Agribusiness Review - Vol. 10 - 2002

Paper 2
ISSN 1442-6951

APEC: What's in it for Australian Agribusiness?

Peter White

• Introduction
• History of APEC
• Features of APEC
• APEC and agribusiness
• APEC's agribusiness agenda
• APEC's progress
• The future
• References

Introduction

Australia faces significant challenges in the 21 st century, particularly in relation to its continued economic development within the Asia–Pacific economy. Nations such as Australia, that are geographically isolated, have learnt that looking overseas for trade and investment opportunities is an important strategy to improve their balance of payments.

Globalization has been recognized as one of the ten major factors in restructuring worldwide agribusiness in the next century ( Boehlje et al 1995 ). Significant steps have been taken around the world to put agribusiness on the international agenda, beginning with the development of the European Union (EU), the protracted debates at the General Agreement on Tariffs and Trade (GATT) fora which culminated in the Uruguay Round, the North American Free Trade Agreement (NAFTA), Mercosur, and the Asia Pacific Economic Cooperation (APEC). There are also significant sub-groupings of nations within these arrangements, which recognizes the diversity of economies and cultures within these blocs.

APEC has evolved in an environment of cultural and economic diversity, and hence genuine reform of trade and investment will be very difficult. The Asia Pacific region has always had significant tensions over trade, with increased use of non-tariff barriers and a trend towards regional trading blocs.

Traditionally, some countries in the region have had very closed markets.

The purpose of this paper is to evaluate the benefits accumulated to date for Australian agribusiness from APEC and to examine APEC's potential to influence future agribusiness growth in the Asia Pacific region. For the purposes of this paper, agribusiness refers to the commodity and processed products from primary industries. 

History of APEC

The concept of APEC was first articulated by Australian Prime Minister Bob Hawke in 1989 ( Hay 1994 ), and the first meeting of Economic Leaders was in Seattle in 1993. Subsequent meetings of the Leaders have been held in Bogor (1994), Osaka (1995) and Subic (1996). Davis (1995) has summarized the outcomes of these meetings as:

• • Seattle – agreement to a broad vision of free trade;
• • Bogor – agreement to free trade and investment by specific dates;
• • Osaka – tabling of the blueprints of reform from each country; and
• • Subic – tabling of individual action plans.

There are three aims for APEC: trade liberalization, trade facilitation, and development assistance (Podbury et al 1996). Within these aims, the APEC Economic Committee (1996) reported that APEC's general principles are:

• • mutual respect and equality;
• • mutual benefit and assistance;
• • constructive and genuine partnership; and
• • consensus building.

A large number of sub-groups have also been formed to work on specific parts of APEC's agenda, and a secretariat has been established in Singapore.

It is not the purpose of this paper to critique the conduct and outcomes of the major meetings. These details can be obtained from the Singapore office of APEC and from publications of the Department of Foreign Affairs and Trade (DFAT) (DFAT 1996a) . 

Features of APEC

Eighteen countries have membership of APEC: Australia, Brunei, Canada, Chile, People's Republic of China, Hong Kong, Indonesia, Japan, Republic of Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Philippines, Singapore, Chinese Taipei, Thailand and the United States of America. More countries have expressed an interest in membership, notably Vietnam and India.

There is no doubt that APEC represents potentially the most powerful trading bloc on the planet. DFAT (1996a) estimates that by 2020, APEC will include nine of the world's largest fifteen economies, including China as second and Indonesia as fifth. Currently, APEC economies account for more than half of world export trade. Eor and Kim (1996) have outlined the importance of agricultural trade between the APEC nations, stating that exports of wheat, rice, corn and soybeans exceed 50 per cent of world trade in these commodities.

Half of the total inward and outward APEC foreign direct investment is located in, or originates from, other APEC economies, indicating the strong links that already exist within the APEC region.

As far as Australia is concerned, 1994 figures indicated that about 77 per cent of Australia's exports went to APEC economies and 67 per cent of imports came from APEC countries ( Podbury et al 1996 ). Also, it has been estimated, using an economic model, that successful outcomes of APEC would result in a 3 per cent increase in terms of trade for Australia ( Huff et al 1995 ). Hence a prosperous future for Australia is clearly tied to the success of APEC.

