Fran O'Sullivan: Have we got moos for EU

Global food giants like Nestle, Cargill and Kraft get an easy ride from the World Trade Organisation, which is more prepared to put the activities of dairy co-operative Fonterra under the microscope than corporate power.

That's the bottom-line when you strip away all the well-meaning, national-oriented terminology: The WTO is basically a playing field which competing commercial interests will attempt to tilt in their favour.

After six days of round-the-clock negotiations in Hong Kong, the focus of the European Union - which is home to many major companies that dwarf New Zealand's so-called dairy giant - was still on attacking state-trading enterprise (STE) privileges, not the privileges of the many transnational giants that have been spawned since the EU was formed.

The problem of Fonterra is its success. It has significantly increased its share of the global dairy trade since the 2001 merger that brought together the Dairy Group, Kiwi Co-op and the Dairy Board to create a more efficient and market-oriented organisation big enough to take on global heavyweights.

WTO boss Pascal Lamy, who formerly represented the European Union in WTO negotiations, mounted a spirited attack against Fonterra when I interviewed him at his then Brussels headquarters two years ago. He's clearly an honest broker.

But he also has to ensure the EU "gets paid" in return for giving up its export subsidies.

The draft ministerial declaration agreed late on Sunday in Hong Kong is reasonably specific.

As a means of ensuring that trade-distorting practices of STEs are eliminated, disciplines relating to exporting STEs are intended to stop them using monopoly powers to circumvent rules on export subsidies, Government financing and the underwriting of losses.

The battle is on.

Trade Negotiations Minister Jim Sutton stoutly defended Fonterra in repeatedly arguing that a farmer co-operative was not a state-trading enterprise, nor was it supported by Government subsidies.

There are plenty of people who claim Fonterra is a state-trading enterprise that channels taxpayer funds towards the kiwi dairy farmer in a circuitous manner.

His counter-argument is that dairy farmers are proud they are not subsidised.

Unfortunately for Fonterra and the Government, the issue is not as obvious as the dairy sector would make out.

The EU argues that New Zealand, Canada and Australia have helped their state-trading enterprises secure a dominant share of the global market for these countries (up to 30 per cent share in global exports), which allows them to distort international trade markets.

The EU maintains these STEs can be private enterprises, albeit with artificial protection from market forces, saying they benefit from a wide range of Government-backed privileges, the most important of which are monopoly powers such as exclusive export rights.

Such governmental privileges not only confer huge financial benefits but also distort global agricultural trade.

On the surface, the claim is an absurdity.

Fonterra is a private co-operative, not a Government-trading enterprise.

But under WTO rules, the distinction is not so clear cut.

A report by Grey, Clark, Shih and Associates - acting for Canadian dairy interests - is still cited even though debunked by Fonterra.

It argues that through Fonterra, New Zealand provides export subsidies to support the sale of its dairy products, saying Fonterra was established as a de facto export monopoly because it was an export-oriented company and was intended to continue as an export-oriented company.

To ensure that Fonterra would have the greatest ability to sell on to the export market, the New Zealand Government granted it exclusive access to (restricted) higher value markets for dairy products through Government export licences. To ensure that Fonterra could be established, the merger was exempted from the requirement for Commerce Commission review, which would have considered the competition aspects of the merger and which would have almost certainly rejected the proposal.

Fonterra's constitution requires that all dairy producers supplying Fonterra must be shareholders in the corporation and must supply all of their production to Fonterra for sale. As a result, Fonterra has effectively captured virtually all local dairy production. This action has been supported and condoned by the Government.

The combination of controlling virtually all dairy production and holding the exclusive right to access high-value markets, and continued support from the Government, has allowed Fonterra to cross-subsidise exports of dairy products.

Using the revenues generated in the high-value markets, Fonterra can sell into other more competitive export markets at lower prices. The lower prices offered by Fonterra are made possible by profits that it realises from its sales into the more remunerative protected markets.

As a result, the lower prices that it offers into the other markets are made possible through export subsidies.

That rationale is not attractive - but it still survives - and is the one that Fonterra (and New Zealand) must debunk in the next four months if the dairy co-operative is not to face constraints on its activities.

Sutton, performing his swansong as trade minister in Hong Kong, was like a pig in shit, said a private sector member of his team. With his departure date from the portfolio still not confirmed before he left for Hong Kong, Sutton was widely quoted in international newspapers, illustrating the reservoir of credibility he has built in international trade circles after six years in the job.

His namecard has become a collector's item. It's the same one he had before Prime Minister Helen Clark asked him not to stand for re-election to Cabinet.

But he had crossed out by hand all his previous portfolios (Agriculture, Biosecurity, Associate Minister for Rural Affairs) to just leave Trade Negotiations, so there were no misunderstandings.

Sutton will leave big shoes to fill.

The private sector lobbyists who were accompanying him have no doubt that Phil Goff has the political smarts and analytic ability to pick up the role quickly.

But there are reservations about the amount of time they believe he will be able to make available to push the New Zealand case in the many mini-ministerial meetings that will take place overseas next year to try to bring the WTO round to a conclusion by December 2006.

This is short-sighted.

Sutton went out of his way to blood Goff by taking him on at least one occasion into the critical green room talks where the WTO's heavyweight trade ministers thrashed out the bones of the draft declaration released on Sunday.

Goff should also be able to make a virtue out of the fact he is not a farmer, unlike Sutton, whose competitors argue he is talking his old book.

Not quite pat

* The EU argues New Zealand has helped its state trading enterprise secure a dominant share of the global market - thus distorting international trade.

* The EU says such an STE can be private enterprise albeit with artificial protection from market forces.

* Therefore, it benefits from a wide range of Government-backed privileges, the most important being monopoly powers such as exclusive export rights.

* Fran O'Sullivan attended the WTO round in Hong Kong.