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Canada-Australia commerce: enhancing the relationship

A report for the Canadian Council of Chief Executives

by
Dan Ciuriak – Director and Principal, Ciuriak Consulting Inc.

Executive Summary

Canada and Australia are highly similar economies in terms of size, wealth, governance systems, most observable socio-economic characteristics, resource endowments and specialization in international trade. To the extent that countries trade because they are different, this works as a disincentive to deepening trade relations. Yet there are important sources of gains that flow from these very attributes: the similarities of consumer preferences come with complementarities in opposite seasonality, the similarity of export engagement comes with complementarity in time zones, the similar output structures come with similar needs for specialized inputs and producer services, and the overall degree of socio-economic similarity lowers the risks associated with bilateral liberalization.

The commercial relationship is stronger than often thought

Cross-border merchandise trade is well balanced at about US$ 1.8 billion in each direction in 2011 (measured using each country’s import data), but represents for each country only a modest share of its global trade.

Services trade is more important in this bilateral relationship than it is in either country’s global trade. While the scale is modest—Canada’s 2010 exports to Australia were about $US 800 million, while Australia’s exports to Canada were about $US 527 million—the services share of bilateral goods and services trade is close to double that in Canada’s and Australia’s global goods and services trade.

Investment is by far the most important feature of bilateral commerce. Both Canada and Australia have global direct investment (FDI) stocks that are larger than annual global exports of goods and services. For Canada, in 2010, the stock of investment was 1.55 times the size of global exports of goods and services; for Australia, the comparable ratio was 1.31. However, in the bilateral relationship, these ratios are about an order of magnitude larger: for Canada the ratio of direct investment in Australia to its exports of goods and services to Australia in 2010 was 8.7; for Australia the comparable figure was 13.1.

While foreign affiliate sales data are not available on a bilateral basis, applying the global average of a $1.67 in foreign affiliate sales for $1.00 in FDI, foreign affiliate sales in 2010 may be estimated at US$ 36 billion for Australian firms in Canada and US$ 25 billion for Canadian firms in Australia. Seen this way, the relationship suddenly looks neither small—US$ 65 billion in two-way trade plus foreign affiliate sales—nor lagging in growth.

The number of Canadian firms exporting to Australia, as recorded in Canada’s Exporter Registry, 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 was reported by Austrade to have been about 2,000 in 2008, or about 2/3 as large a number. The investment figures suggest that many firms have also established a commercial presence. Accordingly, there is an expanding base of business with an interest in the policy environment. The establishment of the business Leadership Forum in 2010 is no surprise in light of these findings; governments need to take note.

At the policy level, this bilateral relationship has not received as much attention in recent years as have others. Given their expanding web of free trade agreements, Australia and Canada now provide each other less than “most favoured nation” treatment in many areas. There is some evidence that this matters: for example, the introduction and survival rates of Canadian products in the Australian market following the AUSFTA fell off sharply.

Examining the range of bilateral instruments affecting the commercial relationship, the present study suggests that there is considerable potential for policy to further boost the strength of this relationship.

Trade in goods

Both countries have several thousand tariff lines in place against each other of 5% or higher. Tariff elimination alone could boost bilateral goods trade by about US$520 million, or by about one-sixth. Given the modern “made in the world” paradigm for goods production, restrictive rules of origin for tariff preferences would largely defeat the purpose of tariff elimination, especially for relatively low tariffs. Accordingly, for the above-mentioned potential gains in trade from tariff elimination to be actually realized, an accommodating approach to rules of origin would be required. Some additional boost to trade would be provided even for goods that are presently not subject to tariffs from the various facilitative measures that typically accompany tariff elimination.

The assessments of market potential by the official trade promotion agencies also suggest there is room for further development of trade in various sectors of particular interest, including (in terms of Canada’s export interests) 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); and (in terms of Australia’s export interests), environmental goods, mining and oil & gas technology, and wine.

