Enhancing Canada-Australia commercial relations

Joint Statement by the Australian Industry Group and the Canadian Council of Chief Executives timed with the release of a new report, “Canada-Australia commerce: enhancing the relationship“

Canada and Australia have for many years enjoyed a significant and diversified economic relationship characterized by strong commercial exchanges, solid two-way merchandise trade flows and, more recently, strong growth in investment and services trade.

In September 2011, the Australian Industry Group (Ai Group) and the Canadian Council of Chief Executives (CCCE) commissioned research to explore the potential for enhanced bilateral trade and investment relations, as well as actions to promote regional and global trade liberalisation. Completed in early 2012, the studies included economic modelling and input from key stakeholders in both countries.

One of our main conclusions is that the policy framework for the bilateral relationship is in need of updating. In recent years, both countries have focused on strengthening commercial ties within their respective regions. As a result, Canada and Australia no longer provide each other with terms of trade that are as favourable as those offered to other partners. Ai Group and the CCCE believe this should be remedied with a concrete set of initiatives to be implemented over the short term.

As well, Australia and Canada should consider more innovative approaches to closer economic and commercial relations. We should take advantage of the remarkable similarities in our economies both in scale and structure, in our societies, and in our governance systems. Our goal should be the free flow of goods, services, capital and labour — bilaterally and regionally.

Australia-Canada Commerce is Strong and Dynamic

Australia-Canada commerce is shaped by the reality of geography. Our largest cities and main commercial hubs, Sydney and Toronto, are separated by 15,500 km. Each country is among the other’s most distant major markets. Not surprisingly, bilateral trade between the two countries is weighted toward services rather than goods. Direct investment and associated foreign affiliate sales are also greater on a bilateral than on a global basis.

The overall commercial relationship is well balanced.

• Australia’s 2011 imports from Canada were $1.8 billion; Canada’s imports from Australia were only slightly lower (all figures in USD).

• Canada’s services exports to Australia were approximately $800 million in 2010, while Australia’s exports to Canada were about $527 million.

• Canadian foreign direct investment (FDI) in Australia in 2010 amounted to $15.1 billion, while Australian FDI in Canada amounted to $21.6 billion.

• Sales data between foreign affiliates are not available bilaterally. However, applying the global average of a $1.67 in foreign affiliate sales for each $1 in FDI implies foreign affiliate sales in 2010 of about $36 billion for Australian firms in Canada and $25 billion for Canadian firms in Australia.

Overall, bilateral commerce is strong and growing rapidly, driven mainly by the steep increase in investment.

The number of Canadian firms exporting to Australia grew from 2,161 in 2003 to 2,977 in 2008, before falling off to 2,780 as the global economic crisis unfolded in 2009. The number of Australian firms exporting to Canada stood at about 2,000 in 2008. Many of these are small and medium-sized enterprises (SMEs) for which establishing a trans-Pacific presence represents an important strategic step. As two-way commerce has intensified, there is growing private sector support for policy action to facilitate a closer relationship. This growing interest is reflected in the first Australia-Canada Economic Leadership Forum, which took place in November 2010 in Sydney, and a follow-up meeting that will be held in Toronto in July 2012. Based on the results of our commissioned research, Ai Group and the CCCE believe there is considerable potential to enhance the bilateral economic relationship. Several recommendations are set out below.

Tariff Elimination

Several thousand tariff lines (at 5% or higher) are still in place that impede trade between Canada and Australia. Eliminating these tariffs would increase bilateral goods trade by an estimated 17 per cent or $520 million annually, provided that each country adopted an accommodating approach to rules of origin.

There is room for further development of trade in specific sectors. From the perspective of Canada’s export interests, these include: agricultural products; food and beverages; fish and seafood products; agricultural technology and equipment; forest products; metals, minerals and related equipment, and consumer products, including apparel and fashion. From the perspective of Australia’s export interests, they include environmental goods, mining and oil and gas technology, and wine.

Canada uses tariff rate quotas to protect its supply-managed agricultural sectors, particularly the dairy industry. This system of high tariff barriers is inconsistent with Canada’s efforts to secure improved market access for its exports. Moreover, such policies undermine efforts to improve the competitiveness of supply-managed sectors and to promote international sales of Canadian dairy and other agri-food products.

Non-tariff Barriers

Generally, non-tariff barriers appear to be low. Australia and Canada are actively aligning to international standards and have negotiated Mutual Recognition Agreements in several areas. Our countries are at the leading edge of efforts globally to reduce trade barriers. Australia’s quarantine regime, which protects its unique ecology from non-indigenous pests and plant and animal diseases, is a concern to some Canadian exporters. We note that, while Australia maintains a strictly non-discriminatory approach in its sanitary and phytosanitary regime, it has agreed to the establishment of consultative mechanisms aimed at facilitating timely and accurate information flows in some of its bilateral free trade agreements.

A similar bilateral consultative mechanism on bio-security measures would accommodate Canada’s interests in areas where the quarantine regime has impeded Canadian exports in the past, such as beef, pork and salmon.

