This is the transcript of the speech given by the Treasurer, Peter Costello, to the Auckland Chamber of Commerce on the occasion of the 20th Anniversary of the Closer Economic Relations Agreement between Australia and New Zealand.
Speech by Treasurer Peter Costello to the Auckland Chamber of Commerce.
I would like to thank the Auckland Chamber of Commerce for the invitation to speak to you this morning.
Australia and New Zealand are much more than good neighbours. We are, in many respects, siblings with a common heritage and a shared future. And like many sibling relationships there is a good deal of rivalry that is competitive, sometimes ferociously competitive, but I hope, ultimately friendly.
Australia and New Zealand developed along broadly similar lines as raw material exporters with strong connections to Britain.
Both were blessed with extensive natural resources that allowed international trade in imperishable, high value agricultural outputs and gold.
Both grappled in the 19th century with being very distant from large world markets in times of high shipping costs.
Both rose towards the top of world per capita GDP rankings in the late 19th century, before witnessing a relative decline through large parts of the 20th century.
Both grappled with inward-looking, protectionist policy frameworks in the mid-20th century that sought to build small-volume domestic manufacturing industries behind tariff walls. In practice this served to reduce trade-to-GDP ratios and produced periods late last century of weak growth in productivity, incomes and employment.
In the 1970s, Australia and New Zealand began to reassess their highly regulated economies, recognising that changes in the global economy required increased efficiency, productivity, and diversification. Both countries subsequently made a conscious decision to expose local industries to more intense competition from the world’s best, and to re-engage in the global economy.
As a result of policy reforms undertaken in the 1980s and 1990s, Australia and New Zealand have developed more flexible, outward-looking economies that have proved resilient to the economic shocks of the last five years.
We are currently amongst the fastest growing economies in the industrialised world.
A key part of this process of global re-engagement by Australia and New Zealand has involved efforts to achieve greater trans-Tasman economic integration.
CER IN THE CONTEXT OF BILATERAL ECONOMIC REJUVENATION
The Closer Economic Relations (CER) Agreement which has its 20th Anniversary this year was founded on the recognition that for each of us a larger “home” market would permit greater specialisation, economies of scale, and faster productivity growth.
The CER Agreement was initiated by the Coalition Government in Australia and by the National Party Government in New Zealand.
It was one of the earliest bilateral trade deals.
It was announced in March 1980 in a joint communique between Prime Ministers Fraser and Muldoon, neither of whom is regarded as an avid free trader.
It remains one of the most open and successful free trade agreements in the world, covering free trade, free movement of people, the Trans-Tasman Mutual Recognition Agreement (TTMRA).
And this free movement has forced productivity improvements on both sides of the Tasman. One of the earliest tests for Australia was when New Zealand shearers introduced a wide comb for shearing. The powerful Australian Workers Union tried to have wide combs banned in Australia. It led to lower costs and higher output. The struggle over “wide combs” was bitter and at times quite violent in Australia.
But gradually Australian shearers recognised the innovation made sense, and could increase their earnings. And they also realised that if Australian shearers banned wide combs, New Zealanders would be happy to take them up in Australia.
Where once 30,000 seasonal shearers took the wool off 180 million Australian sheep, now 6,000 full-time shearers shear about 115 million sheep.
A romantic piece of Australian rural life has changed and there are many fewer people employed directly in shearing. But the wool industry is more globally competitive, and (assisted by a good macroeconomic policy framework and other reforms) there are more people employed throughout the economy as a whole, supporting higher overall living standards.
This example helps illustrate how, by strengthening competition and performance, CER also strengthened both economies in their trade with the rest of the world.
CER was GATT and WTO consistent, and enhanced both economies’ engagement in multilateral trade.
Australia’s overall trade strategy is to pursue WTO-consistent opportunities at all levels. This includes bilateral, regional and multilateral approaches to facilitate market access and growth.
Australia has just signed a Free Trade Agreement with Singapore and is in the process of negotiating a similar agreement with Thailand.
