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| 1998 | |
|---|---|
| 11 September | Interest rates hiked to 49.75 per cent. |
| 23 September | IMF prepared to provide financing in support of Brazilian fiscal reform. |
| 30 September | Brazil's reserves down to US$45.3bn (April peak-US$74bn). |
| 4 October | President Cardoso re-elected for a four-year term. |
| 8 October | Joint Statement of Understanding released by IMF and Brazil recognising Brazil will put into place a strong and sustained fiscal adjustment. |
| 28 October | Brazil announces fiscal adjustment package, including a R$8.7bn cut to government spending aimed at reducing the government deficit by R$28bn in 1999. |
| 2 December | US$41.5bn IMF financial assistance package for Brazil approved and the first tranche of funds released. |
| 2 December | Brazilian Congress votes against a crucial element of the Government's fiscal adjustment plan, involving reforms to public servants' pensions, adding to fears that the Government will be unable to put into place all elements of the plan. |
| 1999 | |
| 6 January | Announcement of a debt moratorium in Minais Gerais state sparks fears the Federal Government will not honour its debt. |
| 13 January | Central Bank President Franco resigns replaced by Francisco Lopes. Real's floating band-width against the dollar is widened. The real moves immediately to the top of band, while reserves continue to fall. |
| 15 January | Decision to float the real against the dollar due to continued capital flight, and the unsustainability of the currency's defence. It falls in the day's trading to 1.60 against the US dollar. |
| 2 February | Central Bank President Lopes resigns replaced by Arminio Fraga Neto. Value of the real continues to fall throughout January and February. |
| 2 March | Real reached its low point in trading, falling to 2.25 against the dollar. The real commences a steady recovery throughout April and May. |
| 4 March | Central Bank introduces a single rate system, and lifts interest rates to 45 percent. |
| 8 March | Revised agreement between Brazil and IMF announced. Takes into account the effects of the devaluation on the Government's fiscal reforms. |
| 19 March | Congress passes final measure from the Government's fiscal adjustment package, the CPMF cheque tax. |
| 30 March | IMF agrees to release second tranche of assistance funds (around US$9.8bn). |
| May | Brazilian economy records 1 per cent growth in the first quarter of 1999 and better than expected inflation, prompting hopes of a faster recovery for Brazil. |
3.25 The Brazilian financial difficulties were not the only effect on economic development in South America. Two other factors impacted on the region, namely the economic crisis in Asia that spilled over into the Brazilian financial instability and the effects of El Nio.
3.26 DFAT's recent estimates show that 'most regional economies in South America experienced recession in 1999howeverthe largest regional economy and the largest market in the region, Brazil, was able to record positive although modest economic growth.'20 An estimated 0.8 per cent growth.
3.27 The outlook this year is for a return to solid economic growth and 'with all of the economies in the region to record positive growth.'21 Brazil is expected to make quite a strong recovery with GDP growth estimated to be 3.3 per cent in 2000 and about 3.8 per cent in 2001.22
3.28 The strong economic downturn in South America in 1999 had a significant impact on Australia's exports to the region with exports falling by about 26 per cent. In elaborating on the fall in Australian exports, DFAT noted that:
3.29 Figure 3.1 shows the fluctuations in value of Australian exports to South America for the period August 1997 to February 2000.
Figure 3.1 Exports to South America (PDF Format)
3.30 Australia's export performance in 1999 is not consistent with its medium term performance in South America. 'For example, 1999 was the first calendar decline in our exports since 1994 and trend growth in the last five years averaged five per cent . It has been 10 per cent for the last decade and that is even taking into account the very poor outcome in 1999.'24
3.31 DFAT considers there are good prospects for return to growth in Australia's trade with South America in the medium term:
3.32 Although Australia's export sector is expected to improve over the next year or two, DFAT identified some potentially offsetting factors the ongoing recovery in Australia's largest export markets in East Asia and the regional trend within South America to negotiate free trade agreements.
3.33 The importance of regional trade agreements has grown in the past decade. Regional trade is increasingly conducted on a preferential or free trade basis. Important arrangements such as Mercosur, the LAIA ALADI,26 the Andean Community and the G3 (Colombia, Venezuela and Mexico) all provide preferential or free trade access for members. These arrangements discriminate against other trade partners, including Australia, and have the potential to seriously distort trade flows. On the other hand, investors have taken advantage of the fact that they can tap into common markets, notably Mercosur's market of 215 million people, by investing in one location within that grouping.