Dieter (1996) suggests that APEC has the potential to be more important and complex than other trading blocs for three reasons: the size of the collective economies; the inclusion of several Asian countries with unresolved issues (i.e. Hong Kong, China (PRC) and Chinese Taipei); and the strong diversity amongst member countries. USA and Japan are two key players in APEC. They have the largest bilateral trade in the world and so are very important, but the relationship is not necessarily simple, as these countries have quite different forms of capitalism ( Beeson 1996 ).

There are also significant differences in political ideology, culture, and degree of intervention in the economy by the government. Other major trading blocs such as NAFTA, Mercosur, and the EU are much more homogenous, and hence do not face some of the challenges confronting APEC. There is a meeting of eastern and western philosophies and cultures in APEC, which has the potential to reduce the effectiveness of any actions of the organization. There is no single issue that unites APEC beyond support for global trade liberalization and even this relies on diplomatic pressure ( Hay 1994 )

The internal politics of APEC are important. This is manifested in the lack of a logical and acceptable leader within the group. Japan and United States are the largest nations, and it is logical that they would figure in any leadership debate. However, other APEC countries, particularly the ASEAN nations, are wary of the power and influence of these two countries, and believe that their own nations might be disadvantaged ( Hay 1994 ). Other countries lack the desire or clout to take a clear leadership role. However, given that consensus is the model preferred by the APEC nations, rather than the legalistic GATT type of approach, the notion of leadership becomes less important.

APEC and agribusiness

Despite some restrictions, there is significant trade and investment in agribusiness both within and beyond APEC. Hence, the trade and investment in products derived from primary industries must be high on the agenda for any discussions by APEC members. Table 1 shows an overview of some of the economic characteristics of APEC countries. These have significant implications for agribusiness.

Like any sector of the economy, agribusiness is driven by supply and demand factors. Supply relates to the availability of large areas or natural resources with the capacity to produce the quantity and quality of product demanded by the consumer, and/or the support necessary to process these products. Demand is related to the need for food and fiber, the size of the population, its disposable income, and its level of sophistication.

Countries such as China, with a high population (1.2 billion), have a high demand for food and fiber. Even though China has considerable tracts of land (9 561 thousand sq. km), third behind Canada (9 976 thousand sq. km) and the United States (9 809 thousand sq. km), and a fair proportion of this land is suitable for agriculture, it still requires considerable imports of both primary and processed product ($US 16 billion). Note that it also exports large quantities of product ($US 15 billion). As China's infrastructure strengthens, it is inevitable that better road and transport systems and storage and marketing facilities will assist in increasing the quality and quantity of agricultural exports.

Australia is a leading exporter of rural based products, the major export being wool ( DFAT 1996b ), and imports relatively less of rural based products (approximately 24 per cent of total exports). This is because Australia has a competitive advantage in relation to the development of its agricultural resources and the high level of agricultural technology. Due to its isolation, Australia historically has had to develop self-sufficiency in food and fiber products. However, as the domestic market's needs became largely satisfied, and as the burgeoning markets in Asia were identified, Australia has developed an export focus. It ranks alongside Chile, New Zealand and Thailand in its high proportion of rural based exports. Chilean exports are largely in horticulture and seafood products, whilst New Zealand exports include significant amounts of meat, dairy products and wool ( DFAT 1996b ). Thailand's main rural exports are rubber and seafood.

Table 1: Some features of the economies of APEC

Adapted from DFAT (1996b) and other DFAT data. NA = data not available.

Predictably, Japan is one of the largest importers of rural based products (22.3 per cent of total), and exports proportionately very little (1.1 per cent of total exports). This is because Japan has a high population and relatively few agriculture resources. It has a high demand for product, but a limited capacity to supply. Other countries such as People's Republic of China, Hong Kong, Korea, the Philippines and Chinese Taipei are also net importers of rural based products, reflecting similar trends to those in Japan, with these countries having high populations and an inability to supply those people.