We are pursuing bilateral trade and economic agreements with China and Japan and exploring better economic ties with South Korea.
Australia is also pursuing a free trade agreement with the United States, which I will return to.
These opportunities must complement each other and ultimately must support the multilateral trade negotiations now under way at the World Trade Organisation.
Since its inception 20 years ago, CER has been an extraordinary success in improving trans-Tasman trade and investment links.
Over the past decade, trans-Tasman trade has grown at an average annual rate of 9 per cent.
New Zealand is now Australia’s fifth-largest market taking 5.9 per cent of our exports.
Two-way trade between Australia and New Zealand has expanded 500 per cent since 1983.
Total bilateral trade was more than $16.2 billion in 2001-02 (including $3.8 billion in services).
Total two-way investment is $33.8 billion – Australia is the largest foreign investor in New Zealand and is the second largest destination for New Zealand investment.
Over half of Australia’s total investment in New Zealand takes the form of direct investment, reflecting the high level of economic integration.
Undoubtedly, the business activity generated by the CER has brought substantial wealth and employment for both countries.
The current CER work program focuses on “third generation” trade facilitation issues.
TREASURY PORTFOLIO ISSUES
Two key areas in which we are working to advance the CER agenda and achieve ever-closer economic integration are corporate law and taxation policy.
Effective corporate regulation plays a vital role in building a strong and vibrant economy. When the Coalition was elected to Government in 1996, corporate law was moved into the Treasury portfolio to improve the focus on the economic objective of corporate law.
In recent years Australia has systematically modernised its framework of corporate law.
The most recent step in this process has been the release of the ninth instalment of our Corporate Law Economic Reform Program (CLERP 9 reforms) to enhance the corporate disclosure framework.
These reforms follow a principles-based approach that will enhance the integrity of Australia’s capital markets while avoiding the excesses of the rules-based approach adopted by the US.
The New Zealand Government has also been strengthening its own regime by pursuing an active program of corporate law reform.
These reforms have brought our regulatory frameworks into closer alignment, especially in the area of takeovers law, where we each have members sitting on one another’s Takeovers Panels.
However the existence of separate national regulatory frameworks continues to give rise to compliance burdens for companies that operate on a trans-Tasman basis.
The CER process provides a mechanism through which the Australian and New Zealand governments can work together to reduce these costs through the establishment of mutual recognition arrangements governing cross-border fundraising.
The ultimate objective is to enable Australian and New Zealand companies to raise funds in both jurisdictions using a single disclosure document that complies with the requirements of the relevant home jurisdiction.
This will provide substantial benefits to NZ companies seeking to raise funds from Australian investors (as well as to Australian companies with operations in New Zealand).
We also plan to explore the potential for extending mutual recognition arrangements to other areas of corporate regulation, such as company registration and insolvency that may also impose significant costs on cross-border activity.
The New Zealand Government has already established a mutual recognition mechanism as part of its framework of corporate regulation.
Yesterday the New Zealand Deputy Prime Minister and Minister of Finance, Dr Cullen, and I announced that the Australian and New Zealand Governments will introduce legislation to reform trans-Tasman imputation to deal with the long-standing issue of “triangular” taxation.
The reform reflects the commitment of the Australian and New Zealand Governments to the continued strengthening of the Closer Economic Relations agreement and to promoting trans-Tasman business and investment.
The triangular tax problem arises where Australian and New Zealand shareholders, investing through a company resident in the other country that earns income and pays taxes in the shareholders’ home jurisdiction, are unable to get imputation credits arising from the payment of such taxes.
To resolve this problem, Australia and New Zealand will extend their imputation systems to include companies resident in the other country.
Under this reform, Australian and New Zealand shareholders of trans-Tasman companies that opt into the reform will be allocated imputation credits, representing New Zealand tax paid, and franking credits, representing Australian tax paid, in proportion to their ownership of the company. However, each country’s credits will be able to be claimed only by its residents.
This reform will remove an impediment to trans-Tasman business, and I am especially pleased to be able to announce it in this year of the twentieth anniversary of the signing of the CER agreement.
