exports. In spite of government statements to the contrary, our beef exporters have met their quotas over the past two years and would easily have surpassed them if allowed. And under the deal, we will have an 18-year wait before quotas and some tariffs are removed. This means that the existing generation of producers will receive scarcely any benefits at all. (Although under the FTA’s investment rules there is the strong possibility that our cattle farms will fall under US ownership anyway.) The comparison with Chile—which got access over a transitional period of only four years without a ‘special relationship’ with the US—makes the Australian deal all the more shocking. The industry rightly felt aggrieved: Certainly for the foreseeable future we will be bumping up against that quota, in our view. I must say that that is our biggest disappointment. Our No. 1 objective in this agreement was to try to take that quota out of play. The quota just distorts the market tremendously when it comes into play. Even if it is not hit—if it just looks like the possibility of its being hit— traders start taking positions on whether that quota will be hit . . . They tend to focus more on what is happening with 8

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quota and how they can make money out of quota rather than marketing and selling the product in the best possible manner.8

2 The maintenance of US price safeguards in perpetuity At the end of the 18-year period, quotas will be lifted, but price safeguards will remain to protect US beef. Safeguards are designed to restrict imports; they are basically tariffs that kick in if our exports become too competitive against US goods. In the beef case, a 6.5 per cent decline in Australian prices (hardly a huge fall) will be enough to trigger safeguard tariffs. Based on the last ten years of data, the industry has concluded that ‘those safeguards would have triggered in six out of ten of those years’. Not surprisingly, the beef industry remains ‘adamantly opposed’ to safeguards of this kind because they tend to be ‘arbitrary’, ‘distort trade enormously’ and are ‘enormously frustrating’ for exporters. Asked to comment on the extent to which US safeguards undermine free trade in beef, the General Manager of Meat and Livestock Australia, Dr Peter Barnard, left little doubt that their effect would be damaging and dramatic: We believe that they absolutely undermine the eventual transition to free trade. They are there for one reason: to thwart trade in beef between the two countries. They are very stringent safeguards. They have been deliberately designed by the United States to bite when they will hurt most. They are most stringent in the last quarter. Just as you want that increased access into the United States, they come in to bite really hard . . . So clearly they will have a potentially significant impact on our objective, and the government’s objective, of eventual free trade in beef from Australia into the United States.9 (emphasis added)

The possibility that our government has difficulty distinguishing the Australian interest from the American one may not be so far-fetched in view of the starkly different positions we adopted towards Japan on the matter of safeguards. During the Uruguay Round, the Australian government 9

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argued strenuously against Japanese safeguards, only to turn around and accept them in this deal with the USA. Ironically, even Japan—known also for its highly protected beef and dairy markets—committed to more extensive liberalisation under the Uruguay Round for beef and dairy than the US has done under this agreement.10 But surely our remarkable generosity must have won us something out of this agreement? Surely our negotiators insisted on something substantial in return? Sadly, it seems, no.

3 Puny gains and broken promises The industry is hard pressed to find something to cheer about in this agreement. The best thing the Cattle Council officials and Meat and Livestock Australia have to say is that the industry will be ‘marginally better off’ over the next 18 years. They have calculated in their submission to the Senate that they would be better off by half a cow per year per producer over the next 18 years. In dollar terms, the annual benefit for the average producer over the next 18 years is about A$600, or the value of a calf. These estimates are supported by a different set of calculations from the Centre for International Economics (the same consultancy firm that modelled the benefits of the FTA for the government).11 While many would consider that half a cow per producer leaves much to be desired of our negotiating team, of our government, and of the FTA itself, industry spokesmen nonetheless have taken pains to avoid any hint of criticism of all three.12 Indeed, given the dismal outcomes and the obvious disappointment of the industry, the question must be posed: Why hasn’t the industry loudly complained, or opposed the deal? Why so complacent? Could it be that the industry was bought off by the Howard Government, after the fact? We return to this intriguing question in Chapter 6.

Manufacturing ‘wins’: Miracle or mirage? Clearly in the case of agriculture, our big ‘wins’ look some-what 10

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hollow if you tell more than half the story. So what about gains in other sectors like manufactured goods? Increasing our manufactured exports to the United States is high on our list of priorities, given our huge trade deficit with the United States in this area, which in 2003 reached US$12.5 billion. Again, the possibilities for this sector were promising. While Australia and the United States already enjoy relatively low tariffs in manufactured goods, Australian exporters still face large barriers in some important areas, such as our worldclass fast ferries, autos, textiles and footwear.13 We were also expecting big gains from access to the US government procurement market (purchases of goods and services by the government). The US government procurement budget exceeds A$200 billion annually—however, Australia has been locked out of this market because of the Buy American Act, which places a 6–12 per cent tax on the bids of foreign countries (unless you are a signatory to the WTO’s Government Procurement Agreement, which we are not). Meaningful access to this market was a key goal of the Australian government, and indeed access is what the government claims it has delivered. But as Table 2 on page 12 reveals, the government’s spiel on manufacturing again belies the real deal. No wonder then that the United States believes it will be the biggest winner in manufacturing terms, calculating a further US$2 billion of exports to Australia as a result of the deal. We return to some of the more disturbing issues surrounding the deal’s impact on our own government procurement system in Chapter 4. For now, we should turn to one last aspect of the deal in which, again, our wins have been painted as irresistible by the government: investment.

The investment ‘wins’: Foreign funds for Australian assets It is the investment Chapter of the FTA which—according to the government’s own modelling—holds the lion’s share of gains for Australia. So what have we won in this regard? It is true that the United States has substantially liberalised 11

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Table 2: The real deal in manufacturing Australia

United States

The Australian manufacturing market will be 99% open to US exports from day one, no questions asked.

The US keeps a number of its manufacturing trade barriers in place including: • A ban on the import of Australia’s highly competitive fast ferries; • Complex rules of origin laws for Australian manufacturers, including textiles and autos.14 The US federal government retains the right to ‘set aside’ procurement-linked funds mandating that suppliers source products that have a certain minimum proportion of US content.

We agree to abolish all procurement-linked industry development and ‘buy national’ programs.

12

Unfettered access for US firms to the Australian government procurement market.

Restricted access to the US government procurement market for Australian firms limited by numerous discriminatory ‘buy national’ arrangements, and an entrenched ‘buy American’ culture.

Government preferences for ‘small’ local firms remain (defined as firms employing up to 200 people): • Government policy privileges foreign suppliers, requiring them to subcontract a small portion of procurement work to local SMEs in IT (10% for goods, 20% for services)—but this requirement is ‘flexible’.

Government preferences for ‘small’ local firms remain (defined as firms employing up to 1500 people): • US law requires SMEs in all sectors to receive at least 25% of prime contracts; plus additional shares as subcontractors.

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regulations surrounding Australian investment in the United States. For our US-based business leaders, however, this is a hollow victory, because the free flow of investment is not matched on the US side by the free flow of personnel necessary to make investments viable. While the United States has managed to secure the free movement of its own business executives to Australia (the so-called ‘essential personnel’ necessary to make joint ventures and other forms of direct foreign investment work effectively), it has resolutely denied Australian investors the same rights in the United States.15 That’s right. While Australia makes it as easy as possible for US executives to flit in and out of our country on business, our negotiators failed to secure reciprocity from the US side. But this important issue has been overshadowed by what the government claims is a major ‘win’ for Australia—the neutering of our Foreign Investment Review Board, paving the way for an influx of American investment. According to our government, this is a massive win, since US investment will allow Australian firms to access new know-how and business practices and thereby enhance technological upgrading and productivity. But as one of Australia’s leading economists, Ross Garnaut, has pointed out, if this were true, we surely did not need an FTA to achieve it. Simply remove screening from foreign investment, as we have done under this agreement, to achieve the anticipated results. In 1989 Canada subscribed to the myth of plenty from US investment. But, as we show below, the 1990s delivered an unprecedented decline in Canadian standard of living. Will Australia do better? Increasing US investment in Australia would be a big bonus if it were going to involve wealth-creating, or technologically upgrading activities. Over the past ten years however, the vast majority of US investment in Australia has been for the takeover or purchase of Australian firms and assets—that is, for the simple transfer of wealth from Australian to US hands. By comparison, US ‘greenfield’ investment in this country—investment in new ventures which creates more jobs for Australians—is marginal. And there is nothing in the deal to ensure that US 13

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investment in Australia will become more wealth-creating in the future.16 In fact, under the deal, we will remove all remaining conditions that require foreign investors to demonstrate some benefit to the national economy—whether by upgrading technology and skills or supporting innovation by sourcing local components, or by hiring a certain percentage of Australians in management. And we will give up screening any foreign investments under the value of A$800 million. That means 90 per cent of all Australian companies could now be purchased without any screening of the acquisition whatsoever! Canada’s experience of an onslaught of unproductive US investment after it signed an FTA with the USA (and then the North American Free Trade Agreement (NAFTA)) should sound a loud warning to Australians. In his illuminating book, The Vanishing Country, Mel Hurtig shows how Canada abolished its Foreign Investment Review Agency (the equivalent of our Foreign Investment Review Board) following its FTA with the USA in 1989, and replaced it with Investment Canada, charged with the task of soliciting foreign investment. This led to a massive influx of US investment—US$487 billion between June 1985 and June 2002. Incredibly, however, a staggering 96.6 per cent of this total was for US takeovers of existing Canadian assets and companies, while a minuscule 3.4 per cent was for investment in new businesses (businesses bringing job and wealth creation)!17 The implications for the Canadian economy have been profound: By the mid 1980s, about half of the major U.S. corporations in Canada were 100-per-cent American-owned. Ten years later, some 85 per cent had no Canadian shareholders. And in the latest Financial Post list of the fifty largest foreign-controlled corporations in Canada, forty-six were 100-per-cent foreign-owned. As Canadian shareholders were eliminated, corporate boards were substantially reduced in size and more American directors were added, as were more US CEOs and board chairmen. As external directors were eliminated, there was no longer a force to influence policy 14

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decisions which would be beneficial to Canada. Gone too was the ability to scrutinize the payment of dividends, management fees, and content costs paid to the parent company. Increasingly, local advertising, insurance, travel agencies, and many other companies are bypassed as head offices in the U.S. make purchasing decisions . . . These new arrangements increase the likelihood that . . . corporate decisions will be made without particular regard for Canadian law, conventions of business behavior or the sensibilities of local communities or governments.18

So has this massive influx of unscreened US investment proved an enriching experience for Canada? Has it boosted productivity and efficiency, increased employment, income or standard of living, as anti-screeners predicted? Unfortunately for FTA enthusiasts, the evidence is overwhelmingly negative. Canada’s free trade decade (the 1990s) was its worst since the end of the Second World War by almost all measures. The unemployment rate reached its highest annual averages since the 1950s, annual average increases in both personal19 and wage income20 were also the lowest on record since the 1950s, as Table 3 reveals.

Table 3: Comparing unemployment and wages in Canada’s ‘Free Trade decade’ (the 1990s) (all figures in percentages)

1950s 1960s 1970s 1980s 1990s

Average unemployment rate

Average annual increases in personal income

Average annual increases in wage income

4.2 5.0 6.7 8.3 9.5

— 8.3 13.4 9.7 3.2

8.4 9.1 13.0 8.9 3.3

Source : Adapted from Hurtig (2002: 368–70)

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As for productivity, which had been climbing in the decade prior to Canada’s economic integration with the US, this also collapsed in the 1990s, thanks to the failure of firms (many of which had been taken over by US ventures) to invest adequately in machinery and equipment.21 As a result, US productivity increased at three times the rate of Canadian productivity between 1995 and 2000.22 But Canada’s woes stem as much from what is in the agreement as from what has been left out or ambiguously worded. Exclusions for health care, for example, crafted by helpful US trade attorneys, left Canada open to trade action from the US should it continue to subsidise the cost of health care—as discussed in our Chapter 3 on the Pharmaceutical Benefits Scheme. And this textual ambiguity was no mistake on the US side. The day the FTA with Canada was signed, US Trade Representative Yeutter boasted back home that: ‘We’ve signed a stunning new trade pact with Canada. The Canadians don’t understand what they’ve signed. In twenty years, they will be sucked into the U.S. economy’.23 Australians might therefore be forgiven their wariness of Americans bearing ambiguous FTAs. Unfortunately for Canada, such wariness may have come too late. In the wake of Canada’s startling decline, some of the most vocal Canadian proponents of the Canada–US FTA have now become its strongest sceptics. In the words of former Conservative Premier of Alberta, Peter Lougheed, speaking in 1999: I know people will fall from their chairs to hear me say this, but maybe right now we need to return to the Foreign Investment Review Agency. We need to be more interventionist. The passive approach isn’t working. If [the present trend] continues, we are going to look at our country in about three years and say: What have we got left?24

Echoing this sentiment was former Canadian Supreme Court Judge and free trade advocate Willard Estey, who after strongly supporting the FTA with the United States in the 1980s concluded in 2000: 16

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I supported free trade a decade ago. Now I am starting to suspect that Canada may have contracted out our independence to those trade agreements. The problem is that we are letting corporations with no loyalty to this country strip it of its finite resources.25

Could such devastation await Australia? As we write, more than half of the foreign companies which are members of the illustrious Australian Business Council are not even listed on the Australian Stock Exchange, so they do not have to worry about being accountable to Australian shareholders. We can only expect this proportion to increase under the deal. All of this brings us back to the conundrum: If the FTA promises such devastation, similar to that experienced by Canada, who is supporting the deal, and why? While the final chapter of this book is devoted more fully to this issue, such an intriguing question warrants a cursory airing here.

Who is all the way with the FTA?26 Escaping harassment? Since the release of the Agreement text in February 2004, our wine and steel industries have lent their support consistently to the deal, despite their disappointing market access outcomes. So what did these industries get from the deal? Believe it or not, their great win was protection from US bullying and harassment—a longstanding problem for these highly competitive exporters. For the past decade or so, whenever our exports of wine and steel have become ‘too competitive’ in the US market, the US has simply whacked tariffs on our goods. While the fact that the US regularly harasses its ‘special friends’ so blatantly may surprise some Australians, it is a fact that cannot be denied. In the words of the Mineral Council of Australia’s Trade Policy Director: Australian exporters of steel, beef, dairy products and wine all want the FTA to reduce the scope for US companies to 17

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trigger harassment of Australian exporters by misuse of safeguards . . . Australian exporters will be protected from harassment under US countervailing, anti-dumping and safeguards actions.27

While beef and dairy will also enjoy some relief from harassment, this was not enough to lock in their support from the outset, particularly in light of their puny market access gains. But since February 2004, something has made beef and dairy change their tune from negative to positive. Similarly, the sugar industry—which got nothing from the deal—has fallen completely silent in the wake of its initial uproar. What is going on here? Why have these industries— which were promised so much but got so little—not condemned this deal for the farce that it is? Could it be that the government has bought the silence of its most likely critics? We return to this question in Chapter 6.

Business Council of Australia: Who are we? The Business Council of Australia is made up of Australia’s largest companies. Australia’s largest companies may be able to overcome the remaining market access barriers. But some of our largest companies are foreign owned, so not surprisingly are more than happy to see access to the Australian market improved even further. In fact, the majority of the Council’s members are foreign owned and large enough to hold significant clout.28

Consultants for hire: Cash for comment? Of course, the government has its favoured Agreement advocates who are regularly trotted out to sing the praises of the deal. Those most frequently called upon to speak in the ‘Australian interest’ include a former US trade representative currently residing in Australia (and whose ties with his former employer—the US government—undoubtedly remain strong), and a former Australian trade diplomat who happily 18

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lends his voice to any number of causes, seemingly regardless of Australian interests. Current causes include New Zealand apple growers (who want to export their diseased apples to Australia), and the ironically named Medicines Australia, made up predominantly of large US pharmaceutical company representatives. Of course, their former affiliations should not disqualify such people from speaking out in favour of the deal. But they should come with a health and prosperity warning for all Australians, to indicate whose interests they happen to be promoting.

Beyond market access: Giving it all away Important as it is, the issue of market access, and the lopsided nature of the deal, is only the most superficial aspect of the FTA—and the one best covered by the public discussion in Australia so far. Our concern in this book goes well beyond questions of market access, and weaves a distinctive argument out of three strands of analysis. The first strand makes clear that the deal is chiefly concerned with the institutional determinants of a nation’s competitiveness and is aimed at undermining—and, ultimately, dismantling and destroying—the institutions that give Australia a competitive edge and provide social protection. This strand of our analysis shows how the deal imposes major changes on many of our key institutions and how the consequences of these institutional changes will be far more devastating for our future than the lopsided market access issues. These are the institutions which both underpin our economic and social prosperity and preserve our distinctiveness. They include the institutional arrangements that: • protect Australian agricultural producers from devastating

pests and diseases (our quarantine system); • make medicines affordable for all Australians (the PBS); • encourage innovation without protecting monopolists

(intellectual property laws); and 19

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• support and promote Australian companies and help

foster local excellence (our taxpayer-funded government procurement system). We shall argue that all these institutional arrangements, and more, are placed under peril by the FTA. Why is this important? After all, one might make the case that countries can swap institutions, and that we might be better off with USstyle institutions than the ones we grew ourselves. The counterargument is that a country’s institutional arrangements not only impart identity and distinctiveness, they also mediate the pressures of international competition, often lending the country its source of competitive advantage. To take the case of agriculture, once we allow our core ‘clean and green’ label for our agricultural exports to be compromised—as we show is already happening in dress rehearsal for the FTA’s entry into force—then this distinctive advantage is lost forever; it cannot be retrieved. This is a loss of national competitiveness. Likewise if we dismantle our government procurement arrangements and sever them from any mandated role in developing the nation’s industry and infrastructure—another clear consequence of the FTA—we disarm ourselves in the face of our trading partners, especially the United States, which is making no such concessions in its side of the bargain. The second strand to our argument is that we locate each of these institutional changes—be they in quarantine, or public health, or government procurement, or intellectual property rights—within the wider setting of the strategic goals being systematically pursued by the United States around the world. This is another issue that has been side-stepped in the debates on the FTA in Australia. The changes to Australia’s institutions that are being pushed through are not random; rather they are conceived as serving the interests of US business acting in concert with US government agencies such as the United States Trade Representative (USTR), a partnership that we call ‘America Inc.’ to indicate its coordinated character. Through a string of bi-lateral and 20

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multilateral trade agreements that impose ‘harmonisation’ with the US regulatory system, America Inc. undertakes to make the world a safe and easy-profit environment for American companies, tilting the playing field aggressively in its favour. We show how, in signing up to the FTA, our government played directly to this agenda in the fundamental areas of government procurement, pharmaceuticals and intellectual property. This second strand of our argument places the FTA with Australia in the broader setting, where: • in agriculture, the United States seeks to compel countries

to accept its diseased and contaminated produce through the threat of trade sanctions coupled with bilateral FTAs; • in the pharmaceutical sector, the United States seeks to

impose its high drugs prices on the rest of the world, under the banner of ‘sharing’ in the R&D costs the companies claim to bear; • in government procurement, the United States seeks to

force entry into other countries’ lucrative public contracts, while keeping its own ‘buy American’ laws and numerous ‘buy national’ programs intact; and • the United States seeks to make the world safe for its

holders of monopoly intellectual property rights, such as patents, copyrights and trademarks, with a view to expanding royalty flows to the United States. Thus our analysis will also show that this Australia–US FTA falls squarely within the ambit of US strategic goals, as pursued around the world through multiple channels, including bilateral FTAs. We use this analysis to argue that the Australian side in the negotiations have been the compliant dupes of the United States in allowing the US side to further their strategic goals through this FTA. The third strand to our argument makes the point that the effects of the FTA do not lie exclusively in the future. We are already witnessing a dress rehearsal for the full Americanisation of Australia, in areas such as quarantine and government procurement, even before the deal has been 21

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signed. As we demonstrate in the next chapter, the standards already being lowered in the area of Australia’s quarantine during the bilateral negotiations, with Biosecurity Australia appearing to buckle under pressure from Washington, give us a glimpse of things to come as life under the FTA unfolds. It must be said, however, that in spite of our attention to US strategy—like the web-spinning spider setting out to catch the unwary fly—the reader looking for a standard America-bashing book is likely to be disappointed. Indeed, it is hard not to admire the American side in the negotiations for this FTA: they recognised a good deal when it was made available to them and they put their business interests ahead of neighbourly notions of a ‘special relationship’. While the United States will certainly have a leading role in the devastation that the FTA will unleash on our country, it is not the Americans who are responsible. Rather, it is entirely the Australian side in these past negotiations who must carry the burden of blame. We lay full responsibility for the disastrous deal that has emerged from these negotiations firmly on the shoulders of the Australian government led by John Howard. By eroding and dismantling our key institutions, we therefore argue that the FTA will effectively destroy our ability to protect and promote national prosperity. We marvel that such vast areas of a country’s social and economic life could be transformed so utterly, and with such minimal public debate—all in the name of seizing a ‘once in a lifetime opportunity’—to be thoroughly integrated with American interests in a manner that is entirely, 100 per cent favourable to the United States and in almost every way represents a step back for Australia, or a step forward into a space where the playing field is tilted aggressively against Australian companies. That such an agreement could be negotiated by a government that calls itself Australian, and could actually be presented to the Australian people as a ‘victory’ and as a ‘once in a lifetime opportunity’, is simply staggering. Once this FTA is implemented, then the era of the American Economic Empire may be said to have begun, with 22

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Australia as one of the first ‘developed’ economies in tow.29 This empire, like the Roman Empire before it, will not be based on colonisation and occupation, but on a much cheaper model of simply changing countries in your own image, and ensuring that they pay tribute to you—masses and masses of dollar tribute. This is what the US secures from its so-called FTA with Australia. The agreement opens the door to American investment—which can enter virtually without restriction—and remodels Australia’s intellectual property laws so that they offer US-style protection of monopoly rights in pharmaceuticals and biologicals, in software, in entertainment products, and so on—all backed by the payment of hefty royalties from Australia to the US, now and forever. And the agreement does not even offer ‘free trade’ in the area where Australia would actually benefit—in agricultural products. We envision this book as a contribution to the debate that this country must have about our own future—if we care at all about our future. The worst-case scenario would be that we do not care. In that case, as a country, we would be happy to be led by the nose by a government that represents the interests of a foreign power, to be shackled to the institutions and procedures of that foreign power—not as an equal party, enjoying the safeguards and Bill of Rights of the US Constitution, but as a slavish, doltish appendage to that power, providing it with abundant opportunities for profitable investment and paying tribute every year on monopoly intellectual property rights that actually restrict and block our own industrial development and fledgling knowledge economy. Our message in that case would be that it is time we did care about this country’s future, and time that we stood up and insisted on our leaders being called to account for where we are being led. This book is therefore primarily a work of analysis—an exposition and account of the nature, causes and consequences of the deal that has been done. We believe that even if the deal cannot be undone, some of its worst excesses may perhaps be contained and that a clear-eyed analysis is an essential first step if we are to find a way to avert disaster. 23

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The question of whether anything can be done to prevent the damage that the deal will unleash is one we take up at the end of the book.

Six steps to killing a ‘lucky country’ Our way of framing the impact of the FTA on Australia’s longterm future is to describe it in terms of six steps towards killing off this lucky country of ours. The FTA—both in what it says and what it leaves ambiguous—reads as a manual, we argue, for how to kill a country. We present each chapter as a step in that process. We began this chapter with Step 1, which involves choosing as your partner the country with the longest track record of negotiating favourable FTAs, while you yourself go into the negotiations with minimal preparation—simply placing faith in the idea that your ‘best friend and ally’ will look after your interests as well as theirs. Here we have seen the outcomes of this in the area of market access. The following chapters consider the next five steps, which we detail below.

Step 2 Take one of your most valuable export sectors and undermine its key competitive advantage—by dismantling safeguards against pests and diseases Chapter 2 shows how our quarantine system, and its sciencebased assessment of risk to animal and plant health, have been seriously compromised by the intrusion of political considerations—namely our trade relationship with the US. It discusses how and why Australia is being asked to pre-empt dispute settlement procedures that exist for quarantine issues under the WTO—which has already approved our quarantine procedures as being ‘science-based’—and instead embark on a bilateral route with the US that will take all such matters behind the scenes to be resolved in private discussions with US trade 24

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officials. We agree under Chapter 7 of the FTA to let US trade representatives into the core of our risk assessment procedures under our quarantine bodies, Biosecurity Australia and the Australian Quarantine and Inspection Service (AQIS).

Step 3 Make it impossible for the government to continue subsidising pharmaceuticals—by making way for foreign drug companies to charge full monopoly prices for their products In our third chapter we discuss a similar issue in relation to the Pharmaceutical Benefits Scheme (PBS), namely that the established procedures for listing new drugs—which evaluate their cost-effectiveness and therapeutic value—are to be undermined from within by our agreeing to let US trade officials have input to this process. In this case, US influence will be felt not through direct access to an established committee like the Pharmaceutical Benefits Advisory Committee (PBAC), but through input to a new body, the Medicines Working Group, that will rapidly be made arbiter of a dispute-settling procedure. These changes, together with our government’s agreement to extend protection of monopoly rights to US drug companies and so thwart early market entry of generics producers, will inevitably produce a soaring pharmaceuticals bill, with flow-on effects to a resource-starved health sector.

Step 4 Do away with a tried and true method of domestic industry promotion—public purchasing policy—making it harder for domestic firms to gain a foothold in the domestic or international market Abandon ‘buy Australian’ norms in favour of ‘buy American’. In Chapter 4 we turn to the question of government procurement. Australia is not one of the parties to the WTO’s plurilateral Government Procurement Agreement— 25

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having concluded that it would not be in the national interest to join because of huge and unfavourable discrepancies between the US market and the Australian one. We show how the about-face has occurred—the decision to sign up to a procurement agreement with the US under the FTA—in spite of the continuing discrepancies. We show not only that Australia has agreed to relinquish all meaningful ‘buy national’ and ‘build local’ industry policies, but that the US continues to apply and extend its ‘buy American’ preferences in both formal and informal ways.

Step 5 Substitute a world-class system of intellectual property protection and regulation for that of a foreign power. Stifle independent production of knowledge and culture in favour of using other people’s Chapter 5 examines the issue of intellectual property rights (IPRs). Australia is a party to the existing multilateral framework, the WTO Trade Related aspects of Intellectual Property Rights (TRIPS) agreement. As part of the FTA however, we are agreeing to go well beyond the TRIPS standards and provisions. Here we are not being asked to agree to the formation of a new committee (probably because there is no effective Intellectual Property (IP) committee in Australia) but instead to adopt, more or less holus-bolus, American laws and regulations on patents, copyright and trademarks, including issues to do with recognition, protection, challenge and enforcement. In this case we agree to adopt multilateral standards that we have not yet ratified—with severe implications for our own domestic industry.

Step 6 Buy, bully or browbeat all those who would seek to challenge the damaging deal, closing off public scrutiny and debate, and setting one sector against another 26

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In our final chapter we conclude by bringing the story back to two puzzles that emerge from this analysis: how did the government end up with such a devastating deal, and how did it manage to sell such a lopsided, anti-Australian outcome as a ‘win’ to the Australian public? We emphasise that we do not want to see our country devastated through these six steps, or any others that can be discerned in the FTA. We do not want to see Australia as an appendage of a foreign power. But that is precisely where we are headed if and when the clauses of the FTA start to bite. As a nation, we had better understand just what we stand to lose through this trade agreement with the United States. That is why we have written this book.

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Quarantine

Open season for pests and diseases How to kill a country—Step 2 Take one of your most valuable export sectors and undermine its key competitive advantage. Agriculture is an obvious choice in the Australian context. As a clean, green image is the jewel in the crown of this thriving export machine, destroying its viability is easy. Simply dismantle our stringent quarantine controls and invite in the world’s most devastating pests and diseases. Then stand back as these pests and diseases infest and infect our clean, green export industries, from pork and chicken to apples and citrus. Countries still wary of pests and diseases will then reject our tainted exports to protect the health of their own plants, animals and people. As imports build up and our export industry dies away, thousands of jobs will be lost and the trade deficit will balloon. So this sure-fire way of eroding export earnings and putting thousands of people out of work will have the added impact of blowing out the trade deficit. Unfortunately this is an all-too-accurate picture of what the Australian government has done with quarantine issues in the FTA. It would come as no surprise to most Australians that we are one of the world’s leading agricultural exporters, along with the United States and the European Union (EU). Perhaps less well known, however, is the source of our competitiveness in agricultural matters. Unlike other developed countries, we are able to maintain our competitive position without resorting to 28

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massive subsidies and tariffs, policies which cost taxpayers millions and rob farmers in developing countries of their livelihood. We do not need these expensive and unfair price supports because we have an efficient and cost-effective agricultural sector, backed by a powerful (yet fragile) weapon—our unique status as a clean, green agricultural producer. As an island nation, Australia is mercifully free of many of the world’s most devastating pests and diseases, nasties which have brought agricultural industries elsewhere to their knees (think mad cow disease and foot-and-mouth in Britain, and bird flu in Asia). Freedom from such problems enables our producers to compete with low-cost and subsidised exporters in the international market. A smaller pesticide bill helps keep our prices—and the use of toxic chemicals— down. But even when our produce does cost more, consumers are guaranteed they will not be digesting diseased or toxically fumigated goods. Not surprisingly, many find this ‘clean’ alternative appealing, and are happy to pay for the peace of mind. But with trade and travel on the increase, our island status only protects us so far. A stringent quarantine system lies at the heart of Australia’s clean, green image. Anyone who has been sprayed with pesticide by an apologetic flight attendant before landing in Australia, or who has queued patiently while customs officials scrutinise suspect souvenirs, would be all too familiar with this. Similarly, agricultural produce from our trading partners is subject to rigorous scrutiny by the Australian Quarantine and Inspection Service (AQIS)— our quarantine law enforcer. But who sets the rules that AQIS enforces? This critical task falls squarely on the shoulders of Biosecurity Australia. Nestled in the Department of Agriculture, Forestry and Fishery, Biosecurity is responsible for setting our quarantine rules and regulations, making it the primary protector of plant and animal health in the land. If a trading partner wants to export an agricultural product to Australia, it must first request permission from Biosecurity Australia. Upon receiving such a request, Biosecurity pulls together a panel of 29

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scientific experts from government, industry and academe to produce a scientifically based Import Risk Assessment (IRA). Such reports review all the available scientific evidence, and construct a risk assessment. If these risks are found to be significant, then the IRA might also stipulate the measures required to bring that risk down to an ‘acceptable level’, which in our case is ‘very low’.1 Australia, like the United States, is a signatory of the WTO Agreement on Sanitary and Phytosanitary Measures (SPS) which came into effect with the creation of the WTO in 1995.2 This international agreement lays down broad responsibilities on signatory countries to make transparent their procedures for protecting the health of their human, animal and plant populations, without restricting unduly their rights to impose strict standards of risk assessment and enforce those standards. Now the WTO, in its last Trade Policy Review, has explicitly endorsed Australia’s sciencebased approach to protecting our plant and animal health, under the terms of the SPS Agreement. Here is what the WTO had to say: Australia’s SPS and quarantine requirements have been criticized by a number of its trading partners on the grounds that they are unduly stringent and therefore protectionist. But with Australia heavily dependent on agriculture and a major exporter of agricultural commodities and agrifood products, which receive relatively little government assistance and are sold at world market prices, these measures are believed to be necessary to ensure that Australia’s reputation as a reliable exporter of high quality agricultural products is not jeopardized by pests and diseases.3

Mark Vaile, Minister for Trade, believed that the WTO’s favourable review had put to rest the mistaken idea that our stringent quarantine standards are unnecessary barriers to trade. Indeed Minister Vaile has delivered a robust defence of Australia’s quarantine system on more than one occasion— to defend it from baseless charges, such as those from our 30

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American friends, that our quarantine services lack an ‘objective’ and ‘science-based’ standard. I make no apologies for our conservative level of protection. As an island continent we are free from many of the pests and diseases prevalent in other parts of the world and our quarantine regime is designed to ensure that we stay that way . . . Quarantine decisions in Australia are, and will continue to be, made by AQIS in an impartial and objective manner— based on science . . . as a nation that exports two-thirds of its agricultural produce, strong science-based international rules on quarantine—as exhibited in the WTO SPS Agreement—are very much in our national interest . . . Let me be very clear on this. Quarantine barriers are not something that the government will trade-off for any reason—be it in response to political pressure or to gain better market access for some other commodity.4