3.34 As DFAT points out South American governments argue that regional trade agreements play a role in reinforcing the trend towards trade liberalisation in the region.27 These agreements are set out in Table 3.1.
| Grouping | Members |
|---|---|
| Latin American Integration Association | All South American Countries |
| Southern Cone Common Market (Mercosur) | Argentina, Brazil, Paraguay, Uruguay* |
| Group of Three | Colombia, Mexico, Venezuela |
| Andean Community | Bolivia, Colombia, Ecuador, Peru, Venezuela |
| * Bolivia and Chile are associate members |
| Chile Colombia | Colombia - Venezuela |
| Chile Ecuador | Colombia - Ecuador |
| Chile Mexico | Ecuador - Venezuela |
| Chile Peru | Bolivia - Peru |
| Chile Venezuela |
Source DFAT, Submission, p. 310.
3.35 South America's web of RTAs is set to expand, with the Free Trade Area of the Americas - an Americas-wide free trade zone - being the most ambitious. Other potential arrangements include linkages between Western Hemisphere countries and the EU. The continuing proliferation of discriminatory RTAs pose considerable challenges to the multilateral trading system.
3.36 Chile, as Table 3.2 shows, has been the main exponent in the negotiation of trade liberalisation agreements as part of its three-fold approach to trade. Most of the bilateral agreements that Chile has reached with Latin American countries are free trade agreements negotiated under the umbrella of ALADI. These agreements, known as Economic Complementation Agreements (ECAs), have as their main goal the achievement at some point, of total liberalisation of trade in goods.28 It is interesting to note the 1990s, with the opening up of the South American economies, saw the implementation of the Chilean bilateral agreements, the details of which are:
3.37 Not only does the proliferation of discriminatory RTAs pose considerable challenges to the multilateral trading system, so too the bilateral free trade agreements can pose problems for Australian exporters resulting from substantial tariff discrimination. The Chile-Canada free trade agreement has placed the major Australian export, coal, at risk.
3.38 AIG cites the example where an Australian supplier to the mining industry in the South American market was on the receiving end of the effects of RTAs in that:
3.39 The issue of free trade agreements is now receiving wider coverage in the Australian media. According to The Australian Financial Review 'Australia has also indicated its willingness to explore the possibility of a free-trade area involving Chile, New Zealand, Singapore and the US the P5.'31 This FTA idea has been discussed in the past but given the events on the multilateral stage Australia is more disposed now to revisit the idea.
3.40 The CER-Mercosur dialogue is the central mechanism for progressing Australia's trade and economic relationship with Mercosur. As we have seen, the dialogue has lost much of its impetus and needs to be reinvigorated as a matter of urgency.
3.41 What is evident for the long term though is the need to engage Mercosur at another level. It is clear that if Australia is serious about increasing its trade and investment relationship with South America then it must go beyond the promotional rhetoric and take positive action as its competitors are doing in the region. One initiative that was being explored, as an area of cooperation under the dialogue, was the creation of a CER-Mercosur Business Forum to encourage greater contact between the business communities of Australia, New Zealand and the Mercosur countries32 but this has gone no further.
3.42 However such a forum is not enough in the face of the American push for the FTAA and Mercosur's negotiations with the EU for preferential trade ties. Moreover Mercosur has shown an increasing willingness to engage Asia in trading arrangements. The Common Market of the Mercosur commits it members to free trade in goods, the free circulation of productive factors capital and labour and a common external trade policy.33 Furthermore the Common External Tariff (CET) of up to 23 per cent applies to around 85 per cent of all goods imported into Mercosur, and as DFAT points out other items, such as sugar and automotive products, are deemed to be sensitive and due for inclusion by 2006.34
3.43 Australia needs to move with the times. With Mercosur pursuing the expansion of its preferential trade ties then no amount of CER-Mercosur dialogue will place Australian business on a competitive footing on exports into the Mercosur market. Moreover Mercosur aims to establish a free trade zone with Andean Community members, already having a preferential agreement with Bolivia. As the South American markets continue to expand and require product and expertise that Australia is capable of supplying, then the regional preferences and wider trade agreements with Mercosur will kick in and Australian business will not be able to compete.