The expected date of effect of the new legislation is 1 April 2003 both for New Zealand companies maintaining an Australian franking account and for Australian companies maintaining a New Zealand imputation credit account. Companies will then be able to attach the other country’s credits to dividends from 1 October 2003.
The Australian Government remains committed to examining further opportunities for harmonising the taxation systems of our two countries in order to create an environment that facilitates trans-Tasman business and investment.
More generally, the Australian Government is currently reviewing Australia’s international tax rules.
While it has focused on how to tax outbound investment by Australian investors, the Review has also examined three issues affecting foreign direct investment into Australia.
First, the taxation of expatriate workers employed in Australia. Business needs to attract skilled people to fill shortages and access new ideas and skills.
The Australian Government has re-introduced legislation into the Parliament to remove major disincentives to the employment of expatriates in Australia, although it would appear that the Opposition will again oppose this measure.
The Review is looking at further options to reduce tax impediments to the employment of expatriates.
Second, the Review looks at ways to improve the taxation of conduit income flowing through Australian holding companies.
Conduit income arises where a non-resident investor earns income via an Australian company.
As part of this process, we have examined New Zealand’s conduit holding company regime.
Third, the Review examines Australia’s tax treaty practice.
The Review will focus on three treaty issues.
- Should future treaty policy be based on the revised Australia-United States tax treaty, which reduced withholding taxes?
- The shape of Australia’s future tax treaty negotiation program.
- How to improve consultation with business on individual tax treaty negotiations.
Other developments – TTMRA and TPA Reviews
There are two other issues within the Treasury portfolio that have significant implications for companies that operate on a trans-Tasman basis.
The first is the review of the Trans-Tasman Mutual Recognition Agreement (the TTMRA).
This Agreement provides that goods legally available for sale in one country may be sold in the other.
Similarly, any person registered to practise an occupation in one country may do so in the other.
The Review is being conducted by Australia’s Productivity Commission.
It will examine the role of the TTMRA in:
- fostering and enhancing trade and workforce mobility between Australia and New Zealand;
- enhancing the international competitiveness of Australian and New Zealand business; and
- enhancing the capacity of Australia and New Zealand to influence international standards relating to product descriptions and registration of occupations.
The final report will be provided to me in October 2003 and subsequently presented to the Australian Heads of Government and the New Zealand Prime Minister.
The second is the review of the competition provisions of Australia’s Trade Practices Act.
This review was conducted by an independent Committee chaired by Sir Daryl Dawson, a former Judge of the High Court of Australia.
The Dawson review was the first comprehensive review of the competition provisions since the Hilmer Committee reported in 1993.
The final report of the Review was handed to me at the end of January.
The Government is currently considering the final report, and will release it following full examination of the recommendations.
Progress in advancing the current work program is not confined to the Treasury portfolio.
Important initiatives are also occurring in a number of other areas. These include the introduction of a joint food standards code and agreement to establish a trans-Tasman therapeutic products agency.
Further cooperation in science and technology, biosecurity and quarantine, and industry and competition issues is also expected to result in developing an even more integrated trans-Tasman economy.
I am often asked whether Australia and New Zealand will have a single currency. Given the fact that 12 countries of Europe with different languages and culture, comprising in total around 300 million people now have a single currency is it so hard to imagine a single currency across the Tasman?
The answer is no.
But I hasten to add that neither of our governments is working on it.
What is working on it is the fact that our countries are becoming more engaged in trade with each other, our business cycles are closer, our monetary policy is directed at similar targets and official interest rates are therefore moving in the same broad manner. In addition, our currencies have moved in broadly similar ways in recent years. We have noticed that sometimes dealers trade the A$ as a surrogate for the $NZ.
Things could change. Particularly if one country or the other engaged in unwise policy or had a substantial economic shock. But in the absence of such developments then the process is likely to continue to develop.
CER AND US FTA
I spoke earlier about Australia’s trade strategy of pursuing opportunities in both bilateral and multilateral forums.