So if quarantine barriers are ‘not something that the government will trade-off for any reason’—in the Minister’s own words—one has to ask: Why is Australia agreeing to put SPS (i.e. quarantine) measures on the negotiating table in the context of this Australia–US FTA? More critically, why are we agreeing to create new committees and working groups, which give US trade representatives the power to influence our nation’s scientific assessments of risk when it is well known that the United States adopts an aggressive stance on such matters, and has publicly queried—time and again— the ‘objective’ and ‘science-based’ character of Australia’s quarantine assessments? Australians would surely be startled, if not alarmed, to know that under the FTA we have agreed to let US trade officials sit on the bodies that will influence our quarantine standards. Formalising the participation of US trade representatives in our quarantine decision-making processes will give foreign government officials the power to intervene in policies crucial to our national economic security. The implication for Australian quarantine is obvious. Australia will be compelled 31

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to compromise its scientifically rigorous risk assessment as a result of US trade pressure. Depending on the sector involved, this is likely to either irreparably damage Australia’s status as a disease-free agricultural exporter—our key competitive advantage—or increase the use of toxic pesticides to decontaminate infested US imports, posing a greater health risk to Australians. While the text does not spell this out in so many words (hardly surprising), the implications are clear both from the nature of the changes involved and from the evidence, presented below, of Biosecurity’s new orientation to risk in response to US pressure. Australian government officials do not deny that the United States frequently complains about our quarantine system. But according to officials in Canberra, it is highly unlikely that the United States would use the FTA bodies to air such complaints: . . . arrangements under the FTA do not politicise the process. That is not to say—and I have already made this point—that there is not from time to time in either direction political pressure applied in relation to SPS disagreements. That has been a fact of life and will no doubt continue to be a fact of life.5

Why, in the view of our negotiators, are these new FTA bodies not likely to politicise SPS determinations? Because the Agreement doesn’t say so, clearly! And what if—in a hypothetical moment of weakness—the US momentarily loses sight of these bodies’ true purpose and tries to unduly influence our quarantine decisions? ‘Australian officials are more than capable of resisting such pressure’, runs the argument from our Canberra officials. This would be reassuring, if the evidence were not so completely in contradiction. The reality is that in the same period that Australia proposed an FTA to the US and then began negotiating the deal, our science-based quarantine system has been steadily undermined. In the past six months alone, Biosecurity has released three revised IRAs, 32

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all of which would have overturned existing import bans (on apples, bananas and pig meat) but none of which would have effectively protected Australia from some of the most devastating pests and diseases. They would, however, have been effective in increasing US apple, banana and pork imports. So questionable were these IRAs that all three were referred to Senate inquiries at the insistence of outraged industry groups. The Senate hearings revealed that Biosecurity’s scientific risk analyses were defective, and that they are already being unduly influenced by trade considerations—and this is before we have actually ratified the FTA.6 Growing industry alarm and unrest at Biosecurity’s apparent concern to hasten (US) imports at the cost of plant and animal health has begun to have repercussions in Canberra. In the face of mounting industry pressure, in July 2004, the head of Biosecurity Australia (one of our negotiators on the FTA for the SPS Chapter 7), Mary Harwood, was compelled to resign. This, then, is the body that is supposed to be standing by the robust scientific evidence and withstanding American pressure to allow US agricultural exports into Australia. If what has transpired so far can be taken as a dress rehearsal for what is to come, the FTA will serve only to institutionalise US pressure, making it even harder for our government to defend Australian interests. The implications of the new arrangements have not gone unnoticed by Australian industry representatives, such as the Australian Chicken Meat Federation (ACMF): ‘Even though the US regards our quarantine as a non-tariff barrier, it has not challenged our cooked chicken meat protocol in the WTO. We believe the US may attempt to get quarantine through the back door through this FTA’.7 Thankfully, some of our elected representatives are similarly sceptical about the changes, the most vocal being Democrats Senator John Cherry who, to his great credit, was instrumental in having Biosecurity’s questionable IRAs referred to the Senate for inquiry: 33

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Certainly our concern is that the only role trade officials from the US could possibly play in our quarantine system in a technical working party is trying to put pressure on, more political pressure to lower our quarantine standards, and increase the risk of diseases coming into Australia from other countries.8

The only conclusion one can reasonably draw regarding the creation of these quarantine committees under the FTA is that we have caved in to pressure from the United States— our trusted friend and ally. The United States has insisted on these provisions precisely because they know our quarantine procedures have received a high mark from the WTO, and that appeals against our decisions to the WTO (e.g. to exclude pest-infected US apples) are unlikely to be successful. In effect, despite our negotiators’ protestations to the contrary, the US rationale for the new FTA arrangements can only be pre-emptive: to displace the WTO mechanism in favour of a non-transparent, bilateral forum operating in secret. Such a forum would necessarily give US trade negotiators the power (that they do not currently have under the WTO) to shape nationally critical quarantine outcomes or (in FTA language) ‘address . . . issue[s] of particular interest or concern affecting . . . trade between the Parties’.9 As in the case of changes affecting the Pharmaceutical Benefits Scheme (discussed in Chapter 3), this is rather like putting Dracula on the board of the blood bank. Our main purpose in this chapter is to show why agreeing to provide a political forum outside the auspices of the WTO in which to discuss quarantine issues cannot be justified on national interest grounds. The information that follows will dismay and confound those with any faith in our government’s ability to advance the Australian interest, even in negotiations with ‘special friends’. We start with the origins of the quarantine agreement, showing how many aspects simply rubber-stamp the demands of US farmers, whose aim is the ‘reduction’ and ‘elimination’ of Australian quarantine standards. A nightmarish tale from our apple industry (along with 34

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similar examples from the banana and pork industries) then reveals how our government is already finding it difficult (and often impossible) to resist US pressure on quarantine. We conclude with a look at the existing system of SPS regulation under the WTO, which provides a tried and tested avenue for countries with legitimate trade-related quarantine concerns to seek a transparent investigation and fair resolution. This stands in stark contrast to the back-room negotiations to which we are exposing ourselves under the FTA.

How the FTA changes Australian quarantine Quarantine matters are covered in Chapter 7 of the FTA on Sanitary and Phytosanitary (SPS) measures. It reaffirms the existing commitments of both Australia and the US to the WTO Agreement on SPS measures. This should have been sufficient for a trade agreement between the two countries. But the US always wants more from a bilateral FTA than it can secure through a multilateral agreement like SPS (on quarantine) or TRIPS (on intellectual property rights— discussed in Chapter 5). So instead of leaving SPS matters in WTO forums, Chapter 7 establishes two bodies that will bring US trade representatives into the heart of Australia’s decision-making procedures. The danger for Australia in this arrangement is that we lose access to a multilateral system of dispute settling, with agreed procedures and a body of accumulated evidence, for the untried and untested bilateral procedures between the United States and Australia, where one party has an obvious size and weight advantage over the other. Chapter 7 mandates the establishment of two quarantinerelated discussion bodies: • The Australia–US Committee on Sanitary and Phytosanitary Matters (hereafter the SPS Committee). • The Australia–US Standing Technical Working Group on Animal and Plant Health Measures (hereafter the SPS Working Group). 35

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According to the Agreement, these bodies will ‘provide a forum for addressing bilateral sanitary and phytosanitary (SPS) matters, resolve trade issues, and thereby expand trade opportunities’.10 Given its emphasis on trade facilitation, the Agreement stipulates that the SPS Committee will comprise trade representatives as well as scientists.11 In the event of a trade-related quarantine dispute, the SPS Committee will refer the issue to the SPS Working Group. Within 60 days, the Working Group must devise a ‘Work Plan’ and ‘conduct technical and scientific exchanges on the matter with a view to reaching consensus on resolution of the issue’.12 Who exactly will sit on these bodies and how will they operate? It is significant that these important details are not explicitly stated in the text. This kind of ambiguity was one of the central issues highlighted by the Senate Inquiry into the FTA, in its Interim Report, where it states: There is a considerable amount of concern about the need to establish an SPS Committee and a Technical Working Group, and what their role and influence will actually be . . . In the Australian context, particularly as we are an island nation, the integrity of our scientifically-based import risk assessment is of paramount importance to the well-being of our environmental, agricultural and aquacultural sectors.13 To give a flavour of the discussions that took place during the Senate hearings, consider the following edited exchange between the senators and Ms Virginia Greville, one of our chief agricultural negotiators: Senator Conroy: . . . How many scientists will be on this new committee? Ms Greville: That is not stipulated in the text; it is yet to be agreed . . . There has been no discussion of, and it is not stipulated in the text, how many will be— 36

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Senator Conroy: Do you know how long that will take? Ms Greville: How long what will take? Senator Conroy: Before we know the composition of that? Ms Greville: The text provides for 45 days, I think. I have to look it up. Senator Conroy: After the signing, or after the passage? Ms Greville: After entering into force. Senator Conroy: So we are not going to know the composition of this panel until after we have voted for it? Ms Greville: It says: The Working Group shall establish operating procedures within 45 days of the date of entry into force. Senator Conroy: So the Senate will vote for it without knowing what it is. Ms Greville: The Senate will vote for it on the basis of the articulation of what it will do and how it will operate, which is explicit in the text. Senator Conroy: You do not think it is relevant for us to know? Ms Greville: The operating procedures are the nuts and bolts—who will call meetings, how will the agenda be set— Senator Conroy: No, the composition is not a nuts and bolts issue; I am sorry. Ms Greville: The parameters of the composition are outlined in the text. It talks about members of the relevant competent authorities with responsibility and expertise to consider the particular technical issues, or some such words. The text does not stipulate who they are or how many there are, but— Senator Conroy: I presume you are not waiting until the text is passed before you have discussions about the likely composition—or are you? 37

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Ms Greville: To be honest, we are, in the sense that we already have, as I have said before, an informal arrangement which looks very similar to this where we reasonably regularly talk to our United States counterparts on these kinds of issues. There is no limit currently on who, within the relevant authorities, participates in those. It is generally decided on who knows what is going on. So we have not devoted any time that I know of, since the text was finalised, to discussing the operating procedures for the technical working group. I certainly have not been involved in any. Senator Conroy: So I guess the answer to that is that we, the Parliament, will not know about the composition of these committees before we vote on the Bill. Ms Greville: You will know to the extent that the composition is dealt with in the text.14

More disconcerting, however, is the ambiguity that surrounds the exact nature of the relationship between the SPS Working Group and Biosecurity Australia’s IRA panels— the panels responsible for determining Australia’s quarantine standards. How will the Working Group’s findings influence the outcomes of Biosecurity’s risk assessment processes? Will IRA panels be obliged (legally or otherwise) to accept the Working Group’s findings as the final word on the impact of a certain pest or disease, or how a pest or disease is best managed? Just how much influence will this joint US–Australia Working Group have over Australia’s quarantine decisions? Worryingly, even one of Australia’s chief negotiators of this SPS Chapter is unsure about how this relationship will actually play out (though for her, the ambiguity of the Agreement text is no cause for concern)—as shown in this edited exchange: Senator O’Brien: Okay. So Biosecurity Australia cannot say, ‘That’s been resolved at the US–Australia level; you, the import risk assessment panel, will accept that resolution’?

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Ms Greville: No. The import risk analysis panel is responsible for its import risk analysis . . . Senator O’Brien: You can see the inconsistency there, can’t you? Australia and the US meet. The US believe that they have resolved an issue, but our import risk assessment panel, being independent, say, ‘We don’t accept that resolution. We find something different.’ Does that not mean that the US could take us through the appeals processes and produce the agreement reached at the US–Australia level as evidence of the incompetence of our import risk assessment finding? Ms Greville: I think we are getting a little far into the realms of the hypothetical here. Senator Conroy: No, we are not at all. Senator O’Brien: We are trying to understand how the agreement will work. Ms Greville: I understand the point that you are making— Senator Conroy: You have negotiated this, and we are trying to understand what the processes are. Ms Greville: Sure . . . I have to say that, on the face of it, if those two competent authorities have come to some agreement about what a technical issue is or is not, it is unlikely that that would not be taken on board by the import risk analysis panel as a very useful contribution. What I cannot tell you is that it will be binding on the import risk analysis panel, because I do not believe that that will be the case. Senator Conroy: You ‘do not believe’? You negotiated it. We want you to tell us that it will not be. Ms Greville: As far as I am aware, it will not be, but I should— Senator Conroy: It is legally unable to be enforced. Ms Greville: It is legally unable to be enforced. I can assure you of that . . .

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Senator O’Brien: . . . Clearly what I am trying to understand is what that means in the context of the processes that we establish to assess import risks, which are supposed to be independent of trade and bilateral considerations. It appears to me that what is being suggested is that the solution found by that panel will need to be given some weight by the import risk assessment panel. The alternative is that this is a window-dressing body that has no meaning in our import risk assessment process. It has to be one or the other . . . I think the way in which I couched my question was either that their finding would have some weight or that it would have none. I am still trying to understand it. It would have some weight. Ms Greville: Yes, it would have some weight. I think it would probably have quite a lot of weight, but that is not the same as saying that that technical resolution process has replaced the thinking of the IRA panel— Senator O’Brien: It is clearly an established mechanism which, on your evidence, we should understand to create the prospect of a finding on sanitary and phytosanitary matters which will have bearing on our import risk assessment process. I think that is how industry understands it and I think you have confirmed that. How you sort out the question of how much influence it will have is very much a matter of experience rather than something that we can predict. That is a fair proposition, isn’t it? Ms Greville: Yes, it is . . .15

But wait a minute. The government’s FTA fact sheet states clearly that under the deal, ‘Australia’s regulatory systems, risk assessment and policy development processes are not affected, and the FTA does not compromise Australia’s quarantine regime’ (emphasis added).16 So there is something of a gap here between the stated position and the actual understanding of the people involved. More precisely, these new FTA bodies set up a conflict of interest between the science of risk assessment and trade. 40

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This is also the view expressed by one of the most respected scientific bodies in the land. The Federation of Australian Scientific and Technological Societies (FASTS)—the peak representative body of 60 000 scientists and technologists in Australia—had this to say to the Joint Standing Committee on Treaties (JSCOT) enquiry into the FTA: Chapter 7 in the draft free trade agreement essentially creates a bureaucratic structure to discuss sanitary measures in respect of trade. It does this by creating two committees—a fairly general committee and then a standing technical working group. The objectives of both of those committees go to protecting animal, human or plant life and to facilitating trade between the parties. So we would say that there is a potential internal conflict of interest between the two broad objectives of both parties. You would be well aware that for many years US agribusiness has claimed vociferously that Australia has used quarantine measures as a barrier on trade. They—and indeed other countries—have been quite vigorous in trying to get Australia to relax its quarantine regime. FASTS’s view is that this new structure would seem to shift a concession to the US in this matter.17

So the issue of textual ambiguity in the SPS Chapter should not be lightly dismissed, especially as such ambiguity seems typical of the broader document. Some sections of the FTA text (arguably where the United States knows exactly what gains it intends to secure and interests it intends to protect and is not afraid to make this clear) are extremely detailed, while others (regarding the other party’s gains and interests) are often left vague enough to be open to legalistic interpretation down the track. This is a key American negotiating tactic known as ‘constructive ambiguity’, an issue we shall again encounter in Chapter 3’s discussion of changes to the PBS.18 For now, we can simply note that being a ‘special friend’ is no guarantee that the ‘resolution of ambiguity’ down the track will help, not harm us. We see this all too clearly in Canada’s experience, discussed in Chapter 1. 41

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The US approach to quarantine—and its impact on the FTA The WTO SPS Agreement The United States was a strong advocate of the SPS measures being adopted as part of the WTO accords in 1995, and ever since it has been the most aggressive user of these WTO standards on SPS measures, accusing countries when they take steps to protect themselves from infested US imports of erecting unfair trade barriers. A particularly fraught case involved the European Union placing an import ban on US and Canadian beef exports in 1989, where the beef had been treated with growth hormones. Following the establishment of the WTO in 1995, the United States and Canada launched a case against the EU, the first test of the WTO SPS Agreement.19 In 1997, after nine years of wrangling, the WTO ruled that the EU ban was inconsistent with its WTO obligations (in that it was not based on science) and ordered that the ban be removed. In the latest such case, the United States has contested Japanese quarantine restrictions on US apples.20 Japan imposed import restrictions on US apple exports in 1994 in order to protect itself from fireblight infestation (the same pest currently concerning Australian apple growers, and the subject of a controversial Biosecurity Australia Import Risk Assessment discussed below). The United States appealed to the WTO’s Dispute Settlement Body, which found in 2003 that Japan’s requirements for orchard inspections—500-metre buffer zones between infected trees and trees with apples intended for export to Japan, and chlorine fumigation—were invalid since they were not based on ‘scientific’ evidence; a despicably constructed ‘technicality’, but enough to get US lawyers over the line. At the time that this ruling ran out, on 30 June 2004, Japan and the United States had met several times, but Japan was holding a firm line in defence of its apple orchards although it had issued a revision to its requirements. But the United States insisted on full retraction, and imposed trade sanctions worth US$143.4 million—the estimated trade loss from the 42

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banned apple exports. Of course it is now to be expected that Japan will counter with targeted trade sanctions against the United States. Thus these SPS measures work their way through the WTO process and beyond. The Japanese case centred on the fact that fireblight could be transmitted on fruit. However, the evidence that Japan presented was based on the existence of fireblight bacteria on immature fruit. The United States thus argued that it wanted to export mature fruit, not immature fruit, and that Japan had not presented any evidence about mature fruit. The WTO thus ruled that Japan’s science was insufficient to justify its stringent quarantine measures. Unfortunately for Japan, it had not considered that the age of the apple would be used by the United States as a defence. Had Japan thought of it, it could have presented evidence which showed that fireblight could be transmitted on mature as well as immature apples. Indeed evidence since presented to the Australian Senate Committee on apple imports from New Zealand by our own industry has proven this point.21 Australia too has had its share of disputes on SPS matters brought to the WTO for resolution—notably in the case of Canada’s challenge to Australia’s import ban on Canadian fresh, chilled and frozen salmon to protect Australia’s salmon fisheries.22 That this has been the sole ruling against Australia on SPS issues, and that this ruling was based on a technicality, is indicative of the perceived legitimacy of our quarantine regulations under WTO law.23

Bilateral SPS measures As in the case of TRIPS, the United States has followed up on the multilateral SPS standard with a series of bilateral standards achieved through FTAs, whereby countries are pressed to concede standards on SPS measures that go beyond the WTO guidelines, by inviting US trade representatives into key national decision-making processes. This is certainly so in the case of Australia, as indeed of Chile. In the Australia–US FTA, we are agreeing to the formation of 43

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bilateral committees and working groups that give the United States a direct voice in the setting of our SPS standards (and, admittedly, give Australia a voice in the setting of US standards, though we should expect our impact in this context to be governed by US notions of ‘reciprocity’ rather than pure science). This is a concession that goes well beyond anything agreed to under the SPS WTO rules. Government commentators have noted that the SPS Chapter in the Agreement does not include formal ‘dispute settlement’ procedures, so that each party may still have recourse to the WTO procedures in the event of a failure to resolve outstanding issues. Realistically, though, with respect to SPS issues, it does not take too much effort to see that the new arrangements will for the most part pre-empt formal dispute-settling by taking it out of the forum of the WTO and thrusting it into the ambit of the new FTA Standing Committee, which will be much more sharply oriented towards the interests of the United States. This leads us back to the recent scandals involving Biosecurity Australia and the setting of import standards for the prevention of entry of exotic pests and diseases. As we show below, there is now convincing evidence that the kinds of pressures that we can anticipate in increased measure once the FTA is implemented are already being felt in the quarantine area. It is surely no coincidence that the marked erosion—in some respects, destruction—of our risk assessment standards has taken place during the very time span that Australia has engaged the United States in doing a trade deal. In this respect, it is the case of quarantine that gives us the sharpest picture of how life under the FTA is likely to unfold.

Australian quarantine standards: Already buckling under pressure? The recent sudden departure of the Executive Manager of Biosecurity Australia is one small indication that things are not all well with our quarantine system (read: our SPS protection standards). The consequent reshuffle of the biosecurity agency 44

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was preceded by a number of alarming stories whereby the integrity of Australia’s procedures for protecting our plant and animal health was being placed under severe strain. One by one, Biosecurity was overturning existing quarantine protocols and doing so in the context of the FTA negotiations—first with bananas, then pork, followed by apples. The pattern could not be clearer. In response to what can only be described as a series of outrageous actions on the part of Biosecurity, our farmers were brought out into the street to protest, particularly in relation to apple imports. The nightmare detailed below reveals how vulnerable our officials have already become to relentless trade pressures to relax existing protocols.

She’ll be apples: ‘Relaxed and comfortable’ in the face of disaster The release of the revised IRA on New Zealand apples in February 2004, which recommended the importation of apples under ‘strict’ quarantine conditions, was met with outrage from Australian growers.24 Much to the industry’s astonishment, the revised report reduced and even eliminated many of the quarantine protocols recommended in the 2001 draft, but presented no new scientific evidence to justify this extraordinary about-face. Growers are convinced that the decision to import apples under these less stringent protocols will spell the death of the Australian industry. So concerned are local apple farmers that in June 2004, growers and their communities staged mock funerals Australia-wide. In Shepparton in Victoria, more than 8000 people clothed in black marched solemnly down the street, following an apple-filled hearse. Some led the ghoulish parade dressed as the Grim Reaper. When straight-talking Australian farmers resort to fancy dress to make their point, you know there is something seriously awry. The climax of the day came with the burning of hundreds of wooden apple bins, symbolising the death of the Australian industry should we accept New Zealand apples under Biosecurity Australia’s conditions. 45

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So what are Australian farmers scared of? Fireblight—a devastating apple and pear disease taking its name from its symptoms. You can tell you have had a dose of blight if it looks like a bushfire has silently ripped through your orchard overnight, making the burning of apple bins in Shepparton particularly symbolic. Fireblight kills and blackens whole branches of apple trees and entire pear trees, and once you have it, that is it. No country has ever successfully eradicated this devastating disease. Codling moth and apple scab are also common in New Zealand, whereas Western Australia remains the only production region in the entire world to be free of these parasites (which is why Western Australia won’t even import apples from Australia’s eastern states). Australian apple and pear growers have focused their efforts on fireblight, however, as it is considered to pose the greatest risk. According to industry representative John Corboy, fireblight is like being shot in the head, where the others are a shot in the arm.25 If you’re facing a double barrel, you protect your head first. So why is the Apple IRA a shot to the head for Australian industry? What are our growers’ main concerns? First of all, the Biosecurity Australia risk regime is not designed to keep exotic apple diseases out of Australia, but rather to minimise their entry and the possibility of spread. But the idea of inviting fireblight in at all—even if you try to prevent its spread—does not invite confidence from the industry. For Corboy, ‘this is about as dangerous an assumption as you could ever make for any pest or disease. Pests and diseases, by their nature, find a way of re-creating . . . They are very good at perpetuating their species’.26 Moreover, while Biosecurity contends their protocols will limit the entry of fireblight bacteria and other damaging infestations to insignificant levels, the apple growers are not convinced. So what are these protocols? First, under the latest draft IRA, apples destined for the Australian market have to be harvested from a block of ‘symptom free’ trees (not disease free, just symptom free). Leave aside the fact that chemicals used to treat fireblight in New Zealand actually suppress 46

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symptoms. More worrying is the method proposed to ensure a tree is symptom free—a visual inspection from the ground. The symptoms you are looking for could be as small as 2mm lesions. Moreover, there is 30 per cent of a tree that you cannot actually see from the ground (unless of course you’re ‘Magoo the Magician’, as Senator Buckland pointed out).27 But Biosecurity Australia is happy to grant a New Zealand tree symptom-free status on the basis of just one visual inspection, and it does not even have to be just before harvest. Our growers are also concerned about the decision of Biosecurity not to require a buffer zone around symptomless trees to make sure that people do not accidentally pick from a ‘bad apple’ tree, even though this recommendation was in the previous draft. When the United States imports apples from Korea, it requires a 200metre wide buffer zone around export-quality trees. But we are proposing no buffer at all! Like the Australian producers, Senator Heffernan was intrigued as to how human error might be limited under such a system: ‘If there is no delineation between a diseased block and an export block—just a track up the middle, with no market zone—and there are 50 blokes and one manager who has gone for a cup of tea, or to the toilet or somewhere, how do you know that people do not pick off the wrong tree?’28 The response of Biosecurity Australia? ‘You don’t.’ Biosecurity Australia’s revised protocols for ‘managing’ risks associated with banana imports from the Philippines were met with similar incredulity by the Senate Committee investigating the Banana IRA.29 The latest Banana IRA (released in February 2004) also overturned its own previous recommendation that such imports were simply too risky to allow. And the quarantine standards proposed in the revised IRA were similarly suspect. The recommendation that every bunch of bananas brought into Australia (79 million bunches per year) be hand-wiped by Filipino packing station workers to remove mealy bugs, elicited the following response from Senator Heffernan: ‘You are not talking of a practical scenario when you talk about wiping each banana. That is 47

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bloody bullshit [sic].’30 The fact that the quarantine process would be overseen by the Philippines’ Minister for Agriculture, whose family just happens to control the Philippines’ largest tropical fruit exporting firm (a ‘risk’ overlooked by Biosecurity), received a similar response. These are just a few of the questionable changes to quarantine protocols proposed by Biosecurity in its most recent draft IRAs. The fact that the risk estimates for both apples and bananas could change so dramatically between the first and second drafts—with no new science to justify these changes—defies belief. It is not as if no new science exists on the relevant diseases. Indeed, as the apple grower cited below points out, new science on fireblight treatment exists in abundance but it just happens to go against Biosecurity’s recommendations, and was not even cited in the new report: For every one of those treatments [recommended by Biosecurity Australia] there are a whole lot of scientific papers that oppose what Biosecurity is saying. From my perspective it does not seem to be a balanced argument. It seems to be that anything that supports the Biosecurity case is adhered to or taken into account and anything that does not support their case seems to be dismissed.31 But this is one of the benefits of playing the role of judge, jury and (quite possibly) executioner. Biosecurity sets Australian quarantine standards through its IRAs. If there is a challenge to the science of an IRA, the agency is the arbiter of the dispute, and has the final say on the outcome. Moreover, the agency has just tightened its own rules to stipulate that you cannot appeal against revised IRAs on the grounds of scientific merit. Biosecurity’s word on scientific risk appears to be final, whether it is disputed or not. This is paricularly worrying, given the trouble Biosecurity seems to have in accurately counting and collating the findings of its statistical risk modelling. Mistakes in the most recent Banana IRA profoundly underestimated the risk to Australia and led to a complete revision of the quarantine 48

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recommendations, but not before the industry had spent thousands of dollars proving that Biosecurity’s calculations were incorrect. It would thus have come as no surprise to the then-Executive Manager of the agency, Mary Harwood, when she was asked by the Senate Committee on 31 March 2004: ‘Have you had the spreadsheets checked by a third party with respect to the Apple IRA?’. Indeed, Harwood’s carefully worded response indicates that the question did not come out of the blue. ‘The spreadsheets have been verified as presenting an accurate electronic transcription of the model as presented in the printed report,’ she said.32 This was enough to satisfy the Senate that the Apple IRA was at least based on sound calculations. So imagine the committee’s astonishment and anger when, on June 30, Ms Harwood revealed in her opening statement that numerous errors had indeed been found in the mathematical calculations of Biosecurity Australia’s apple report. The story gets worse. Biosecurity had actually known about the errors in early March, but did not say anything to the industry, or even to the Senate when Harwood was asked directly if the report had been checked. They had simply put a corrected version of the report on their website, but with no reference to the fact that there had been mistakes in the original, or that the copy on the website was different from the copy that the industry was in the process of scrutinising—at enormous expense. Moreover, Biosecurity officials had continued to travel the country handing out incorrect hard copies to industry representatives, not mentioning once that the document was flawed. So why did Harwood confess these errors to the Senate without prompting on 30 June? Because she had received a phone call from John Corboy the day before, alerting her to the fact that the industry’s modellers had found an error in the report. It takes little to appreciate the shock to the industry upon hearing that Biosecurity had known about these mistakes for months, but didn’t consider it important enough to share this information with the industry! Better then to confess to the Senate before the industry itself had a chance to break the news directly. 49

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This was no inconsequential error on the part of Biosecurity. As an agency it knew the industry was spending hundreds and thousands of dollars testing and responding to a document that was in fact flawed: After the Banana IRA was shown to have problems, Biosecurity Australia stated in the public arena that those problems did not affect the Apple IRA and that the Apple IRA was correct. They found that they had made mistakes but they did not tell anybody. They did not tell us that we were in fact responding to a document that had fundamental errors in it. Not only that, but they continued to distribute documents that they knew were wrong . . . We have spent hundreds of thousands of dollars in cold hard cash, and that is not counting the time and effort that industry people have spent responding to a document that is wrong and that Biosecurity Australia knew was wrong.33

So what can we glean from this series of events? Industry representatives have no doubt that the cause of Biosecurity Australia’s erratic behaviour is fear of retaliation from our trading partners—particularly the US, waiting in line after NZ for an Apple IRA: Senator Colbeck: Would you like to comment on the suggestion that New Zealand might take this issue to the WTO and the impact of that on the philosophy of Biosecurity Australia preparing the IRA? Mr Corboy: There is no doubt that Biosecurity Australia and AFFA [Department of Agriculture, Fishery and Forestry Australia] do not want to end up in the WTO, and I think they themselves would concede that. Our concern as an industry is that it is a bit like when you want to win Tattslotto. If you want to win, buy every ticket. If you do not want to be in front of the WTO, give everything away . . . There is no doubt that what is the least trade restrictive is what influences Biosecurity Australia’s thinking. There is no doubt that 50

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everything they do is based on what the WTO would think about it, and I think it would be equally true to say that there is a free trade culture within Biosecurity and AFFA that pushes the lead on these issues. We believe that influences it and we believe that would be a normal human reaction, too, so that should be taken into account.34

Perhaps more than fearing the WTO (which has up until now given Australia’s conservative SPS procedures the seal of approval), Biosecurity Australia had the experience of watching the US drag Japan through the WTO for its apple standards at the same time that it was caught up in negotiating the FTA. As noted earlier, while there was plenty of scientific evidence to support Japan’s case, they were caught out by the US’s unscrupulous legalistic approach to SPS issues. Even if Biosecurity Australia had the mindset, like its Japanese counterparts, of seeking to preserve national safeguards (for which there is little supporting evidence), it would still be hard pressed to maintain such a course when Biosecurity itself was so involved in the FTA negotiations and so mindful of the pressure to show results which the US Trade Representative (USTR) could sell to US farmers back home. The conviction that Australia’s scientifically based quarantine system has already become politicised is not confined to the apple industry, as the Senate Inquiry into banana imports from the Philippines revealed. During this inquiry, compelling evidence was presented to indicate the penetration of trade discourse into Biosecurity’s risk assessment processes. For example, the testimony of David Peasley, a member of the Risk Analysis Panel,35 revealed that all stakeholder meetings in Australia regarding the Banana Import Risk Assessment started with a presentation on Australia’s international trade position and obligations, highlighting the impact that trade pressures (i.e. non-science matters) are already having on the framing of quarantine discussions in Australia. Peasley, author of the dissenting report on bananas, was similarly dismayed that his dissenting views were not noted in the draft IRA, or in records of panel 51

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proceedings. Indeed, as the Senate Inquiry revealed, no formal minutes of panel meetings were actually kept, highlighting the astounding lack of transparency of the Banana IRA process. Thanks to this lack of transparency, Biosecurity nearly got away with its attempt to paint the final draft IRA as a ‘consensus’ report, which it most certainly was not.