3.44 To move with the times and put teeth behind the Australian Government's identification of Mercosur as an important emerging market for Australia, Australia needs to move from a trade facilitation approach to one of trade liberalisation with the regional grouping. Australia has adopted a multilateral approach to trade liberalisation through the WTO. Mr Cobban, the First Assistant Secretary, Americas and Europe Division in DFAT told the Committee that:
3.45 The Prime Ministers of Australia and New Zealand, in a joint Prime Ministerial communique, dated 4 August 1999, said that:
3.46 The WTO meeting in Seattle in November 1999 failed to set in train a new round of negotiations. As DFAT noted in its submission to the inquiry when examining regional economic integration in South America:
3.47 Since the WTO meeting in Seattle, the Prime Minister of Australia has now signalled a willingness to consider bilateral trading agreements following a visit to South Korea. In his address to the Korean Business Lunch in Seoul on 19 May 2000, the Prime Minister said:
3.48 Furthermore the WTO's dispute settlement system is at risk of losing public and political support as it is used by big countries for political leverage and it does not apply equally to agriculture.39 The Committee takes the view that Australia needs to 'energise trade initiatives and trade activities' with Mercosur by taking a trade liberalisation approach rather than a trade facilitation one in the long term. This approach is essential in the face of Mercosur's preoccupation with further developing its Common Market and its negotiations with other larger trading entities.
The Committee recommends that the Australian Government pursue as a priority the development of an Australia-Mercosur free trade agreement.
3.49 The objective of this significant regional free trade agreement is 'to create a common market between the states of Bolivia, Colombia, Ecuador, Peru and Venezuela.'40 With a population of 109 million, it aims to establish a directly elected parliament and a genuine customs union by 2001, although DFAT comments that this would appear unlikely. A common external tariff of 5 to 20 per cent took effect in 1995.41
3.50 The organisation was established in 1969 and was officially known as the Acuerdo de Cartagena (the Cartagena Agreement) but was also known as the Grupo Andino (Andean Group) or the Pacto Andino (Andean Pact). In March 1996 member countries signed a reform Protocol of the Cartagena Agreement in which the Group42 was superseded by the Andean Community of Nations in order to promote greater economic, commercial and political integration under a new Andean Integration System.43 The headquarters of the community is in Lima, Peru and the Trade Sub-Committee visited the headquarters and met with the Director General of the Andean Community and the Adviser to the Andean Community General Secretariat, during their visit to Peru in March 2000.
3.51 In April 1998 the Community signed a framework agreement with Mercosur on the establishment of a free trade accord with the process of extending trade preferences to commence in October 1998. However negotiations were delayed due to differences regarding tariff reductions and the items to be covered by the accord.44 In January 1999 there was a pledge by representatives of the Community and Mercosur to pursue the completion of the first stage of negotiations by the end of March 1999. Brazil frustrated by the lack of progress negotiated its own agreement with the Andean Community45 with the accord coming into force in August 1999 and valid for two years.
3.52 In the discussions at Andean Community headquarters in Lima, the Trade Sub-Committee was advised the Community wished to develop relations with the EU and has been exploring the possibility of establishing a 'fourth generation agreement' covering free trade, cooperation and political dialogue. The Andean Community currently enjoys a general system of preferences in the EU linked to efforts to solve drug problems and the current preferences extend to 2004 and will be renewed in a new agreement. Furthermore the Sub-Committee was told that it has hoped to have a free trade agreement between the Andean Community and the EU by 2005.
3.53 What is particularly interesting is that the Andean Community aims to strengthen ties with the Asia Pacific countries. There are expectations, the Trade Sub-Committee was told, that some sort of consultative/ cooperative mechanism would eventually be established between the Andean Community and Asia Pacific countries, either bilaterally or as blocs.
3.54 The Committee recognises the importance of the Andean Community and its place as a significant regional body. Australia has yet to build formal links with the countries of the Community and as an important first step in this process the Committee would like to see the establishment of links at a parliamentary level. Although the Australian Parliament has a parliamentary group with one of the Andean countries, Venezuela, under the Inter-Parliamentary Union, the Committee would like to see the establishment of an Australia/Andean Parliamentary Group covering all of the members of the Community.
Recommendation 3
The Committee recommends that the Australian Parliament, under the Inter-Parliamentary Union, establish an Australia/Andean Community Parliamentary Group.
