Who will be the winners and losers if the US-Australia Free Trade Agreement finally gets the nod? Deborah Tarrant investigates opportunities for local businesses in the wash-up with the Land of the Free.
Hailed as the Holy Grail for Australian business, the US Free Trade Agreement for all its devilish details, political hotfooting and headlines has refreshed a serious interest in trade and local export potential.
Australian organisations keen to take advantage of comparatively unhampered exposure to the world's biggest economy are determining their readiness to tackle highly competitive marketplaces and speculating on the impact of a possible influx on domestic markets.
A final version of the FTA is still a way off, pending the outcome of meetings by the Joint Parliamentary Standing Committee on Treaties, with debate of legislation in both the Australian Parliament and US Congress scheduled for July. A real outcome is not expected until later this year. The full impact of the agreement will not be known until it swings into action and the earliest estimated start date is 1 January 2005.
Australian business leaders on the whole have lauded the agreement made in February, even following the release of the 900-plus pages of detailed document in March, dampening any suggestion of threats to local industry.'The US market is 20 times the size of the Australian market. Common sense says there will be more of an upside for Australian companies,' says Christine Gibbs-Stewart, general manager of international trade and business solutions, Australian Business Limited.
Peter Hendy, chief executive of the Australian Chamber of Commerce and Industry (ACCI), asks in the broad sense what's not to like about tacking an internal market of 20 million on to a market of nearly 300 million.
'Comparatively, it's the difference between a shop doing business on a main CBD street and on the main drag in a country town,' he says. He quells the fears of an onslaught, saying: 'Australia has had a very open economy with low levels of protection. We have little to give away.'
The federal government is promoting the broad economic benefits of the FTA and the potential to energise its 2002 stated aim of doubling the number of Australian exporters by 2006. Last year saw the number of Australian exporters grow from 25,000 to 31,450 (6000 are already exporting to the US).
Most export growth is expected to come from the small-medium business sector, currently estimated to represent 97 per cent of all Australian exporters and there is no doubt export is good for business. Research by Austrade proves statistically that exporters outperform non-exporters, while the ACCI equates every five per cent in export growth to 25,000 more jobs.
Amid the excitement, the Business Council of Australia's president Hugh Morgan has injected some sobering reality, pointing out the US-FTA in itself is not a guarantee of economic growth being handed to us on a platter. 'It requires individuals and companies to actively seek out the enormous opportunities available from being able to compete on a level playing field in United States markets.'
The aspects of the FTA that are anticipated to have sweeping impact are:
Access to the US government's annual purchasing program of some $US200 billion each year, although this may occur on a state-by-state basis.
The establishment of mutual technical and professional standards (which may in the long-term benefit CPAs as recognition of qualifications and experience of the Australian professionals in the US is encouraged).
Harmonising of intellectual property laws, particularly on patents, trademarks and designs.
Standardising of labelling and packaging.
A framework for cooperation with the world's largest financial services market, already worth more than $600 million per annum to Australia.
Growth opportunities are widely predicted. Among the biggest potential export winners are the automotive industry with the lifting of tariffs, in particular the manufacturers of utilities with the removal of a steep 25 per cent tariff, and ship repairers with the lifting of a whopping 50 per cent tariff.
Pharmaceutical companies say the agreement will facilitate speed to market.
Clothing and textile manufacturers win on one hand with the lifting of tariffs but may lose on the other, once the final detail of the agreement's Rules of Origin section is clear, as much of the yarn used locally is imported.
E-business is looking up, with FTA negotiators agreeing not to place tariffs on electronically traded goods. Australian Information Industry Association CEO Rob Durie sees clear potential for Australian IT companies with the opening of the US government procurement scheme. To date there has been a six per cent penalty on US firms if they did not use a US software.
Both biotech and IT are expected to be winners with standardised intellectual property rules and, more particularly, the freeing up of investment restrictions enabling start-ups more readily to form partnerships and access a vastly bigger venture capital pool.
Not all is calm domestically though, with our screen producers protesting about the failure to protect our free-to-air local television content rulings, while the fine print allowed for the possibility of local programming on pay-TV to rise from 10 to 20 per cent under the agreement.
Education may also face a financial sting under the intended extension of copyright in the agreement.