GDP per person can be used as an index of the affluence of a country. From Table 1 it can be seen that Japan ($US 25 209), the United States ($US 23 472) and Canada ($US 20 877) are the most affluent nations, followed by Singapore and Australia. It follows that these markets should be significant as there is a high level of disposable income. Combined with its high population (125.6 million), Japan emerges as an important and highly valued market. All other things such as tariffs and other barriers being equal, there are significant opportunities in that market, particularly for quality products.

However, it would be shortsighted to rely upon the GDP per person as the sole indicator of a good market. As can be seen from the table, China and Indonesia have GDP per person of $US 524 and $US 772 respectively. These countries are still a very good market for high quality products as they have a high population and, although the average GDP may be low, there is a substantial proportion of consumers with high levels of wealth. In addition, tourism, western cuisine, and up market hotels and restaurants are adding to the demand for large quantities of quality product.

In summary, Table 1 shows that agribusiness is a very important part of the trade of APEC. Substantial markets exist now and these are likely to grow. As countries become more industrialized and experience increased population pressures, demand for both basic and high value agricultural products will increase. In addition, Australia will hold, and hopefully increase its position, both as a supplier of high quality product and as a potential investment site for other APEC nations.

Looking in more detail at Australia's relationships with other nations within APEC (see Table 2 ) it can be seen that Australia's trade in merchandise, and more particularly in agribusiness, is generally growing.

Most of Australia's markets are growing with the increased demand for food and fiber products. However, in some instances, export markets for agribusiness have declined (e.g. Canada, Korea, Mexico, Papua New Guinea, and United States) and this has largely been attributed to reduced sales of beef ( DFAT 1996c ). 

Table 2: Importance of trade in merchandise between Australia and other APEC countries, 1995/96

Adapted from DFAT (1996c)

Note: All exports and imports show an increase over a five-year trend except those marked thus ( )*.

The most significant export market is Japan, with rural based products accounting for about 25 per cent of the market. Meat is a major part of these exports to Japan, but this has leveled off in the past couple of years. In contrast, imports of agricultural products from Japan are negligible. Other growing export markets for Australian agribusiness are live animals to Indonesia; milk and cream products and wool to Malaysia; beef, live animals, milk and cream products to the Philippines; milk and cream products to Thailand; wool to China; crustaceans to Hong Kong; and butter and other fats to Mexico (DFAT 1996c). With the exception of Canada, Chile and New Zealand, exports are greater than imports. However, imports of fruit products and alcoholic beverages from Chile are the major growth areas ( DFAT 1996c ).

With free trade and investment, there can be problems for some countries and industries. There is potential for a country to be overshadowed by a larger partner, or for disparity in labour structure to disadvantage a developed economy. This can be important in some aspects of agribusiness – for example, horticulture production and processing – and this has been studied in other trading relationships.

Angirasa and Davis (1996) examined the potential for the NAFTA agreement to disadvantage US horticulture due to Mexico's capacity for cheap production in a high labour intensive sector of agriculture. Their study showed that the US horticulture producer would not be disadvantaged because of limitations in Mexico of land, irrigation and yield. In addition they cited seasonal differences and the fact that the full ramifications of NAFTA will be introduced over fifteen years, giving the US growers time to adjust. It could be argued that the US horticulture's security was fortuitous and some countries in APEC may not be as well protected.

In conclusion, it is clear that agribusiness is a cornerstone of the way in which APEC works. Australia has the opportunity to put forward initiatives to assist its agribusiness to be more internationally competitive through the Department of Foreign Affairs and Trade, and to influence some of the outcomes of the policy groups. However, Australia's position will be weakened in some areas as a result of reduced barriers to trade and investment with Australia, and policy makers must consider that within the options discussed and delivered. 

