FTA vs PBS as the election issue

It’s looking increasingly possible that the conflict between the Pharmaceutical Benefits Scheme and the US-Australia Free Trade Agreement will become the central issue of the election. It is also increasingly apparent that, contrary to all the reassurances we got when the agreement was announced, that the FTA and the PBS are in mortal conflict, and that only one of the two can survive.

Today’s developments include a statement from US Ambassador Schieffer that the US may not certify that our legislation implements the FTA and more commentary from sources close to the government, all suggesting that this is a really big deal.

Reading Christopher Pearson’s column in particular, it is notable how thoroughly it undermines the claim that the FTA presents no danger to the PBS. He talks about the remedies available to the US in relation to Labor’s amendments. In addition to the possibility that the Americans will walk away from the agreement altogether, he points out two further possible courses of action.

The second aspect of the amendments likely to cause concern is that trade agreements are negotiated on the basis of “standstill”. In other words, once an agreement is reached, the parties are expected not to introduce legislation that would alter their relative positions.

Finally, the Americans could argue that the amendments are likely to give rise to a dispute under the “reasonable benefits” clause, in the event that their drug companies are unable to realise benefits that they anticipated would flow from the agreement.

What’s critical to note here is that these points have nothing to do with the specific content of Labor’s amendments. They apply to any legislation concerning the PBS that an Australian government might seek to introduce in the future and, arguably, to any administrative decisions made by Ministers. If Pearson is correct[1], the FTA gives the Americans an effective veto power over anything we might attempt to do to improve the functioning of the PBS. It’s notable that Pearson’s points are almost identical to those that have previously been made by critics of the deal, and pooh-poohed by the government.

It is critical, in both policy and political terms, for Labor to hold its ground. Even without the threat to the PBS, this was a lousy deal. If the Americans refuse to certify, Labor should announce its intention to renegotiate the entire deal, this time on equal terms.

fn1. Pearson is clever and well-informed, but he’s never shown any previous knowledge of international treaty law. In the absence of references to independent experts, I think it’s reasonable to take these claims as coming from sources inside the government.

16 thoughts on “FTA vs PBS as the election issue

  1. I haven’t listened to everything Tony Abbott has had to say on the subject of the FTA and its planned and potential effects on the PBS, but he seems to want to reassure people that “nobody will pay any more for their PBS prescription drugs under the FTA” or words to that effect.
    What I haven’t heard him address is the matter of the effect of the FTA on the price to the public, aka taxpayers, of the running of the PBS.
    The drug companies will be perfectly content to have no Australians paying more individually for their PBS listed prescriptions – just so long as the mug taxpayers are picking up the bill via the PBS.
    Perhaps I’ve missed it but, if it’s in fact the case that Abbott for one has been being clever with his words – why haven’t the opposition parties been quoted, calling him on it?

  2. I’ve had the same thought, Frankis. I’m also surprised Labor hasn’t pushed harder on this point.

  3. The developments are interesting John, yet somehow the idea of the Americans knocking back such a good deal (for them) just doesn’t add up – unless they have grown contemptuous, assuming they can have whatever they like (don’t know where they could have got that idea!).

  4. I like CS’s remarks. Is it true that, as far as Australia is concerned, “We wouldn’t want be a member of any club that wouldn’t accept us as a member”? If the US refuses to agree to the FTA over primarily the PBS issue, it does look suspiciously like they expected to make big gains with respect to the PBS. So, unless we assume the US has it wrong, perhaps we should think twice about the FTA in this regard

    Alternatively, the US is playing politics with respect to the Australian election and targeting Mark Latham. It will then cave in and endorse the FTA eventually. Alternatively, it is fine-tuning just as we are.

  5. I agree with all the above. When the US said they were considering their position I thought it inconceivable that they would fail to certify the agreement. They’ve got us on toast and will never negotiate a better agreement with any country except those they can bully and ride roughshod over.

    Maybe they are concerned about the other “safeguards” that Labor has promised to bring in if elected and are waiting to see who wins the election. Try this one for size:

    The Terms of Reference of the Medicines Working Group will include a commitment to the principle of universal access to affordable medicines. The Medicines Working Group will not consider any policy issue that could be seen to undermine the principle of universal access to affordable medicines. The Medicines Working Group will operate with appropriate transparency in regard to agenda items, minutes and recommendations.

    This is heresy to Big Pharma and similar words were specifically rejected by the US negotiators according to Brian Toohey about a week ago.

    There is a listing of the Labor safeguards in AFTINET Bulletin no. 100. This is currently here but when Bull 101 comes out will move to here.

  6. Some interesting comments…
    But I can’t help but make a big point on the lack of scrutiny and even knowledgeable discussion on the FTA.

    We never expected mouthpiece “economic analysts” in the media to do much but where have “Economists” and “Academics” been? The only ones to comment knowledgeably have been IP specialists and LAWYERS!

    I think that radical left wing fanatic Ross Gittings (NOT!) was the only one to even engage with very real prospect of the FTA becoming a “legal straight-jacket”, restricting our future options and giving away a piece of our sovereignty.

