O'Sullivan: War tradeoff tipped for talks

By FRAN O'SULLIVAN

Guns for Trade has never been at the heart of New Zealand's decision to stand shoulder to shoulder with the United States in the War against Terrorism.

This country has spilled blood in every major military conflict of the past century, bolstering the cause of freedom in the theatres of war in World War I, World War II, Korea, Vietnam, Bosnia and now Afghanistan - even if our Government still absurdly refuses to confirm the SAS's role in the current stoush.

But in two weeks' time the sensitive tradeoff will inevitably be raised, if obliquely, as Prime Minister Helen Clark becomes the first Labour PM since Bill Rowling to officially meet a sitting US President in Washington.

Clark has played down, wisely, the prospect of New Zealand quickly cementing a free-trade agreement with the US.

Such a deal has been on New Zealand's foreign affairs and trade agenda going back to Jim Bolger's time as Prime Minister.

There are many obstacles, not the least of which is New Zealand's small size and relative unimportance to US domestic interests.

US domestic politics have repeatedly intervened to hinder New Zealand's chances. Former President Bill Clinton was denied fast-track negotiating authority by Congress and, even though President George W. Bush narrowly got congressional approval for trade promotion authority, his decision last week to erect tariff barriers around the ailing US steel industry has caused a worldwide rethink of his free-trade credentials.

An outright global trade war is now in the making as the European Union threatens sanctions against US Government-subsidised airlines and Russia toys with a ban on "Bush legs" - US chicken legs which, it claims, are full of salmonella.

The issue has been referred to the World Trade Organisation by the EU, Australia and New Zealand, supported by countries including South Korea, Japan, Brazil and Russia.

In Geneva, other WTO members pilloried the United States for persisting with tactics, aimed at protecting ailing domestic industries, that have been routinely found illegal by WTO panels and judges.

"There is a reading [of WTO trade accords] that we may be entitled to compensation," EU Trade Commissioner Patrick Lamy said.

"If compensation is refused [by Washington], we may be entitled to retaliate."

The EU says it is the prime victim of the US measures and that its steel producers - mainly in Germany, Britain, France, Spain and Italy - could lose around $4.69 billion a year while the tariffs are in force.



But the WTO's wheels grind slowly. It is bound to rule against the US eventually - but American steel producers will gain a two- to three-year period of grace to restructure their industry while the WTO bureaucracy grinds on.

Bush has been slated as a hypocrite, a player who is happy to preach competition abroad but who will resort to protectionism for strong domestic interests - particularly in a year when congressional elections take place.

Clark will put the steel tariff issue on the agenda during her discussions with Bush.

Like Australia, New Zealand is hoping its own representations in Washington will enable the regional steel producer - BHP - to escape the tariff barrier.

That barrier - tariffs of up to 30 per cent on steel imports - is expected to be in place for three years. New Zealand's Glenbrook Mill, which exports steel worth $50 million to the US each year, will be affected.

But steel imports from the United States' Nafta partners, Canada and Mexico, will not be affected. Nor will those from about 80 developing countries.



Given that the US has already made some exceptions, Australia and New Zealand may well find themselves at the point where the "guns for trade" equation surfaces - if only in the minds of each Government's respective political opponents.

Australian Industry Minister Ian Macfarlane is adamant that "America for America" is the US bottomline in trade matters. Australia's steel exports to the US top $1.05 billion so it is a major issue for them.

Both countries are pursuing free-trade agreements. Clark is taking a "ready when you are" stance, whereas Australian Prime Minister John Howard is being more direct in his advocacy.

Bush's decision was not unexpected. The US International Trade Commission last year recommended tariffs of 20 to 40 per cent to help the steel industry.

At that time Greens co-leader Rod Donald was quick to slate New Zealand's hopes for a free-trade deal with the US as a "mirage".

The Greens want more Government focus on making the New Zealand economy more self-reliant through import substitution rather than pursuing bilateral trade deals.

Clark's exquisite difficulty is that, like Bush, she faces an election this year - one which on current poll trackings is likely to see the Greens replace the Alliance as the largest minority party.

That result should not hugely affect the Government's free-trade agenda.

There is bipartisan support across Parliament with both Labour and National supporting free trade.

Where the going gets difficult is that minority parties could question why New Zealand supports the US in its battle to squelch al Qaeda if nothing is offered in return.

It is politics at its most basic, but it can happen in election year. Ask Bush.

The wider concern from a global trade war is the impact on the post-Doha round of trading talks due to get under way at the WTO.

The trade organisation has put agricultural reform on the agenda.

If the EU and Asian countries retreat to narrow trading block alliances and erect their own protectionist barriers, New Zealand's hopes for significant reform will be dashed.

The big loser in any trade war will inevitably be the consumers.

Goldman Sachs estimates that crude steel production this year will be about 712 million tonnes. Some industry players believe that up to 100 million tonnes is excess production.

Both the US and China are net importers of steel. The US is forecast to import 23.5 million tonnes this year and China 25.1 million.

The major steel exporting countries are dominated by member nations of the old Soviet Union, with a forecast 53.4 million tonnes of steel exports this year, Japan (23.8 million tonnes), Brazil (7.8 million tonnes), the EU (3.8 million tonnes) and South Korea (2.8 million tonnes).

Foreign steel will be priced off the US market and has the potential to swamp Europe and Asia.

Opinion in the influential financial sector is firmly against Bush's actions. A poll in London's Financial Times found that 88 per cent of respondents believed Bush should have rejected protectionist measures on principle. Only 12 per cent thought Bush was justified in adopting steel tariffs regardless of any accusations of hypocrisy.

Former Australian Prime Minister Malcolm Fraser, writing in the Sydney Morning Herald, said Bush's decision had probably doomed Australia's hopes of concluding a trade deal to open US markets to Australian agricultural interests.

"Is it conceivable that a President who has just slapped punitive quotas on the importing of steel would risk the wrath of US farming interests in many major states which will be important to his re-election when the time comes?"

Fraser answered his question with a no.

"The US today is a unilateral superpower. It makes its decisions its own way with little regard for the opinions of friends or allies. On trade matters, hypocrisy has reigned supreme."

Washington policy wonks have taken issue with the Farm Bill before the US Senate that will subsidise US agriculture to the tune of US$170 million ($395 million).

Cato Institute director of fiscal policy Chris Edwards and researcher Tad Dehaven recently quoted evidence from New Zealand as reasons the US Government did not need to subsidise its farming industry or provide subsidies in order for Americans to eat.

"Subsidy elimination in New Zealand was swift and sure. There was no extended phase-out of farm payments, as was promised but not delivered under US farm reforms in 1996. Instead, New Zealand's Government simply offered one-time 'exit grants' to those who wanted to leave farming when subsidies ended.

"New Zealand's plan was initially met with protest marches on Parliament and organised resistance by farmers. Bolstering opposition was the Government's own prediction that 10 per cent of all the country's farms would go out of business. But the subsidies were ended, and New Zealand farming has never been healthier."

Trouble is Bush and Clark may be singing from different song sheets.