APEC's agribusiness agenda

There is no doubt that the inclusion of agribusiness in the APEC trade reform agenda would benefit Australia because there is relatively less protection in Australia compared to countries such as Korea and Japan. Agribusiness products are subject to a wide variety of tariff and non-tariff barriers. On average, tariffs in APEC countries averaged 14 per cent in 1993 ( Pacific Economic Cooperation Council 1995a ). Amongst this, manufacturing was 15 per cent, agriculture 13 per cent, and mining 6 per cent. It is important to note in these data that food, leather and textiles, although categorized under manufacturing, are agribusiness products. Therefore, the implications for agribusiness, and particularly for value added products, are significant.

The data also showed that incidences of non-tariff barriers were highest in agriculture (more than 16 per cent) compared to manufacturing (12 per cent) and mining (4 per cent). When support measures for agriculture are included, agriculture is significantly ahead of any other type of enterprise. In short, the most highly protected sectors are agriculture and apparel.

Nations such as the United States and Australia have argued long and hard that reform be comprehensive to make APEC truly effective. The MEGABARE model has shown that Australia's gross national expenditure could double by 2020 if liberalization includes agriculture ( Podbury et al 1996 ). They also estimated that export prices for Australian agriculture could be 3 per cent to 24 per cent higher under a liberalization regime.

However, many nations are very cautious about the extent of the reform in agribusiness offered by APEC. It is well known that agriculture has been a stumbling block in the development of other trading unions such as the EU. The most common example is France's stance on this matter ( Leuschen 1995 ). French agriculture is strongly protectionist, and Leuschen argues that there are social issues at stake, with memories of food shortages after World War II. This is a rather tenuous claim, and food security is used as a lever for protection. Nevertheless, the French have mounted significant, generally successful, campaigns to protect their agriculture. Part of their success could be because, whilst contributing only 2.8 per cent of GDP, farmers control 17 per cent of the vote ( Leuschen 1995 ).

It could be argued that rice plays a more important role in the social fabric of Asian countries than general agriculture has for France, and also has electoral support. Hence, it is no surprise that the APEC members are divided over agricultural reform, in particular the trade of rice ( Hay 1994 ). Ravenhill (1996) stated that originally Japan, Korea and China proposed that agriculture be excluded, although Hulme (1996) believed that these countries are genuinely committed to liberalization, albeit cautiously. At one stage Indonesia had also asked for rice to be excluded.

As an index of the priorities of APEC countries towards agribusiness liberalization, it is useful to consider that, of ten Working Groups formed, only one is overtly linked with agribusiness. The Fisheries Working Group is examining tariff and trade matters, airfreight issues and health and quality ( APEC 1996 ), although the agenda seems to lean more in favor of resource management issues than trade. It is only recently that Australian officials have been able to shift the agenda to more trade related matters.

These data indicate that significant gains can be made, particularly for countries like Australia, which depend on agribusiness exports, when reform is addressed. This is the challenge for Australian negotiators.

APEC ' s progress

Opinions are divided about the value of APEC's performance to date. Much of the criticism leveled at Australia's involvement in APEC has been directed at the perceived lack of results. Ten working groups have been formed and tangible results have been slow to appear. However, it is fair to say that in an organization such as APEC that relies upon goodwill and consensus clear progress will take time to occur.

The first five years were more concerned with foreign policy than tangible economic gains (Hay 1994). A subsequent study ( Beeson 1996 ) was more optimistic about APEC's future and more pragmatic about what was possible within the inherent political constraints of the region. In contrast, ( Ravenhill 1996 ) was critical about lack of action. The Asian preference for consensus, it was believed, resulted in a lowest common denominator approach. There were no incentives to conform and no threat for lack of conformity. Ravenhill believed that Australia has been over-optimistic and that the best that could be hoped for is agreement rather than results.

There has been criticism of the Osaka meeting ( Hulme 1996 ) because of the level of exceptions that were allowed to some nations. At Osaka, nations were expected to table their blueprints for reform. The initial actions (so-called 'down-payments') of some nations such as South Korea, Thailand, the United States and the Philippines were not impressive. However, Indonesia's and Australia's plans were well received ( Hulme 1996 ). China's effort was highly acceptable as it offered 30 per cent tariff reductions on more than 4000 items. Also, China offered to drop import controls on 170 items ( Hulme 1996 ). Hulme suggests that China's offer was based on their wish to join WTO and he noted that a delegation arrived in Geneva only a week later to revive talks on that ic.