Competition Policy/Trade Remedies

Canada and Australia maintain similar competition policy-related institutions, laws and standards, and there is a well-developed relationship between our competition authorities. Where there are allegations of abuse of market power or “predatory” behaviour, it makes sense to address them through cooperation between the competition authorities rather than the imposition of border measures. Bilateral agreements to replace anti-dumping regimes with competition policy cooperation exist between Australia and New Zealand and between Canada and Chile. Antidumping investigations between Australia and Canada are rare. There have been eight such investigations over the last two decades (seven initiated by Australia and one by Canada), with duties applied in four cases. (One is still in effect.) Still, the presence of anti-dumping laws and the threat of their application have a chilling effect on trade.

Services Trade

The research we commissioned suggests that there is potential for Canada-Australia services trade to increase by as much as 50 per cent in the context of an ambitious bilateral agreement. Some of the gains would come from greater mutual recognition of qualifications, improved access to government procurement opportunities and modernization of our existing bilateral air services agreement. The expansion of bilateral merchandise trade through tariff elimination, and facilitation of bilateral investment as discussed below, would provide a further boost to the two-way flow of services.

At the 2011 Australia-Canada Roundtable on Foreign Qualification Recognition, stakeholders assessed progress towards mutual recognition of qualifications in various professions. While much progress was reported, the final report identified a trend toward “skewed reciprocity”: Australia facilitated immediate access for Canadian qualified professionals in a number of fields, but Canada was less forthcoming. Consistent with the Public Policy Forum’s conclusions, the development of more streamlined processes for mutual accreditation of professional qualifications holds considerable commercial potential for both countries. A formal dialogue between Canadian and Australian agencies is warranted, along the lines of the Public Policy Forum dialogue.

Air-Services Agreement

The 1988 Air Services Agreement, renewed in 2000, is less than state-of-the-art. From Canada’s perspective, it is less liberalizing than more recent agreements under Canada’s “Blue Sky” international air policy, introduced in 2006. To date, Canada has negotiated 28 new or updated agreements, including one with New Zealand. Australia, for its part, is seeking to move to a new generation of air services agreements with likeminded partners. Such agreements include open capacity, beyond and intermediate rights, safety, security, environment, competition and investment provisions.

Investment

The recent growth in Canada-Australia FDI suggests that there are relatively few restrictions on foreign investment. However, both Australian and Canadian investors have expressed concern about the lack of transparency in the review of substantial foreign investments, including mergers and acquisitions. The discretion available to the two governments in reviewing investment proposals reduces the predictability of investment review and increases “sovereign risk”.

As well, some Canadian investors are concerned about the possible introduction of investment restrictions on sovereign wealth funds (pursuant to a review now being conducted by Australia’s Senate Standing Committee on Rural Affairs and Transport). Such policies might affect investments by pension funds owned and managed by Canadian provinces. Canadian provincial pension plans are significant investors in Australian assets and are interested in expanding their positions.

Long lead times and substantial resource commitments are necessary in the preestablishment phase of investments in the minerals and agriculture, infrastructure and financial services sectors. These sorts of investments are extremely sensitive to perceptions of sovereign risk.

Canada recently announced its intention to increase the threshold for review under the Investment Canada Act from the current level of C$330 million to C$1 billion over six years. This will reduce the perception of risk and will bring Canada’s threshold roughly into line with the threshold that Australia now provides preferentially to both the United States and New Zealand (approximately AUD$1 billion).

If and when Canada implements this increased threshold, Australia should extend its preferential review threshold to include Canada. These preferences could be spelled out in a bilateral agreement similar to the Australia-New Zealand Investment Protocol signed in February 2011.

In addition, consultations between the two governments could eventually ease direct restrictions applying to certain sectors and improve the transparency of review of bilateral proposals related to the purchase of existing businesses, the value of which exceeds the review threshold in the other country.

Bilateral Tax Treaty

Canada and Australia signed a double taxation agreement in 1980 that was updated and amended in 2002. In 2009 the two countries launched a consultation process for negotiations towards a modernized tax treaty. Our governments should commit to completing these negotiations at the earliest opportunity.

Labour Mobility: intra-company transferees

Given the importance of investment to Australia-Canada commerce, it is vital that each country take steps to facilitate the movement of personnel between corporate offices. Australia and Canada have uncapped employer-sponsored temporary foreign worker programs that are used primarily to meet domestic labour market needs. A small percentage of temporary foreign workers are transferees within multinational firms. However, regulations pertaining to the temporary relocation of personnel within corporations tend to be no less complicated than those associated with permanent migration.

Canada’s terms for intra-company transfers of personnel are less onerous than its general rules. No labour market opinion is required and the length of stay is five years for technical (“specialized knowledge”) staff and seven years for senior executives or

managerial staff. However, the initial work permit is issued for only one year; renewals require a stay outside of Canada. Australia similarly waives its labour market test for intra-company transfers but the permitted length of stay is four years, the same limit that applies to temporary workers brought in for domestic labour market requirements.