    “Selling off a slice of our country”:

    Let’s not even talk about economic benefits, as these tend to suit whoever is paying for the study…

    I feel it’s a generational thing. Most economists have never even heard about IP impacts on the economy and even less about new technological developments that tend to shake those old assumptions of “scarcity” and opportunity costs in a knowledge economy, especially when it comes to Open Source software, “copy-left” and other fast changing areas.

    Be relevant and Wake up! or…

  7. The PBS shakedown, within the terms of the FTA, is just part of the comprehensive dominance of the market – indeed, dominance of the economy – that the Americans have tried to achieve in Australia – and many other countries – with such devices as the Treaty of Friendship, Commerce and Navigation and the FTA agreements since, at least, 1948.
    Except perhaps in the short term, these agreements have brought little advantage and caused a good deal of loss to everyone except the Americans.
    Whether it is by bullying or by more sophisticated negotiating talent or by playing on the greed and the celebrity – the renown – that an agreement with the United States is imagined to bring, the Americans regularly have a stronger hand than those “negotiating” across the table.
    As for Australia, we have always been a weak-kneed lot, whether it’s been with the United States, the European Union – with that lot, we lay down and begged them to walk all over us – or others.
    Sometimes we’ve given our market away for absolute free, as when Whitlam cut our tariffs unilaterally by 25% in 1974.
    But tariffs have lost much of their ancient force in the last thirty years. The monetary policies that we adopted from 1969 on did for our economy what similar policies have done for the United States economy over the same period – they have gutted our industries, especially manufacturing, and they have brought large and chronic deficits in our trade and payments.
    Those are the basic problems and our governments – not only the Howard Government, though its responsibility is of course greatest vis a vis the FTA – haven’t had sufficient perception even to identify them. Instead, they have tried to come up with gimmicks that will make the electorate think they have somehow found a magical solution to our chronic problems.
    The FTA has been one of the brightest of the bright ideas in this context.
    And, of course, given that context, the Howard Government negotiators couldn’t let the negotiations fail. They knew from the start that the Americans wouldn’t give much, if anything, on agriculture – though the Americans grabbed access from us – and that, on every article to which the Americans attached some value, they – the Australian negotiators – would have to be “flexible.”
    That has applied to the PBS and everything else.
    It’s the Australian form on trade and on economic negotiations more generally. We haven’t shown any real degree of independence in thinking and competently analysing situations to determine our own best interests in a well-regulated, stable world economy, since the years immediately after the Second World War and this postwar competence vanished from about the late sixties.
    Since then, we’ve done almost everything we could to disregard what are our real and fundamental economic interests and to promote the interests of others. We’ve seen countries match and surpass us whose competence, growth and living levels we patronised thirty years or so ago.
    At time of writing, Australia has won nine golds and is fourth in the total medals tally at Athens. Wouldn’t it be great, in the matter of economic policy and, more generally, in the game of negotiating in our fair and reasonable national interests, we could win one – just one – gold medal a little way down the track – say, under a new government in 2005? Perhaps we can hope although right now, any such hope seems to be pretty slim. The way it’s been up to now, I think I’d be prepared to settle even for just one and that not even gold. Even bronze would make for a marvellous change.

  8. James, I think some of your comments are misleading.

    A small open economy is not ‘giving our market away’ by making unilateral tariff cuts. In fact the conventional wisdom is that unless we can strategically affect other country’s trade policies a unilateral move toward freer trade benefits us. The idea is that even if the other country is silly enough to impose costs on itself through protection we are better-off moving toward free trade. It is true that politicians see opening markets as a concession that gives something way.

    If you accept this political logic (it is equivalent to mercantilism) then you get a basis for international agreements rather than possibilities for unilaterally improving the economy. Then most gains will go to the countries whose terms of trade change most with liberalisation — the small country. This puts the larger country in a relatively strong bargaining position. It is therefore not at all surprising that the US has demanded and obtained significant concessions in the recent FTA.

    The issue is whether the side payments the US have demanded outweigh the benefits to Australia. The doubts the US are posing with respect to the FTA in turn raise doubts about this latter issue.

  9. I’ve been disappointed there hasn’t been more discussion of Peter Brain’s study, done under the rubrik of the National Institute of Economic and Industry Research (NIEIR). Sure it was done for the AMWU, but Brain has always regarded manufacturing as important and impresses me with his integrity.

    Brain’s main concern is that our recent industry policy, or lack of it, is effectively a policy of deindustrialisation or what he calls ‘pastoralisation’ ie. dependence on mining, agriculture and tourism.

    He reckons we have a trade deficit of knowledge-based goods equal to 10% of GDP and growing.

    The big problem with the FTA, he says, is our loss of sovereignty. The constraint on industry policy at a national and subnational levels will lock us into the present drive towards pastoralisation.

    Brain has sometimes said we should export some of our politicians and import some different ones who understand what policies are required for economic development. His report contains an interesting chapter (7) on “The current drivers of growth in industrial economies”.

    There is a link to a pdf file from the home page of AFTINET or download it directly by clicking here.