At the last meeting in the Philippines, countries tabled their Individual Action Plans for scrutiny. As for the plans at Osaka, there was a degree of variation in the quality of these documents. Australia has now analyzed these plans for their relevance to Australia and has formulated Market Access Profiles, which will be used as the basis for future negotiations.

Another cause for concern within agribusiness is the potential for undue emphasis on raw agricultural commodities at the expense of processed food ( Hooke 1996 ). Hooke points out that the more processed a product becomes the higher the tariff and non-tariff barriers – the so-called 'protection or tariff escalation phenomenon'. The opportunity for real gains for Australian agribusiness lies in pushing reform for processed food and other products as a 'value adding' industry and is important for the Australian economy in terms of employment and investment.

A comprehensive study of tariff reductions, non-tariff barriers and limitations on investment has been done by the Pacific Economic Cooperation Council (1995b) . It shows considerable movement forward in the past few years. China has played a major role in this liberalization.

DFAT (1997) has outlined a series of gains for Australia already flowing from APEC, including increased exports of wool to Mexico, the United States and China, powdered and liquid milk to Malaysia and Thailand, and sugar into the United States. It is very optimistic of continuing these gains, and has put considerable resources into ensuring that APEC works for Australia. APEC is seen as an important part of Australia's regional trade negotiations and supplements bilateral activities.

The question must be asked whether those liberalization initiatives were as a direct result of APEC or whether they would have happened anyway as a result of post-GATT negotiations. Perhaps a comparison of reforms within non-APEC countries could give that information. One such piece of data from DFAT (1996) indicates that, since its inception, APEC's goods exports increased by 58 per cent compared to 41 per cent in other countries, although this may have been a function of the faster growing economies of APEC countries. DFAT's data (1996) also indicated that investment liberalization has resulted in 24 per cent growth in investments into APEC countries from Australia over the past five years.

Publications by APEC on its success to date are, predictably, positive about the outcomes in terms of reductions of tariffs and other impediments to trade (for example, Pacific Economic Cooperation Council 1995b) . It showed that tariffs in APEC countries have declined in the period from 1988 to 1993, particularly in agriculture and food. It could be argued that these gains in the first few years of APEC are concessions that countries were quite willing to allow as they were not vitally important to those countries' economies. It will be interesting to observe for the next few years to see whether the momentum continues when safe options become fewer and countries will have to make hard decisions to honour their commitment to APEC.

The future

The future for APEC is sound, and, most importantly, Australia stands to gain considerably. However, it will require the resources and commitment of the Australian Government to secure the best deal for the nation. DFAT is addressing key priority issues such as high tariffs in key markets, existing and emerging non-tariff barriers, greater disciplines on export subsidies, securing fairer treatment for Australian firms investing abroad, and strengthening APEC's trade liberalization and trade facilitation processes, market development and promotion. It is also looking for opportunities to negotiate multilateral market access on agriculture and manufactured products (DFAT 1997) .

APEC is important because it provides an opportunity for Australia to establish a presence within the Asia Pacific region and to be involved in its economic growth. It has been lauded as one of two key drivers in trade reform in Asia, the other being the way in which small Asian nations are taking control of their own future ( Forbes 1996 ). The agreement for liberalization of trade to be at the countries' own pace eased pressure on smaller nations to conform to the larger ones.

APEC has developed and maintained such a level of communication that actions by countries to go against the spirit of free trade are not well received. The openness of APEC is what is important, in contrast to conventional trade talks where nondisclosure is the norm.

Whilst there are substantial benefits for Australia to be a part of APEC, there is no doubt that there are some disadvantages. Australia's traditional markets may be threatened and imports will increase, threatening domestic markets. Australia's small population, its reliance on exports, and its rural based economy can make it less competitive than other more industrialized nations. However, as Australia is the biggest supporter of APEC, it must lead by example. Australia's involvement in APEC may not be able to be substantiated on economic grounds, but it is a strong political stance that has been made, and now has to be followed through.

References