‘Clean and green’ agriculture under the FTA? If Australian officials are already feeling the impact of trade pressures on matters of quarantine, why would we agree to establish yet another avenue for pressure from the US? How did we come to agree to the establishment of these formal SPS committees in the first place? Whose idea was it to place quarantine decisions under the scrutiny of trade representatives? In this connection, we find some illuminating comments from the US agricultural lobby, more specifically the California Farm Bureau Federation (CFBF). Their 2003 report on FTA negotiations with Australia clearly states that such a forum would be critical to pursuing the elimination of Australian quarantine standards. Indeed, the creation of such a body was a precondition for US farmers’ support for the deal: [Australia’s] burdensome phytosanitary restrictions are currently limiting export opportunities [so in order to increase export volumes] the California Farm Bureau Federation requests that . . . in addition to the standard WTO-based SPS language that is normally included in a free trade agreement . . . any FTA with Australia establish a standing SPS committee that will meet at least twice a year, and that would be under the direction of the US Trade Representative’s office and their Australian counterpart. While technical regulators and scientists would of course be active participants, a policy level committee would help ensure that the technical and policy priorities are consistent and compatible . . .36 (emphasis added) 52

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In this respect, Articles 7.4 and Annex 7-A of the FTA appear to simply reproduce the US farmers’ recommendations to its own government. The relaxation and elimination of our quarantine standards is the intended outcome of the agreement on the US side.37 US farmers clearly believe that the bodies created under the deal will deliver this outcome. So how does our government respond to such claims? Again, our officials certainly do not deny that these are the beliefs of the US agricultural lobby. But according to our chief agricultural negotiator, this belief is entirely misguided and based on a lack of knowledge about Australia’s quarantine system: We cannot control the sorts of comments that American agricultural interests make about either our SPS regime or the impact of this agreement on that SPS regime . . . If they continue to characterize it as some kind of victory then that is their prerogative but that does not make it right or true.38

Moreover, according to our negotiators, the misguided beliefs of US farmers are not shared by US government officials, who are allegedly more understanding and knowledgeable about our quarantine system. Unlike their farmers, US officials apparently know these quarantine bodies are not going to negotiate away Australian quarantine standards. They are simply about exchanging technical and scientific information, something that we already do with the US on an informal basis. This all sounds very reassuring. Unfortunately, it raises more questions than it answers. If our longstanding system of informal exchange will benefit from formalisation, why did we not go ahead and formalise it years ago? Why wait for an FTA? If the US government is so certain that our quarantine system is fair and reasonable, why has it failed to make its farmers aware of this? And if US farmers’ claims that the FTA will result in changes to our quarantine system are wrong, why then has the US government not come out and disabused US farmers of this idea? While they are at it, they might also tell USTR Robert Zoellick, because he clearly believes that the deal will lead to 53

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the removal of longstanding Australian import restrictions on a range of highly sensitive products. A 8 February 2004 USTR press release revealed Zoellick’s understanding of the real deal: ‘Food inspection procedures that have posed barriers in the past will be addressed, benefiting sectors such as pork, citrus, apples and stone fruit.’39 As an aside, the inclusion of pork in this statement is particularly concerning in light of Biosecurity’s recent decision to allow pork imports from the US, even though the Commonwealth Scientific & Research Organisation (CSIRO) recommended otherwise. The report concluded that changes to quarantine protocols proposed by Biosecurity would see a 94–99 per cent likelihood of an outbreak of the deadly postweaning multi-systemic wasting syndrome in the next ten years. Since its appearance in Europe only a few years ago, this disease has killed 8 million pigs, at a cost of US$1.5 billion. There is no preventive vaccine or cure; only Australia, Finland and Belgium are free from it.40 On 13 May 2004, a Senate Committee recommended that Biosecurity’s decision to allow importation of pork products be overturned, and that quarantine restrictions remain in place (a recommendation that Biosecurity has ignored, prompting legal action by the industry). The Senate Committee also criticised Biosecurity Australia for prioritising ‘least trade restrictive’ criteria in its IRAs, even though Australia is not required to do so under its WTO obligations. But to return to our main concern, there is no doubt that US farmers expect their biggest export gains to depend upon the reduction and elimination of Australia’s quarantine standards under the FTA. As their powerful trade body explains: It is critical to note that this increase [in exports] depends as much, or more, on progress in follow-up sanitary and phytosanitary talks on items such as Australia’s quarantine and food safety regulations than on changes in Australia’s low or zero tariffs . . . Failure to get these barriers removed will tip the scales considerably against expanded US exports to Australia.41 54

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The fact that US farmers are convinced they will be successful in their quest to eliminate our quarantine standards is indicated by the fact that they have already put concrete dollar figures on the gains anticipated from this outcome: Assuming that progress is made in the sanitary/phytosanitary follow-up talks called for in the draft, United States exports of these commodities could expand $150–$200 million over the intermediate and longer term. For example, United States exports of pork and poultry currently . . . are subject to sanitary and phytosanitary regulations that keep the trade volume minimal. With progress in sanitary and phytosanitary talks and improved market access, United States exports of pork could reach $50 million, with poultry exports reaching $25 million . . . With the elimination of tariffs and sanitary/phytosanitary restrictions on fresh and processed vegetables, fruits, and nuts, United States exports of $80 million over the 1999–2001 period could increase by 50%, or $40 million.42

Clearly, in the emerging pattern of protocols overturned, we are seeing the extent to which trade considerations have intruded dangerously into risk assessment practices—while FTA negotiations have been under way—and begun to shape what should be determined strictly on the basis of science.

Conclusion The changes demanded by the US and agreed by Australia do not formally circumvent the WTO’s dispute settlement procedures for SPS issues. They need to be much more subtle than that to find inclusion in a bilateral trade agreement. And so they are. The new bodies are designed precisely to pre-empt those disputes from arising in the first place, by ‘settling’ them informally—between ‘good friends’ cooperating over their SPS differences by sharing information about 55

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their respective procedures (we note the striking parallel with the PBS in our Chapter 3). In this way, our government can reassure the Australian people that they still retain the right to have recourse to the WTO’s dispute settlement mechanisms. As indeed we will—in theory. However, the case for taking Australia–US SPS measures out of the established WTO processes, and creating new preemptive bilateral processes in their stead, has not been made, let alone demonstrated. If the US believes that our quarantine standards are not grounded in science and merely ‘trade barriers in disguise’, why not simply take it up with the WTO? If it wants to exchange information on SPS issues, why not simply keep on doing so informally, without making it a provision of the FTA? In this chapter, we have suggested two reasons why this might not be done. First, the United States knows that the last WTO Trade Policy Review approved Australia’s science-based quarantine approach, thus giving us a strong chance of succeeding in any WTO dispute-settling procedure. So the United States might judge its own chances of succeeding before such a WTO panel as slim. Second, in such a case, the United States intends to use the new bilateral forum established under the FTA to ‘resolve’ all such issues—behind closed doors—before they reach the dispute stage. In effect, the new arrangement will displace the WTO mechanism in favour of a non-transparent, bilateral forum operating in secret, giving US trade negotiators institutionalised power to shape nationally critical quarantine outcomes. We thus concur with the spirit of the Senate’s final report into its Inquiry into the FTA, on the topic of quarantine measures, that: It is not in Australia’s national interest to reduce Australian quarantine standards. Australia can ill afford for these committees [proposed under the FTA] to be an avenue for the United States to influence our policies, as it would be the ‘thin end of the wedge’ undermining our international reputation and our environmental and agricultural sectors.43 56

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This is a polite way of saying that our agricultural export industries stand to be devastated if we allow ourselves to be browbeaten within the secret confines of these new committees and allow open season for pests and diseases to enter Australia. As we have shown in this chapter, the Howard Government’s record over the past two years is anything but reassuring. Indeed, it would appear that the lowering of quarantine standards during the past two years of bilateral discussions with the United States has been a dress rehearsal for the FTA era about to dawn. (It offers a striking parallel with the case of government purchasing policy, discussed in our Chapter 4, where the erosion of ‘buy Australian ‘high-tech’ standards—as a prelude to a shift to ‘buy American’—has also been a practice run for the FTA script.) From the evidence presented so far, we can draw only one conclusion: agreeing to provide a political forum outside the auspices of the WTO in which to settle differences over quarantine issues cannot be justified on national interest grounds.

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Medicines

Undermining our Pharmaceutical Benefits Scheme How to kill a country—Step 3 Take a world-renowned institution that delivers affordable medicines to those most in need and undermine it from within. Start by giving multinational pharmaceutical companies a voice in decisions about which drugs will be subsidised with taxpayers’ money. Then increase external pressures on national health-policy decisions by creating a joint Medicines Working Group with a foreign power, forcing existing national bodies into subsidiary roles. Finish off the job by toughening intellectual property laws to strangle your country’s own generics-based pharmaceuticals industry. Such steps will not only reduce a once-proud health care institution to a pawn of multinational pharmaceutical companies, but will also push up the price of drugs, placing them out of reach for many of your citizens, regardless of need. Eventually, your equitable and affordable drug delivery system will be replaced with a replica of the type of high-cost, high-price open-market system found in the United States. Unfortunately, this is all too accurate picture of what the Australian government has agreed to deliver under the Australia–US Free Trade Agreement. Pharmaceuticals are covered in the FTA in Annex 2-C on Pharmaceuticals, an unassuming attachment to Chapter 2 on National Treatment and Market Access for Goods. But this small annex packs a big punch. It lays down a set of principles 58

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relating to the treatment of pharmaceuticals, without once mentioning Australia’s Pharmaceutical Benefits Scheme (PBS) by name. Yet the PBS is certainly at the heart of this annex—just as restricting generics competition in the pharmaceutical sector is one of the central goals of Chapter 17 on Intellectual Property Rights. The PBS is a model Australian institution, providing drugs and medicines in an equitable manner. It stands out internationally as an effective vehicle for the fair distribution of medicines, and is based on a simple yet socially invaluable ideal: that everyone should have access to life-saving and life-improving drugs, be they rich or poor. Thanks to the PBS, the idea of people having to choose between buying food or pharmaceuticals is as foreign to Australians as the companies that would dismantle this precious system. Despite its value however, the PBS has been targeted for aggressive opposition by the US pharmaceutical (‘pharma’) industry, whose bottom line weighs far more heavily on the minds of industry lobbyists than the wellbeing of Australians. For the US pharmas, the PBS is an unfair trade barrier which distorts markets and discriminates against US companies, abusing their right to peddle drugs at top-shelf prices to ailing Australians.1 And these are not our words. According to the Pharmaceuticals Research and Manufacturers of America (PhRMA), anything short of free trade in drugs, with no price controls and with unrestricted advertising direct to consumers, is ‘trade distorting’. From the perspective of PhRMA, any system that dares to refuse to list its members’ drugs on demand is ‘abusive’ and ‘discriminatory’. And PhRMA has the ear of the US Trade Representative Office on this point. Abusive? Discriminatory? This may strike some as a little rich, coming from the super-protected and super-profitable US pharmaceutical industry. Consider this one statistic. In the year 2002, the profits of the top 10 US drugs firms exceeded the profits of all the other 490 members of the Fortune 500 list for that year.2 These companies are not just wealthy; they are dangerously wealthy, and they use their funds ruthlessly to pursue their own political agenda. Right now, their agenda 59

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seems to include agitating, through the FTA, to have drugs prices raised in Australia. To this end they are targeting our PBS, which looks set for devastation, along with other Australian institutions, under the trade deal. It is worth pausing to ask why the PBS was on the table at all in these negotiations. Why was there any consideration of the PBS in this trade agreement? It is after all one of Australia’s oldest institutions and a world-class system for delivering medicines on the basis of social as well as economic efficiency. The Australian Medical Association (AMA) publicly opposed inserting any consideration of the PBS in the FTA.3 We note that Trade Minister Mark Vaile stated clearly at the outset of the negotiations that the PBS would not be tampered with, that it was sacrosanct. Yet at the conclusion of the negotiations, we find that it has indeed been tampered with—and not to make it stronger, but to strengthen the profits of US pharmaceutical firms. We will show that the changes being demanded of the PBS go beyond even those deemed acceptable in the US itself. Again we ask the question: In whose interests are these changes being made?4 We wish to be clear-eyed in our appraisal of the evidence. It is easy to adopt a stance of ‘bashing’ multinational pharmas and indeed, they invite such abuse with their unsavoury and often fraudulent practices, but such a stance does nothing to further rational discussion. In this area, as in others, the facts themselves are enough to convince that the FTA will rob Australians of the integrity and independence of yet another prime national institution.

The spectre that haunts the FTA: Australia’s PBS The PBS haunts the FTA, in the sense that it is omnipresent, and yet it is never mentioned by name. What is this institution that is seen as such a palpable threat by the American pharmas? The PBS was established under the National Health Act in 1953, but its roots go back even further, to the immediate post-war years when the Labor Government 60

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wanted to ensure that all Australians could have access to penicillin, the new wonder-drug whose discovery was so largely the work of the Australian scientist Sir Howard Florey.5 Its basic principles have always been focused on securing public and universal access to essential medicines on affordable or cost-effective terms. The PBS has evolved from a scheme that fully subsidised a few life-saving drugs to one that partially subsidises a broad spectrum of medicines. By 2004 there were around 2500 different branded items listed on the PBS, at a total public cost of A$6.2 billion.6 Drugs are distributed on the basis of need, with substantial public subsidies—through the co-payments scheme and the PBS Safety Net. As noted by the Interim Report of the Senate Inquiry into the FTA, around 80 per cent of all medicines available at pharmacies in Australia are subsidised by the PBS; it covers more than 158 million prescriptions each year.7 It is easiest to think of the PBS as a public wholesaler of drugs equipped with compulsory purchase powers. It deals direct with the international pharmaceutical companies as a strong purchaser, with powers to list drugs or not to list them.8 If they are listed, at a price negotiated through the PBS, then Australians have access to these drugs at subsidised prices. If the drugs are not listed, they can be supplied, on prescription, direct to consumers at non-subsidised prices. The key committees that run the PBS listing system are the Pharmaceutical Benefits Advisory Committee (PBAC), which evaluates the relative cost-effectiveness and therapeutic value of newly proposed medicines, and recommends whether the drug be listed; and the Pharmaceuticals Benefits Pricing Authority (PBPA) which decides on the price to be paid for a listed medicine.9 When a new drug is proposed by a pharmaceutical company, it needs to receive, first, clearance on grounds of safety and efficacy, through Australia’s Therapeutic Goods Administration (TGA). Then it submits a price to the PBAC, which discusses its cost-effectiveness at that price. This is done normally through comparison of the new drug with a drug that is already listed. If the PBS is to pay the requested price, the PBAC has to be convinced that 61

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the new drug is cost-effective and that it delivers a superior treatment to existing medicines. Here the selection of which drugs to use for points of comparison is important—and such issues are part of the professional prerogatives of the PBS. It goes without saying that, while the membership of PBAC is drawn from a wide variety of industry-related groups, its membership has, until now, been exclusively Australian. According to the US pharmas, there is a direct relationship between the high cost of drugs in America, and the existence of institutions like the PBS in other countries, which are able to negotiate lower prices for drugs. Because US pharmas are ‘forced’ by institutions like the PBS to sell their drugs more cheaply outside the United States, US pharmas must make up for this ‘loss’ back home by charging more. How else could they afford to invest in the expensive and risky research and development (R&D) activities required to create new drugs? This is the official pharma rationale (which the evidence here will demolish) behind the demand that Australians pay higher prices for US drugs. The stated goal of the US pharmaceutical lobby is thus to spread the costs of R&D around the world, under the slogan: ‘Why should US consumers bear the heaviest burden in support of the industry’s R&D?’ The only way to resolve this unfairness is drive prices up around the world, particularly in countries where there are publicly subsidised systems for the delivery of medicines—such as the PBS in Australia. President George W. Bush allegedly passed this message direct to Australian Prime Minister John Howard at their meeting in October 2003: raising Australian prices for US pharmaceuticals would be good for consumers around the world because it would spread the burden of R&D costs.10 In the view of America Inc., then, higher prices for medicines in Australia is the bitter pill we have to swallow.

How the FTA will devastate the PBS While the Howard Government in Australia insists that the changes to the PBS will be ‘minimal’, the evidence we present 62

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completely contradicts such assurances. The FTA will in fact introduce processes that are fundamentally at odds with the operations of the PBS. Let us just highlight six of the ways in which the PBS will be undermined.

1 Refashioning the priorities of the PBS The PBS has always based its drug listing on the criteria of universal access, cost-effectiveness and therapeutic value. Now, however, these criteria are to be reversed, overturning 50 years of public health practice in Australia. Instead, under the FTA, the PBS will be forced to prioritise policies and decisions that reward the ‘innovation’ and ‘research and development’ activities of pharmaceutical companies.11 In fact, the traditional goals of ensuring the affordability of therapeutically effective medicines for all Australians are entirely absent from both Annex 2-C12 and the ‘Exchange of Letters on the PBS’ between Minister Vaile and USTR Zoellick.13 This is not a ‘mere’ matter of ‘words’ because, as we shall see, the new bodies established under the FTA, including the Medicines Working Group and the disputessettling procedures, will work exclusively to these new criteria, not to those established as part of the PBS. The irony is that Australia is already one of the world’s leading consumers of new (‘innovative’ and ‘R&D-based’) medicines, and so hardly needs encouragement to consume ‘innovative’ drugs as written into the FTA. In 2001, the market share of new medicines in Australia was over 29 per cent, on a par with Canada, but well ahead of the major European countries (ranging from 22–27 per cent), the UK (16 per cent), and Japan (14.8 per cent), and closest to the United States (32 per cent).14 But given that ‘innovative’ seldom means ‘better’ in terms of health benefits, and that the changes place more importance on rewarding ‘innovation’ than on preserving the widely admired goals and achievements of the PBS, we conclude that FTA Annex 2-C is patently at odds with the national interest. 63

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2 Creating a new ‘independent process’ to review unfavourable PBS decisions Like ‘innovation’, the emphasis on ‘transparency’ in the Agreement also appears skewed against the national interest. The big pharmas have long complained that no forum exists where they can contest unfavourable PBS listing decisions. The FTA addresses this concern, and creates a new review process to independently assess contested listing decisions of the PBAC. While the stated aim is presented in the acceptable language of increasing the ‘transparency’ of the PBAC decision-making process,15 the intended aim of this provision is to provide pharmaceutical companies with a lever to systematically challenge the PBAC and increase the rate of new drug listings. Of course, pharmaceutical companies already have a right of judicial appeal against decisions of the PBAC, to the Australian Federal Court. This provides an avenue of ‘independent review’, but one not frequently taken advantage of by the pharmaceutical companies (mainly because they know their cases would not stand up in court).16 But by introducing a right of review, the FTA now provides the United States with the legal means to bring an action against Australia should its pharma industry be disappointed by the review outcomes. By depicting the PBAC as an ‘unfair barrier to trade’ in FTA negotiations,17 US pharmas have managed to create a new avenue for challenging PBAC decisions through the ‘independent review’ process, and will be able to use the threat of trade sanctions to ensure they get their way.

3 Creating a new coordinating body for pharmaceuticals The FTA establishes a new body, the Medicines Working Group, as a means of fostering dialogue between the US and Australia on ‘emerging health care policy issues’, and with a view to making ‘innovative medical products available more quickly’.18 Again such wording betrays all too clearly the 64

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intent—to reorient the PBS away from cheaper (and efficacious) generics towards expensive, ‘innovative’ drugs backed by (purported) R&D expenses that allegedly have to be recouped. Moreover, there is the strong possibility that US members of this Medicines Working Group will seek to turn it into an active forum for the review of PBAC decisions.19 This, of course, is not explicitly stated in the text. But a tried and tested principle of international trade negotiations, and certainly one well understood by the Americans, is that you must be most clear and precise in matters that affect your own interests, and as vague as possible in matters that affect the interests of the opposing party. From this perspective, Annex 2-C on Pharmaceuticals of the FTA is a masterwork of ‘constructive ambiguity’.20 It does not mention the PBS by name at all, and in place of the principles of fair and equitable access for all, it substitutes principles based on ‘innovative’ and ‘R&D’ based drugs. Similarly, the Medicines Working Group has no clear mandate or rationale, but there is no doubt that the US side has a very clear vision for this group: they want it to become the pre-eminent body responsible for making decisions concerning the distribution of pharmaceuticals in Australia, subverting the PBS and subordinating the PBAC and the PBPA. But if none of this is spelt out explicitly in the text, how do we know it is true? Take a look at the other words missing from the deal: ‘social’ and ‘cost-effective’.

4 Deleting the critical words ‘social’ and ‘costeffective’ In its bilateral FTAs, the United States is careful to exclude any reference to the social and public goals of national drug delivery systems. In particular, it avoids any form of words resembling the 2001 Doha Declaration on TRIPS and Public Health, in which the world’s trade ministers affirmed that WTO Agreements ‘should be interpreted and implemented in a manner supportive of WTO members’ right to protect public health and, in particular, to promote access to medicines for all’.21 The Doha Declaration also affirms a government’s right to force 65

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pharmaceutical companies to license their drugs to cheaper generics producers to meet national goals, particularly in the event of a public health emergency (such as the HIV/AIDS crisis in African countries).22 The US pharmaceutical industry showed themselves in the worst possible light in vigorously opposing the Doha Declaration and in denying any validity to the claim that medicines should be available for all. This attitude of intransigence has carried across to the FTA negotiations, and might perhaps explain the total absence of any mention of social goals in the FTA Annex 2-C. But this does not explain the Australian side’s compliance and pandering to American interests in agreeing to delete all such principles.

5 Quashing effective competition through generics Apart from these direct assaults on the integrity of the PBS, the FTA also makes it very difficult to mount real competition to patented pharmaceuticals in the form of a generics industry. It is a widely observed fact that drugs prices decrease drastically as soon as a medicine falls out of patent protection and is produced competitively by generics producers. The US pharma industry has fought tooth and nail to stymie and restrict generics competition for its patented medicines.23 Take the case of Canada—a country which one might think would be spared the full onslaught of PhRMA fury because of its neighbourly proximity and common Anglo-Saxon origin. Not so. Canada is one of the few Western countries to take the Doha Declaration seriously and enact legislation to facilitate competition from generics producers. This has brought down the wrath of PhRMA, which has demanded that the US government list Canada as a ‘priority foreign country’ under ‘Special 301’—basically a list of countries that the US suspects of violating international rules, and which the government is considering taking action against. Under Canadian legislation, generic versions of patented drugs can be approved by Health Canada prior to the patent becoming invalid; the generic medicines are assessed for safety and efficacy using data and the 66

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results of clinical trials that relate to the earlier approval of the patented versions of these medicines.24 It is the very success of these Canadian provisions that has apparently so infuriated PhRMA and its ally, the US government. What else can explain the extraordinarily detailed provisions in the FTA which specifically, point by point, rebut and prohibit the provisions laid out in the Health Canada regulations? The highly detailed provisions of Chapter 17 of the FTA on Intellectual Property Rights make it much harder for generics producers to deliver lower-cost versions of the expensive patented drugs that the big pharmas like to promote. We discuss this more fully in Chapter 5, where we explore the cunning ways in which extensions of patent terms are driven by the lobbying of the pharma companies and are designed, largely, to keep generics competition at bay. The context for this change is highly instructive. US pharmaceutical companies have been pushing for the extension of patent protection more vigorously of late because generics companies are about to capitalise on opportunities offered by patent expiry on US$100 billion worth of revenues by 2005 (based on 1999 sales). The generics industry has thus been identified as ‘a new threat’ to the pharma sector’s monopoly profits.25 Australia’s Department of Industry, Tourism and Resources identified at least 16 popular drugs whose patent is about to expire in the next couple of years and which would benefit directly from patent extensions under the FTA.26 Beyond these direct effects, perhaps the most significant effect is the most subtle, and one not spelled out in the Annex or in the clauses on IPRs. It is the framing of a new context for the PBS, one where trade pressures and market access loom as large as the social priorities and cost-benefits that have ruled the PBS in the past.

6 Putting the PBS into a trade sanctions and legal sanctions context The real effect of the FTA on the PBS is that drugs pricing in Australia will henceforth be conducted in the shadow of 67

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threatened trade sanctions, as well as threatened legal challenges to PBAC determinations. This is not to say that PBAC determinations are always perfect; in certain cases they may leave something to be desired. But one may readily assume that, up to now, the PBAC would err in favour of protecting the Australian public interest rather than US pharmaceutical interests. In future, under the terms of the FTA, this will no longer be a valid assumption. There will be an ‘independent process’ for reviewing any decision taken by the PBAC that is interpreted as hostile by a US pharmaceutical company. Resolving the details of this ‘independent process’ will no doubt be one of the first items on the agenda of the newly created Medicines Working Group. Whatever process is eventually agreed upon, it will be required under the terms of the FTA to consider cases that explicitly challenge and criticise decisions taken by the PBAC. Moreover, there is under Chapter 21 of the FTA a provision established for reviewing disputes over the implementation of the FTA. Determinations of the PBAC are likely to be the first cases tested in this way (as discussed below). All this can only be interpreted as initiating a process of dismantling the PBS as an independent Australian body. It is part of the process through which the FTA is ‘killing’ Australia’s key national institutions, and creating something alien to put in their place—something much closer in character to the monopoly pricing system of the United States.

And the effects of all these changes? The Australian negotiators, Department of Foreign Affairs and Trade (DFAT) and the Department of Health and Ageing, all seem to be at one in insisting that the changes envisaged to the PBS are minimal, and in any case are concerned merely with ‘process issues’ rather than the substance of drugs pricing. Such disingenuous claims—which also surface in the case of quarantine, discussed in Chapter 2—can be readily discounted for what they are. The American view at least makes no bones about how 68

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they see the impact of Annex 2-C. In hearings on the FTA conducted by the US Senate Finance Committee, on 9 March 2004, there was the forthright suggestion made that Australian PBS prices of patented drugs would increase as a result of the FTA. Senator Kyle congratulated the US Trade Representative, Robert Zoellick, on having secured an agreement that would deliver higher prices paid by the PBS for US-patented drugs.27 This is the clear understanding of the deal in the United States. Direct changes to the PBS are only one means of increasing drug prices under the FTA. As noted above, changes to intellectual property laws under Chapter 17 will also push up prices by delaying the release of cheaper generic competitors. The US pharma lobby (led by PhRMA) has been most aggressive in linking improvement of IPR protection for pharmaceuticals (and reducing competition from generics) with the use of trade sanctions. And just in case Australian negotiators were thinking of refusing the industry’s demands to amend our system, PhRMA submitted a recommendation to the office of the US Trade Representative (USTR) in 2003 that ‘Australia be included on the Special 301 Watch List’.28 This would have the effect, if accepted, of moving Australia closer to the point where trade sanctions would apply. So we can expect the FTA to have a radical and adverse impact on Australia’s current exemplary system for delivering medicines on a socially useful and cost-effective basis. The Agreement refashions the system for delivery of medicines in the image of the current American system. So, what kind of system have the pharmaceutical companies created in America? In point of fact, it is a very unattractive industry. It has become a hugely profitable, protectionist cartel whose products are largely ‘me-too’ imitations of each other. In the relatively rare event that a new product is genuinely based on innovation and research and development, this R&D is most likely to have been performed in a government lab rather than in the private labs of the big pharmas. The industry has 69

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been found guilty in the United States of price gouging, fraud and other illegal practices in grossly overcharging public programs like Medicaid. The industry actually spends more on marketing its drugs than it does on R&D. It lobbies incessantly, in the United States and elsewhere, against the real source of competition, namely generics producers, and it has been successful in staving off imports, and home-grown knockoffs, for decades. And the list goes on.29 This is the industry that is so determined to change Australia’s PBS.

The truth about the drug companies30 The favoured mantra of the global pharmaceutical industry is that it needs high profits to sustain the very high costs of bringing new drugs to market. ‘We are an “innovation” and “R&D-based” industry,’ they protest. ‘Reduce our profits, and you will cut off the supply of new, life-saving drugs.’ Their self-serving arguments have dominated debate in the United States, so staving off any effective reform of the high cost of drugs (three to four times higher in the United States than in most other countries), and now being rolled out across the world, through FTAs, to crush any effective national system of drugs purchasing and distribution—of which the outstanding example is Australia’s PBS. This is why it is Target #1 in the eyes of the US pharmaceutical industry. So how does the pharma industry defend its aggressive drive for increasingly higher drug prices? To answer this, we turn next to the myths propagated by the industry in the United States and around the world. These are the same myths that have served to structure the recent trade negotiations and the subsequent inclusion of Annex 2-C in the FTA. Let us see how they stack up against reality.

Myth #1: High profits are needed to feed high costs of producing new drugs As noted above, the pharmaceutical industry is not just profitable, it is super-profitable. The Public Citizen organisation in 70

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the United States (founded by Ralph Nader) keeps a close monitor on the industry through its ‘Congress Watch’ division. Its report on 2002 Drug Industry Profits, issued in June 2003, makes for scary reading. The principal fact reported is that, as a group, the top ten drug companies enjoyed profits of US$35.9 billion in 2002, maintaining this level when the rest of the US economy suffered a downturn, and amounting to more than half of the combined profits of the Fortune 500 companies in that year. Similarly, in 2003, drug industry profits were still well above the level of the rest of the Fortune 500 companies.31 The same story can be told for the first quarter of 2004. The US industry vigorously defends its high profits on the basis of the alleged high costs of developing new drugs. It is a fact that the costs of bringing new drugs to market are very high. But how high? The favoured figure of US$500 million for each new drug is the one assiduously promoted by the industry itself. But more reliable independent estimates, which are based on the industry’s own data, put the R&D cost of a new drug at closer to US$60–$70 million per drug (allowing for failures).32 This dramatically deflates the notion that the industry’s hyper-profit taking reflects development costs.

Myth #2: The industry is ‘innovation’ and ‘R&D-based’ As an instructive exercise, count the times you hear or see the words ‘innovation/innovative’ and ‘R&D’ in conjunction with pharma industry publicity. In a civilisation that values the new and the innovative, these words have become the weapons of the wily. The drugs business has learned to use these terms in a strategic manner: to gain listings for new drugs and to charge higher prices. ‘Drug X is an innovation, therefore it must be good, or better than Y.’ Behind the vocabulary of innovation, however, lies a starkly different reality. In the first place, the mainstream drugs industry relies only minimally on its own R&D to produce new drugs. 71

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Increasingly, the big drug companies rely on taxpayer-funded research, in government laboratories such as those operated by the National Institutes of Health (NIH), by universities, and by small biotech firms that can be taken over by the big pharmas. This considerably reduces the risks associated with production of new drugs, thus taking away the principal plank in the big pharmas’ platform. Between 1965 and 1992, 15 of the 21 most important drugs developed were based on knowledge and techniques from federally funded research. In most cases, the research had gone beyond concept stage to the molecular level, which means that the most risk-intensive phase of R&D was borne by the public sector. Indeed, most of the R&D costs for seven of the best-selling drugs for cancer, AIDS, hypertension, depression, herpes and anaemia were funded by the NIH.33 The fact is that spending on R&D by US pharma companies is dwarfed by spending on marketing. The world’s 15 largest drug companies (of which most are American) spend almost three times more on marketing and advertising (35.3 per cent of revenue on average) than on innovation (12.9 per cent), clearly demonstrating that the high cost of US drugs is due to efforts to sell the drug rather than to create it.34

Myth #3: Innovation means new and better drugs The fact is that over the past two decades, what has passed increasingly for innovation is new versions of ‘me-too’ drugs. The research shows that only a tiny minority of drug ‘innovations’ are therapeutically significant. Over a 21-year period, the French drug bulletin, La revue prescrire, has found that by far the majority (1780 of 2693 new drugs) were superfluous products that added nothing to the clinical possibilities offered by already available products.35 Other studies have concluded similarly. Of the 455 new patented drugs introduced into Canada from 1996 to 2000, 25 (just over 5 per cent) were major therapeutic improvements, 204 were line extensions (typically a new strength of an existing medication), and 226 represented little or no improvement over existing medicines. 72

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In short, the large majority of drugs are basically ‘minor variations on existing medications’—for example, the additions to the statin group of drugs for lowering cholesterol.36 The more striking feature of big pharma is the paucity of innovation: take, for example, the well-known practice of ‘evergreening’. This is a term coined to designate the practice of extending the lifetime of patented drugs in order to stall the marketing of cheaper generic drugs. The Canadian scholar Lexchin reports that: When the Canadian Coordinating Office for Health Technology Assessment was about to release a report saying that all of the different drugs in the statin group were equivalent, Bristol-Myers Squibb, makers of one of these drugs, objected to the release of the report and went to court to block its publication.37

While the case was thrown out, the Canadian agency spent 13 per cent of its annual budget defending itself.