In this regard, you will be aware that Australia is currently negotiating a Free Trade Agreement (FTA) with the United States.
Such a prospect has prompted some concerns in New Zealand.
A survey released in December 2002 of 50 New Zealand CEOs showed that the latter saw an Australia-US FTA as the biggest single threat to the New Zealand economy.
Fears were expressed that New Zealand would lose ground to Australia in attracting foreign investment and that New Zealand exports to Australia would be displaced.
Another study by an Auckland University economist estimated an annual loss of 0.03 per cent of GDP.
However these conclusions do not tally with modelling commissioned by the Australian Government, which indicates that an Australia-US FTA would boost New Zealand economic growth.
A Centre for International Economics study issued in 2001, “Economic impacts of an Australia-US FTA”, indicates a sustained flow-on effect of up to 0.03-0.04 per cent annual increase in New Zealand GDP, mainly as a result in increased Australian economic growth.
While this projected increase in New Zealand economic growth is small, for the reasons cited the effect is likely to be positive rather than negative.
Consistent with the understandings reached between Prime Ministers Howard and Clark, we will continue to consult closely on developments and will do what we can, consistent with our own objectives, to assist New Zealand.
We would certainly not try to discourage the US from embarking on a FTA with New Zealand.
And it bears re-emphasising that Australia’s goal is to reach an agreement with the US that complements and strengthens the process of multilateral liberalism, from which we all benefit.
I would also strongly emphasise that the conclusion of a FTA between Australia and the US would not result in any downgrading in the importance that the Australian Government attaches to the CER process.
We will continue to work hard with the New Zealand Government to remove regulatory barriers to trans-Tasman activity.
Finally, I would like to touch on our regional activities.
Given our geography and the extent of our economic relationships with Asia, the region is economically and strategically important to both our nations.
Australia and New Zealand have a very productive relationship with the Asian region and are making a valuable contribution by representing the interests of our region in various international financial institutions.
Australia and New Zealand were strong advocates for better assistance and revision of inappropriate IMF programs during the Asian Financial Crisis and we continue to argue for more appropriate representation of Asia in the IMF and World Bank.
Australia and New Zealand were founding members of the Asian Development Bank in 1966 and both nations continue to play an active and valuable role in this important regional financial institution.
Australia and New Zealand continue to provide leadership in the APEC forum to strengthen the regional economic architecture.
The APEC Finance Ministers’ process has proven to be of great value in areas such as capacity-building, strengthening financial systems, and improving corporate governance frameworks.
Australia and New Zealand have made significant contributions to this process, leading work on Corporate Governance and establishing Voluntary Action Plans.
My own experience of the last 7 APEC Finance Ministers’ meetings has underlined the usefulness of exchanges between Ministers on fiscal and financial sector reform as a practical manifestation of Australia and New Zealand’s closer regional engagement.
New Zealand and Australian officials continue to play a key role in strengthening the policy discussions in the Manila Framework Group.
The benefits of regional cooperation between Australia and New Zealand are also evident in relation to the Pacific Islands.
Australia and New Zealand have played a prominent role in the work of the Pacific Islands Forum Economic Ministers’ Meeting (FEMM). We have worked together to assist Pacific Island countries to implement economic policies for sustainable development.
Australia and New Zealand have succeeded in harmonising a range of management principles and processes which have improved administrative efficiency within AusAID and NZAID as well as improving aid delivery to partner countries.
In addition, Australian and New Zealand are currently co-funding a range of projects in the Pacific in the area of economic stability.
Our countries have had the common sense and common purpose to put in place solid and enduring bilateral arrangements.
Our achievements within CER and globally as robust market economies prove the benefits of embracing harmonisation and more liberal international trade.
We must maintain the vigour of our relationship and extend the framework of CER so that it continues removing barriers to further economic integration, while respecting national sovereignty.
Let us celebrate 20 years of achievement.
But more importantly, let us continue to search for new ways of strengthening our relationship to our mutual benefit.