    I’d love to know what John and other economists think of Brain’s analysis, leaving aside his modelling of costs and benefits. I’ve only seen two references to it. Tim Colebatch in The Age seems to agree but thinks he’s whistling in the wind.

    Glen Milne sools that well-known intellectual Alan Oxley onto him who blows Brain out of the water with economic arguments such as “piffle!”

    Brain is not against trade, but he believes we are not ”free-trade and free-investment ready” for an AUSTFA type agreement. I haven’t asked him, of course Harry, but I don’t think he’d accept a general notion that openness is always for the best. His emphasis seems to be on balanced development, proactive industry policy and investment in infrastructure, R&D, industry clusters and networking, especially in strategic industries. Trade, yes, but not as a frontline industry development strategy.

  10. spaeaking as a person who doesn’t favour the PBS, free markets and all that sort of thing, the Yanks are stark staring mad if they think they will bludgeon Australia to accept the restricted trade agreement without the ALP caveat legislation.
    Asutralians love their PBS. Remeber also the only part of the population that votes continually for Howard is the over 55s.

    Who benefits most from the PBS?

  11. The US Govt. would not necessarily be foolish to cavil at the ALP amendments to an agreement still so advantageous for them (see CS and Brian Bahnisch above) if they saw it as a precedent for other agreements. The Four Corners program on the FTA of 3-4 weeks ago made this point strongly. Negotiators can be much more picky over a precedent-setting agreement than a one-off agreement.

  12. I think the secret may be out. This is a quote from Allesandra Fabro and Mark Davis, ‘US drug lobby baulks at FTA revisions’ AFR August 23, 2004 (subscription required):

    A senior official with the influential US lobby group, the Pharmaceutical Research and Manufacturers Association (PhRMA), told The Australian Financial Review he was surprised the changes to Australian patent law had been pushed through parliament so quickly.

    “One would have to worry about the stability of investments and research in a place where change can happen in such an apparently fast and loose manner,” said PhRMA’s deputy vice-president international affairs, Joseph Damond.

    “It will probably make research-based pharmaceutical and biotech companies wonder how committed Australia really is to attracting investment and research in this sector.”

    I understand that Big Pharma has 600 lobbyists in Washington. Prof David Henry told Phillip Adams recently that Big Pharma owns the US government, which is part of its marketing arm.

    While this is a bit extreme, it is true generally that most countries in trade negotiations do what is in the interests of their major corporations. The EU certainly does, as do the more corporate governments in Asia. Australia, New Zealand and maybe Canada are among the few who act against the interests of their corporations (Australia’s fossil fuel companies are perhaps an exception).

    In fact we are now being asked to act in the interests of foreign corporations against our own public interest.

  13. Brian, Prof. Quiggin made a similar point back on Feb. 10 this year (“Free Trade or Economic Integration?”) when he said: “The second issue, thrown into relief by the FTA negotiations is whether it’s a good idea to let our economic institutions to [sic] be determined by a government that is responsive to American interest groups, but not concerned with the welfare of Australians.”

    However I think excessive awe of the US is only part of the explanation for Australian mainstream parties’ attitudes. Peter Brain, in his report on the FTA for the AMWU (referred to in your comment above, and thanks for the link) probably explained the Liberal attitude when he referred to the “pastoralisation” of the Australian economy which he sees resulting from abandonment of industry development as a Government objective. I have long suspected this to be quite deliberate.

    I will venture a generalization: Oz is seen simply as a “hole in the ground” by most of our policymakers, and virtually all policymakers on the Right. As far as the “welfare of Australians” referred to in the quote above is concerned, the attitude probably is that talented Australians will get good jobs overseas or running multinational branch offices here, and the remainder don’t count.

    Frankly, I don’t see this attitude being reversed any time soon.

  14. Gordon, thanks for the interest. Sometimes I feel lonely!

    I don’t think our policy of pastoralisation is deliberate as such. It is a de facto policy when we are espousing a ‘let the markets determine what happens’ policy (except when we hand out gooly to interests that are electorally important.)

    I found Philip Toner’s ‘Lies and statistics’ column in the weekend AFR chilling (subscription required.) He has ETMs growing at 17.5% pa in the seven years to 1995-96 and at 3.6% thereafter. He has the trade deficit in this area at $75.4 billion pa. Exports in ETMs have declined by 10.4% in the two years from 2000-1, while imports have increased by 10.6%.

    I’m not prepared to fold the tents, however. Maybe we can do an Ireland on the edge of a large economic block. We’d need to capitalise on our bilingual Asian population, though. I recall an article some time ago that said if you spoke a foreign language fluently then statistically you were less likely to get a job. Not sure that was any foreign or Asian specifically. Most of all we need is an attitude change.

  15. Cameron, I could think of a lot of things. One would be a change to the approach to industry policy which seems to be largely hands off by government, and to the notion that the cold wind of maximum competition will give the best results in all cases.

    To be honest when I wrote that I was finishing off the para. What I was thinking of was our attitude to our own Asian population and using them more proactively in interacting with Asia.

    From memory the report that talked about foreign languages said that firms/organisations with Caucasian bosses trying to get into Asia tended not to trust Australians of Asian origin.

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