Myth #4: The pharma industry seeks a free market The reality is that a free market in pharmaceuticals would undermine the hyper-profits that derive from monopoly production and pricing. The pharmaceutical industry is the world’s pre-eminent industry in operating a business model centred exclusively on intellectual property rights. It only produces drugs for as long as they are protected; after that, it lets them go, where they can be taken up by generics producers—and where the real competition begins.38 But the pharma lobby has been assiduous in seeking to extend the term of protection: from 14 years, to 17 years, to 20 years, and now (with various ‘compensation’ clauses agreed in the FTA) for up to 25 years. The term is always being ratcheted up. Further ratcheting up of patent life terms, to the detriment of competition from generics, is part of this strategy. The aim is a system of worldwide oligopolistic pricing behind impenetrable patent barriers—which is to say, the erection of a 73

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system of ‘tribute’, based on monopoly rights in every conceivable biological entity or process. Real competition is to be completely banished from such a system, as we discuss in Chapter 5. Beating back generics producers is another critical element of this strategy. The generics drugs industry is the only real source of competition for the monopolistic, patentprotected pharmaceutical industry. As noted earlier, the patented pharma industry is facing a big threat from its dwindling ‘pipeline’ of forthcoming drugs: up to US$100 billion of protected revenues will be subject to generics competition by 2005. Of the top 20 of the protected drugs in 1999, no less that 75 per cent would face generics competitors by 2005. So what is the big pharmaceutical industry doing about this threat? From the evidence as of mid-2004, it seems that they intend to buy out this source of competition. It was reported in July 2004 that Novartis, the largest Swiss drugs maker, which failed in its earlier bid to take over the French company Aventis, planned to use its US$8 billion war chest on acquisitions in the generics sector, with the aim ‘of becoming the biggest company in that industry’.39 Novartis was reported as having its sights set on ten generics companies as possible acquisitions. Consider what this means. The world’s most profitable industry, thanks to patent protectionism, faces competition from just one sector, the non-patented generics sector. So it uses its inflated profits to buy out the competition in this rival sector. If anti-trust authorities allow the drugs companies to get away with this, then they can make life a lot easier for themselves by gradually raising prices in the generics sector, and delaying the introduction of generics, through their own actions as generics firms themselves. But they also intend to crush the generics industry through manipulating the regulatory rules, to make life as difficult as possible for generics producers. This is exactly what they are doing in the current series of FTAs—the Singapore and Chile FTAs, and now the Australia–US FTA as well. 74

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Myth #5: The pharma giants have no wish to meddle with the PBS The way that the drug companies behave towards their own government in the matter of reasonable pricing and drug discounts for government purchasing is instructive. For example, when the US National Institutes of Health in 1995 sought to include a ‘reasonable pricing’ clause in contractual agreements, whereby a drug company would agree to market all drugs developed with taxpayer-funded R&D at a reasonable price, the amendment was overturned as a result of vigorous pharma lobbying. More recently, PhRMA has been actively opposing the introduction of legislation similar to the PBS, which would make drugs more affordable in the US. In 2000, PhRMA took the US state of Maine to court to block the introduction of legislation to enable negotiation of drug prices. Such legislation would have ensured (in the words of Maine’s Governor) that ‘ordinary people [would] be able to get the drugs they need without necessarily having to face the terrible choice between the rent, the food, and the medicine’.40 Similarly, PhRMA filed lawsuits to stop the state of Florida from introducing a law requiring drug manufacturers to provide discounts if they wanted their drugs to be included on a list of preferred drugs for recipients of Medicaid. Florida Governor Jeb Bush stated that ‘protecting the large profit margins for multibillion-dollar pharmaceutical companies is not a priority. We are more concerned about making sure our senior citizens have better access to affordable prescription drugs’.41 But US state governments are still fighting on this front. Six New England states (Maine, New Hampshire, Vermont, Rhode Island, Massachusetts, Connecticut) recently formed The New England Consortium. These states, along with New York, meet regularly to ‘try to come up with a joint plan to either form a purchasing cooperative or otherwise control pharmaceutical prices’.42 For the consortium, Australia’s PBS remains the model to be emulated. The US Congress passed a Medicaid prescription drugs 75

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benefit bill in 2003 (scheduled to go into effect in 2006). But a huge lobbying campaign by the pharma industry ensured that the bill prohibits the government from negotiating over prices. What a difference from the Australian PBS! In the PBS, drug prices are reached after a process of evaluation of cost-effectiveness by an expert committee, the PBAC. Currently, if pharmas can make the case that the R&D costs for a certain drug have been especially high, and if the drug is deemed by the PBAC to be cost-effective, then its price can be higher. This is sensible flexibility built into the Australian system.43 But an ‘out of control’ lobbying blitz by the pharma industry in the US ensured that no such sensible outcome was achieved in this most recent case. Indeed, far from giving government discounts, the reality is that drug companies have been overcharging government-run pharma schemes. US law requires drug makers to offer their lowest prices to the Medicaid programs (federal and state health programs targeted at the poor). But a series of scandals has recently been uncovered where the pharmas were found to sell their products to private sector organisations at well below prices charged to Medicaid. Schering-Plough, Bayer and GlaxoSmithKline have all been found guilty of such offences, and have made hefty out-of-court settlements to avoid having the evidence aired publicly.45

The result? Soaring prices that bear no relationship to costs What then is the result of all this cosiness and protectionism and unregulated pricing? It is higher prices for drugs that bear no relationship to costs. Americans pay the highest prices in the world for their drugs, and the dramatically rising drug bill absorbs a major part of the health budget.46 There seems to be no limit to the prices that US pharmas are prepared to charge for life-saving drugs. Drugs needed to treat colon cancer, for example, cost US$500 in 1999; by 2004 the same regimen was priced at US$250000—a 50000 per cent increase in five years.47 76

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So out of control has the situation become that even the most respectable medical journals, such as the New England Journal of Medicine (NEJM), are now targeting the fact ‘that drug prices are astronomical’ as a principal underlying issue in the shortcomings of the US drugs delivery system. In a recent editorial, the NEJM commented: Although [Medicaid] is by far the largest health care purchaser in the United States, it is prohibited by Congress from negotiating with the pharmaceutical industry over prices. This legislation, together with the strong patentprotection system and prohibitions on the importation of drugs from other countries, secures high prices and high profits for pharmaceutical manufacturers. Re-examining these restrictions and encouraging the pharmaceutical industry to reassess its prices would be a valuable place to start.48

The point to note here is that strengthening the patentprotection system and placing restrictions on the importation of cheaper patented drugs from other countries are precisely the points that the big Pharma companies have had inserted into the FTA, with the compliance of the Australian negotiators! As a result of the unsavoury practices and the relentless propaganda of the drug giants, the pharma industry has sunk in public esteem in the United States to its lowest level in decades. It seems that it is now only a matter of time until a government-mandated pricing and drug delivery system will be introduced in the United States in order to overcome the litany of abuses that have been brought to light. The irony is that this is happening just as the industry scores its first major success in pulling the teeth of a foreign national drugs delivery system based on social criteria rather than monopoly pricing—Australia’s PBS. The supreme irony of the present situation should not be lost on anyone. We are starting to dismantle our highly successful system, under US pressure, just as the United States is starting seriously to contemplate creating a ‘PBS-like’ system of their own! 77

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What the FTA concessions mean for Australia Given our knowledge of the strategies pursued by the US pharma lobby, and the kind of language being employed in Annex 2-C on Pharmaceuticals, where any reference to social benefit and cost-effectiveness in medicines delivery is dropped, the immediate steps to be taken to attack the PBS are fairly predictable.

First step in dismantling: Appealing against the PBAC The first step in dismantling the old and shaping the new postFTA PBS is likely to be a move by the United States to refer the issue of an ‘independent review process’ to the new Medicines Working Group. This will be a way of asserting immediately the authority of this new body. The Working Group, faced with the task of an independent review, is likely to recommend a procedure that will avoid the courts, and instead refer the appeal straight to the Minister. Since it would be politically inastute of the Minister to uphold the first such appeal (bearing in mind the controversy over the PBS and its integrity), the United States would then have the perfect case to bring to the new ‘dispute settlement procedure’ laid out under Chapter 21 of the FTA, both as a substantive issue, and as a way of testing the working of these procedures. While the Australian government claims that the review process does not provide an avenue for overturning PBAC decisions, if we do not provide an appeals process that satisfies US pharma companies we could face large financial sanctions.49 Moreover, logic dictates that there is little point in having a review process if the outcomes of the review have no meaning. It is naive to think that negative review findings will not be used by US pharma companies to pursue a change in PBAC decisions.50 If once again this appeal process results in rejection of the request for reconsideration of the listing of a new US drug, then we have the makings of a full-blown trade dispute within a few months of the passage of the trade deal, putting the PBS at the very centre of 78

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US–Australia trade negotiations, which is precisely where the United States wants it.51

Second step in dismantling: The transparency trick The next step in dismantling the PBS will be the requirement that ‘transparency’ work only in one direction: the PBAC will be forced to reveal the basis for its decisions to list or not to list a drug; but drug companies will be allowed to remain secretive about the true production costs and test results of their ‘innovative’ drugs. Given the one-sided nature of the transparency, public funds are increasingly likely to be wasted on subsidising fictitious innovation costs. As we saw earlier, the most reliable evidence indicates that US drug prices typically do not reflect the costs of innovation; they reflect high marketing expenditures and what the market will bear, in an oligopolistic setting where competition is highly restricted. Given these facts, the only way that transparency can be in the national interest in this context is to insist that a mutual obligation be placed on US pharmaceutical companies to provide full disclosure of costing and therapeutic advantage upon which the PBAC and the Pharmaceutical Benefits Pricing Authority (PBPA) can base their respective determinations. But two-way transparency is unlikely for at least two reasons. First, it would reveal that the pharma companies’ claims to inflated drug prices (allegedly due to their enormous R&D costs) are not substantiated. Second, the pharma sector has the capacity and determination to resist the demand for transparency in its own claims regarding pricing and therapeutic advantages of new drugs. Indeed, the US federal government itself has tried and failed to get pharmaceutical companies to reveal the basis of their costing decisions. When the investigative arm of Congress, the General Accounting Office, sought to force US pharma companies to reveal estimates of their R&D, marketing and distribution costs for individual products, the companies fought all the way to the Supreme Court, where the General 79

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Accounting Office’s request was finally rejected. If the US Congress is unable to get US pharmaceutical companies to reveal the basis of their costing decisions, the chances of the Australian government succeeding appear slim indeed.

Promoting real transparency and real competition Of course it is open to the Australian government to take the issue of ‘transparency’ seriously, and for an Australian Minister of Health to stand up to the US pharma lobby by demanding that pharma submissions to the PBAC be made public. Even if this were to fail, it would at least alert the public to the issues surrounding pharma pricing and claims to superior efficacy, and bring pressure to bear on the government to resist the pharmas’ pleas for higher prices. Another way forward would be to promote real competition in the pharmaceuticals sector through releasing the competitive power of generics producers. Parliament would have to take direct steps in this regard, in ways that directly contradict the steps being taken under the terms of the FTA. If it is good enough for the US Congress to query what is being done in its name through FTAs, it is good enough for the Australian Parliament to do the same. A report by an American expert on international drug pricing sums up the situation with regard to the FTA and the PBS. Kevin Outterson, law professor at the University of West Virginia, predicts that Australian drug prices will rise by at least 30 per cent within five years under the deal: Australia got nothing on the pharmaceutical deal . . . It’s exclusively to the United States’ benefit . . . Australia has lower prices and a more functional and complete system than anyone else and that’s exactly why the drug companies want to shut it down, because it is such an outstanding model . . . The FTA is designed to gum up the works on a very efficient, thoughtful system, that many of us wish we could 80

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import into the US . . . I am troubled by US trade representatives utilizing the FTA to attack it just when our own domestic states are beginning to evaluate it and possibly embrace it. The real cost will become evident three to four to five years out and at that time it will be too late . . . The FTA will be firmly ensconced.52

Conclusion The FTA Annex 2-C on Pharmaceuticals, combined with the clauses in Chapter 17 that severely limit the scope for generics competition (discussed in our Chapter 5), succeed in importing US-style pharma values and strategies into the Australian system for producing and distributing pharmaceuticals. Together they amount to a death sentence for sensibly priced medicines in Australia. The impact of the pharmaceuticals clauses will be gradual but relentless. There will first be an attack on the integrity of the PBS itself: there will be repeated appeals and use of the alternative ‘independent review’ process. These will be spearheaded by individual US pharmaceutical firms (when their new drugs fail to be listed), and by PhRMA on behalf of US pharmas generally. Their efforts will go far to ensure that the PBS lists more and more ‘innovative’ drugs that have limited benefits. This in turn will drive up the costs of the PBS, which will be depicted in government discussions as an unacceptable drain on the public purse. This in turn will lead to a progressive dismantling of the PBS, done in the name of superior private sector efficiency and free trade in pharmaceuticals. This will be complemented by a concerted attack on the capacity of an Australian generics industry to offer real competition to the ‘innovative’ drugs produced under patent protection by the mainstream pharmas. The progressive loss of generics as a source of medicines, combined with drastic restrictions on parallel importing, will also have the effect of driving up the costs of the PBS and making its continued existence problematic. 81

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Finally, we have to ask: What motivates a government to so irresponsibly allow for the dismantling of one of the nation’s most treasured institutions? So far we have canvassed the intellectual arguments. In the case of pharmaceuticals, it appears that we have to canvass the strong likelihood of private economic motives as well. Is it possible that the Howard Government is acting as an agent for the international pharmaceutical industry—happy to accommodate their PBS- and generics-destroying agenda in return for unspecified benefits? We do not (yet) have the smoking gun but, like any decent detective, we cannot ignore the disturbing clues that point in that direction. Consider this for starters: the government deliberately misrepresented the fact that the PBS was up for discussion in the FTA talks; it gave repeated assurances publicly, while at the same time, in secret, it was laying down the terms of the Australian capitulation. As the Senate Inquiry into the FTA recently reported: . . . this committee now knows that, contrary to these [the government’s] misleading assertions, the PBS was in fact ‘on the table’, from the very first round of negotiations . . . the fact remains that the PBS was being talked about with US negotiators from the outset. This occurred even while the government made assurances clearly designed to convince Australians that the PBS was not up for grabs in the FTA.53

Second clue: government’s collusion, perhaps more accurately, ‘conniving’, with big Pharma is further revealed by the strategic ‘absence’ of any explicit reference to the PBS in the FTA. The reason? Only thus could the government maintain a public fiction that the PBS and pharmaceuticals ‘as named’ were not under discussion while delivering on all of big Pharma’s wish list. Third clue: recent revelations as to the destination of former Howard Government staffers indicate the strong links between the government and the pharmaceutical industry. No fewer than six former staffers have been appointed to rewarding jobs with US drug giants or their industry representatives.54 If these clues don’t convince, factor 82

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in an earlier development which now presents itself as the fourth clue: a Four Corners program recently made the allegation that the Prime Minister met with the major pharmaceutical companies to discuss the industry’s ‘great concern’ about ‘membership of the PBAC, particularly the publicly hostile attitude of some members and staff to industry’. Shortly afterwards, all but two of the PBAC members were either dismissed or resigned in protest. 55 Is this, then, a government in the pocket of big Pharma? If this is so, then the inexplicable starts to look less mysterious and the bizarre spectacle of an Australian government willing to deliver up our treasured institution is no longer something to ponder. We can explain it in the straightforward language of money politics. Here then is evidence that Australia is poised to become an appendage of the United States—a kind of Pacific Puerto Rico. The result of all this? A system of medicines delivery in Australia that progressively gives up any semblance of being driven by social need, in favour of a system indistinguishable from the present one in the United States, with its soaring prices and soaring profits for the drug giants. This at least meshes with the strategy pursued by the large US drug companies, not only through their association, PhRMA, but also, it seems, through a strongly Pharma-orientated Howard Government. The irony is that the US pharma industry has so misbehaved that it has raised the prospect of political price controls in the United States just at the time that it is making headway in dismantling such controls in countries like Australia.

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Government procurement

Trading ‘buy Australian’ for ‘buy American’ How to kill a country—Step 4 Start by doing away with a tried and tested method of domestic industry promotion—public purchasing policy (where governments support local firms by purchasing their goods and services wherever possible). This will make it harder for local companies to gain a foothold in the domestic or international market. At the same time, replace your ‘buy national’ programs with a ‘buy foreign’ preference, throwing open your government procurement market to the world’s largest foreign suppliers—especially in the most wealthcreating, knowledge-intensive industries like those based on information and communications technology (ICT). This will force many of your smaller ICT companies, unable to compete with such massive players, into bankruptcy. Strike a final blow to local firms by removing all performance requirements on foreign contract-winners, such as the requirement to use local goods, services and skills, or to license technology to domestic companies. In short, discard the key measures that have linked public purchasing with economic improvement, industry development and support for local excellence in the past. And do all this in exchange for the promise of access to a very large foreign procurement market. But ignore the fact that the promised market is one which remains highly protected by its own ‘buy national’ laws, cultural norms and other discriminatory arrangements—the very things you have agreed 84

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to abandon. In no time at all, domestic ICT firms (along with many others) will have fallen by the wayside, and your taxpayers’ funds will be filling the coffers of prospering foreign suppliers. Government procurement (or public purchasing) is a crucial policy instrument that goes to the heart of nationbuilding and industry development. ‘Procurement’ refers to the methods employed by government agencies to purchase the goods and services they need, both for day-to-day administrative purposes as well as for large infrastructure projects. These goods and services range from boots, blankets and bombs for the military, to meals and medical devices for hospitals, to computers, telephones and software for government offices—and all manner of items in between. Australia’s civilian procurement market alone is worth around A$45 billion annually. Worldwide, government purchasing soaks up some 10–15 per cent of global output. No wonder then that firms are keen to access government procurement markets, and that responsible governments seek to use their enormous purchasing power to stimulate and encourage local industry, innovation and employment. All countries utilise government purchasing as a tool of industry promotion. Some have used both military and civilian procurement more consistently than others to build new industries, foster technological innovation and upgrade infrastructure over many decades. The US model of public purchasing is the gold standard in this regard; US government agencies have long used ‘buy American’ procurement policies as the catalyst for domestic innovation and industry development, particularly in core high-technology industries such as the semiconductor industry through military procurement in the 1960s and 1970s, the aeronautics industry since the end of the Second World War, along with the Internet, supercomputers, and many more. Many household names such as Boeing had their roots in government procurement and together with the new national champions in ICT like Microsoft, IBM and Intel, continue to 85

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depend on sales to government agencies for a large slice of their revenue. Australia too has benefited greatly from government procurement, most famously with the Snowy Mountains Scheme in the 1950s and 1960s, hailed by many commentators as a major nation-building achievement.1 The Snowy Scheme was part of a large project to provide a national infrastructure in everything from roads, bridges, ports and water and electricity supply, to hospitals, education and defence establishments. It is widely agreed that such infrastructural projects of the past have provided ‘the platform on which our security, growth and quality of life were built’.2 They helped to extend our industrial base, and to upgrade local skills and enterprise. Our procurement system, using taxpayers’ money to support and advance local expertise, made this possible. The role of government procurement in building a national infrastructure remains just as vital to today’s advanced economy. ‘Infrastructure’ in the twenty-first century, however, is as much about information and communications technology (including the fast-growing area of high-speed Internet communications) as it is about roads, dams, electricity and railways. ICT is a major sector for large and lucrative procurement contracts, since governments at all levels everywhere are major purchasers of computer hardware and software and IT services. So it is easy to appreciate that access to the world’s government procurement markets is now at the top of the wish list for ICT providers such as IBM, Microsoft and EDS, to name just three of the US giants that prosper from Australian procurement contracts.3 Given the sheer size of the public procurement market (accounting for an estimated 40 per cent of total IT spending alone in Australia),4 it is also easy to see how government policies can make or break monopolies in this area, if they are so inclined. While all governments recognise the critical importance of an ICT infrastructure in a global environment, responsible governments have also prioritised the building of a national 86

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software industry through their procurement policies. In Australia, for instance, governments have used public purchasing policies to foster an industry capability in IT. The case of Computer Power Group, formerly one of Australia’s largest software services companies, is just one example of a once-vibrant Australian enterprise with roots in procurementlinked industry development.5 Those very principles, however, which seek to promote an independent industry capability in ICT, are to be annulled under the FTA. Given the importance of the new ITC infrastructure to national development, procurement budgets are not shrinking, in spite of outsourcing and the popular idea that we are living in an era of ‘small’ government. On the contrary, procurement continues to consume a large and in some cases increasing slice of government spending. Worth an estimated 10–15 per cent of GDP in the developed world alone, and some 20 per cent of GDP in the developing countries, the world market for government procurement is enormous.6 When the plurilateral WTO Agreement on Government Procurement (WTO GPA) entered into force in January 1996 (with 26 member countries) it opened an estimated US$350 billion annually in government contracts to international bidding. This was roughly a tenfold increase over contracts subject to the earlier GATT Code on government procurement agreed in the previous Tokyo Round of trade negotiations (which had only 12 signatories). Just why government procurement should become the subject of trade agreements, however, is not immediately obvious. ‘Increased transparency’ is the favoured justification of the US in pressing its case for opening procurement markets. But increasing transparency—making tender details public—does not mean increasing access for foreign suppliers. As the 2001 Doha Declaration and the WTO’s Working Group on Transparency in Government Procurement make clear, a country’s ‘transparency’ obligations are quite separate from its ‘buy national’ obligations and are indeed compatible. The current aim of the WTO is to develop a multilateral agreement which would increase the openness of 87

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bidding without surrendering ‘buy national’ preferences (an option closed off to Australia under the FTA).7 Indeed, in view of the historic relationship between public purchasing and industry development, many governments remain reluctant to open procurement markets, none perhaps more reluctant than the US itself. In spite of being the main driver of market opening, and even though more than 30 countries currently have the legal right to bid for US contracts under the WTO GPA and other FTAs, the share of foreign suppliers in US government procurement was estimated to be a mere 2 per cent.8 Not surprisingly, then, when 26 countries signed the WTO GPA in 1995, Australia was not one of them. Why not? After a cool appraisal of the pros and cons of joining, DFAT concluded that we would be worse off, because membership would not increase our access to the US market, whereas we would have to give up a great deal in return.9 One might then rightly ask: What has changed in the interim period to cause DFAT to alter its earlier assessment? Two questions are crucial in this regard: • Are we required to give up less under the FTA than under the WTO GPA? • Has the United States removed the obstacles to market access that we would have encountered had we signed on in 1996? If even one of these questions could be answered in the affirmative, then a case of some kind might be made for opening up our procurement market to the US giants. But, as we shall see, when the answer on both counts is that nothing has changed since DFAT’s 1997 assessment, and that we face the same obstacles and sacrifices, we must wonder at the wisdom of overturning and rejecting our own earlier negative assessments of the consequences. The parallel with the trend in quarantine analysed in Chapter 2 (reversing previous risk assessments on the basis of no real change in circumstance) would seem to indicate that when we negotiate with the US, all objectivity on Australia’s part flies out the window. 88

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Changes required under the FTA Government procurement matters are covered in Chapter 15 of the FTA, which grants both parties ‘non-discriminatory’ rights to compete for procurement contracts in each country. Government procurement is broadly defined to cover the purchase of both goods and services by most major administrative and public bodies. On the Australian side, the procurement agreement applies to the federal, state and territory governments; in the United States, in addition to the federal government, 27 states are included. Essentially, Chapter 15 of the FTA will involve four main changes for Australian firms.

1 Australian firms will have access to the US government procurement market for the first time (but this will be heavily qualified by ‘buy American’ norms) Australian firms are currently excluded from the US procurement market because of two laws: the Trade Agreements Act of 1979 excludes Australian companies from bidding for US contracts because Australia is not exempt under the Act, while the Buy American Act of 1933 and its subsequent amendments impose a 6–12 per cent price penalty on the supply of goods by foreign firms to the United States federal government. Chapter 15 of the FTA removes the exclusionary impact of these laws on Australian suppliers. However, as we detail below, remaining barriers mean that ‘access’ alone is unlikely to bring Australian suppliers significant benefits. In contrast, American firms are already allowed to bid for Australian government contracts without restriction (so long as they meet certain performance requirements), and they do. Australia’s current procurement system has little in the way of mandatory ‘buy Australian’ regulations and is therefore already unrestrained in comparison with the United States. What the deal will do, however, is remove the performance conditions that we currently place on foreign tenders; that is, remove a key mechanism for supporting and promoting Australian firms and industry development. 89

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2 Performance conditions for foreign suppliers in the Australian market will be removed Performance conditions usually include the imposition of ‘local content’ requirements on foreign suppliers (which require foreign suppliers to source a certain percentage of their inputs locally), or ‘offset’ arrangements (which require foreign suppliers to upgrade technology via licensing or other means to support local manufacturing, services and jobs).10 These are the kinds of ‘performance conditions’ that enhance domestic innovation and industry development. However, offsets are explicitly prohibited in the FTA, despite their longstanding use by the United States itself. According to Article 5 of Chapter 15: . . . the procuring entity may not seek, take account of, impose or enforce offsets in the qualification and selection of suppliers, goods or services, in the evaluation of tenders or in the award of contracts, prior to or in the course of a procurement process.

As the US International Trade Commission noted in its report on government procurement, the FTA made ‘significant advances in providing access for US companies to a considerable part’ of Australia’s government procurement market: Importantly, Australia will no longer apply provisions for local manufacturing or local content requirements to US firms . . . this is an especially important accomplishment since . . . these advantages are not available to competitors in the Australian market . . .11

3 ‘Buy national’ policies that give preference to local industry development and local suppliers will be outlawed—for Australia Currently, the procurement policies of the state governments and the territories contain provisions for preferring local 90

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suppliers and for linking procurement to industry development. The state government of New South Wales, for example, mandates its authorities to apply a 20 per cent price preference to goods of Australian and New Zealand origin,12 while Victorian authorities require bids for projects exceeding A$1 million or A$3 million in value (depending on location) to provide evidence of their proposed contribution to local sourcing, skills and technology transfer, and job creation. Western Australia too has an explicit ‘buy local first’ philosophy which underpins its ‘buy local policy’. Under Chapter 15, however, many or most of these policies will have to be dismantled. As the Queensland Public Works Department, commenting unofficially, observed: . . . when the agreement comes into play, most states’ procurement policies will be in breach. There will not be able to be any local industry development related activities and in the public tenders, there will be no incentives or rewards for typical local industry related activity.13

The same source noted that the FTA ‘when completed will have a huge impact on IT&T [information technology and telecommunications] government procurement and local industry development’.14 This is because Chapter 15 removes the preferential arrangements that underpin the growth of new high-value added Australian industry, notably the critical information and communications technology sector. The effect of conditions 2 and 3 above is that Australia agrees to abandon major national industry development programs that are currently linked to government procurement. However, this is done in an entirely lopsided manner. As the USTR notes in its assessment of the FTA, ‘The Australian government will eliminate its industry development programs . . .’ and ‘The Australian government will restrict its use of selective tendering . . .’.15 Yet the US makes no such commitments and, indeed, continues to use procurement as a principal means of encouraging high technology industry development.16 91

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Add to this lopsidedness the fact that US government agencies at state level have confirmed that their own preferential and ‘buy local’ policies will be largely unaffected (while ours will be).17 According to the Intergovernmental Policy Advisory Committee’s report to the USTR on government procurement, under the FTA: . . . state and local governments reserve the right to condition their agreement to accept the proposed procurement language based not only on the terms of the final agreement and implementing legislation but also upon the inclusion of terms and conditions such as [those set out] in their acceptance letters.18

These conditions state among other things that ‘existing state and local exceptions to coverage will be maintained, including but not limited to all existing or future preferences and practices’ (emphasis added) which benefit small businesses, as well as a range of other significant industries.19 Contrast this understanding with that of our own state governments noted earlier, and one can only conclude that either there is a high level of confusion on the part of our own authorities, or an extraordinary absence of reciprocity on the part of the Americans. Either way, it does not bode well for the Australian interest.

The small business exception? The one exception to complete abandonment of the ‘buy/build Australian’ element in procurement policy relates to smaller enterprise. Both Australian and US governments may continue to discriminate in favour of ‘small’ local firms, while the US may also continue its longstanding practice of ‘setting aside’ a portion of the federal procurement budget for ‘small’ domestic companies.20 Here too, however, lopsidedness looms large due to vast disparities in how ‘small businesses’ are defined in the respective countries. In the US, a ‘small’ firm can employ up to 1500 people, while the 92

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Australian maximum is 200. This has harmful consequences for Australia (a point we take up shortly).

4 Transformation of the Australian system in favour of US-style procedures that remove flexibility and substantially raise administrative and business costs Over the past 20 years, Australian state and federal agencies have been working to simplify and streamline procurement processes so as to minimise administrative burdens on both firms and government bodies. Under Articles 15.7 and 15.8 of the FTA, however, Australian government entities will be required to adhere to complex administrative procedures, even for minor contract placement. Australian government entities will also be exposed to the increased likelihood of legal challenges by foreign suppliers who claim unfair treatment. In this context, the Australian law firm Corrs Chambers Westgarth has been one of the few to bring its analytical talents to bear on the FTA. In the view of legal partners David Hodges and Tom Brennan, the FTA will effectively reverse the previous trend in procurement regulation away from a rigid emphasis on process and procedure towards a more cost-effective system which prioritises ends over means.21 Changes under the deal, aimed at making the bidding and award process more amenable to US bidders, will require radical changes to our procurement system, a cost that will be borne by Australian firms and taxpayers. The main regulatory changes will involve strict controls on the use of selective tendering and other ‘restricted’ procurement strategies, and the obligation of procurement authorities to provide information to all unsuccessful tenderers as to the reasons for their not succeeding. But the most onerous change is the substantial expansion of tenderers’ rights to, and scope for, legal challenge to government procurement decisions. In particular, unsuccessful tenderers will have a right to judicial review of procurement decisions in the courts; the courts will be able to reverse bid decisions 93

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or put them on hold.22 These are radical changes that threaten to overturn a relatively streamlined and cost-effective process in favour of one that will usher in large regulatory burdens, more litigation and thus higher costs all round for Australian tenderers, government agencies and taxpayers. The incorporation of US dispute processes into procurement practice, thus establishing a formal bid challenge system, will create a situation quite foreign to Australian experience. As DFAT concluded in its 1997 report on the implications of joining the WTO’s GPA, the bid challenge is likely to substantially increase costs and delays for both suppliers and buying agencies, working particularly to disadvantage Australian suppliers. The Australian Chamber of Commerce and Industry voiced a similar cautionary note at that time.23 As a result, we should expect a large regulatory and financial burden on Australia in having to comply with the new American regulatory measures. Since Australia is the one being required to conform to the other bilateral partner’s legal and administrative norms, it will bear the brunt of the burden. The US, by contrast, will need to make only minor adjustments, if any at all.

Why these changes harm Australia, but help America While the provisions and terms of the FTA apply equally to both countries, their impact will be entirely different. Yes, the American procurement market is large. In 2002 nondefence expenditure totalled US$200 billion at the federal level and US$1.04 trillion at the state and local level. Our government claims that the gains from securing access to this large market outweigh the sacrifices we must make at home. The favoured rationale for the change is that we get access to the bigger market so we must gain more from the deal than they do. To quote Treasurer Peter Costello: ‘The bigger benefits are going to go to the people who are getting access to the larger market. This is why it’s in Australia’s interest’.24 94

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It is not too difficult to appreciate why the hole in this logic is almost large enough to drive a truck through. First, if the Treasurer’s logic were sound, why would Australia have a chronically huge trade deficit with the United States (which hit A$12.5 billion in 2003)? The related flaw in the ‘bigger market equals more benefits for Australia’ logic is that by the same reasoning, in a country of 300 million, Australian firms will find themselves up against proportionately many more US businesses (not to mention other foreign competitors). Finally, the larger the market, the larger the number and size of the firms against which Australia’s relatively small firms will have to compete. Indeed, the Australian business community is well aware that our firms are generally too small to meet the demands of large US agencies, and that gains in procurement will depend on our firms winning lots of small contracts—ranging from $20 000–$60 000 in value.25 Ironically however, contracts of this size will invariably be reserved for ‘small’ American firms under various preferential programs, which must reserve at least one quarter of the US federal procurement budget for smaller American suppliers (a significant ‘buy American’ barrier we discuss below).26 Conversely, in the absence of similar mandatory programs for Australian business, a much larger slice of the Australian procurement market would now be opened up to US firms.