In the non-agricultural sector, non-tariff barriers appear to be low. Both Australia and Canada are active in aligning standards internationally and have MRAs in some conformity assessment areas. Since both countries appear to be at the leading edge of efforts to reduce barriers in this area, significant scope for further enhancement of the commercial relationship on a bilateral basis does not likely exist.

In the agricultural sector, however, Canada’s supply-management system, particularly in the dairy sector, and Australia’s quarantine regime, which it maintains to protect its unique ecology from risk of entry of non-indigenous pests and plant and animal diseases, pose very high barriers. Australia’s export interests in dairy could be accommodated by Canada without disrupting its overall supply management system by extending an increased quota to Australia. Given the opposite seasonality, the quota arrangement could be structured on a seasonal basis so as to reduce inventory costs in Canada. Whether it is possible for Australia to accommodate Canada’s export interests in areas such as beef, pork and salmon, where would-be Canadian exporters have been thwarted in the past, is difficult to assess. Australia has brought its risk assessment for agricultural commodity imports into apparent conformity with SPS rules; since these rules allow Australia to set very high standards, it would be inconsistent for Australia to relax these on a bilateral basis. That being said, inter-governmental cooperation appears to have led to the identification of less trade-restrictive ways to handle Australia’s legitimate biosecurity concerns in a number of areas. A similar process adopted in the Australia-Canada relationship could also potentially facilitate market entry for Canadian agricultural products into Australia’s market while meeting Australian prudential concerns.

Services trade

Applying commonly used techniques, the analysis suggests that bilateral trade could be increased by US$343 million or by over 50%. Given the difficulty of tying trade impacts to specific regulatory measures, this result is subject to greater uncertainty than the estimates for goods trade and must be treated with appropriate caution.

One specific area where cross-border services trade can be improved is through a modernized air services agreement that provides the best possible travel opportunities for business, tourism and personal reasons. An agreement with a high level of ambition in terms of the “freedoms” of competition covered would also have the potential to increase competition and efficiency in both the Australian and Canadian air services markets.

Moreover, some degree of services trade expansion may be expected from service trade related to expanded goods trade, progress on mutual recognition of qualifications, and improved access to government services procurement opportunities.

Investment

Generally there are minimal hurdles for Australian and Canadian companies seeking to invest in each other’s economies and thus limited scope to enhance the relationship in this area.

One notable imbalance concerns the threshold for review of inward investment. Australia applies a higher threshold for New Zealand and US investors than for Canadian investors. When Canada implements its commitment to raise the threshold for review of inward investment, Canada will be applying a threshold to Australian investors comparable to that which Australia applies to New Zealand and US investors. Accordingly, a bilateral investment agreement that achieves MFN treatment for Canadian investors in the Australian market has some potential to facilitate bilateral investment.

Further, modernization of the bilateral tax treaty to bring it fully up-to-date and, to the extent appropriate, aligned with the updated model OECD code, was identified as a useful facilitating measure.

Labour Mobility

Given the importance of investment to bilateral Australia-Canada commerce, facilitating the movement of personnel between corporate offices is clearly an important way to reduce deadweight procedural costs. Both Australia and Canada have uncapped employer-sponsored temporary foreign worker programs, primarily to meet general domestic labour market needs. While only a small percentage of temporary foreign workers are transferees within multinational firms, the close connection between temporary movement of personnel and immigration attracts the panoply of regulation associated with permanent migration.

Canada’s terms for intra-company transfers are less onerous than its general rules: no labour market opinion is required and the length of stay is also longer—5 years for technical (“specialized knowledge”) staff and 7 years for senior executives or managerial staff, although the initial work permit is issued for only 1 year and renewal of a permit requires a stay outside of Canada. Australia also waives a labour market test but the permitted length of stay is 4 years, the same as for temporary workers brought in for domestic labour market requirements. Reciprocation by Australia of Canada’s terms would represent a benefit for Canadian firms operating in Australia at no risk to Australia.