3.55 The Latin American Integration Association (LAIA or ALADI in Spanish) was established in 1980. Its objectives are the reduction of intra-regional trade barriers and industrial cooperation.46 DFAT pointed out that under the auspices of the Treaty of Montevideo, regional and sub-regional mechanisms are incorporated to foster trade, including tariff reductions on a wide variety of ALADI sourced goods.
3.56 The group of three comprises Colombia, Mexico and Venezuela. This free trade area came into force in 1995 with the objectives of removing tariff and non-tariff barriers, unifying customs procedures and putting in place cooperation accords in various non-trade areas. The aim is to eliminate internal trade barriers within 10 years.
3.57 The FTAA is a comprehensive trade negotiation process embracing the 34 democratic nations of the Western Hemisphere. The negotiations hold the potential for creating the world's largest free trade area, with 800 million people and a combined GDP of nearly US$11 trillion.
3.58 The FTAA is seen by DFAT as the most important prospect in economic integration. In December 1994, at the First Summit of the Americas, the 43 leaders of the Western Hemisphere agreed to negotiate the creation of a free trade area not later than June 2005:47
Nine negotiating groups were established on market access, agriculture, investment, subsidies, anti-dumping and countervailing duties, intellectual property rights, government procurement, services, and competition and dispute settlement.48
3.59 It is interesting to note that the Andean Community negotiated as a bloc to obtain chairmanship of three of the nine negotiating groups: Colombia - on market access; Peru on competition policy and Venezuela on intellectual property. Moreover the Community insisted that the final declaration of the Second Summit include recognition that the varying levels of development of the participating countries had to be taken into consideration throughout the negotiating process.49 Chile chairs the dispute settlement group.
3.60 In commenting on the FTAA, DFAT said that the 'complexities and political difficulties will make this a slow process, which will probably continue in parallel with sub-regional agreements.'50
3.61 The US seems to have lost interest in the project and with President Clinton not securing a 'fast-track' mandate from Congress, so the impetus from the US has been removed. The likelihood of any significant achievements in the near future is very low.
3.62 The profound influence of NAFTA on the global trading environment has spread into South America. The NAFTA agreement between Canada, Mexico and the US came into effect on 1 January 1994.
3.63 In an overview of the most significant free trade agreement since the formation of the European Economic Community in 1957 shortly after it came into effect in 1994 and its implications for Australia, it was observed that:
3.64 Under the US legislation to implement NAFTA, there is an expansion clause whereby other countries are identified as prospects for negotiating free trade arrangements. At the outset the focus was on Chile and other countries in Latin America.
3.65 In December 1994 Chile was invited to join NAFTA. Negotiations between NAFTA and Chile were suspended in 1995 due to the absence of a 'fast track' authority for the US Administration. However Chile has signed comprehensive NAFTA - like free trade agreements with the other two NAFTA members, Mexico and Canada.52
3.66 The Australia-Chile Chamber of Commerce (ACCC) in its evidence put the concept that Australia could be an APEC hub that is a hub between South America, through the Chilean gateway, and Asia. With the advent of direct flights between Australia and South America the concept of Australia as a bridge to Asia is now feasible.
3.67 The chamber pointed out it now:
3.68 It is interesting to note that 80 per cent of Chilean business within Asia is done with Japan, Korea and China. As the ACCC notes most of these businessmen travel from Santiago to Miami, Miami to San Francisco or Los Angeles and get to Tokyo or Beijing in 2 days. The Chamber maintains that if you improve the link between Sydney and Santiago then this very large flow of businessmen would come through Sydney and up into Asia.54 'The opportunity today is to convert what were effectively end games, or ends of the transport link, into a link between regions.'55 This is further boosted by the fact that Chile is in APEC and Australia is a substantial member of APEC. The Committee agrees with the ACCC's observation.
3.69 The Ambassador for Ecuador sees significant merit in Australia, through Brisbane, being the hub into Asia for its flower exports - a major export industry for Ecuador.