US small business ‘set-asides’ The United States has carved out a right to continue ‘buy American’ measures in its Small Business Set-Asides program under Chapter 15 of the FTA.27 These laws involve set-asides for ‘small’ firms that, as we have seen, are up to ten times larger on average than Australian firms. One important effect of this size discrepancy is to include many more US firms in government procurement programs reserved for small business. Indeed, the generous definition of what constitutes a ‘small’ business in the US effectively continues a ‘buy American’ preference and industry development policy in a different 95

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guise. The US federal government gets around the FTA requirement to waive ‘buy American’ laws by providing funds to state and local governments mandating that the money be spent on suppliers and products that have a certain minimum proportion of US content.28 We note the striking fact that the Canadian provinces have refused to sign up to deals negotiated by their federal government that allow Americans to retain small business set-asides.29 On DFAT’s own estimate, these set-asides are likely to significantly impair access of Australian suppliers to American procurement markets. Indeed, because of the importance of the US offset program, it is ‘conceivable that Australian export growth’ resulting from the Procurement Chapter ‘could be confined to niche markets where there is no significant US small business competition’.30 This was the conclusion of DFAT in 1997 in considering the pros and cons of joining the WTO’s GPA. It remains quite as valid today, as we shall see.

The 9/11 effect Finally, the situation regarding government procurement in the US has been affected—like everything else—by 9/11 and its consequences. Quite without any reference to the FTA, the United States has been mandating further stringencies in its approach to government procurement. One matter being discussed in the Congress, as part of the ‘Buy American Improvement Act’ debates, is a proposal that every agency or government department file an annual return demonstrating why they have sought waivers from the Buy American Act in providing a tender to a foreign supplier. As one industry consultant noted in an interview, ‘if they want every contracting officer to report every part, country of origin, price, the reason they bought it, and so on, then they [US government agencies] would avoid buying anything with foreign content just to avoid having to do the report’.31 So the situation for Australian firms seeking procurement contracts in the United States may not be nearly as rosy as painted, despite the fact that we are throwing open our own 96

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market and abandoning any semblance of ‘buy Australian’ as a tool of national development. The contrasts in situation between our two countries could hardly be more stark. Indeed, it may come as a surprise to some Australians to learn how deeply Americans value their ‘buy American’ approach to government procurement. Let us take a closer look.

The US strategy on government procurement: ‘Buy American’ US strategy in government procurement can be summed up in two words: ‘buy American’. This takes a dual form. Internationally, the goal is to help other countries ‘buy American’ by vigorously pursuing market access concessions in international agreements and then supporting US firms in their bids for foreign contracts. At home, by contrast, the strategy is to minimise foreign access wherever possible through ‘buy national’ devices, which may be legal or non-transparent in character. So on the one hand, US government and business work hand in glove to drive open foreign procurement markets through bilateral and multilateral arrangements. Once market access is achieved, the relevant US trade agencies together with their corporate partners coordinate resources to secure foreign procurement contracts. In the home market, on the other hand, government agencies restrict foreign access to procurement contracts through a variety of means, including longstanding ‘buy American’ laws that shape purchasing practices, discriminatory offset arrangements for ‘small’ businesses, local preference arrangements and other non-transparent barriers (including the elastic use of ‘national security’ exemptions). In all these respects, government procurement is an area that nicely illuminates ‘America Inc.’ at work—a term we use to draw attention to the highly cooperative and coordinated character of the US government–business relationship, especially where dealings with foreign interests are involved.32 Consider first the international aspect of the strategy. Of course it is fair to say that most governments take some 97

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interest in helping to secure nationally significant contracts for foreign projects (e.g. Australia’s gas deal with China). But the US appears to go further than most, with the creation of a government agency dedicated to coordinating American bids for government contracts around the world. The so-called Advocacy Center—whose raison d’être is to secure the ‘national interest’—was created in 1993 to help US firms win government contracts across the globe. Nestled in the Department of Commerce, the Center puts the financial resources and authority of the US government behind what the government proudly calls the ‘aggressive advocacy’ of US firms. Advocacy assistance takes many forms; from the offer of financial sweeteners to helping its firms lobby foreign governments in order to win a contract.33 The decision as to which firms to assist in this manner is based on an assessment of the project’s contribution to the ‘national interest’. This means that: ‘Typically companies must demonstrate how supporting their bid will positively benefit the US economy, primarily in the form of exports of goods and services.’34 So much for the international strategy. In the home market, the devices to ensure that government agencies ‘buy American’ are much more creative. Let us go through the ways that the United States guides and requires its government agencies and departments to source locally.

‘Buy American’ as a legal and cultural norm in public purchasing preferences US procurement policy institutionalises a host of ‘buy national’ programs through its ‘buy American’ legislation. The Buy American Act of 1933 restricts government purchases of supplies and construction materials to those defined as ‘domestic end-products’. Suppliers must meet a two-part test: the article must be manufactured in the United States, and the cost of domestic components must exceed 50 per cent of the cost of all components. Under proposed extensions of the 98

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Act, the domestic content threshold would be increased to 65 per cent and current exceptions to the provisions of the act (‘waivers’) would be tightened (see below). In short, the Buy American Act mandates that US government agencies give priority in public purchasing contracts to goods and services produced domestically, employing American labour. Many states and local governments also apply ‘buy American’ or other ‘buy national’ provisions in their own procurement policies. In many cases, states give preference to local suppliers, and apply local content requirements.35 The FTA overturns none of this. However, since the US has worked vigorously to access foreign procurement markets, federal policy is to grant national treatment to any country willing to grant reciprocal treatment.36 The Trade Agreements Act of 1979 waives the application of the Buy American Act to the finished goods of designated countries, which include the parties to the WTO GPA, NAFTA, and other bilateral procurement agreements, such as Chapter 15 of the current Australia–US FTA. So what is the problem for Australian firms? Surely once the provisions of the ‘buy American’ laws are lifted, the playing field will be even—and all that will stand in the way of Australian companies seeking access to US procurement contracts is their own competitiveness. Unfortunately, all evidence points towards a very different conclusion. A few of our dynamic companies with niche products (like Resmed) will turn market access to their advantage but, overall, Australian companies will find their ability to bid for a contract of little value since the rules of the game are so heavily biased towards the home team. Some of these biases are legally structured, such as the small business set-asides (discussed above) which exclude foreign companies. Others have a cultural basis— public agencies simply prefer to buy national whenever possible. This bias may lead to creative circumventions of the competitive tendering process, and at times entail a lack of transparency, including breaking the rules, as we shall see. In sum, even when the ‘buy American’ laws are waived in principle, the field is tilted to the American side in practice. 99

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The culture of ‘buy American’ It is no exaggeration to say that a ‘buy American’ bias pervades all levels of US government and finds expression in the purchasing choices public agencies make, independently of legislation. Take state agencies, for example, where strong strains of economic nationalism often surface in the way they pitch their public purchasing strategies. Here’s how the Economic Development Commission of Florida’s ‘space coast’ (near Cape Canaveral) explains to business why government contracting is important. ‘We will show you how to help our country remain strong’, it says, while building your business: When you work with the government and its primes, you are not only helping yourself make a business, you are helping to keep our country strong. Think of it as a ‘duty’ to make money, grow your business, and help the country. That sounds like a ‘win-win’ to us!37 (emphasis added)

What remains intriguing is how this vibrant form of economic nationalism has happily coexisted with America’s aggressive drive into foreign procurement markets. Far from fading with the US push for global market access, the ‘buy national’ orientation seems as strong as ever. Perhaps the answer is that ‘buy American’ laws have so profoundly shaped the public culture that procurement laws are now less important. One piece of data that makes this highly plausible is, as we mentioned earlier, the paltry share of foreign suppliers (around 2 per cent) in government procurement.

Transparency be damned: The case of Boeing versus Airbus Clearly then, even where ‘buy American’ laws are formally waived, the cultural orientation of public officials is such that ‘buy American’ preferences still rule the day. We can glimpse the extent to which a practice is entrenched as part of the 100

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public culture (hence not dependent on formal laws to sustain it) by employing a simple test: What do the relevant authorities do when entrenched domestic norms of ‘buy local’ come into conflict with the rules of open and transparent tendering? Are the authorities most likely to uphold transparency and competitive tendering at the cost of rewarding domestic suppliers? An answer to these questions can be found by considering the case of the Boeing 767 tanker deal. The incident concerns the favouring of a national champion, Boeing—nurtured by public purchasing programs and heavily dependent on the procurement market—over and above the more competitive bid of its European arch-rival, Airbus. The case has gained much publicity over the past two and a half years, not only because of the value of the contracts involved, but also because of the sheer mendacity of the procurement agency and top level public officials who simply ignored competitive tendering and ‘transparency’ obligations in their determination to favour Boeing at all costs.38 In 2001, the US Air Force developed a draft Operational Requirements Document (ORD) specifying through 26 criteria what it required of its new tanker aircraft (to provide mid-air refuelling). Instead of then calling for tenders, however, the Air Force passed the ORD over to Boeing and gave the company five months to rewrite the official specs so that it could secure the US$23.5 billion contract. In spite of Boeing being unable to meet 19 of the 26 original capabilities required—including the specification that the new tankers be at least as effective as the 40-year-old ones they would replace—the Air Force nonetheless accepted the rewritten proposal to contain costs. Boeing’s competitor, Airbus, was then given just 12 days to bid on the project. The Airbus bid met more than 20 of the original 26 specifications and came in at US$10 billion below the Boeing price. This obviously wasn’t good enough as the contract went to Boeing. Subsequent emails between the various parties reveal that the White House intervened to ensure the deal went to Boeing; the agencies critical of the deal for being too costly 101

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and unnecessary were instructed to move ahead. The Boeing tanker agreement (currently under investigation, and suspended pending the outcome) illustrates how deeply ‘buy American’ norms are entrenched in the culture. Norms of transparency may often take second place to ‘buy American’ norms, especially when the stakes are large.

Growth of informal barriers and non-transparency, post-9/11 The Boeing case is not an isolated one. The federal Transport Security Administration (TSA) can match the Air Force in its ‘buy American’ zeal. Only after vigorous protests had been launched by Beretta (an Italian handgun supplier to the US military) and other firms did the TSA ‘drop narrowly drawn contract specifications favourable to US manufacturer Smith & Wesson and open up the competition industry-wide’.39 Questions in Congress over the handgun contract (discussed below) have drawn attention to the TSA’s broader contracting practices, particularly its apparent tendency to avoid competitive bidding for its contracts. A member of the House Homeland Security Appropriations Subcommittee found that the TSA, in little more than a year since its inception, awarded, without calling for tenders, more than 90 contracts valued at over US$50 million.40 At the same time that the federal procurement market is booming with new spending, there are many indications that the contracting process is increasingly veering away from open and transparent tendering. White House officials, lawmakers and some industry lobbyists have been objecting to the improper use of government-wide technology contracts, popular deals that are pre-awarded to companies and then opened up for all agencies to use. Reports by some agency inspectors-general found that acquisition personnel often don’t conduct full competitions on the contracts. In the US technology procurement markets, large contractors such as Lockheed Martin, Northrop Grumman and Computer Sciences Corp. lead teams of other companies on the biggest 102

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technology contracts in government; they are reported to ‘exert even more influence over the procurement process than they did before Sept. 11’, as the agencies are ‘relying heavily on trusted vendors with proven track records’.41

Evidence of pervasive informal pressure to apply the Buy American Act Even where suppliers are from countries signatory to the WTO GPA, there is evidence that ‘buy American’ preferences are still being exercised throughout the network of government procurement agencies. Two recent cases involve effective pressure to revoke contracts granted to German manufacturers of handguns for use by airline pilots and to British manufacturers of berets for US troops. In each case, Congressional intervention resulted in an overturning of foreign tender awards in favour of US suppliers.42 Outspoken advocates of the Buy American Act make it clear to the relevant agencies as to whom their procurement decisions should favour. When the Bureau of Immigration and Customs Enforcement was about to award a ‘substantial contract’ (worth some US$30 million) to supply handguns to its officers, the agency was instructed by the chairman of the House Ways and Means Committee ‘to strongly consider American companies when making that award’. It did. A few days before the hearing, the Defense Logistics Agency cancelled all the contracts involving foreign suppliers.43 As Japan’s Ministry for Economy, Trade and Industry (METI) has observed of the US on a number of occasions, ‘preferential treatment for domestic products is a basic policy of the federal government’.44

Other significant ‘buy national’ biases But it is not just the Buy American Act and its cultural embeddedness that grounds public procurement so safely in domestic enterprise. In addition to the Small Business Set-Asides program detailed above, there are many other 103

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institutional means operating in tandem here. Let us highlight just a few of them.

Acquisition versus procurement One ‘hidden’ way of securing government contracts for local firms without the bother of going through normal tendering processes is by making a semantic distinction between acquisition and tendering. The distinction is important because while both activities involve government purchasing, ‘procurement’ requires conventional tendering that is open and transparent; ‘acquisition’ does not.45 Evidence indicates that the US government is seeking to rebadge more of its purchasing requirements under ‘acquisition’, thus removing them from the regulatory burdens of ‘procurement’. For example, the bulk of the enormous budget of the newly constituted Homeland Security Agency will be dedicated to ‘buy American’ policies. Although procurement has some place in the agency’s purchasing policy, US procurement commentators report that ‘the real meat of the department’s buying strategies is spelled out in the section on technology acquisition’. Similar trends can be seen in the practices of other agencies, including the Energy Department, Coast Guard and Transportation Security Administration. Such agencies as the Coast Guard and the Transportation Security Administration have awarded creative, flexible contracts that have broken the mold of traditional government procurement. TSA’s purchasing is based on an acquisition model that puts responsibility for the contract’s success more on the vendor than on the agency. White House officials have heralded it as a model for Homeland Security.46 (emphasis added)

‘Acquisition’ advocates are currently aiming to extend the practice beyond the science and technology arena. While there is a debate between those who want to see acquisition 104

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extended and those who call for caution on the grounds that it requires a different set of skills, there is widespread support for the model of acquisition that has been institutionalised in the military.47

Strengthening of the Buy American Act As if all this is not sufficient, there is currently a bill before Congress that, if passed, would extend the Buy American Act of 1933. At the very time that the US is asking Australia to abandon any kind of ‘buy Australian’ provisions in government procurement contracts, Congress is considering strengthening this Act and making it even more difficult for US government agencies at federal, state and local level to do anything other than source locally. If the Buy American Improvement Act of 2004—introduced in both houses and now referred to the House Committee on Government Reform for further action—is enacted, key provisions would: • close loopholes in the current waiver authority in the Buy American Act by restricting its five primary waivers; • increase the minimum ‘American-made content’ standard from 50 to 65 per cent; • give US producers preference if the US bid is substantially the same as the foreign company’s bid, or the US company is the only US producer of the goods or product; • encourage US procurement at US embassies and military bases for overseas use on routine, non-emergency purchases; • require each agency to file annual reports with Congress, providing an itemised list of all Buy American Act waivers, dollar values, and sources—to be made available on the Internet; • develop consistent, government-wide definitions of terms commonly used to invoke waivers (‘inconsistent with the public interest’, ‘unreasonable cost’, etc.).48 The fourth requirement, calling on all agencies to prepare a detailed Buy American Act waivers return, appears to be crafted 105

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in full knowledge that agencies would find such a requirement burdensome. At face value this is a major complication for the FTA—which states that such requirements will be waived for the signatories. But here is Congress considering imposing a further requirement on US state agencies to justify such waivers—irrespective of any FTA entered into.

The FTA’s implications for Australian industry in the US and at home A hollow victory: ‘Winning’ access to an uneven playing field We are now in a position to see why the government’s claim that Australian firms will have significant opportunities to compete for contracts in the American market is seriously flawed. In spite of confident assurances that the deal will deliver Australian companies access to a very large market by removing the formal provisions of the ‘buy American’ legislation, such claims have no basis in fact. The lengthy list of obstacles and restrictions detailed here, including the pervasive practice of favouring American suppliers over foreign ones, indicates that exemptions from the ‘buy American’ provisions are likely to be of marginal significance to Australian firms. This finding lends support to DFAT’s earlier conclusions and the view of legal experts that ‘there is no reason to think that it [Chapter 15] will lead to a substantial flow of business opportunities to the generality of Australian exporters’.49 It is worth recalling too that the US maintains preferential arrangements for US suppliers in the one sector where Australian suppliers are most able to compete effectively— the smaller enterprise (SME) area where niche products rather than mass quantities are called for. However, this is an area that remains largely reserved for American firms through a number of small business programs, various set-aside schemes and buy-in-state regulations which mandate local content and local suppliers.50 Clearly, Australian-based 106

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companies operating in the US would not be eligible for these contracts.

Swapping ‘buy Australian’ for ‘buy American’: The case of ICT policy Turning to our home ground, the critical question is: how will our ability to pursue ‘buy/build national’ policies be affected? Here we find the most damaging implications of the procurement provisions of the FTA, and arguably the most dangerous of all is their impact on the development of our ICT industries. As we noted at the outset of this Chapter, ICT is the modern infrastructure, equivalent to the railways of the nineteenth century. Without a strong and independent ICT capability, a country is destined to be left behind in an increasingly competitive global economy. In recognition of the importance of ICT to the nation’s economic future, since the late 1980s Australia has been actively promoting the development of this industry via targeted public purchasing programs. Since we began negotiating the FTA with the USA, however, all of this has begun to change. Like other countries, Australia has put in place a strong ‘buy national’ ICT policy in recognition of the catalytic role of procurement in fostering local know-how and innovation in this nationally critical area. From 1991 (emulating its US counterparts), the government began to place clear quantitative targets on ICT contractors, so that successful bidders had to meet ‘buy and build Australian’ goals, including the requirements to: export goods and services worth 50 per cent of what the firm imports; achieve 70 per cent local content; invest 5 per cent of local annual turnover in R&D, and so forth. Successful bids required evidence that certain specific performance conditions had been met, such as: product development; investment in capital equipment; skills development and service support; sourcing services and product components, parts and/or input, locally. In addition, applicants had to demonstrate performance in an area such as 107

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exports, R&D, development of strategic relationships with Australian or New Zealand suppliers/customers, or participation in a recognised industry development program. Since 2002, however, just as the federal government decided to embark on the trade deal with the US, we have seen a substantial shift in Australian ICT policy. Up to that point—beginning with the outsourcing fiasco in 199751—the broader pattern under Howard’s leadership had been a gradual watering down of federal procurement-linked industry development. But in the past two years, as the prospect of an FTA has loomed on the horizon, our federal government has proposed the virtual abandonment of industry development requirements as a sign of goodwill to America Inc.—a taste of what the US could expect from a deal with the Australians. In this respect, the Howard leadership has been in full dress rehearsal for this event, for just as the government decided to move forward with a bilateral agreement with the US it began to remove the stronger ‘buy national/build local components of its government-procurement ICT programs. To detour for a moment, the parallel with the overturning of quarantine protocols in the same time frame is quite striking, as noted in Chapter 2. There we saw the Howard Government sending ‘we will accommodate you’ signals to the Americans by relaxing biosecurity standards. Here we find the Howard Government sending similar signals by jettisoning ‘buy Australian’ and enthusiastically adopting a ‘buy American’ policy in everything from ICT to Defence. Just as the US has an Advocacy Center for its international procurement activities, so do we—except that ours is advocating ‘buy American’, with an office in Washington established expressly for this purpose!52 Returning to the Howard Government’s ICT strategy, under the most recent proposal, which coincides with the opening of negotiations for the FTA, two main changes apply to companies supplying ICT goods and services. The first replaces the obligation to meet certain performance conditions with voluntary guidelines that set out the government’s expectations 108

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of its ICT suppliers (note: ‘expectations’ replace ‘requirements’). The second reduces the compliance conditions on bidders by restricting the industry development component to SMEs. For a contract less than A$20 million, there are no such requirements. For contracts above A$20 million, the government will specify a small minimum share of the contract value to be subcontracted to SMEs (10–20 per cent as indicated earlier). But even here, we have undertaken to apply the rule ‘flexibly’ and exempt foreign suppliers from this ‘requirement’ wherever commercially inconvenient. The fact is that American firms and their governments do not like having performance conditions attached to US business activities abroad. Thus, we have willingly agreed to do away with all mandatory ‘industry development’ and ‘buy Australian’ conditions that have been linked to procurement tenders in the past. As legal experts on procurement note: The endorsed supplier arrangement conducted by the Department of Finance and Administration at the Commonwealth level will . . . no longer include industry development requirements. There can be no requirement for domestic content, domestic supplies, the licensing of technology transfer or similar actions taken into account when making a choice of supplier. This will see the abolition of a mandated component in the information and communications technology areas53 [which, with only a little tongue in cheek, we may refer to as the ‘Microsoft Clause’].

The only ‘buy Australian’ component that will remain in federal ICT programs is the ‘anticipation’ (note: not ‘requirement’) that large contractors (foreign multinationals like Microsoft, EDS, IBM) subcontract some of the project work to SMEs. Thus the guidelines for suppliers of ICT state: ‘The Federal government anticipates that its [foreign] suppliers . . . will make use of the skills and capabilities of Australian SMEs in the research, development and delivery of ICT products and services’.54 Contrast this voluntary approach of the Australian government with the mandatory 109

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‘buy American’ approach in US small business set-asides— and draw your own conclusions as to which economy will protect its domestic and expand its foreign procurement markets. For Australia then, the FTA will mean, above all, the entry of US firms into a lucrative procurement environment virtually unsheltered by ‘buy national’ restrictions or the requirement to contribute to Australian manufacturing. Thus US companies have celebrated this aspect of the agreement.55 Whereas our firms will enter an arena biased towards the local supplier, American firms will enter an arena tilted towards the foreign product—a form of ‘buy nonAustralian’ bias. This ‘buy non-Australian’ bias is most heavily played out in defence procurement, and is one which current federal policies help to foster. In sum, more access to Australian procurement for US firms, and no requirements to contribute to local development in return for Australian tax dollars.56 In all of this, what most deserves attention is the thoroughly asymmetrical nature of the respective procurement environments: on the one hand, we see the removal of the ‘buy Australian’ core of government procurement policy; on the other hand, we find this is occurring at the same time that US purchasing norms and practices are making ‘buy American’ provisions more pervasive through creative, nontransparent and other regulatory measures. To use that overworn and misleading metaphor, this is not just an uneven playing field—it is a field on which two different kinds of game are being played. Our concerns about the imbalance between the full access being granted to US firms in the Australian procurement market, and the limited access being conceded by the US state governments, is echoed in the Senate Inquiry report. Referring to the ‘serious reservations and testimony heard by the Committee’, the report goes on to state that ‘Detailed analysis of these provisions . . . should have been canvassed before the Agreement was signed’.57 It is hard to escape the conclusion that the consequences for Australian business, government and community will be 110

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damaging. They will turn what is currently a net gain for the country (Australian taxpayer dollars invested in upgrading local skills and enterprise) into a net loss for Australian industry and jobs (transfer of Australian taxpayer dollars to American companies).

Conclusion We began with the question of what, if anything, has changed since DFAT’s negative conclusion in 1997 that it would not be in the national interest to open our procurement markets to the United States. The evidence in this Chapter offers compelling confirmation of that earlier assessment. First, we are required under this deal to give up as much as we would have given up under the WTO’s GPA. Second, the United States has not only failed to remove obstacles to meaningful market access, rather it has strengthened them in the intervening period. While the FTA attempts to give Australia special trade status, the benefits we could have derived are offset by a series of other clever regulatory and semantic devices on the part of the Americans that ensure US protection of American industry. In sum, the FTA does not override all other regulations and restrictions that favour American content. If anything, those other restrictions water down the FTA to ensure American protection. The only real benefit that Australia could hope for was market access. But access to a highly uneven playing field—marked out by US set-asides and other culturally pervasive ‘buy American’ preferences— is most unlikely to translate into meaningful gains. The United States has a set of clear and vibrant cultural and legal norms that compel government agencies to buy American goods and services in preference to foreign ones. These provide a set of standards that some countries, including Australia, could well aspire to emulate. Australian firms thus find themselves at a double disadvantage in the government procurement markets of both the United States and Australia 111

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because of the operation of these norms. On the one hand there is a ‘buy American’ norm operating in the United States, complemented by an emergent ‘buy non-Australian’ norm operating at home, that will now be institutionalised through the FTA.58 Although ‘buy national’ policies played an important role in the 1980s and 1990s, particularly in ICT, changes in government and the absence of continuous central coordination that could mould a resilient pro-Australian public culture, have meant that American-style ‘buy national’ policies have been followed only in the most fitful manner under the Howard Government—most recently as window dressing. In their most recent guise, procurement policies have all but abandoned any pretence of promoting Australian expertise and know-how through support for local development, in full dress rehearsal for the FTA. While Labor seeks to distinguish its policy as one that will make Australians not just sophisticated users of IT, but also sophisticated producers of IT, this goal is destined to have little more than rhetorical status now that Labor has approved a trade agreement that makes its achievement impossible. The most damaging implication of the FTA’s government procurement Chapter, however, is that it effectively cuts off our lifeline to procurement-linked industrial renewal and nation-building in the future. Any options open to future governments to set about seriously institutionalising a proAustralian purchasing orientation (to match the American one, for instance) will be utterly ruled out once we push forward with the FTA. In so far as such efforts would require deviating from the agreement, Australia would be in breach of the new procurement regime and, as such, subject to trade sanctions. The abandonment of mandatory offset and industry development provisions, together with the much more protective US environment in which our firms will have to compete, and the costs of compliance with new regulatory requirements, will combine to bring about a net outflow of resources from Australia.

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Intellectual property rights

Suppressing our own knowledge economy How to kill a country—Step 5 Take your own national system for recognising and protecting Intellectual Property Rights (IPRs)—which is already fully compliant with international standards— and give it a major ‘transfusion’ from the system of a dominant foreign power. This will offer much stronger protection for the patents and copyrights held by this foreign power, and will dramatically increase your royalty payments to the foreign country, putting a major strain on your balance of payments (especially if—like Australia—you are already a net importer of IP-protected goods). Buttressing foreign patent and copyright claims will also help throttle your remaining innovative industries, forcing them to navigate around the patent claims of foreign corporations rather than staking fresh claims themselves. You can also suppress competition for IP-protected goods by making it impossibly hard for generic versions of these products to be introduced, for instance by allowing the ‘evergreening’ of existing patented pharmaceuticals. But why stop there when you can drastically ratchet up sanctions against IP ‘violators’? You could even send your own citizens to jail for interfering—wittingly or not—with the technological gizmos of foreign IP holders (like the devices they use to stop you enjoying a digital video-disc you bought in the United States or Europe, back home in Australia). This is an excellent way for an appendage country to appease its foreign master. The pity is, this is exactly what Australian negotiators have signed off on in the FTA. 113

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Before you decide to skip this chapter in the belief that such ‘technical’ matters don’t affect you, stop and consider these questions: • Do you ever purchase pharmaceuticals, prescription or otherwise? • Do you ever use a library at school, university or in your local area? • Do you ever buy CDs or DVDs, or electrical goods such as mobile phones or digital cameras? • Do you ever want to work in a high-wage, high-tech industry such as software development, information technology, or multimedia design here in Australia? If you (or your family) answered ‘yes’ to any of these questions, you can’t afford not to read on. The section of the FTA that deals with intellectual property rights (IPR) issues is Chapter 17—trademarks, patents and copyright. The clauses on IPRs and their protection that we find in the Australia–US FTA are almost identical to similar sections in previous FTAs between the United States and Singapore and with Chile. The phrases used come almost verbatim from US laws such as the Digital Millennium Copyright Act 1998. In other words, the US has a very definite agenda in this area. Our aim in this chapter is to show just how devastating this agenda will prove to be for Australia’s innovative industries and for our balance of payments. While the FTA in general is concerned with trade and investment related matters—where gains and losses can be easily discerned—the section dealing with IPR issues is another matter entirely. The gains and losses here are much more abstract, at times speculative, but always with real economic and social consequences. We concur with the Senate Inquiry in asking why it is that the issue of protection of monopoly rights should be the subject of free trade agreement negotiations at all.1 The FTA further reinforces the recognition already granted in Australia to such monopoly rights. As we demonstrate in this chapter, the goal on the US 114

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side is to secure even further strengthening of monopoly rights that can only have the effect of suppressing our own creative endeavours and innovation. It is the very complexity of these issues that makes them even more important to understand— the United States is counting on our ignorance in this area to shepherd through its changes with minimal protest from Australian consumers and Australian firms utilising products protected by US IPRs—the people with the most to lose. The IP-protected sector is now by some accounts the largest sector of the entire US economy. Everything from life forms to movies is covered in this sector. Its exports now exceed the exports of the automobile, automobile parts, agricultural and aircraft industries combined.2 This is the real reason for the US concern to extend and strengthen IP rights. The copyright-protected sector on its own—covering films, TV programs, home video, digital video-discs, business and entertainment software, games, books, music and sound recordings—was estimated to be worth 5.2 per cent of US GDP in 2001—US$535 billion. In the same year, this sector achieved foreign sales of US$89 billion, making it the leading export sector in the United States.3 The inclusion of trademarks and patents would of course make these figures even more impressive. Thus in the area of intellectual property, the US has a very definite agenda backed by very real economic interests. Indeed it is abundantly clear, as one reads the clauses of Chapter 17, that what is being created is a radically different IP system for Australia. These changes will take our IP system far beyond what we have already agreed to through multilateral arrangements such as the WTO Agreement on Trade-Related Aspects of Intellectual Property (TRIPS), towards a US-style system that emphasises the rights of IP holders (the majority of whom just happen to be large American companies). Importantly however, we will stop short of introducing any of the protections for IP users that are also built into the US system (through both specific legislation and its democratic Constitution). In other words, we will give away all the rights to (American) IP holders, but 115

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have none of the safeguards to protect Australian IP users, which means all of us. Chapter 17 makes no effort to conceal the fact that it is focused squarely on the interests of IP holders, that is, the owners of patents, trademarks and copyrights. The interests of the users of goods or services protected by intellectual property rights, such as libraries and universities, or consumers of pharmaceuticals and high-tech goods are all but ignored. Now, the United States is the world’s largest exporter of such IPRs, and Australia is a net importer, particularly from the United States. Our payments of royalties to foreign companies exceeded our income in 2002 by more than A$1 billion, and it will continue to rise as a result of the FTA. So there is no question as to where the financial benefits lie in this case: Australia will be sending an ever-increasing flow of royalties to the United States. And this will be not just for the short term. As intellectual property rights are strengthened and lengthened, so we can expect to see US corporations such as Disney make claims on behalf of their copyright-protected inventions (Mickey Mouse and the rest) virtually in perpetuity.4 We can expect the same from US producers of pharmaceuticals, from US producers of software and information and communication technologies (ICTs), all of which will have a substantial blocking effect on Australia’s own efforts to innovate in these areas. Just how this will happen is detailed below. The point here is this: Under Chapter 17, Australia has actually agreed to place in the Free Trade Agreement provisions that have nothing to do with free trade, and everything to do with protecting the monopoly rights of IP holders! This does much to reinforce our argument that there are two agreements in the FTA: there is a trade agreement that purports to represent principles of free trade (but breaks with these principles wherever they might damage American interests); and there is an investment and IP agreement that unashamedly brings Australia’s institutions and procedures into line (read: harmonises) with those of the US, to make Australia ‘safe’ for US investors and US intellectual-property holders.5 116

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In the case of IPRs and their promotion by the US, we come across a totally new kind of economy—one that has been created by US interests in just the past two decades. The object of this economy is not to make profits through production and trade, in the way these terms have been understood for centuries. Rather, it is to make profits from the exploitation of intellectual property—a very different kind of business goal, requiring a very different kind of business system. The key distinction in this new setting lies between goods and services that carry IPR protection, and those that don’t. The ones that don’t are the ‘normal’ goods and services as treated in economics. In the new language of the global knowledge economy, they are called ‘generics’. There are generic pharmaceuticals, as opposed to branded and patented pharmaceuticals. There are generic compact discs and other forms of recorded music, as opposed to the copyrighted versions. There are trademarked goods such as clothing (which carry visible trademarks), perfumes (which carry trademark-protected scents) or any of thousands of goods and services, versus their non-trademarked, generic equivalents. In the new economy, the goal is to turn these IPRs from what have traditionally been monopoly rights for limited duration, strictly to encourage innovation in the arts and sciences, into ‘natural rights’ associated with trade and investment. This is the paradigm shift that needs to be effected, which is pursued through all the FTAs that the US is involved in.6 The rewards from this new kind of IP-protected economy are substantial and growing ever larger. The Disney Corporation on its own earned an estimated US$8 billion in 1998 just from licensing Mickey Mouse products; no wonder they lobbied so hard to have the copyright term extended in 1998 from 50 years to 70 years, thus extending their opportunities to pick up royalties from Mickey until the year 2023. The US Congress has extended the terms of copyright no fewer than 11 times in the last 40 years of the twentieth century, most recently in the Copyright Term Extension Act (CTEA) of 1998, 117

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passed a day after the Digital Millennium Copyright Act 1998.7 The royalty flows from IPRs are extremely attractive: after all, you don’t have to do anything to earn them, other than own them and defend them, just like the absentee landlord drawing rent from land. Some companies in the US are now exclusively IPR companies; they make or produce nothing, and spend their entire time sending threatening letters to companies alleging IP infringement (e.g. patent infringement) and taking the occasional victim to court to bolster their credibility. The best way to view Chapter 17 of the FTA, we suggest, is to see it as the latest in a series of US attempts to refashion the world’s economies to make them safe for this new kind of IP-protected economy. From the US perspective, Chapter 17 is concerned first of all to give state-of-the-art protection to such IP-protected goods and services, including maximum definitional coverage and duration of rights. Were the US negotiators perhaps just a little surprised at how readily the Australian side in these negotiations fell into line on this point?