Mutual recognition of qualifications between professions in Canada and Australia is an area which business has identified as important in facilitating bilateral commerce. In this regard, a recent assessment by stakeholders from Australia and Canada noted a “skewed reciprocity”, with Australia facilitating immediate access to practice for Canadian-qualified professionals in a number of fields, while Canada has been less forthcoming. A review of the system for rrecognition by Canadian jurisdictions of qualifications acquired in Australia thus appears to be a way to further improve the bilateral relationship.

In a similar vein, Canada fully acceding to the APEC Business Travel Card program, in which Australia already is a full participant, would facilitate business development travel for both Canadian and Australian business travelers.

Finally, the conditions imposed on youth travelers vary considerably in stringency. Matching the best terms provided by either would be a way to provide a gentle long-term boost to Canada-Australia relations.

Government Procurement

In the revised WTO Government Procurement Agreement, Canada extends to other GPA members the same commitments it has made in respect of provincial and territorial commitments under the Canada-United States Government Procurement Agreement as well as under the NAFTA procurement measures in respect of federal crown corporations. Since Australia is not a party to the GPA, it gets less than MFN treatment.

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 non-discrimination against SMEs are limited to Australian and New Zealand firms. Accordingly, in this respect Australia provides less than MFN treatment to Canada.

Government procurement has been identified as a priority sector in Australia-Canada trade; there is a basis for improvement of the bilateral commercial relationship by full MFN extension of government procurement policies on a bilateral basis.

Competition Policy/Trade Remedies

The relationship between the Australian and Canadian competition authorities is very well developed. Indeed, the strength of this relationship makes it feasible to contemplate another step in the direction of creating a seamless operating environment, namely replacing antidumping with competition policy measures in the bilateral relationship. Antidumping investigations in respect of Australia-Canada bilateral trade are rare (only eight investigations were initiated over the last two decades, seven by Australia and one by Canada, resulting in duties being applied in four cases, only one of which is still in effect). Accordingly, the main impact of such a step would be to reduce uncertainty about market access.

Small and medium-sized enterprises

Finally, given the expansion in the number of firms engaged in cross-border trade in the Australia-Canada bilateral relationship, it can be straightforwardly concluded that the vast majority of new entrants are small or medium- sized enterprises. The facilitation of bilateral market access thus represents a very significant boost to potential growth for individual small and medium-sized exporters, particularly those serving niche markets where the similarity of tastes between Australia and Canada will work in their favour. Accordingly, concerted efforts by governments to remove barriers to bilateral commerce in this relationship should be seen as benefitting primarily small and medium-sized enterprises.

Summary

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

  1. Eliminate tariffs on bilateral trade, accommodating Australia’s dairy interests through an expanded quota, and applying non-restrictive rules of origin. This would boost two-way trade in goods by about one-sixth and would likely leverage associated gains in services sectors even without explicit measures in the latter sector.
  2. Update the bilateral air services agreement with a high level of ambition in terms of the “freedoms” of competition covered.
  3. Enter into a bilateral investment agreement that achieves MFN treatment for Canadian and Australian investors in terms of the level of investment subject to policy review.
  1. Conclude the negotiations to modernize the bilateral tax treaty to bring it fully up-to-date and, to the extent appropriate, aligned with the updated model OECD code.
  2. Enter into a labour mobility agreement that offers each other the best terms currently on offer by either on a bilateral basis for intra-company transfers and youth working holiday programs.
  3. Enter into a government procurement agreement that provides each party MFN treatment.
  4. Enter into a competition policy agreement that suspends the operation of antidumping law in the bilateral relationship.

In addition, Canada could potentially boost the relationship with unilateral action in a couple of areas:

  1. Review the process for recognition of qualifications acquired in Australia by Canadian jurisdictions to remedy the apparent “skewed” nature of reciprocity in this area.
  2. Expedite its full participation in the APEC Business Travel Card program.