We recommend, at a minimum, that Australia adopt Canada’s extended terms. Such a change would benefit Canadian firms operating in Australia.

Short-term Business Travel

Australia is a full member of the APEC Business Travel Card program, which was designed to provide business travelers with streamlined entry to the economies of the Asia Pacific region. Canada is only a transitional member, meaning that card holders are entitled to use special service lanes at major international airports upon arrival in Canada, but are still subject to regular entry/visa requirements. Canada’s full accession to the program would facilitate Canadian and Australian business travel. For example, several Canadian executives who travelled to Australia to pursue or conclude substantial business agreements reported disrupted travel plans due to the restrictions associated with Australia’s 30-day “tourist” visa. Had Canada been a full member of the APEC Business Travel Card program, these executives would have been able to take advantage of the APEC Card’s 60- to 90-day visa. The same considerations apply to Australian APEC Card holders who enter Canada to conduct business.

Youth Working Travel

The conditions imposed on youth travel vary considerably. Matching the best terms provided by either Australia or Canada could be a long-term catalyst for Canada-Australia commercial relations. In particular, where Canada offers a two-year term of stay, Australia provides for a renewable one-year stay but with impractically restrictive conditions (see reports for further details). We recommend that Australia waive these requirements and extend the term to two years, matching Canada’s terms.

Government Procurement

Canada extends to WTO Government Procurement Agreement (GPA) members the same commitments made in respect of provincial and territorial commitments under the Canada-United States Government Procurement Agreement as well as its NAFTA procurement commitments in respect of federal Crown corporations. Since Australia is not a party to the GPA, it is not entitled to Most Favoured Nation (MFN) treatment.

Australia also provides less than MFN treatment to Canada. Australia’s rules generally prohibit discrimination against potential suppliers due to their degree of foreign affiliation or ownership, location or size. However, the specific measures to ensure nondiscrimination against SMEs are limited to Australian and New Zealand firms. Government procurement has been identified as a priority sector in Australia-Canada trade. We recommend full MFN treatment of government procurement policies.

Summary

Working within the established institutional framework for the bilateral relationship, there are a number of areas where policy adjustments could enhance the relationship:

1. Eliminate tariffs on bilateral trade, including in the agricultural sector, and applying non-restrictive rules of origin to facilitate the use of preferences;
2. Establish a bilateral framework for consultations and cooperation on bio-security measures to reduce the commercial impact of existing risk-mitigation measures and to provide advance-notice of concerns that might lead to new measures;
3. Enter into a competition policy agreement that suspends the operation of antidumping laws in the bilateral relationship;
4. Develop a formal dialogue between Canada and Australia to facilitate mutual professional accreditation, following on from the recent Public Policy Forum dialogue;
5. Update the bilateral air services agreement with a higher level of ambition;
6. Enter into a bilateral investment agreement that delivers most favoured nation treatment for Canadian and Australian investors;
7. Conclude negotiations to modernize the bilateral tax treaty;
8. Negotiate a labour mobility agreement;
9. Negotiate a government procurement agreement that provides Australia and Canada MFN treatment.

In addition, on a unilateral basis, the two countries could facilitate commerce in the following areas:

10. Canada should commit to fully participate in the APEC Business Travel Card program.

11. Australia should liberalize the terms of its youth working holiday program for Canadians by extending the term to two years and/or waiving the requirement for “specified work” in rural areas as a condition of re-application.

Policy entrepreneurship needed to achieve greater ambition

The above measures would provide a tangible boost to the bilateral relationship. It is however possible to think more ambitiously about this relationship.

The many similarities between our economies mitigate against many of the controls that nations put in place at their borders to prevent exploitation of differences across economies (for example, in wage levels, social security benefits and regulatory safeguards). Meanwhile, distance serves to minimize incentives to exploit such differences.

Many of the current rules and controls that apply in a regional or multilateral context may not be necessary in the Canada-Australia context. Trial pilot projects to harmonize or align such rules and controls, via Memoranda of Understanding, would facilitate bilateral commerce. For example, Canada and Australia could waive their detailed controls on intra-company transfers of staff. The gains resulting from full implementation of these pilot projects would increase each country’s competitiveness.

Comprehensive reforms of Canada’s supply management system are needed to overcome barriers to entry and innovation, and to reduce costs for consumers. The Trans Pacific Partnership (TPP) represents the ideal forum in which Canada can address agricultural access issues as part of an ambitious agreement to enhance trade and investment. Moreover, the TPP provides a framework within which all members can pursue the vision of a free trade area of the Asia Pacific. Ai Group and the CCCE support Canada’s entry into the TPP to further enhance the bilateral trade relationship, and as the best means to ensure ambitious reforms in other areas on a regional basis.

We are committed to moving forward on the short-term bilateral trade and investment agenda, and to providing private sector leadership over the longer term in support of a much closer partnership. This joint statement, and our commissioned research, represent a starting point for discussions at the next Australia-Canada Economic Leadership Forum, to be held in Toronto in July 2012. A Working group established by this Forum will help build a stronger Australia-Canada bilateral relationship.