What Chapter 17 on Intellectual Property delivers The Australian government’s stated goals for IPRs as part of the FTA were modest enough. They were to: • Reaffirm the standards established in the WTO TRIPS agreement and other IP agreements to which both the US and Australia are signatories. • Seek to ensure that the rights of Australian IP holders are protected according to international standards in the US. • Ensure that Australia remains free to determine the appropriate legal regime for implementing internationally agreed IP standards, maintaining a balance between [the interests of] IPR holders and [the interests of IP users such as] consumers, communications carriers and distributors, and the education and research sectors. 118

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• Deepen cooperation on IP issues of mutual interest and strengthen cooperation between our respective IP agencies. • Explore opportunities to work with the US to promote effective and appropriate IP systems in the Asia-Pacific.8 Modest as these goals were, the final agreement either falls well short of them, or goes well beyond them (depending on your point of view). The claims by the Australian government negotiators that they have agreed only to ‘minor changes’ in Australia’s IP system cannot be sustained when one looks at the facts. Changes agreed to, which will come into effect immediately upon ratification of the Agreement, include the following: • Australia agrees to extend copyright from 50 years beyond the death of the author to 70 years. This brings our provision into line with the US Copyright Term Extension Act 1998, but goes beyond our commitment internationally through TRIPS, in explicit contradiction of the recommendation of the most recent review of the matter in Australia by the Intellectual Property and Competition Review.9 • Australia signs up for the World Intellectual Property Organization (WIPO) Copyright Treaty 1996 and the WIPO Performances and Phonograms Treaty 1996. Neither of these has been debated in the Australian Parliament, but both contain clauses requiring signatories to impose ‘severe penalties’ for infringement of copyright in digital settings, or circumvention of technological means of controlling access (such as through encryption of signals). • Moreover, Australia goes well beyond TRIPS enforcement provisions by criminalising acts such as interfering with technological gizmos used to control access to copyrighted films or recordings, introducing into Australia the criminal code clauses taken straight out of the US Digital Millennium Copyright Act 1998. Basically then, without any public debate, Australia agrees to lock up Australian 119

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IP ‘violators’, even those just wanting to listen at home to a CD they bought in the US. This also flies in the face of explicit recommendations of the Australian Intellectual Property and Competition Review. • Australia tightens up its patent regulations to completely exclude any ‘parallel importation’ of patent-protected products (read: pharmaceuticals) against the trend of past Australian practice, and in line with draconian protectionist measures currently enforced in the US. As we detail below, parallel importing involves buying an IP-protected product not directly from the IP holder, but from a third party who is legally manufacturing that product (probably more cheaply) under licence. This might involve importing drugs produced cheaply under licence in India, rather than from the actual patent owner (who invariably is producing the same drug at triple the cost in the US). As we detail below, such regulations will inevitably result in higher drug prices for Australians. • Australia tightens its copyright regulations to make it much more difficult to facilitate ‘parallel imports’ of copyright-protected products such as CDs, going directly against the letter and spirit of previous Australian government measures to liberalise such parallel imports, in order to curb the monopolistic pricing practices of the copyright holders. Again, such regulations will inevitably push up prices of IP-protected goods for Australians, including CDs and DVDs. • Australia tightens its patent regulations to make it very difficult for the Australian government to engage in compulsory licensing. Compulsory licensing allows a government to force an IP holder (such as a pharmaceutical company) to license other companies to manufacture their good. This is crucial in the event of a national emergency requiring large amounts of a product to be available at affordable prices. Compulsory licensing is a freedom widely enjoyed in the rest of the world, and a basic defence against abuse of the patent system by monopolists. 120

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• Australia tightens its patents regulations to make it far more difficult for producers of generic products (particularly in the area of pharmaceuticals) to compete, thus reducing the one source of real competitive pressure on IPprotected goods. What should be immediately apparent is that the Australian government has gone into overstretch with Chapter 17 on IPRs, outflanking its current international obligations under TRIPS and trumping even its own modestly stated goals. The suspicion must be that, knowingly or unknowingly, we have bought into someone else’s agenda here. In reality the IP provisions constitute, for the American side, the real core of the ‘free trade’ agreement. Everything could be discarded relatively easily save for these precious provisions. Making the world secure for American holders of monopoly IP rights is the pre-eminent objective of the United States government, and every avenue is being aggressively pursued for that purpose, whether through multilateral agreements such as TRIPS, regional instruments like the North American Free Trade Agreement (NAFTA), or through extensions of these provisions through bilateral FTAs.10 In the area of IP, the United States is by far the world’s largest exporter, and as we have seen, Australia is a leading importer of IP. So in the context of these negotiations, making things easier and more secure for IP holders has a clear and immediate advantage for one side only. Again, one must ask whose interests were being protected by the Australian negotiators in the FTA Chapter 17?

TRIPS and the new IP economy The new economy that has emerged in the course of the past couple of decades is one where IP-protected goods are sharply demarcated from their generic counterparts. Its outlines are still only dimly perceived by those not actively involved in promoting it. This is the world of goods and services protected by monopoly ‘intellectual property’ rights 121

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through patents, trademarks or copyright. These goods and services attract very considerable revenue flows, as noted above. The rules of this new kind of economy were first revealed in their entirety in the agreement on Trade Related Aspects of Intellectual Property Rights that is part of the set of agreements that ushered in the World Trade Organization (WTO) on 1 January 1995.11 The TRIPS agreement itself is a remarkable achievement, and a stunning victory for the holders of patents and other IPRs in the developed world, particularly in the US. We see the significance of TRIPS in terms of its bringing together three quite distinct currents: • First, it represents the globalisation of IPRs, from a formerly fragmented state where there was, at best, some bilateral recognition between countries (e.g. mutual recognition between the US Patent and Trademark Office and the European Patent Office) and a system of global conventions that were unenforceable. • Second, it links for the first time an IPR regime with the world trade regime, thus making breaches of IPRs actionable and subject to trade sanctions. • Third, it brings all IPRs under the one jurisdiction—copyright, trademarks and patents—thus generalising the rules for all three kinds of property right. In these three ways, TRIPS represents an enormous leap forward for the companies holding IPRs and looking to draw benefits from them abroad. In the words of one distinguished commentator, TRIPS created ‘a revolution in international intellectual property law’12 going well beyond the original Paris and Berne conventions which established modern IPRs in the late nineteenth century. And it was all accomplished in a single stroke, in a narrow window of opportunity seized by US multinational interests, organised in the Advisory Committee on Trade Negotiations, and in the most concentrated form in the Intellectual Property Committee, jointly founded by IBM and Pfizer in 1986. 122

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The Intellectual Property Committee was the crucial strategic body that fashioned the negotiating agenda for the United States. It consisted of just 13 multinational corporations, all with extensive IPR-related business interests, and it was extremely successful in shaping public international law to suit its private interests. The Intellectual Property Committee and the broader Advisory Committee seized the initiative between 1986 and 1991, and succeeded in making an agreement on IPRs a central part of the Uruguay Round of the world trading system, and a part of the launch of the WTO in 1995. The drafting of the TRIPS agreement started as a relatively restricted attempt to coordinate international law opposing counterfeit and copying, but ended up laying the foundations for a globalised system of trade in IP-protected goods and services backed by the full force of the world trading system. Countries wanting to sign up to the WTO found that they had to sign up to TRIPS as well; it was presented as a package.13 Australia, as a member of the WTO, is thus party to the TRIPS agreement, and has already brought its patenting, trademarks and copyright provisions up to TRIPS standards. So one has to ask why we are agreeing to further changes in these issues through bilateral discussions with the United States, when the ink is barely dry on the last overhaul. What exactly is going on here? It is an American review committee that has given the game away on Chapter 17. The illustriously named Industry Functional Advisory Committee on Intellectual Property Rights for Trade Policy Matters (IFAC-3) was asked to give the President and Congress an ‘advisory opinion as to whether and to what extent the agreement [FTA] promotes the economic interests of the United States’.14 IFAC-3 is a very interesting body. It includes representatives from a wide variety of companies and associations in the IP-protected sectors, such as the Recording Industry Association of America, the Intellectual Property Owners Association, and from various companies with strong interests in patents, copyright or trademarks (e.g. Pfizer, Eli Lilly, Merck, Levi 123

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Strauss and Time-Warner). In its report of 12 March 2004, it stated: IFAC-3 believes that, taken as a whole, this agreement is very strong and commends the U.S. negotiators for a job well done . . . IFAC-3 strongly supports the Chapter on intellectual property and believes that, on the whole, it establishes key precedential provisions to be included in the other FTAs now being negotiated, including the FTAA [Free Trade Agreement of the Americas]. IFAC-3 wishes to underscore the importance that it attaches to . . . ensuring that the model FTA intellectual property text, which has been carefully developed through the course of negotiation of six FTAs, continues to form the basis for these other agreements.15 (emphasis added) And why go to all the trouble of negotiating FTAs rather than another multilateral effort like TRIPS? Again, IFAC-3 is very clear on this point: While IFAC-3 recognizes that the negotiation of FTAs with individual countries and regions is labour-intensive, especially when compared with the negotiation of a multilateral agreement among the 146 Members of the WTO, FTA negotiations provide the most effective approach currently available to the United States for improving global intellectual property protection. The negotiation of an individual FTA provides the opportunity to deal with specific intellectual property concerns that U.S. industry may have in the particular negotiating partner.16 In other words, if you are the world superpower, intent on making the world safe for your IP-holding firms, what avenue would you take in order to best protect your interests? You would first set a multilateral framework in general terms, cemented with strong enforcement mechanisms and linked to world trading sanctions to bring recalcitrant countries into 124

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line. This was done with TRIPS and the creation of the WTO, as of 1 January 1995. You would globalise your own system of IPR protection as much as possible with this multilateral agreement. You would then proceed to fill in the ‘gaps’ through a series of FTAs, each time bringing the language closer and closer to your own laws and administrative procedures—until you were ready for another shot at a multilateral agreement. And each time you negotiate one of these FTAs, you would also pick up outstanding issues that need to be dealt with in that particular country; using the prospect of access to your own market as the carrot, and trade sanctions as the stick. This is exactly the phase that the United States finds itself in now. As noted by IFAC-3, there have been six FTAs to date with IPR chapters, each one going beyond the basic requirements of TRIPS, and each one building on the previous agreement.17 The next such agreement is expected to be the Free Trade Agreement of the Americas (FTAA), a major regional agreement covering 34 countries. Once the IPR chapter in that agreement is safely bedded down, then perhaps the United States will try to have another shot at a global agreement, through the WTO. Linking IPRs and trade: The US way So, from the perspective of the United States, and its concern to make the world safe for American holders of IPRs, what are the main ‘precedent-setting’ clauses that it would want to include in the FTA—seeing this exercise as part of an ongoing process of building and strengthening monopoly rights and enforcement practices already achieved? What, in other words, are the rules of the new economy of IPR-protected goods and services, and how are these rules reflected in the provisions of Chapter 17 of the FTA? Contrary to the goals one would expect to see in a ‘free trade’ agreement, the new rules are all about protection and thus about placing limits on what everyone else can do, including Australian scientists and innovative companies who find their way blocked by the claims of US IPR holders. 125

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Privatised protection please The last thing that IPR holders want is free trade in IPRprotected goods. And so, without a trace of irony, through FTAs, they put direct and explicit limits and restraints on free trade. They give this a variety of names, such as ‘parallel imports’. The FTA Chapter 17 spends quite a lot of effort damning and denouncing parallel trade, and making life as difficult as possible for anyone who might dare indulge in the practice. Under Article 17.9.4 it states: Each Party shall provide that the exclusive right of the patent owner to prevent importation of a patented product, or a product that results from a patented process, without the consent of the patent owner shall not be limited by the sale or distribution of that product outside its territory at least where the patentee has placed restrictions on import by contract or other means.

The very language used—the exclusive right of the patent owner to prevent importation . . . without consent—embodies a new standard of privatised protection.18 Is this really what the Australian negotiators were after? The idea behind parallel imports is actually quite simple. It refers to the case where IPR-protected goods are brought into one country, not from a second country by direct arrangement with the IP holder, but from a third country, where the goods have been put on the market by the IP holder or with the IP owner’s consent. The IP holder thus loses direct control over the trade in this way—which is why it is so strenuously opposed. It is not illegal trade—for the goods can be bought in the third country with full IP protection, either under licence or through some other means. Or they might be manufactured in the third country, again under licence (which might be a compulsory licence). The goods involved can include patented pharmaceuticals, or copyrightprotected CDs or DVDs, or copyright-protected software, or even copyright-protected books. The case of parallel imports is simply an instance of free trade in IP-protected goods.19 126

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But any thoughts of having ‘free trade’ in patented products are well and truly quashed by Article 17.9.4, which upholds the right of the patent owner to ‘prevent importation of a patented product, or that results from a patented process, without the consent of the patent owner’, and this right is not limited by ‘the sale or distribution of that product outside its territory’—at least ‘where the patentee has placed restrictions on importation by contract or other means.’ It is clear that ‘free trade’ involving IP-protected goods is not part of the US negotiating agenda.

No government interference, thanks . . . While ‘government protection is indispensable to’ the privatised knowledge economy, recognising and enforcing IP claims, the protagonists of the economy most assuredly do not want governments meddling in its operation. So compulsory licensing is a big taboo for the world of IP holders. Hence we find in the FTA Chapter 17 a significant restraint on any action that the Australian government might wish to take to compulsorily license certain IP-protected products—such as patented drugs—where the Australian government feels that generic competition might be of public benefit. This provision is a significant departure from the standards embodied in the TRIPS WTO agreement. Under TRIPS the right to engage in compulsory licensing is unrestricted, subject only to certain conditions having to be met.20 But the FTA reverses this, and compulsory licensing is prohibited unless certain conditions can be demonstrated.21 In effect, the important powers of compulsory licensing have been traded away by Australia in the FTA, but for what?

. . . but give us strong government underpinning While IP holders want to keep government out of their new IP economy, they certainly rely on government to provide its foundations—through the recognition, maintenance and enforcement of IPRs. Thus they want governments to 127

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establish and maintain large, efficient agencies for the recognition of IPRs, agencies such as the US Patent and Trademarks Office and the US Copyright Office, and their equivalents abroad. So one of the hidden costs of every FTA for the countries negotiating them with the United States is the extra resources tacitly assumed to be allocated to the strengthening of Patent and IP Offices, and to the courts where IP disputes might be heard and settled. It is surely an irony that in this era of ‘small government’ one government agency in the United States that continues to grow is the US Patent and Trademarks Office.22 As the FTA starts to bite in Australia, no doubt we will have to put more resources into the Australian IP Office as well. But bolstering resources for patent recognition is just part of the story. Enforcement of rights is the flip side, and this is being tightened up as well. Indeed, the section on enforcement of IPRs is the largest section of Chapter 17. Much of it is devoted to the minutiae of various kinds of ‘technological protection measures’ such as encryption. The clauses here appear to be taken verbatim from the relevant sections of the US Digital Millennium Copyright Act 1998. Section 103 of the Act makes it a criminal offence to sell devices that circumvent copyright protection technologies. Exactly the same clauses show up in Chapter 17. Producers of copyrightprotected digital video discs often encrypt their content, so to play the disc you have to use an authorised machine with the decryption technology built in. Several unauthorised decrypters are now available over the Internet.23 Through FTA Chapter 17, anyone in Australia caught meddling with such decrypters, or any other ‘circumvention’ device, could be prosecuted and if found guilty, sent to jail. These measures are highly controversial, not least within the United States itself and within the TRIPS Council. The TRIPS Council has been locked in disagreement over a particular aspect of encryption, where copyright owners can embed codes on discs, for example, to prevent their being played on ‘unauthorised’ machines in certain ‘designated’ geographical settings. This is a new kind of technologically 128

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enforced and protected ‘market allocation’ system, backed by criminal enforcement sanctions. Australia has just signed up to a system whereby, for example, if an Australian holidaymaker buys a CD in San Francisco, the embedded software codes will stop it from being played at home unless on an ‘authorised’ Australia-Asia Pacific machine. And to tamper with these codes is now interpreted to be a criminal act. Software that can copy Hollywood movies sold on digital video-discs is proliferating. Photocopying an article or recording a TV program for personal use is regarded as legal under the ‘fair use’ provision of the US copyright law. But in the Internet realm, circumventing measures to prevent copying a program to a disc could be construed as illegal. The Motion Picture Association of America (MPAA) argues that under the new Copyright Act, software that facilitates the duplicating of encrypted films is illegal. (If the movies are not encrypted, then no breach of copyright is involved.) The MPAA argues that the only way to make the use of such tools impossible is to make the tools themselves illegal. Some members of the US Congress strongly disagree with this line of argument. (Here is one of the benefits of the US system, where differing viewpoints are aired in an open manner.) Representatives Dick Boucher and John Doolittle have introduced a bill, dubbed the ‘Digital Media Consumers’ Rights Act 2002’, which establishes fair use rights for technologically protected media; among other things this promotes disc-copying tools designed primarily for legitimate consumer use.24 But under Australia’s FTA with the United States, such measures are automatically disallowed, because the IPR Articles of the FTA follow the anti-circumvention provisions of the US Digital Millennium Copyright Act.

Let Mickey Mouse live forever . . . Copyright protection dates back to the eighteenth century, and in the nineteenth century it was enshrined internationally in the Berne Convention (with which the United States refused to 129

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comply for decades, seeing it as in US economic interests to flout such international conventions). Copyright under the Berne Convention was allowed to be held by companies, and as such it underpins the current business model of the publishing, music publishing and recording industries, and is now being extended to software, digital representations and the Internet. In the 1990s copyright terms were extended in Europe from 50 years to 70 years; then followed by the WIPO Treaty on Copyright, and then adopted by the United States in the Sonny Bono Copyright Extension Act 1998. It is reliably reported that the main motivation in the United States for the extension was the fact that copyright protection for Mickey Mouse was due to expire in 2003 and intensive lobbying by Disney did the trick.25 Now we in Australia have been dragged into this tangled web through the FTA, which hits us with a double whammy: we are to be bound by the WIPO Treaty (Article 1 of Chapter 17 on IPRs) and we are to explicitly recognise an extension of copyright to 70 years (Article 4 of the same Chapter). So this drastic extension of copyright is to be adopted into Australian law, notwithstanding that it has yet to be debated by the Australian Parliament or that it was explicitly opposed in 2000 by the Australian Intellectual Property and Competition Review Committee (the only official consideration given to it), or that it is an extremely controversial and unpopular extension that is hotly debated around the world. The Copyright Extension Act 1998 has been challenged in the United States on at least three occasions, notably in the case Eldred v. Ashcroft, where Justice Breyer issued a dissenting judgment, arguing that: ‘The economic effect of this 20-year extension—the longest blanket extension since the nation’s founding—is to make the copyright term not limited, but virtually perpetual’.26

. . . but make life as difficult as possible for generics US pharmaceuticals producers have aggressively sought to expand and consolidate their IPRs in markets around the world, including Australia, well before the FTA. Their strategy is evident in Article 17.10.4 of the FTA: Measures Related to 130

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Certain Regulated Products (read: Pharmaceuticals). Just consider the ways in which the rights of big Pharma are further consolidated in this section of the agreement, at the expense of competition, particularly from generics, and thus with the certain effect of raising prices for all drugs, and undermining systems for social delivery of medicines, such as Australia’s PBS. One of the issues on which the pharmas lobbied hard was the issue of ‘compensation’ for time elapsed between taking out a patent and the approval of a drug for public use. In the US itself, lobbying by PhRMA was successful in securing extensions of patent life to ‘compensate’ for these delays brought about by Food and Drugs Administration (FDA) procedures. (This is discussed in our Chapter 3 on the PBS.) PhRMA then turned its attention to securing comparable changes in patent law around the world. One of the first countries to oblige was Australia.

Evergreening The most egregious case of extending monopoly rights is in Article 17.10.4, which could be called the ‘Evergreening Article’. Evergreening is an insidious practice where an existing patent holder seeks to prolong the patent life after its expiry by, for example, issuing spurious patents and then tying up would-be generic competitors in legal actions. Evergreening has not been much of a problem in Australia because we did not have the complex legal procedures laid down by the Hatch-Waxman Act 1984 (itself a legislative bid to make life easier for generics).27 But all these procedures— and more—are coming to Australia, courtesy of the FTA.28 Under Article 17.10.4, the FTA implements measures to prevent the marketing of pharmaceutical products that are claimed to infringe current patents.29 This has the effect of circumventing the legal process where a current patent holder is required to prove infringement in a court of law.30 Consider what this clause is actually saying. If a generics producer identifies a particular drug as coming off patent in 131

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a year’s time, and wishes to prepare for the production and marketing of the drug, then in place of the existing system, where the generics producer merely has to seek approval from the responsible agency (in this case, the Therapeutic Goods Administration of Australia (TGA)), we now have a system under the FTA whereby Australia commits to refashioning the process so that the patent owners have all the rights, and generics producers have to warrant to the TGA (or whoever else) that their proposed product is not in breach of any patent. This requires them to obtain a professional opinion as to possible coverage by existing patents, with the threat of trade sanctions hanging over their heads if anything can be challenged. As commentators on the FTA have noted, this will have a profoundly discouraging effect on any potential generic competitor to a patented drug.31 Again, this is directed at generics producers whose existence is rendered more precarious in Australia under the terms of this FTA. The problem is that Clause 17.10.4 imposes the procedures of Hatch-Waxman on Australian generics producers, but none of the benefits. For example, under Hatch-Waxman, a brandname drugs producer has to specify the patent that covers a particular drug and this, along with others so specified, is listed by the FDA in the so-called ‘Orange Book’. So, generics producers in the United States know which patents they are dealing with. But in Australia under the FTA, where there will be no such listing requirement imposed on brandname producers, the task of ascertaining whether patents are being infringed is made so much harder. What Australia gets in Clause 17.10.4 is a ‘dumbed-down’ version of Hatch-Waxman. So much for a brief account of some of the provisions of Chapter 17, and how they take the Australian system of IP regulation in a radically new direction, well beyond the already dramatic departures introduced through upholding the TRIPS agreement. But now we turn to the pressing issue: What exactly do the clauses of Chapter 17 mean for Australia? Why are we so concerned about Australia being ‘harmonised’ with the United States on these IPR matters? 132

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What the FTA provisions will mean for Australia Some of these IP provisions will have effects that can be immediately identified and highlighted. We will be forced by these provisions to spend more of our own resources to make the monopoly rights of American IP holders more secure in Australia. This will be done frequently in the face of our own interests in promoting competitive alternatives to monopoly IP-protected American products—particularly in pharmaceuticals and software. By agreeing to the provisions of Chapter 17 of the FTA, we are in effect constraining our own creative knowledge economy. Out of a host of damaging effects, let us highlight just four.

1 Subjecting Australia to US law In the discussion of ‘harmonisation’ of Australian business regulation with US norms and practices, and its helpful or harmful effects on Australian business, what is forgotten is that we are cutting and pasting strong pieces of US legislation such as the enforcement clauses of the Digital Millennium Copyright Act 1998 without any means of changing or updating the law ourselves other than through changes introduced and implemented by the US Congress and by the US courts. Every time the United States changes its IPR law, we will have to introduce parallel legislation in the Australian Parliament to keep ourselves ‘harmonised’. In this way, we lose control over our own regulatory future, and lose a significant aspect of our sovereignty.32 Is it really so far-fetched to describe this as being an appendage of the United States, or a client state?

2 Snuffing out our own generics industries We have alluded above to the extensive FTA provisions of Chapter 17 designed to weaken generic competition against IP-protected goods, in cases of both copyright and patents. 133

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These will bite hardest in the field of pharmaceuticals (discussed also in our Chapter 3 on the PBS). In ten years’ time, we will have a much weaker generics pharmaceutical industry—if we have one at all—thanks to the bans on parallel importing and the restrictions placed on the production of generics, and by the facilitation of evergreening introduced into Australia by Article 17.10.4 of the FTA.

3 Increasing royalty payments to US companies One immediate effect of the enhanced tightening of the protections offered to IP holders will be to raise the level of royalties flowing to them. Australia is a net importer of IPRs, so that our royalty outflows considerably exceed our inflows, resulting in a deficit of US$561 million in 2001, rising to US$707 million (over A$1 billion) in 2002.33 Between 1996 and 2000 Australia’s royalty trade deficit with the United States increased by 84 per cent. Under the FTA, we can expect to see further increased royalty payments flow out of Australia to the United States, thus exacerbating Australia’s trade deficit with the United States as well as the country’s general balance of payments problems. The FTA may have an unintended beneficial consequence in making Australian industry much more aware of royalty payments and their balance of payments implications.

4 Diminishing innovation in Australian biotechnological and ICT sectors The Organisation for Economic Co-operation and Development (OECD) report, Patents and Innovation: Trends and Policy Challenges (2004), is quite stark in its estimate of the dampening effect on innovation of extending existing IP rights.34 Australia has some remarkable and successful firms in the ICT and biotech sector, firms such as Resmed and Proteome Systems. They already use the patent system very effectively to protect their own interests, in both Australia and the United States. But even these kinds of firms stand to 134

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lose something by the way that the FTA extends existing IP holders’ rights and thus makes it more difficult for them to navigate their way through their chosen business field.35 In response to such concerns, the OECD advocates that governments explore ‘alternative access arrangements’ to knowledge in both the public and private sectors—such as through agreeing ‘to place certain inventions in the public domain, [or] creating mechanisms for sharing bundles of IP. Understanding how patent pools, patent clearinghouses and public databases can be used in biotechnology . . . would help move these access arrangements closer to reality’.36 What the OECD is hinting at here is that governments have everything to gain by adopting and supporting open-source systems, particularly for software. As we note in our Chapter 4 on public procurement, why should Australian governments at state and federal level go on supporting the Microsoft stranglehold on software operating systems, when there are open-source alternatives such as Linux available that are not only cheaper but more reliable and backed by giants of the industry such as IBM? Why support Microsoft’s IP claims when they stand directly in the way of Australia developing its own software industry? Thus by extending the rights and monopoly powers of US copyright and patent holders in the area of software and business methods, Australia has awarded Microsoft et al. a ‘free kick’ and awarded a ‘penalty’ against its own struggling software and other innovative firms. In any case, it would be difficult to argue that the extended IPR protection measures granted in Chapter 17 of the FTA could be of help to Australian innovative industries in further developing their own innovations.

Conclusion: The availability of other negotiating options? We recognise the difficulties faced by Australian negotiators when squaring off against a superpower—and one, moreover, possessed of a clear negotiating strategy for moving its 135

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agenda along through FTAs. What realistically could the Australian negotiators have done? One avenue that could have been pursued would have been to declare the Chapter 17 provisions a single and enormous concession on the part of Australia—and then to insist on comparable and radical concessions on the American side—such as, for starters, lifting agricultural subsidies, quotas and price safeguards. Of course, we understand that to make such a demand would have effectively scuttled the entire deal, since the United States—at least under the Bush Administration—has no intention of abandoning its domestically driven policy of agricultural subsidies. This only underscores what a lopsided process the whole US–Australia negotiations on this FTA have been from the start. Another avenue would have been to resist the most outrageous demands, and instead insist that Australia abide by its international undertakings, and perhaps extend these by a further limited concession, such as undertaking to ratify the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty, together known as the WIPO ‘Internet Treaties’.37 While these treaties contain many undesirable features, such as the criminalisation of behaviour over circumventing the operation of technological protection measures in such copyright-protected products as digital video-discs, at least they are multilateral, and Australia could benefit in its relations with other countries through having signed up to these treaties. That could, and should, have been the end of Australian concessions. And the United States should have been satisfied to have found one more convert to the WIPO Internet Treaties that it had such a large hand in formulating. Apart from the damaging impacts of the concessions made on Australian industries and exports, there is the indirect effect of adopting such a US-centric position on our negotiations in other international forums. There are important discussions underway in the World Intellectual Property Organization (WIPO), for example, around the Substantive Patent Law Treaty—an attempt to gain some international 136

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agreement and common procedure on a world patenting system.38 There are fundamental negotiating positions being adopted: the United States is arguing that its own extensions of patentability towards software and business methods should be incorporated, while the European Union and Brazil are arguing against. Australia has excluded itself from such debates through aligning itself so closely with the US position. We close with a practical suggestion. IPRs are ‘property rights’ and governments have always taxed property as a principal source of revenue. So why should governments not impose a tax on royalty flows? There is nothing to stop Australia from introducing such a tax. Call it a ‘creative property tax’ and justify it on the grounds of the claims made by IP holders that their IPRs are purported to enhance creativity and innovation in the arts and sciences. Take them at their word, and tax them accordingly. The government could collect data on the royalty flows abroad, and put a tax on them, at a level of, say, 10 per cent. So if Australian business paid royalties of A$1 billion per year to all US IP holders (a conservative estimate), then the government could take 10 per cent of this amount, or A$100 million and use these tax revenues to encourage creativity at home. The FTA nowhere prohibits the right of governments to levy this kind of property tax; so it remains an initiative that a future Australian government could take. It would be one way of introducing a degree of economic and social responsibility into the new, privatised knowledge economy. The FTA delivers to American interests state-of-the-art protection on all IPRs—trademarks, copyrights and patents—as well as superior enforcement mechanisms that are not just linked to trade sanctions but now also include criminal sanctions. The FTA also delivers a means of tying Australian IPR regulations in perpetuity to those operating in the US—by embodying existing American legislative language in the FTA, and ensuring that it can only be changed by American initiative. The FTA provisions on IPRs are part of a much wider US strategic vision of making the 137

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world ‘secure’ for American owned and enforced IPRs. In effect, this means making the world safe for the US extraction of rents, royalties and fees worldwide or, in other words, safe for ‘tribute’ to be paid to Rome.

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How to kill a country—Step 6 You get a lousy deal, so how do you sell it? First you loudly congratulate yourself on having achieved a magnificent outcome. Then you identify the winners and losers and set one against the other, bribing some, bullying or browbeating others, and generally making sure that nobody sees the national interest as a whole. Then you demonise any dissenting voice as anti-free trade and, above all, hostile to good relations with the foreign party involved. Finally, you buy off or intimidate the press and broadcasting services. There is, however, one sector you cannot buy off and that is the publishers of books. Thank heavens nobody reads them!