A Bolder Vision

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

Canada and Australia represent a special case. The similarity in size and wealth of the economies, as well as in socio- economic characteristics and governance systems, can serve as a natural replacement for many of the controls that nations put in place at their borders to prevent exploitation of large differences in these regards—of different levels of wages, of social security benefits, and of regulatory safeguards. Meanwhile, distance serves to minimize incentives to exploit marginal differences in these regards. The many similarities between Canada and Australia, both in current circumstances and in historical evolution, have made them a staple for comparative studies; thus, there is both depth and breadth of mutual understanding of each other’s economy and society. Finally, inter-governmental cooperation is well with developed with inter-agency contact being routine; in consular affairs, both countries already extend services to each other’s citizens in many third countries.

The basic framework for deepening economic relations involves putting in place the “four freedoms” of free circulation of goods, services, capital and labour. The relevant thought experiment is thus as follows: are there low-cost, informal measures that Canada and Australia could contemplate that would move the relationship in this direction, extracting the major part of the benefits, without incurring the governance costs associated with establishing formal frameworks?

  • For goods trade, this might be accomplished through the following:
    • Tariff elimination.
    • A very relaxed approach to rules of origin, e.g., allowing goods to qualify for mutual preferential access simply on the basis that they can legitimately claim, under the respective domestic laws, to be “Made in Australia” or “Made in Canada”.
    • A negative list approach to standards, under which areas where standards involve genuine differences (e.g., quarantine products) remain subject to controls but it is left to the market to determine which products put on the market in one country can find markets in the other.
    • Customs cooperation between Canada and Australia to put in a place a low-cost, risk-based approach to the Authorized Economic Operator system that is being implemented in the context of the World Customs Organization.
    • Suspension of antidumping in bilateral trade.
  • For services trade, the most important element for freedom of movement of services—the right of establishment—is already effectively in place. Cross-border business services that can be provided on a contract basis over the Internet were never subject to regulation and hence are also effectively open. Effectively free circulation could be approached by implementing the measures discussed above, namely:
    • Effective reciprocity by Canada to Australia’s ready acceptance of Canadian qualifications.
    • National treatment in government procurement for services.
    • A blue skies agreement with the maximum “freedoms”.
  • For investment, free circulation is effectively in place for most intents and purposes. A bilateral investment agreement that achieves MFN treatment for Canadian and Australian investors in terms of the level of investment subject to policy review, as recommended above, would round out the package.
  • For labour, Canada and Australia , safe in the knowledge that people are not moving because of massive wage or social security differentials, could waive the detailed controls on labour movement and replace them with the "good hospitality" policy that both countries normally apply to each other’s citizens in all other matters.
  • To make this truly effective, Canada’s internal inter-provincial and Australia's internal inter-state agreements on recognition of qualifications could be extended to each other’s sub-national jurisdictions through the familiar processes that both countries have put in place for internal market purposes.
    • For companies doing business bilaterally, the removal of all red tape for business visits or for intra- company transfers of staff would provide a seamless operating environment.
    • For both labour markets, job-mismatch unemployment could be reduced.
    • For young travellers working to supplement their resources, the experience of each other’s country would come without procedural costs.

Many of the rules and controls that apply to bilateral commerce might never have occurred to governments to put in place were these the only two countries to which the rules would apply. By the same token, informal arrangements, based on a handshake with a likeminded partner, might facilitate bilateral commerce. Arguably Canada and Australia are better placed than perhaps any other two economies to try such an experiment. While the gains from improved resource allocation that this would allow would be moderated by the scale of bilateral trade and investment, they would by the same token come without adjustment shocks.

Canada has announced its intention to enter into the Trans-Pacific Partnership negotiations; if realized, this entry would provide the opportunity and framework to explore low-cost and informal ways to deepen the bilateral economic relationship to mutual benefit.