Monday, July 20, 2015

Live exports deal: Barnaby Joyce's bulls in a China swap

It wasn't set up as a retaliation. But Barnaby Joyce and the Chinese government have produced a powerful retort to Indonesia's big move against Australia's cattle trade last week.

After years of talks, Australia and China have now signed an agreement  to sell live beef cattle to China for the first time. 

In the long run, the China deal has the potential to eclipse Indonesia and every other export market. In case the Indonesians don't get the message implicitly, the Agriculture Minister spells it out: "It sends a very strong signal to the market – be careful when you say you don't want something," he tells me.

"This gives us the capacity to have another person on the rail buying cattle, and it's a biggie."

The China arrangement starts with a relatively modest 40,000 to 50,000 head of cattle a year but potentially builds to one million. 

This is so big a number that, Joyce adds,  it's beyond Australia's current capacity to supply. 

The entire Australian export head count last year was 1.29 million worldwide, a trade worth $1.3 billion, averaging almost exactly $1000 per beast.  Indonesia accounted for 56 per cent of all those exports. Last week's big news was that the Indonesians had abruptly decided to cut their quota  by 80 per cent compared with the corresponding quarter last year.

"It wasn't specifically an anti-Australian decision," but rather an example of Indonesia's growing economic nationalism, says Hal Hill, an ANU expert on the Indonesian economy.  "But Australia is an easy target," politically he adds. "If there is a measure on the table that has an anti-Australian implication, there'll be no resistance there.

"If it were an anti-ASEAN implication," referring to the 10-country  Association of South East Asian Nations, "it'd be a different story".

 An authority on the Asia-Pacific beef trade, Professor Kym Anderson of Adelaide University, concurs: "Julie Bishop implied that this decision didn't have any anti-Australian implication, but it's hard to imagine it didn't – it was such an unusually large decision. There is some payback."

This episode carries three important lessons.   First, it illustrates that while the global market for hard commodities is collapsing, demand for food is rising long-term. The UN's Food and Agriculture Organisation forecasts that global food demand will rise  70 per cent over the next 35 years.  

"The protein market is very substantially up," says Barnaby Joyce, whether it's in the form of beans or beef or other meats. "It won't completely offset the downturn in coal and iron ore, but it'll certainly be helping."

Anthony Pratt, chair of packaging firm Visy, made the observation that "on the current trajectory, food exports of $36 billion are converging on iron ore exports at $52b," as one rises and the other falls.

He pointed out that the food and beverage industry provided more than half a million jobs while iron ore doesn't employ enough people to fill the MCG at only 30,000.

In the past three years food exports have grown  26 per cent. And processed food exports, with a bigger value-added component, are up  33 per cent.

Another key difference is that while every mining boom must bust, the long-run demand for protein is expected to be strong as a rising middle-class in China and India demands more. This is a structural change, not a short-run boom.

 Second, Australia has botched badly its relations with Indonesia. 

Previous president Susilo Bambang Yudhoyono put priority on Australia for almost the full length of his 10 years in power. When an international gathering or negotiation approached, SBY customarily sent a hand-written note to the Australian ambassador: "What does Australia want?" was his standard question.

Today, Indonesia's government is more inclined to harm than to help. Canberra needs to do two things. First, guard against further Indonesian acts of unfriendliness. 

Hal Hill says: "This Indonesian cabinet doesn't have any clear-headed economic rationalist" who will defend free trade, "other than the Finance Minister and he's got his hands full trying to hold the budget together".

He says the Trade Minister and Agriculture Minister are   in a contest to see who can be more economically chauvinist, and that will mean more protectionism. "Australia has to work harder to have its voice heard to prevent or to overturn decisions that harm our exports."

 Canberra also needs to seek opportunities patiently to rebuild relations where it can.  

The third lesson is the value of diversification. In trade, as in investment, diversification is a risk management tool.  Joyce has done much to diversify live cattle exports. He's negotiated access to seven new countries, including China.

The Trade Minister, Andrew Robb, has negotiated new market-opening deals with all three of Australia's biggest export markets, China, Japan and South Korea. Next is India. And he's taking Australia into the US-led, 12-nation Trans Pacific Partnership.

These are all big, important pathways to keeping Australia's living standards high amidst a colossal mining crunch.

The Labor party is about to come under heavy pressure from the union movement this week at its national conference to oppose the China deal and the TPP. 

While Labor is right to question some aspects of these deals, it must do it without killing them altogether. That would be the height of irresponsibility, a betrayal of the national interest to pander to the protectionist self-interest of a lobby  group.

Trade is the way nations earn. Bill Shorten is soon to be put to the test.

Peter Hartcher is the international editor Sydney Morning Herald

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