The question that remains at the end of this analysis is: why would a government and a country accede to a deal that is so flagrantly at odds with their interests? In trying to make sense of this puzzle, we focus here on two main issues: • How the government negotiated itself into this mess in the first place. • How the government sold this disastrous deal to the Australian public. We conclude with an examination of what Australians can do to minimise the dangers that lie ahead. 139

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How the deal was done We know that prior to this deal, Australia had twice been approached by the United States for a bilateral trade deal (in 1992 and 1997), and had twice rejected this offer on national interest grounds. So what lay behind our government’s recent about-face? What prompted the Howard Government to initiate free trade talks with the United States in 2001? What had changed so dramatically in the space of four years? One of the most significant changes was the collapse of multilateral trade talks in Seattle in 1999, which called the future of the WTO system into question. As multilateralism stalled, countries wanting speedier results on trade and investment liberalisation began throwing their efforts into regional and bilateral trade agreements. Now Australia had always been a leading advocate of multilateralism, and was loathe to break with this tradition. But as bilateral and regional agreements proliferated around us, a fear emerged that if we did not jump on the bilateral bus, we might find ourselves left behind. Fear of being frozen out of trade agreements played heavily on the minds of Australian officials, and undoubtedly contributed to the decision to throw caution to the wind and seek a deal with the biggest kid on the block.1 The desirability of the United States as a bilateral partner was boosted by September 11 and the Bali Bombing and the emergence of the ‘war on terror’ as a new national priority; a free trade deal with the United States would be one more link in the chain binding us together with the world’s military superpower—a safe bet in such uncertain times. In the words of Australian Trade Minister Mark Vaile: . . . an FTA with the United States offers us not just direct economic and commercial benefits. Because of the sheer size and reach of the United States, the FTA will provide Australia with spin-off benefits far and beyond the actual text of the agreement. It is an opportunity to negotiate deeper integration with not only the world’s largest economy, but also the 140

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world’s pre-eminent strategic power . . . it is an opportunity to put our economic relations on the same mature footing as our political and security relations.2

‘Special deals’ for ‘special friends’? There was, however, another reason for our new-found faith in a trade deal with the United States: the idea that our loyal support for the United States in two of its most internationally unpopular efforts—the invasion of Afghanistan and the Iraq war—would translate into economic wins. Without a doubt, there was a tacit view in the Australian government that toeing the line on military and foreign affairs would translate into a special deal on trade and economic affairs. The following excerpt from a television interview with both Mark Vaile and former trade negotiator (and leading FTA enthusiast) Alan Oxley is particularly illuminating in this regard: Helen Dalley: But now should be the best time ever for Australia to pull off a trade coup with Washington. As our troops stand shoulder-to-shoulder with Americans against the axis of evil, Australia is one of very few countries offering unfailing support for the United States . . . The effusive support for John Howard in the Congress is a rarity for a foreign head of state. The Australian proponents of a US–Australia FTA claim the time is indeed ripe for a trade pay-off. Alan Oxley (Aust. APEC Study Centre): We’ve got a special relationship with the United States which the PM seems to have intensified. Maybe he lucked in, and I think our contribution in Afghanistan produced a dividend. The President agreed that the United States would negotiate a FTA with us in full knowledge that it would be difficult for them because of the attitudes of US farmers. Helen Dalley: So this may be the trade pay-off because we’re part of the coalition of the willing? 141

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Alan Oxley: I think it’d be a mistake to say that we’re going into Iraq in order to get the pay-off. The two are independent, but I think very plainly there is a sympathy. Helen Dalley: But do you think it does help that we’re in the military alliance? Is this a kind of pay-off? Alan Oxley: It’ll be a pay-off, yes. Mark Vaile: Certainly the atmospherics of the moment are going to be quite conducive. But we want this decision to be made on the economic merits of what we’re proposing.3

On other occasions, Vaile was keen to emphasise Australia’s strategic importance to the United States (and presumably why this meant that the United States would cut Australia a favourable economic deal): Some people have asked why an FTA with Australia should be a priority for the United States . . . Not only is Australia a significant and advanced economy in its own right—it is also a strategic economy vis-à-vis the Asia-Pacific region. We are the fourth largest economy in East Asia, and heavily enmeshed in the future growth of the region through our role as a leading supplier of primary goods—minerals and agriculture, in particular—and associated services. The same qualities that make us attractive for US companies to invest and base their regional headquarters in Australia also make an FTA with Australia a strategic asset for the United States. In short, what we offer is the prospect of a high quality agreement with a dependable and mature partner in a vital strategic location . . . an FTA would help engender a broader appreciation—in both countries—of our alliance and our common role in helping underpin the stability and prosperity of East Asia and the Pacific. This is now doubly important given the nature of the threats to security—and especially to Western interests—in the region.4

The conclusion to draw from these statements is quite straightforward: the Australian government’s deluded sense of 142

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the ‘special’ nature of its relationship with the United States saw it enter into FTA negotiations under a misguided assumption that the United States would modify its publicly proclaimed approach to international trade negotiations (i.e. its ‘aggressive advocacy’ of US business interests in overseas markets) in order to further the ‘special friendship’ that our countries are believed to enjoy. We know that the Australian negotiating team originally anticipated the attainment of a comprehensive and nationally advantageous free trade deal, including a comprehensive deal in agriculture. This accords with DFAT’s understanding of what actually constitutes an FTA; according to DFAT’s web page entitled ‘Free Trade Agreements: What Are Free Trade Agreements?’: The crucial test of an FTA . . . is that it must eliminate all tariffs and other restrictions on substantially all the trade in goods between its member countries . . . this means, at the very least, that a high proportion of trade between the parties— whether measured by trade volumes or tariff lines—should be covered by the elimination of tariffs and other restrictive trade regulations. Australia considers that this must be a very high percentage, and that no major sector should be excluded from tariff elimination.5 (emphasis added)

We also know that our government firmly believed such an agreement was possible, due above all to our ‘special relationship’ with the United States. But what the Australian public is probably not aware of is this: that Australian business people working in the United States and familiar with the American political system believed such a deal was highly improbable if not impossible, and that the United States had no intention of granting free or even substantial market access to Australia in a range of areas in which we are highly competitive (including sugar, beef, dairy, stone fruit, wine, steel, fast ferries). Moreover, US-based Australian business representatives had expressed these concerns to Mark Vaile during a visit he made to the 143

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United States in 2003 to muster support for the negotiations. Vaile, however, insisted that a comprehensive agreement would be possible due to our ‘special relationship’. We now know that US-based Australian business people were right and Vaile was wrong. Vaile had been warned that his assumptions about our ‘special relationship’ meant nothing in US business circles. But still he pushed on. So while it may shock the average Australian, the fact that we got so little from the deal came as no surprise to many of our US-based Australian business leaders. What did surprise them, however, was that having failed so miserably in the negotiations, we did not simply cut our losses and walk away. Rather, our government actually signed the deal—a deal that clearly falls far short of its original goals, and which, as this book has made clear, in many ways puts Australia’s future economic prosperity at risk. The experience and sentiments of one US-based Australian senior executive reveals most lucidly what some have described as the remarkable combination of naivety and duplicity of our most senior trade official. It is worth quoting him at length: Mark Vaile, assisted by the Department of Foreign Affairs and Trade, organised a breakfast meeting of Australian business leaders in New York last year to enlist our support for the FTA and AAFTAC. I was highly skeptical that the government could achieve a comprehensive FTA, having experienced the US political system for six years. I actually asked Mark to stop calling the negotiations a ‘free-trade’ agreement as it never would be ‘free’. The government needed to avoid overselling it to the Australian public, otherwise they would make Americans look disingenuous. The Americans had no intention of granting full ‘free trade’. We were assured at this breakfast by Mark that given the ‘special’ relationship the two governments had, there was a real chance to conclude a comprehensive agreement and we should do all we could to support it. We concluded that if the government was right and it had this ‘special’ relationship, a comprehensive agreement really would be a significant 144

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achievement. If the government was incorrect, as the business community suspected, they would find out and back away, opting for traditional multilateral approaches. These were the two options. Mark found a third and signed an agreement that was not under consideration by the community and was outside the mandate as we understood it and betrayed many of us . . . That the government signed the agreement, knowing it is economically damaging to Australians, smacks of disrespect and desperation. One is left wondering if we need laws to prevent a government making agreements it knows are economically disadvantageous to Australians.6 (emphasis added)

Our misguided faith in our friendship with the USA, however, is not only symbolic of our naivety. It also reveals the yawning gulf between Australian values and those of our trading partners.

Australian values: When strengths become weaknesses Australian qualities are well understood by Americans. In their diplomatic and business dealings, they have come to appreciate what they describe as Australia’s pervasive sense of ‘egalitarianism’ and insistence on giving others a ‘fair go’. Consider this recent observation of an American business leader, commenting on his Australian counterparts: This sense of fairness and respect for others carries over into the business world today. Observers often say Australians are straightforward and strive to achieve win-win results in business dealings. American Loran Fite, CIO of WestPac Banking Corp . . . has picked up on the subtleties of the local business culture in the five years he’s worked in Sydney. Fite thinks the Australian way is more sincere, less arrogant . . . ‘Americans tend to think of the customer as a revenue stream. Aussies think more in terms of partnership’.7

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Americans appreciate these values in the business world. In academic circles too, our American colleagues, aware of these differences that distinguish us, have underlined the payoffs of Australian fairness, of being relatively relaxed about ourselves and our place in the world, and ‘not being aggressively out there’ like our American friends. These values of fairness and forthrightness, they say, are our great strengths. But by the same token, we should all be familiar with the expression that warns how our strengths may turn into our weaknesses. There is a similar view of countries. Nations institutionalise the things that make them ‘great’ and when circumstances change those very strengths can become weaknesses.8 Australia may not have achieved ‘greatness’ in the sense of being an economic or military superpower, but its greatness has resided in a civility and candidness and a strong sense of fair play at all levels in its dealings with other powers. It is also often said that our strengths can turn against us and become the chains that bind; that the things that make us great can, under certain circumstances, become fetters that threaten our existence. We can transpose this larger point about strengths and weaknesses in the rise and fall of nations to the context of the trade negotiations between Australia and the United States. We went into negotiations with the United States expecting a reward for friendship and loyalty, and at the very least fair and forthright treatment. If we weren’t expecting totally free trade outcomes, we thought we would at least get fair outcomes. How wrong we were. Qualities of forthrightness and fair play stand a people in good stead in many arenas; however, trade negotiations with the United States is not one of those arenas. Set the world’s toughest negotiators—skilled in the arts of chicanery and doublespeak and with a mission not to yield on anything important—onto the world’s most fair-minded and forthright negotiators and you have a recipe for tragedy. Nor do we appear to have learned anything from our past mistakes in dealing with trade partners, especially the United States.9 146

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This of course is not to excuse our elected officials for their follies. After all, having realised that we were out-negotiated, our government might have turned around and refused the deal. And make no mistake, the government is fully aware that it was duped. The fact that many of the negotiators wanted to walk away from the deal, but were forced into line by Vaile and eventually Howard, bears testimony to this.10 While our government might be forgiven for not getting as much from the United States as we wanted, the fact that they are now seeking to paint meagre concessions (and horrendous potential damages) as overall ‘wins’ for Australia is unforgivable—and, some might add, treacherous. This brings us back to the question: How do you sell something that is in so many respects so bad? The fact that there has been surprisingly scant opposition, let alone disinterested commentary or genuine debate, proves that selling the unsaleable is not impossible—but it takes a lot of effort, as the following section details.

How the deal was sold: Bribing, bullying and browbeating opponents 1 Buying off disgruntled producers, bullying recalcitrants We know that sugar obtained an adjustment package of A$444 million—which included incentives for producers to exit the industry—as compensation for their exclusion from the deal—an offer that quickly silenced the industry protests that had greeted the deal’s announcement. But the reluctance of other industries short-changed by the deal—particularly beef—to speak out against it is somewhat more curious. Granted, beef producers have been lukewarm as opposed to enthusiastic supporters (as evidence presented to JSCOT reveals). This lack of enthusiasm is understandable when you factor in three things: that Australian producers have to wait four and a half times longer than Chileans to see US tariffs removed; that their net benefit is about half a cow per cattle 147

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producer annually over the 18-year period; and that permanent US price safeguards (tariffs) will exclude any real export increases down the track. But having been promised so much and given so little, one must wonder why they did not simply reject the deal outright. After all, the president of the National Farmers Federation has made no bones about the pitifully meagre outcomes for beef: ‘Out of every 100 hamburgers [in the US], three come from Australia . . . Improvements in access will only add one hamburger, and that is in year 18.’11 But just in case we think beef is complaining, take note that the president is keen to knock that idea on the head by quickly adding that while the deal is bad for beef, the industry would not want to oppose a deal that brings benefits to other sectors of agriculture. Such magnanimous gestures are as rare as a half-cooked sirloin, as indeed are the painstaking efforts to avoid criticising government for its failure to deliver—which is precisely why they raise interesting questions. Indeed, when pressed by the Senate to register the beef industry’s dissatisfaction with the agreement, the Cattle Council representative pointedly skirted the issue, and seemed anxious to distance the industry from any criticism of the government or the agreement: It falls far short of what our expectations were. We accept that the government has done the best deal possible under the circumstances and we will not oppose the ratification of the agreement . . . 12 (emphasis added)

And again, when pressed further by the Senate, the spokesman for a deeply disappointed industry took pains to deflect criticism from the government: I would like to put on record the Cattle Council’s appreciation of the process. We are of the strong belief that the negotiating team and the Australian government negotiated the best position possible for access, given the circumstances. I think I will leave it at that. (emphasis added) 148

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From Meat and Livestock Australia’s perspective, a similar response was articulated: . . . despite being disappointed with the agreement we do think that it was the best that could be negotiated under the circumstances and therefore support the ratification of the agreement.13 (emphasis added)

In view of so many reasons to be critical of the deal (having counted at least three in Chapter 1), we are led to ask, why the silence?

Could it be that beef has been sugared? Why so decidedly cautious about denigrating the deal in a public forum? Perhaps our cattle producers are an unusually meek and compliant lot. But the more likely possibility is that they have been sugared. What kind of financial package has the government cooked up for beef? And how much has the support of beef cost the Australian taxpayer? We won’t know perhaps for some time, but we should not be surprised to find that when the FTA compensation bill is totted up, beef will be on the list. Dairy will be there too, with a package that some industry insiders estimate at around A$30 million. Dairy has done somewhat better than beef, and shown loyal support for the deal, falling in with the government’s tactic of using Australians to fight Australians, when bribing fails. When pork and apple opposed the lowering of quarantine standards to allow in disease-prone produce from the US, our government asked ‘What do you want [to keep quiet]?’ ‘The maintenance of our quarantine standards,’ replied pork and apple. ‘No deal,’ responded Canberra, and rallied dairy to publicly admonish these recalcitrants. While we cannot substantiate the claim that those poorly served by the FTA are being silenced by the promise of package deals, at the time of writing this book we do note the remarkable absence of criticism and, in the case of beef, the almost identical, if somewhat pat, form of wording used by 149

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industry representatives whenever asked to comment on the deal in public. Put all of this together with what we see as an emerging pattern—the government’s predilection towards buying off dissent—sugar definitely, dairy most probably, and potential ‘offers’ to pork which were rejected (see Chapter 2), we think it highly likely that ‘industry compliance in deep disappointment’ spells a high probability of being bought. If this supposition proves correct, then the costs of the deal to Australians will flow not just from the deal itself. For they will include the costs of buying off opposition from those who were sold the deal in terms of expected gains—costs amounting to almost half a billion dollars for sugar, and tens of millions for dairy and beef. Only time will tell if taxpayer funds have been mobilised to buy off dissent from beef, in a manner similar to sugar, and in all likelihood dairy. But in view of the facts and the pattern of government behaviour to date, the possibility looms large.

2 Gagging debate: Intimidating the press, ridiculing opponents For those who have invested time in thinking through the implications of the FTA, independently of government spin, and who have sought to speak out, there have been surprisingly few media outlets open to them. As an exercise, compare the number of highly positive stories on the FTA with the highly critical pieces scrutinising the deal to see how rarely the latter appear.14 How to account for this apparent lack of interest from the press? Sympathetic journalists explain why anything too critical of the FTA is unlikely to see the light of day: a defiant press might stand to lose not only a large slice of the government’s lucrative advertising budget but also access to breaking stories in Canberra. Where intimidation of FTA opponents has failed, ridicule and mockery have been deployed as substitutes in an effort to discredit critics. We have noted this especially in public forums where the opponent is usually absent and unable to respond, and where one might expect more measured efforts 150

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to weigh up the evidence for and against a position. Instead of using reasoned argument to tackle their opponents, a few highly-recycled FTA enthusiasts have generally resorted to the weapons of the weak: weasel words that seek to silence critics with name calling. Even leading lights in the press, where one would hope for some dispassionate assessment of the deal, have at times fallen in with this group-think approach, seeking to silence opposition by painting detractors of the deal in the most unattractive and unpleasant colours. Typical of this tendency is the following statement from the international editor of The Age: Plainly, there is a large body of opinion that is apprehensive, if not hostile, about Australia binding itself to the sinews of the US economy. Much of the protest comes from the angry left and globaphobes, with their undying paranoia about American imperialism and global business. Further out on the fringes, there are ultra-nationalists in the Hanson mould, who don’t and won’t accept the realities of open markets and open societies.15 (emphasis added)

We live in strange times indeed when fellow Australians have lost the ability to draw a distinction between what is pro-Australian and in the national interest on the one hand and what is anti-American on the other! This may well be a fitting legacy of the Howard Government—to have so confounded our interests and compromised our future that to be pro-Australian is no longer distinguishable from being anti-American.16 This disconcerting trend was further illustrated by the Prime Minister’s bizarre interpretation of the US Congressional vote on the deal. When Congress passed the deal with the largest majority in history, Howard pounced on this as evidence that the deal must be good for Australia: The House of Representatives in America voted by 314 to 109 in favour . . . President Bush and his rival Senator Kerry have supported the free trade agreement, but still Latham is 151

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dithering . . . This is the biggest vote the House of Representatives has ever given to a free trade agreement between the US and any other country and that is a terrific outcome . . .17

Would a resounding rejection by Congress have led our Prime Minister to draw the opposite conclusion, that the deal must not be in Australia’s interest? We all know that the US Congress votes for things that are in the American interest, and that if the ‘yes’ vote is huge, then it must be hugely good for America. What is increasingly clear from the Prime Minister’s own actions, however, is that the leader of our country finds it impossible to distinguish the Australian interest from the American one.

3 Smoke and mirrors: The government’s misleading use of econometric modelling The third way in which the government sought to sell the deal and stifle criticism was to commission a report that would represent the agreement in the best possible light. This required bypassing the in-house Productivity Commission, whose earlier evaluations have shown bilateral FTAs to be more frequently trade diverting than trade creating.18 Before Australia ratifies a significant international treaty, it is common practice for the treaty’s implications to be thoroughly scrutinised by the Productivity Commission. Knowing that the deal was such a dud, however, the government was unwilling to subject it to intense and objective scrutiny. As such, the government simply bypassed this process and employed its own private consulting firm, the Centre for International Economics (CIE), to come up with a report on the deal’s benefits. Not surprisingly, the government’s money bought them exactly the answers they were after: the deal will be a huge benefit to Australia! Unfortunately for the government, the exaggerated claims and unrealistic assumptions of the CIE’s two separate reports— delivered both before and after the agreement was finalised —were transparent enough to be picked up by analysts such as 152

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distinguished economist Ross Garnaut, who pointed out that the latest report did not even pass the ‘laugh test’: Before economists are really satisfied with any piece of econometric modelling, they put it through the laugh test. The laugh test is: can someone who knows the real world that is meant to be described by the modelling exercise look at the results and not laugh? I do not think that this exercise passes the laugh test.19

4 International ridicule: ‘Everyone will laugh at us if we refuse to ratify the deal’ Although the FTA fails the laugh test, we are told we ourselves will not pass the laugh test unless we ratify. This was perhaps the most desperate attempt by the government and its cash-for-comment supporters to convince Australians that we should sign the deal. The irony is that other developed countries are already laughing at us for accepting such an obviously lopsided deal. Europe and Japan in particular can take heart from the fact that we have agreed to let the United States keep so many of its barriers to our agricultural exports, setting a precedent for any future deals we may do with the EU or Japan. The most laughable aspect of the deal, however, is how we so easily became an unwitting pawn in the United States global strategy of making the world safe and rewarding for American business—the goal of America Inc. that overrides all others. Without stopping to think twice, we bought hook, line and sinker the US buzz words for the gullible: ‘transparency’, ‘innovation’ and many more. Such concepts are attractive and important in principle; but too often these words have become little more than the weapons of the wily in trade agreements. ‘If you value innovation, then you should agree to toughening intellectual property laws,’ say the Americans. ‘Sure,’ say the Australians, without a thought for the impact on pharmaceutical prices, the monopoly power of US firms, or the multitude of patents that will ensue for phoney ‘innovations’. 153

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‘If you value transparency, then you will agree to these changes to your government procurement system,’ say the US. ‘Indeed,’ say the Australians, without a thought for the impact of abandoning ‘buy and build Australian’ policies on Australian firms and national prosperity, while US business continues to benefit from ‘buy American’ laws. If there is anything to laugh about in this dire situation, it is how readily we bought into this language, and how the government is still defending the agreement instead of rejecting it outright. Our refusal to sign the deal, on the other hand, would save us some dignity. Far from making us a laughing stock, it would send a powerful signal to the rest of the world that Australia intends to retain its clout as an independent country, able to hold its head high in international forums and negotiate with a clear sense of its own national interest. This is a perception that can only be to Australia’s advantage. A refusal to ratify would also send a strong message to the rest of the world to ‘beware of Americans bearing FTAs’—that when carefully examined, these FTAs might not be worth the price of entry. Australia would be admired around the world for stopping the US FTA juggernaut in its tracks. This too could hardly be to our disadvantage. Would the US see our refusal to ratify as a hostile act? Here too the evidence points the other way. By refusing to ratify, we would not do anything to the United States. We would not be refusing to conduct joint military exercises, or refusing to take US products or US investment, which we already do in abundance. We would simply be saying that we would take these things on our terms, not on theirs. Indeed the United States—nowadays more aggressive economic nationalists than Japan—would likely see Australia’s refusal to ratify as an expression of our sense of independence, and would unofficially at least admire us for it. As strong-hearted realists, Americans, in private at least, are inclined to regard our falling into line with such a lopsided deal as a sign of docility and servility. 154

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The FTA: Australia’s present and future disconnected The priorities we establish for ourselves in our dealings with foreign powers—whether allies or otherwise—flow from the way we view ourselves as a people and our potential place in the world. Those views, which are mediated by the democratic system, are articulated by our political leaders. So, for example, a national strategy which takes pride in Australia’s achievements, has confidence in its people’s abilities, and adopts a positive view of our future, will seek to secure the conditions necessary to safeguard what we have developed and to enhance its value in the future. In this regard, however, the FTA illustrates a complete disconnection between our present and the future: between, on one hand, what we have achieved and is worth preserving for the sake of our prosperity, our wellbeing, and our sense of who we are; and on the other hand, a future entity so ‘integrated’ and ‘harmonised’ with US interests as to be no longer in any meaningful sense ‘ours’. The big decisions—about our health care, about the food we import and consume, about whether we improve local know-how or just license it from the US, about whether we watch X or Y, about whether we make high-calibre medical devices here or simply import the US version—all will be decided by a growing swathe of American interests. Some of them will be the new owners of our minerals and manufacturers, farms and finance houses, others the US trade officials who will be shaping our quarantine policies and our health care capabilities. Many of them will pose as locals, as they do today, like Medicines Australia.20 And even when they do, their interests will rarely align with those of their host country.

What can be done? Can we do anything about this deal or must it play out before our eyes like some Greek tragedy (in the manner that Canada 155

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has been witnessing since its bilateral deal)? What options are available to a people abandoned by their government? What recourse does one have when our elected representatives start representing the interests of other countries? Do we, in the words of the Australian business leader cited above, ‘need laws to prevent a government making agreements it knows are economically disadvantageous to Australians’? The answer is yes. Of course we do. In fact, such a law already exists. The Crimes Act of 1914 explicitly outlaws treachery—the knowing betrayal of the interests of one’s country. But there is a much simpler and less controversial weapon for dispensing with those who would trade our future so cheaply—the ballot box. The risk here, however, is that supporters of the government and the deal have a degree of breathing space before the impacts of the changes work their way through the system. By the time drug prices start going up, for example, the 2004 election will be long gone—and with it the possibility that the deal’s current supporters will see the light and make their protest heard. Australians must therefore stay alert for the signs, and raise the alarm when they emerge, whether it is the rising tide of disease-prone produce from the United States (apples, pears, chicken, pork, even Californian table grapes and cherries, fumigated with heavy doses of the toxic methyl bromide to reduce risk of exotic pests and diseases entering the country); or an incremental increase in prescription costs, or a spike in US mergers and acquisitions of Australian resources, farms, fisheries, finance houses and manufacturing firms, or the disappearance of high-tech Australian companies, the loss of jobs in ICT, or a post-FTA drop in Australian productivity, or any other of the many warning signs discussed in this book. When these things start to happen, do not let the government forget the reason why. Take the advice of one of the government officials we had the chance to speak with who 156

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was working on the deal. While he, like a number of his wellintentioned colleagues, felt too intimidated to speak out directly against the deal in a public forum, his advice to those gathered was clear and compelling: Get out on the street. Bombard your federal MPs with letters. Call your elected representatives to account. And, we would add: draw their attention to Article 23.4 of Chapter 23 (Final Provisions). Under this provision, either Party may terminate the Agreement by giving the other Party six months’ notice in writing.

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Endnotes Chapter 1 1 Horne (1964: 220). 2 Doorstop interview, Sydney, 27 July 2004; 3 Press Conference, Canberra, 9 February 2004; 4 ‘Aust PM says US–Aust FTA agreement great opportunity’, Industry Search, 16 July 2004; 5 ‘FTA Passes US Senate’, Sydney Morning Herald, 16 July 2004; 6 ‘Australia–United States Free Trade Agreement: Key Outcomes’, Department of Foreign Affairs and Trade; 7 On the history of the Australian meat industry’s export strategy and the painful process of shifting from low to higher value-added production, see Griffiths (1998). 8 Cited in APH JSCOT (3 May 2004). 9 Ibid. 10 As noted by Ross Garnaut at the same Senate hearings. 11 The CIE calculated the total benefits to the Australian industry over the 18-year period to be between $1.1 billion and $1.7 billion. 12 Measured against the value of the beef industry over the entire period (c.$100 billion), the benefit of $1.1 billion to $1.7 billion ‘is quite a small benefit indeed’: K. Adams, cited in APH JSCOT (3 May 2004). 13 Australia’s high quality sea craft are locked out of the US market by two kinds of protectionist legislation. The Jones Act, or the Merchant Marine Act of 1920, requires vessels for US domestic cargo trades to be built at US yards. The 158

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14

15

16

17 18 19 20 21 22

23

24

Passenger Vessel Act of 1886 places the same restrictions on the transport of passengers between US ports. Rules of origin mean that the goods you export have to contain a certain level of ‘Australian made’ content to qualify for tariff reductions in foreign markets. This means our textile producers who import their yarn will probably not qualify for any concessions. As Senator Adams put it: ‘The United States has always been one of the strongest advocates of that link with what is called essential personnel issues . . . They have ruled us out, though. They have not accepted that that is in the agreement. The Americans would not move on that’ (APH JSCOT, 3 May 2004). In 2000, mergers and acquisitions (M&As) accounted for 85 per cent of foreign direct investment (FDI) in Australia, which far exceeded the global share of M&As in FDI of 60 per cent (Thomsen 2000: 5). All data on Canada in this section are from Hurtig (2002: esp. pp. 13, 373–5). Cited in Hurtig (2002: 26–7). This measures increase in income from a range of sources, such as wages, interests, dividends. This measures increase in wage levels only. Between 1989 and 1995, Canadian investment in machinery and equipment increased by only 0.7 per cent, compared with 9.3 per cent in the US. Compared with the 1980s, Canadians were worse off in the 1990s (under the FTA and NAFTA) by almost every significant measure, including: personal, family and disposable income; job creation; bankruptcies (which skyrocketed in the 1990s); gaps between rich and poor (which reached record levels in the 1990s); and levels of child, family and individual poverty. Clayton Yeutter, US Trade Representative, 3 October 1987. By 2004 it is all too clear that his prediction is coming true, and it is widely observed in Canada itself that it is becoming a Vanishing Country (Hurtig 2002), as mentioned in the Introduction. Cited in Hurtig (2002: 35). 159

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25 Ibid: 36. 26 The reference is to ‘All the Way with LBJ’, a catch-cry of the era of the Vietnam War when Australia provided unquestioning support for US policies. 27 ‘Implications of an Australia–US Free Trade Agreement’, Rob Rawson, Director of Safety, Health and Trade Policy, Minerals Council of Australia. Mining 2003 Resources Convention, Carlton Crest Hotel, Brisbane, 31 October 2003. . This point was reiterated by both the wine and steel industry representatives at the Australia–United States Free Trade Agreement Business Group (AUSTA) conference on 1–2 March 2004 in Canberra. 28 They include Microsoft, IBM, McDonald’s, EDS, Caltex, Goldman Sachs, Alcoa, JP Morgan, KPMG, Kraft, Rio Tinto, Shell, Singtel, Toyota and Woodside Petroleum. 29 The other two are Canada and Singapore. On the new American empire, see Michael Mann’s superb analysis of the US as ‘economic backseat driver’ (2003), and Robert Wade’s illuminating discussion of US global strategy (2002). Chapter 2 1 Under the WTO SPS Agreement (1995), each country is allowed to determine its own acceptable level of risk/ appropriate level of protection (these terms are used interchangeably). However the assessment of the risk posed by a potential import, and recommendations for reducing risk, must be scientifically based. The WTO SPS Agreement supersedes the previous GATT Treaty on SPS measures, Article XX. On the history of these agreements, see Kastner and Powell (2002). 2 Animal and human health measures are referred to as sanitary and plant health measures as phytosanitary measures. 3 ‘Australia’s Trade Policy Review’, WTO Secretariat Press Release, 25 September 2002. 4 Mark Vaile, Australian Minister for Trade, speaking at the Quarantine and Exports Advisory Council and AQIS Seminar, Canberra, 7 September 2000. Prior to his appointment as Trade Minister, Vaile had ministerial responsibility for AQIS. 160

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5 Ms Virginia Greville (one of Australia’s chief agricultural negotiators) cited in APH Senate (2004c: 38). 6 Senate Rural and Regional Affairs and Transport Legislation Committee, Inquiries into: Biosecurity Australia’s IRA for Pig Meat; IRA for Apples from New Zealand; and IRA for Bananas. Transcripts and reports from these three inquiries can be accessed at: Apples: Bananas: Pork: 7 Jeffrey Fairbrother (ACMF) cited in APH Senate (2003: 360). Industry representative Peter Barter went even further than this: ‘I think the USA would just continue to badger; there’s 50 per cent of the committee that would always be narking, “We should do away with the quarantine, it’s not right, it’s not world trade best practice”, and a whole heap of other reasons; whereas I think it should be up to the Australians to make up their mind if importation is the right thing to do or not’. ABC Rural News, ‘Chicken processor fears quarantine compromise’, 9 March 2004: 8 ABC News Online, 29 February 2004: 9 Annex 7-B.1. While WTO dispute resolution panels operate in confidence, the existence, nature and outcome of the trade dispute is open to public scrutiny. This will not be the case under the FTA. 10 Article 7.1. 11 Article 7.4.6. 12 Annex 7-A Section B.2. 13 APH Senate (2004a: 29). 14 APH Senate (2004c: 44–5) 15 APH Senate (2004c: 40) 16 DFAT, ‘Key Outcomes: Sanitary and Phytosanitary Measures’: 161

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17 B. Smith (FASTS representative) cited in APH JSCOT (2004c: 32). 18 On ‘constructive ambiguity’ in the PBS Chapter of the FTA, see Drahos et al. (2004), discussed in our Chapter 3. 19 On the EU ban on imports of US and Canadian beef treated with growth hormones, and the WTO disputes settling procedures, see Neugebauer (2000). For a contrary perspective, arguing that this case actually undermined the freedom of action of national governments to take steps to protect themselves, see Wagner (2000). The point is that under the FTA, Australia will have these WTO processes put beyond bounds, and replaced by bilateral US–Australia processes where we have much less weight and no weight of accumulated judgments. 20 On the Japan case and its WTO implications, see Whitlock (2002) 21 We are grateful to John Corboy of Apple and Pear Australia Ltd for this explanation. 22 On the Australia–Canada salmon case that came before the WTO, see Thomson (2002). Andrew Thomson served as a Minister in the Australian government during this dispute. 23 This technicality centred on the ‘consistency requirement’ of the WTO SPS Agreement. Under Article 5.5, different levels of protection cannot be required for like products, such as two different types of fish. All ‘fish’ for example, be they live goldfish for the pet industry, or whole marine fin fish for the bait industry, or uncooked salmon products for human consumption, must be accorded the same level of protection under the WTO. Australian salmon producers wanted to maintain a very high standard of protection for salmon to protect themselves from a range of diseases present in Canadian salmon. But in order to do so under the WTO, we would have to have raised the standards of protection for the bait and pet fish industries, which would have crippled them. The WTO ruled that our level of protection for salmon could be no more stringent than our level of protection for other kinds of fish. Despite the WTO ruling, Tasmania still refuses to import foreign salmon. 162

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24 Biosecurity Australia can only deal with one market access request at a time: the US is also waiting on the sidelines to see what happens with NZ. In the words of Trevor Ranford (South Australia Apple and Pear Growers Association): ‘We know that there are at least four other applications sitting on the table to be activated from the US, Canada, China and Chile. Until this is resolved, those others cannot get on—which then begs the question as to whether there is pressure from the US to try to get this one resolved so that there can be a flow-on effect for their application’ (APH Senate 2004d: 47). 25 Australian apple producer, Apple and Pear Australia Ltd representative, and Chair of the Apple Industry National Fireblight Task Force. 26 APH Senate (2004d: 12). 27 According to Senator Buckland: ‘Unless you are Magoo the Magician or someone, how the hell are you going to see what is up the top of a tree by walking through the orchard? It is rubbish’ (APH Senate 2004d: 41). 28 APH Senate (2004e: 14). 29 Note that the majority of Philippine banana export plantations are US owned and operated. 30 APH Senate (2004f: 4). 31 Ugo John Tomasel (Apple Committee of the Queensland Fruit and Vegetable Growers), cited in APH Senate (2004d: 55). 32 APH Senate (2004e: 26). 33 Ms Alma Reynolds (Apple and Pear Australia Ltd), cited in APH Senate (2004d: 15). 34 APH Senate (2004d: 23). 35 APH Senate (2004f: 45). 36 California Farm Bureau Federation, Comments on US–Australia Free Trade Agreement before the International Trade Commission, February 2003: 37 The fact that the relaxation of our quarantine standards was a precondition for US farmers’ support for the deal is also reflected in the statement by the President of the US National Pork Producers Council (NPPC): ‘The support of US pork producers for the Australian free trade agreement is 163

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contingent upon Australia completing its technical work and opening its market to US pork’; NPPC Press Release, 9 February 2004: ‘NPPC Support for Australia free trade agreement conditional on commencement of U.S. pork exports’. Greville in APH Senate (2004c: 39). 8 February 2004, ‘U.S. and Australia complete Free Trade Agreement: Trade pact with Australia will expand U.S. manufacturing access to key Pacific Rim market’; See APH Senate (2004g: 10). American Farm Bureau Federation, 2004, ‘Implications of an Australian Free Trade Agreement on US Agriculture’, Report prepared by the Economic Analysis and Trade Team, american Farm Bureau Federation, Washington, p. 3. Ibid, pp. 2–3. APH Senate (2004b: 154).