3.70 KPMG does not underestimate the importance of Australia becoming an integral part of the future of the economies of Latin America. Australia has a very critical link that is of significant value to South American countries and that is 'our Asia link'.56 KPMG says that Australia should be trying to show how the nexus between Asia and Latin America is building and:
3.71 The Chilean Trade Commissioner, Mr Bournas, told the Committee that the Chilean government has tried to position itself as a gateway to Latin America and this has been successful in generating a great deal of commerce with China and Korea. He says that Chile looks upon Australia as an ally in the task of opening up markets in Asia as we have Asian regional know-how and they have the regional know-how in South America.58
3.72 Qantas provided the Committee with a very interesting piece of information regarding its South America Asia traffic carried on its Buenos Aires - Sydney and vv flights. Passenger traffic is averaging 42 per cent higher per month than that averaged over the first six months since the introduction of the direct air services with South America.59
3.73 The Committee sees as an integral part of the building of linkages the promotion and development of Australia as a bridge to Asia and the Pacific for the economies of South America. The multiplier effect of Australia as a hub would be significant. Clearly the hub concept needs to be explored and is a concept that is big enough for government to take seriously as an initiative. To this end the Committee recommends that a strategy be developed to establish Australia as a bridge to Asia for the economies of South America. Recommendation 4
The Committee recommends that the Department of Foreign Affairs and Trade, along with its portfolio partner Austrade, develop a strategy to establish Australia as a bridge to Asia for the economies of South America.
1. TOOS'99, p. 53.
2. ibid. p. 43.
3. ibid.
4. DFAT, Annual Report 1998-1999,
Commonwealth of Australia, 1999, p. 115.
5. DFAT, Submission, pp. 312-313.
6. The Australian Financial Review,
'Just another entry in the drinks diary', 8 June 2000.
7. ibid.
8. Australia New Zealand Closer Economic
Relations Trade Agreement ANZCERTA, usually shortened to CER.
9. TOOS'97, p. 189.
10. TOOS'98, p. 137.
11. DFAT, Submission, p. 311.
12. See Chapter 5 - Argentina for Committee
comments on the Austrade promotion at EXPOCHACRA 2000.
13. TOOS'97, p. 154.
14. This can be viewed on the DFAT
website http://www.dfat.gov.au
15. TOOS'97, op cit.
16. DFAT, Transcript, 13 August 1999,
p. 4.
17. A framework agreement was signed
with the EU in 1996.
18. DFAT, Submission, p. 305.
19. ibid. pp. 305-306.
20. DFAT, Transcript, 8 May 2000, p.
615.
21. ibid.
22. ibid.
23. ibid.
24. ibid. p. 616.
25. ibid.
26. ALADI the Latin American Integration
Association.
27. DFAT, Submission, p. 310.
28. Chile Facing the Year 2000,
Ministerio de Relaciones Exteriores, Chile.
29. ibid.
30. AIG, Submission, p. 61.
31. The Australian Financial Review,
'The risks in free-trade agreements', 5 July 2000.
32. TOOS'98, p. 137.
33. DFAT, Submission, p. 310.
34. ibid.
35. DFAT, Transcript, 13 August 1999,
p. 27.
36. ibid. See Joint Prime Ministerial
Communique, Joint Prime Ministerial Task Force on Australia New Zealand
Bilateral Economic Relations, 4 August 1999.
37. DFAT, Submission, p. 310.
38. See transcript of the Prime Minister,
the Hon John Howard MP, Address to the Korean Business Lunch, Hyatt
Hotel, Seoul, 19 May 2000.
39. The Australian Financial Review,
'Political use of WTO rued', 28 June 2000.
40. DFAT, Submission, p. 311.
41. ibid.
42. Chile withdrew from the Group in
1976 and Panama has observer status with the Community.
43. The Europa World Year Book, 1999,
Volume I, p. 112.
44. ibid. p. 113.
45. Bolivia is excluded as it is an
associate member of Mercosur.
46. DFAT,Submission, p. 311.
47. Chile Facing the Year 2000,
Ministerio de Relaciones Exteriores, Chile.
48. ibid.
49. The Europa World Year Book, 1999,
Volume I, p. 113.
50. DFAT, Submission, p. 312.
51. DFAT, The North American Free
Trade Agreement, (NAFTA) Implications for Australia, May 1994, p.
1.
52. Chile Facing the Year 2000,
Ministerio de Relaciones Exteriores, Chile.
53. ACCC, Transcript, 1 October 1999,
p. 247.
54. ibid. p. 250.
55. ibid. p. 241.
56. KPMG, Transcript, 17 November 1999,
p. 382.
57. ibid. p. 383.
58. ACCC, Transcript, 1 October 1999,
p. 245.
59. Qantas, Exhibit, No 53.