Chapter 3 1 The US industry group, the Pharmaceutical Research and Manufacturers of America (PhRMA), lobbied US trade negotiators in January 2003 with a view to seeking Australian commitment to ‘refrain from trade distorting, abusive, or discriminatory price controls such as current PBS reference pricing’; See PhRMA 2003, ‘Special 301’ Submission to the Office of the US Trade Representative: 2 The total net profits of the Fortune 500 companies amounted to just under $70 billion in 2002. The profits of the top 10 pharma companies amounted to US$36 billion; Public Citizen Congress Watch (2003): 3 See AMA testimony in APH JSCOT (2004a). 4 On this point, see the strong editorial in the British Medical Journal by Drahos and Henry (2004), and the contribution to the same journal by Harvey (2004). 5 The Australian role in the development of penicillin is one of the great national stories—and it is fitting that the PBS should provide a link to this episode. Unfortunately, the 164

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world leadership displayed early by Australia in antibiotics was not translated into the development of a viable industry, and it was systematically sold out to multinational interests, which then ran it down. See Mathews (2001). This sum is the total public expenditure in 2003/04; it is expected to rise to A$6.8 billion in 2004/05. This figure includes expenditure under the Repatriation Pharmaceutical Benefit Scheme for war veterans. See the PBS Fact Sheet from the Department of Health and Ageing, available at: APH Senate (2004: 2). Department of the Parliamentary Library (2001–2:8) The Department of Health does the actual price negotiations. Of course, a pharmaceutical company does not have to accept the price offered; it can refuse to supply the medicine. Tim Colebatch, ‘Bush wants to end medicine subsidies’, The Age, 24 October 2003, p. 5. Article 1 of Annex 2-C commits the Australian government to recognising and prioritising the following principles: (a) ‘the important role played by innovative pharmaceutical products in delivering high quality health care; (b) the importance of research and development in the pharmaceutical industry and of appropriate government support, including through intellectual property protection and other policies; (c) the need to promote timely and affordable access to innovative pharmaceuticals through transparent, expeditious, and accountable procedures, without impeding a Party’s ability to apply appropriate standards of quality, safety, and efficacy; and (d) the need to recognize the value of innovative pharmaceuticals through the operation of competitive markets or by adopting or maintaining procedures that appropriately value the objectively demonstrated therapeutic significance of a pharmaceutical.’ See for example, the important analysis of the FTA’s implications for the PBS in Drahos et al. (2004). The Exchange of Letters on the PBS makes explicit that the sole purpose of the changes to the PBS is ‘in order 165

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to enhance transparency, meaningful consultation, and accountability in the process of selecting, listing, and pricing of pharmaceuticals . . .’ Data reported by the Association of the British Pharmaceutical Industry: <www.abpi.org.uk/statistics/section.asp?sect=1> Article 2(f) compels signatories to ‘make available an independent review process that may be invoked at the request of an applicant directly affected by a recommendation or determination’. This has since been amplified by the Minister of Health in his Public Consultation Document on the independent review mechanism, 25 July 2004, as a review involving a single expert. In this document the issue of transparency of PBAC proceedings is again dodged, and the undertaking that ‘material agreed as confidential should be protected’ is repeated (at the insistence of the pharma lobby)—so the ability of the PBAC to effectively defend its decisions publicly is still denied. There was such a case, involving US multinational Pfizer and its appeal against the non-listing of Viagra. In 1998 the PBAC rejected Pfizer’s application to list Viagra. Pfizer then took the PBAC to court, arguing that the Committee had overstepped its powers by taking into account the total budgetary impact of a successful listing rather than looking only at the specified evidentiary criteria of safety, clinical efficacy and costeffectiveness. The Federal Court rejected this argument, a decision subsequently upheld, despite a Pfizer appeal (Pfizer vs. Birkett, 2000). For details see Aroni et al. (2003). The PhRMA was concerned that the PBAC rejected 40 per cent of major applications for new listings in 1997, and 59 per cent in 1998. See PhRMA’s 2003 Submission to the USTR on Australia: Ibid. Drahos et al. (2004) contend that US pharmaceutical company representatives ‘will become involved in the actual meetings of the PBAC and its technical subcommittees’ (2004, p. 6). They may be right. Both the text of the FTA itself and the Exchange of Letters are careful to leave such details unspecified in order to provide maximum room to manoeuvre.

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20 The term very neatly conveys the nature of the negotiating game being played out by US trade officials in concert with an army of savvy legal teams and industry groups. See Drahos et al. (2004) for an effective discussion. 21 TRIPS is the WTO Agreement on Trade Related Aspects of Intellectual Property Rights. 22 But the Declaration does not limit the use of compulsory licensing to national health emergencies. Here is the wording from paragraph 5(b): ‘Each Member has the right to grant compulsory licences and the freedom to determine the grounds upon which such licences are granted.’ (We are grateful to Joel Lexchin for pointing this out.) See the Doha Declaration and related WTO implementation program, available at: . For commentary and suggestions, see Matthews (2004). 23 Arguably the pharma industry does this because it knows how effective generics competition is. Under the 1984 Drug Price Competition and Patent Term Restoration Act in the US (aka the Hatch-Waxman Act), the US government sought price reductions in drugs through the promotion of generics competition. The share of generics in prescription medicines thereupon rose from 19 per cent in 1984 to 47 per cent in 2000, when the provisions of the Act were overridden through the lobbying of the pharma industry. See CIPR (2002): Chapter 6. 24 See the Patented Medicines (Notice of Compliance) Regulations, under the Canadian Patent Act 1985. The Patented Medicines section of the Act also creates a Patented Medicine Prices Review Board that has powers to control prices of patented medicines. On the Canadian approach to encouragement of generics, and use of compulsory licensing, see Lexchin (1997; 2003). 25 ‘The Generics Industry in 2005: A New Threat to Pharma’: <www.researchandmarkets.com/eports/851/851.htm> 26 ITR (2002). 27 US Senate Finance Committee, Hearings, 9 March 2004. 28 PhRMA Submission to the US Trade Representative, section on Australia: 167

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29 Consider these recent comments made in the International Herald Tribune: ‘The pharmaceutical industry earns nearly two thirds of its profit in the United States, as drug prices in the rest of the industrialized world are largely controlled by governments. These profits rely almost entirely on laws that protect the industry from cheap imports, delay homegrown knockoffs, give away government medical discoveries, allow steep tax breaks for research expenditures and forbid government officials from demanding discounts while requiring them to buy certain drugs’ (Harris 2004). 30 For a superbly written exposé of the drug companies, see Angell (2004). 31 As Angell (2004) notes, ‘In 2003 profits of the Fortune 500 drug companies dropped to 14.3 percent of sales, still well above the median for all industries of 4.6 percent for that year’. 32 The original figure of US$500 million proferred by DiMasi in the early 1990s has been revised to US$403 million in DiMasi, Hansen and Grabowski (2003). 33 ‘Drug Companies and the NIH: How the pharmaceutical industry is reaping billions of taxpayer-funded research and development’, compiled by the Office of Rep. Bernard Sanders. 34 A typical example is Merck’s Canadian promotion of just one drug, Vioxx, in 2000. It spent over US$6.25 million, ran over 1000 pages of journal ads and distributed over 1 million samples to doctor’s offices. The US pharma industry employs over 600 lobbyists and spent over US$78 million to make its views about intellectual property rights heard by politicians; and in the 2000 American elections Citizens for Better Medicare, at its peak, was spending more than US$1 million a week on advertisements, all of it paid for by PhRMA, the industry lobby. See Lexchin (2003: 23). 35 ‘Drugs in 2001: A number of ruses unveiled’, Prescrire International 2002; 11: 58–60. 36 Lexchin (2003: 15). 37 Ibid: 23. 38 Of course generics producers can take out patents of their own, and do so—covering for example, new modes of delivery of established drugs. 168

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39 ‘Ad blitz for 2 medicines lifts Novartis profit 17%’, International Herald Tribune, 21 July 2004, p. 15. 40 See Lokuge, Faunce and Denniss (2003); for a discussion of the PBS-style proposal in Maine see Barrington (2002) and Phelps (2001). 41 Lokuge et al. (2003). 42 Prescription Drug Pricing Pathfinder: Current Attempts to Control Drug Prices: This site provides a good overview of the range of measures being proposed to come to terms with inflated US drug prices. 43 The architect of this approach to measuring cost-effectiveness, through reference pricing, is Professor David Henry, now Professor of Clinical Pharmacology at Newcastle University. Professor Henry has been one of the most significant contributors to the debate over the FTA and the PBS in Australia, warning strongly of the losses looming if the US pharmas are allowed to raise their influence over the PBAC. 44 See the most recent report from Public Citizen Congress Watch (2004), The Medicare Drug War, where it is revealed that an army of nearly 1000 lobbyists pushed for a Medicare law that has had its teeth drawn. 45 See ‘Drug maker to pay $350 million fine’, International Herald Tribune, 17–18 July 2004, p. 12; and for the case of TAP Pharmaceuticals and Lupron, see ‘Drug firm to pay $875M fine for fraud’, The Boston Globe, 4 October 2001, p. A13. 46 The total drugs bill in the US rose 71 per cent per year from 1987 to 2001; see Lexchin (2003). 47 International Herald Tribune, 9 July 2004, idem. 48 Editorial: ‘The price tag on process: Chemotherapy for colorectal cancer’, New England Journal of Medicine, 22 July 2004, p. 319. 49 See discussion in Drahos et al. (2004). 50 Faunce and Drahos (2004) offer a useful discussion on this point. 51 This was a point put strongly by Professor Ross Garnaut to the Senate Inquiry into the FTA; see APH Senate (2004b: 119). 52 Outterson (2004), testimony to the US Congress Ways and Means Committee, as reported in the Rapid Response in the 169

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British Medical Journal to the Editorial by Drahos and Henry (2004). 53 APH Senate (2004b: 103). 54 For details see ‘Crikey: The power of Big Pharma’, Sydney Morning Herald, 8 August 2004. 55 ABC Four Corners, ‘A Bitter Pill?’, Monday 26 July, 2004. Chapter 4 1 The Snowy Mountains Scheme remains the pre-eminent example of a nation-building infrastructure project in Australia. Unfortunately its management in recent decades has not matched its earlier promise, and as Collis (1990) observes, in recent years it has become the ‘whipping boy’ for some commentators as issues of irrigation-induced salinity achieve prominence. 2 John Prescott, ‘National infrastructure projects: How to prioritise’, Academy Symposium on the Spirit of the Snowy—Fifty Years On, November 1999, Australian Academy of Technological Sciences and Engineering, Canberra. 3 For example, the Australian Tax Office, Commonwealth Bank and South Australian government all contract out their IT activities to EDS. 4 Robust data on procurement spending is scarce; this figure is reported in James Riley, ‘Labor to attack tech trade deficit’, The Australian, 26 August 2003. 5 The Computer Power Group, founded by Roger Allen, was sold to a US multinational in 1998. 6 ‘Government Procurement Summary’, Global Trade Negotiations homepage, Center for International Development at Harvard University: 7 WTO Working Group on Transparency in Government Procurement (2003). On transparency issues in the WTO, see Arrowsmith (2003). 8 US procurement data, so comprehensive in most other respects, does not make public the share of US and foreign suppliers in procurement. The 2 per cent figure is an estimate of the Canadian Commercial Corporation, based on a US General Services Administration report for 1999: 170

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http://www.ccc.ca./eng/images/content/markt_research/ market-us-non-defence-procurement.html DFAT (1997). ‘Offsets’ refer to conditions which require suppliers to use domestic content, license technology, invest in R&D, or meet similar performance standards designed to encourage local industry development and employment. USITC (2004: 126). In other words, wherever bids include local manufactured content, a 20 per cent price margin must be applied to the imported content of all tenders. See NSW Government Procurement Guidelines, Economic Development: Reported in A Review of Government Procurement Policies 2003—IT Council for South Australia (2003: 4). Ibid. USTR (2004: 4). To take just one example, the US Department of Energy’s procurement of supercomputers ‘stimulated advances in high-performance computing’ (CICC, 1999). On the diverse sources of support, including government procurement, behind the development of America’s IT industry in hardware and software, see CICC (1999). The report to the USTR on government procurement observed that IGPAC members supported the goal of increasing market access ‘while preserving the independent authority of state and local governments to adopt legislation, standards and procedures consistent with their experience and interests’. IGPAC (2004). Ibid. For example, this also includes contracts awarded to local companies due to tied bids, as well as the procurement of transit cars, buses and related equipment, steel, coal, autos and printing services, and procurement to encourage economic development to alleviate economic distress and promote environmental quality. For example, under the Small Business Act, US procurement policy ‘is required to reserve each contract with an anticipated value greater than US$2500 but less than US$100 000 171

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exclusively for small business concerns unless the contracting officer is unable to obtain offers from two or more small businesses that are competitive with market prices and with the quality of the goods or services to be purchased. Agencies are also allowed to establish business set-asides for procurements of architectural and engineer services, R&D, and test and evaluation. In FY 2001, small business obtained 33.3% of federal prime and subcontract dollars’ (US Small Business Administration, Office of Advocacy, May 2002). Brennan and Hodges (2004: 14). The changes to procurement methods are spelled out in several articles of the FTA. Article 15.11 on the Domestic Review of Supplier Challenges makes clear the substantial reform to procurement processes that Australia will be required to undertake to deal with appeals and complaints by aggrieved tenderers. Should these reforms not be undertaken, and therefore an obligation under the FTA not be implemented, Australia would be open to dispute settlement proceedings instituted by the US under Article 21.11. Brennan (2004: 23). DFAT (1997); ACCI (1997). Peter Costello, interview on ABC Radio AM program, 11 February 2004. Available at: Consider the view of trade and international affairs spokesman for the Australian Chamber of Commerce and Industry (ACCI): ‘I know of any number of our members who say: “Yes, I could do business in the United States, but they will take my whole year’s production in four weeks. So I can win market position, I can get on the shelves at Wal-Mart, I can do it in the backblocks of Tennessee, but I cannot deliver the quantities they want.”’. (APH JSCOT, 3 May 2004: 52). Moreover, under Federal Acquisition Regulations, government agencies are not required to publish notices of proposed procurement opportunities in excess of US$25 000. Many of the projected contracts would fall below this threshold. Annex 15-G Schedule for the United States Clause 1.

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Grady and Macmillan (1999). Ibid. DFAT (1997). Amy Svitak, ‘Negotiations under way on Defense “Buy American” Deal’, 12 September 2003: On the extent to which various forms of government– business cooperation (or governed interdependence) are prospering under globalisation, see Weiss (1998) and Weiss and Thurbon (2004) on Europe and East Asia, and Weiss (2003) on the United States. In the first 100 days of George W. Bush’s presidency, the Advocacy Center has recorded five large advocacy ‘successes’ (i.e. contracts signed) for US companies: ‘The total value of the five projects/procurements is estimated at $185 million, including $60 million in U.S. export content’. Advocacy Center, ‘Assistance for Exporters’: See Table AIII.2 in ‘WTO Trade Policy Review Report: United States’, 16 January 2004: 184: ‘WTO Trade Policy Review Report: United States’, 16 January 2004; See See Galloway (2004) provides a caustic commentary on this case. Richard H.P. Sia, ‘TSA handgun contract draws ire of firearm makers’, 16 July 2003: Ibid. Shane Harris, ‘Information Technology: Waiting for the Spending Boom’, 15 August 2003: Richard H.P. Sia, ‘TSA revisits German gun contract’, Congress Daily, 30 July 2003; A. Svitak, ‘Negotiations under way on Defense “Buy American” deal’, Congress Daily, September 2003; Svitak, ‘DoD working with lawmaker to settle “Buy American” dispute’, Congress Daily, 17 September 2003. 173

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43 Sia, ‘TSA revisits German gun contract’, Congress Daily, op cit. 44 Japanese Ministry for Economy, Trade, and Industry: 45 The official justification for this distinction is that acquisition work requires long-term planning, that it is focused on technologies that aren’t necessarily commercially available. 46 Shane Harris, Tech Insider, ‘The Buying Game’, 15 March 2003: 47 Ibid. 48 US Senator Russ Feingold on the Buy American Act, 29 July 2003: ; The Orator.com News & Information, 108th Congress, 2nd Session, In the House of Representatives, January 28, 2004, Buy American Improvement Act of 2004; 49 Brennan and Hodges (2004: 13). 50 WTO (2001): Trade Policy Review Body: United States, Report by the Secretariat: 51 The Australian National Audit Office report into the Coalition government’s failed A$5 billion IT outsourcing program (ANAO 2000/01) found that the projected financial savings achievable from outsourcing by Commonwealth agencies and departments had been vastly overstated. In fact, most of the ‘savings’ were derived from asset-stripping: all IT assets developed with tax-payers’ money—including computers, network hardware, telecommunications equipment and software—had been transferred to private IT contractors. The main beneficiaries of this fiasco were US giants IBM, EDS and CSC. 52 The Defence Materiel Organisation (DMO) has an office in Washington in order to assist the Australian Department of Defence with procurement of American military goods. In a recent issue of the DMO’s newsletter On Target, the first listed role of the office is that of ‘procurement’. It reads: ‘On a daily basis, the overseas offices receive requests from . . . defence agencies in Australia to act on their behalf to procure goods and services from suppliers in the region . . . 174

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The Washington office is also responsible for managing interface with the US Department of Defense agencies in support of Australian procurement of goods and services through the US Foreign Military Sales (FMS) program. In 2002–3, the Washington Office of DMO managed some 560 FMS cases involving almost A$1.6 million in new activity’ (p. 6). The newsletter also boasts that ‘in any one year, Washington will place about 2300 commercial orders amounting to $A210 million’. On Target, Defence Materiel Organisation, June 2004, p. 6. Our thanks to Angela Cummine for this example. Brennan and Hodges (2004: 15). Commonwealth Government ICT Procurement and Strategic Industry Development-New Guidelines for Suppliers: http://www.dcita.gov.au See the testimony of US companies reported in IGPAC (2004: 126–7). The current price preference arrangements that exist for Australian- and New Zealand-sourced goods and services under an intergovernmental agreement on procurement would also be terminated should the states and territories agree to comply with the Chapter. Under the deal, the states would no longer be able to give preference to Australian or New Zealand suppliers in IT outsourcing contracts. APH Senate (2004b: 192–3). On the overwhelming ‘buy American’ bias in Australian military procurement, see Cummine (2004). For two examples of the ‘buy non-Australian’ bias in the non-military arena, see Thurbon and Weiss (2004).

Chapter 5 1 See APH Senate (2004b: 46). 2 See the testimony to US Congressional hearings on the USPTO, in J.W. Shoen, ‘US Patent Office swamped by backlog’, 27 April 2004, available at: 3 These data are taken from IIPA (2002). The IIPA is a coalition of six US copyright-based industries: the Association of American Publishers (AAP); the American Film Marketing 175

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Association (AFMA); the Business Software Alliance (BSA); the Interactive Digital Software Association (IDSA); the Motion Picture Association of America (MPAA); and the Recording Industry Association of America (RIAA). This is no idle remark. Jack Valenti, the famed head of the Motion Picture Association of America, testified before Congressional hearings on the Copyright Term Extension Act 1998 that the MPAA would like to see copyright protection for American movies extended to ‘forever less one day’. Tongue in cheek the remark may have been, but it demonstrates the deadly earnestness with which US IP holders seek to extend the scope of their monopoly claims. For an informed discussion of IPRs in the context of the FTA, and the extent of the concessions made by Australia, see Drahos et al. (2004). We agree with the submission to the Senate Inquiry by Drahos et al. (2004) that ‘one of the fundamental things that the US is attempting to accomplish with this and other FTAs is to turn IPRs into a natural right of investment’ (2004: 9). Whereas patents, copyright, etc. have traditionally been viewed as temporary monopolies, or restraint of trade, justified by the innovation or diffusion that they facilitate, the US has been driving, through the TRIPS Accord and now through FTAs and regional trade agreements (like the FTAA), to turn these into natural rights, and any circumvention of them into ‘piracy’. The CTEA is known as the ‘Sonny Bono’ Act. DFAT (2003) negotiating goals for the FTA. The Intellectual Property and Competition Review Committee, chaired by Henry Ergas, tabled its final report in September 2000. This is a comprehensive review of the state of the art in IPR law and practice. It considered the extension of copyright in Australia and explicitly recommended against a term of 70 years. A report from the US Federal Trade Commission (FTC) (2003), provides a complementary discussion of competition and patent law and policy issues. The IPR provisions of bilateral FTAs have been steadily tightened, dating from the Jordan–US FTA signed in 2001, through the Chile and Singapore FTAs, and now in the

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Australia–US FTA; see Schott (2004) and the countryspecific Chapters for a discussion. The Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement entered into force on 1 January 1995, on the same date as the new World Trade Organization (WTO). The agreement calls on member states of the WTO—146 in 2004—to conduct themselves according to the standards laid down in the TRIPS agreement, and introduce their own national regulations matching (or exceeding) the TRIPS standards. Australia has already done so, through amendments to its Copyright and Patents legislation. For authoritative commentary on the TRIPS agreement, see Ryan (1998) and Matthews (2002), as well as the comprehensive treatment by UNCTAD (2003). Reichman (2000: 442). On the complex process of negotiation and strategic manoeuvres that led to the adoption of TRIPS, that is in itself a remarkable story, see the definitive treatments in Drahos (1995); Drahos with Braithwaite (2002); Sell (2003); Sell and Prakash (2004); and Gervais (2003). IFAC-03 (2004: 2). The industry functional advisory committees (IFACs) were formed to examine different aspects of the FTA. Thus IFAC-1 looked at customs matters, IFAC-2 at standards, IFAC-3 at IPRs, and IFAC-4 at electronic commerce. Other advisory committees looked at industry sectors such as aerospace equipment, capital goods, chemicals, and so on. Yet other advisory committees looked at agricultural policy, trade and environment policy, and labour. This complex machinery involving government and business coordination, activated for every FTA that the US goes into, contrasts sharply with the haphazard manner in which the Australian government has treated the public face of its involvement in the FTA negotiations and subsequent discussion of the agreement. IFAC-3 (2004: 2-3). Idem: 4-5. The agreements probably referred to by IFAC-3 are: Jordan; Chile 2002; Singapore 2003; Central American countries; and now Australia 2004. Each such agreement has a 177

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Chapter on IPRs, all very similar, with the exception that as they succeed each other, they get closer to the current US provisions, and each one introduces an element of novelty. For example, the Australian FTA introduces, for the first time, a dispute-settling mechanism for Internet domain name disputes. We owe this term, a most apposite phrase, to Richardson (2004). This was the position taken by the most recent review of the matter in Australia, by the Intellectual Property and Competition Review Committee, in their final report (IPCR 2000). It recommended lifting remaining restrictions on parallel imports—as contained in the Copyright Act—maintaining that this would not undermine ‘the efficacy of copyright as a stimulus to creativity’ (2000: 8). Against the recommendation of the Australian Publishers Association, the IPCR recommended lifting restrictions on parallel imports for books, with a 12-month grace period. This was not acted on by the government, and will be a dead letter with the passage of the FTA. In both the US and the European Union, compulsory licensing has been used as an anti-trust measure where monopolies protected by patent might be abused. On this, see Fine (2004). Under the terms of the FTA, compulsory licensing is prohibited unless its use relates to matters anti-competitive (e.g. to break a drugs monopoly), or public non-commercial usage (e.g. to produce a vaccine for children), or a public health emergency of some kind (such as AIDS/HIV in Africa). The Bush Administration has been raising the budget of the USPTO every year; the budget of US$1.127 billion in fiscal year 2002 was raised to US$1.334 billion in 2003 and to US$1.404 billion in 2004. The increased budget in 2004 allows for hiring of 750 new staff for patent examination. One such encryption-decryption technology is called the Content Scrambling System (CSS), developed first by Matsushita in Japan. An unauthorised decryption system, known as DeCSS, is widely distributed through the Internet.

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24 As Rep. Boucher puts it: ‘Because a hammer can be used to break a window, and a burglar can use a hammer, outlaw the hammer—that’s the philosophy.’ He insists that the US has never outlawed a technology that could be put to legitimate use, and shouldn’t start with DVD-copying tools; see ‘Tools to copy DVDs abound; so do ethics issues’, International Herald Tribune, 10–11 July 2004. 25 See Richardson (2004) for authoritative discussion of this point. 26 APH Senate (2004b: 64). 27 For an explanation and evaluation of evergreening, see FTC (2002). 28 See our recent article on this topic, Mathews, Thurbon and Weiss (2004). 29 The Senate Inquiry into the FTA reserved some of its strongest criticism for this clause, noting that it ‘prompted great concern among both academics and the generic drug industry in Australia as it appeared a significant diversion from current practices and one which could seriously delay the entry of generics onto the market’ (APH Senate 2004b: 124). The submissions from Drahos, Faunce and Lokuge all address this point with great clarity and skill. For a comprehensive discussion of the US experience with evergreening, see the FTC report (2002). 30 Article 17.10.4 states that: ‘Where a Party [read: Australia] permits, as a condition of approving the marketing of a pharmaceutical product, persons [read: generics producers] other than the person originally submitting the safety or efficacy information [read: big Pharma], to rely on evidence or information concerning the safety or efficacy of a product that was previously approved, such as evidence of prior marketing approval by the Party or in another territory [read: data on the public record]: (a) that Party shall provide measures in its marketing approval process to prevent those other persons [read: generics producers] from: (i) marketing a product, where that product is claimed in a patent; or (ii) marketing a product for an approved use, where that approved use is claimed in a patent, during the term of that patent, 179

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unless by consent or acquiescence of the patent owner; and (b) if the Party [read: Australia] permits a third person [read: generic producer] to request marketing approval to enter the market with: (i) a product during the term of a patent identified as claiming the product; or (ii) a product for an approved use, during the term of a patent identified as claiming that approved use, the Party shall provide for the patent owner to be notified of such request and the identity of any such person.’ See for example, Tom Faunce and Buddhima Lokuge, ‘Best to understand the dangers before swallowing this pill’, Sydney Morning Herald, 19 July 2004. Multilateral treaties such as the WTO Agreements are the recognised means for sovereign countries to keep their regulatory systems in approximate harmony with each other. Few countries willingly tie themselves, holus-bolus, to the regulatory systems of a foreign power. Under Australia’s Balance of Payments data (in current US$), we had royalty and licence fees outflows (payments) of $869 million in 2001, and $1011 million in 2002; and inflows (receipts) of $298 million in 2001 and $304 million in 2002. In the case of biotechnology, the report notes: ‘By definition patent holders are granted the right to restrict others from using their inventions. In some cases, it is felt that this restricted access can have negative effects on upstream research or downstream clinical use’ (OECD 2004: 23). On Proteome Systems, see the MGSM Case Study by one of us (Mathews and Carman 2002) as well as the ‘Australian story’ on Proteome Systems by two of us (Thurbon and Weiss 2004) and carried on the Australianinterest.com web page. OECD, op cit: 23. The WIPO Copyright Treaty 1996 and the WIPO Performances and Phonograms Treaty 1996. A draft of the Substantive Patent Law Treaty was tabled by WIPO in November 2001. See the comment by the Genetic Resources Action International (GRAIN 2002).

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Chapter 6 1 See for example, Vaile’s May 2003 speech, ‘A Free Trade Agreement with the United States’, in which he laments the ‘stalling’ of multilateralism and the ‘fracturing’ of regionalism, and advocates a new bilateralism. According to Vaile, the US’s economic and military might make it the ‘jewel in the crown’ of Australia’s bilateral strategy: 2 Mark Vaile, Melbourne, 11 November 2002—at the Australian-American Association—to ask for their support for negotiations: 3 Free trade pay-off? Sunday program, Channel 9, 16 March 2003: 4 Speech to the launch of American-Australian Business 2003, Sydney, 29 October 2002, ‘Australia and the United States: Opening Markets’: 5 6 Oliver Yates, ‘Betrayed by our own sycophantic team’, Australian Financial Review, 16 February 2004. These are Yates’ personal views, not the official views of his employer. 7 Polly Schneider (1999). ‘Australia turns self-sufficiency into IT ingenuity’, CIO, June 11: 8 For an application of this idea to the rise and fall of great powers, see the discussion of the decline of Great Britain in Mann (1988). 9 Many insights into Australia’s mishandled trade negotiations of the recent past are offered by Ann Capling (2001) in a carefully researched account of Australia’s role in the global trade system. 10 See, for example, Christine Wallace, ‘Bush rebuff stunned negotiators’, The Australian, 25 February 2004, p. 6. 11 Peter Corish, cited in ‘Australia’s Labor Party threatens U.S. pact’, James Brooke, International Herald Tribune, 6 August 2004: 15. 12 K. Adams (APH JSCOT : 2004a). 181

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13 Barnard (APH JSCOT : 2004a). 14 Some notable exceptions include Tim Colebatch, ‘Why Latham should reject the FTA’, The Age, 20 July 2004; Ken Davidson, ‘Why rush a free trade deal, Mr Howard?’, The Age, 1 July 2004; Ross Gittins, ‘Costs aplenty in free trade IP deals with US’, Sydney Morning Herald, 24 July 2004; John Hewson, ‘Concessions on sovereignty may be price to pay for having an FTA’, Australian Financial Review, 13 February 2004; Alan Ramsey, ‘Sovereignty lost in the trade-off’, Sydney Morning Herald, 31 July 2004. 15 Tony Parkinson, ‘Let’s rid the free trade debate of antiAmericanism’, The Age, 13 February 2004. 16 In our recent AFR article we compared our Prime Minister with King Attalos III who bequeathed his kingdom of Pergamon to the Republic of Rome in 133 BC. See Weiss et al. (2004). 17 Howard: 18 An example of trade ‘diversion’ can be seen in the way the US has allowed increased dairy exports from Australia, but mainly where such products—certain cheeses, for instance—will displace imports from Europe. 19 Ross Garnaut (APH JSCOT : 2004a). 20 Medicines Australia is widely regarded as the voice of the Australian pharmaceutical industry. But it should be noted that of its 29 Class 1 members, all but one are foreign multinationals, the majority of which are listed on the New York Stock Exchange.

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