What is the fate of other sectors and industries as US companies identify additional market opportunities? Fears that our markets may be swamped are unfounded, assures ABL's Gibbes Stewart. 'Both US and Australia are mature, sophisticated and highly competitive markets. Their supply chains are already developed. There is not a big threat of goods from the US flooding here. Anti-dumping rules imposed by the World Trade Organization still apply.'
Christine Gibbs-Stewart believes the economies of scale within the US domestic market deter US companies from looking elsewhere. 'American companies are not big exporters and to change that mindset would be a big leap of faith.' And, there is the ever-present deterrent of the tyranny of distance to reach a relatively small Australian market. 'The real competition to Australian manufacturers is already coming from China with its lower cost labour market.'
Those wanting to enter the most competitive market in the world need to do the research taking into account the sheer size of the US market, says CPA Australia's small business policy adviser Judy Hartcher. In the US in 2002, there were 22.9 million businesses; 99.7 per cent of these were small firms. A small business in America has less than 500 employees. In Australia, there are little more than 1.2 million small-medium businesses, and our definition of small is less than 20.
The size of the US market means there are almost infinite possibilities for Australian exporters. It also lures exporters from all over the world, putting high pressure on competition.
Critical to making a move on the US, according to Austrade's Victorian manager Leith Doody, is an understanding of the market, the competition and the channels to market.
Due to its size, the US market needs to be segmented many times over, initially into eight distinct regions from the Washington DC in the north-east to Hawaii, and then state-by-state and, while fast-paced, US business is recognised for being very traditional in its modus operandi.
Australian organisations are advised to begin research, with a full reading of the relevant sector within the proposed US- Australia FTA agreement (www.dfat.gov.au), to start developing positioning and pricing strategies, and seeking out prospective partners. Austrade and relevant state government departments regularly run trade missions and market visits.
Trade minister Mark Vaile has announced the establishment of a new taskforce designed to tackle trade opportunities in the US, and Austrade has established a database where organisations seeking contacts with a view to doing business with the US can register online.
Special High Tech tours, designed to introduce Australian businesses to prospective US partners, will be run by Austrade later in the year. CPA Australia has also developed a strategic alliance program with Austrade to assist CPAs with insights on taking a business offshore. (See CPAs to go)
'In the US, if you don't do business their way, it will not work,' cautions Gibbs-Stewart. 'Many Australian companies have made the mistake of entering on the wrong level not realising how US supply chains operate.' For example, processed food distributors will not work with companies that do not have a food broker. 'Australian companies often try to preserve their margins and not pay that bit more for a broker,' she says.
Austrade's Leith Doody confirms that the major reason export relationships fracture or simply fail to develop is due to a lack of cultural understanding, emphasising that the knowledge must be comprehensive. 'Insight into the history, politics and economics of a trading partner, and the details of the businesses being dealt with are prerequisites for success.'
The greatest concern in the build up to the signing of the FTA, concur business leaders, could be a flurry of ill-prepared businesses attempting market entry. 'Every day there are 'gung-ho' Australian companies landing in the US without appointments,' reports Gibbs-Stewart. 'They burn a lot of cash in the process.'
Even with the right deals in place, a protracted commitment of resources is required to get to market. This can be a fatal factor for smaller businesses. For example, Gibbs-Stewart says: 'Many US distributors will expect Australian companies to pay something towards marketing and to attend trade shows. 'Companies need the money in the bank to penetrate such big highly competitive markets and not hit a cashflow crisis.'
Funding
Australian exporters draw funding from traditional sources looking to banks, private equity and venture capital where there are eager investors for the right deal. Restricted opportunities are available from government sources.
Austrade's Export Market Development Grant (EMDG), capped at $150,000 from 1 July 2004, reimburses 50 per cent of expenses incurred on eligible export promotional activities, less the first $15,000. To access the scheme, businesses need to have spent $15,000 over two years on export marketing expenses. In the 2002-03 financial year, $143.9 million was paid to 3843 businesses.
The Export Finance and Insurance Corporation offers a working capital guarantee to fill the market gap; it provides project finance to small exporters deemed not performance worthy by private lenders and investors, and those entering emerging markets where there is a high political risk.
Winners
Manufacturers in both markets
IT companies
Software providers
Professional services
E-commerce
Biotech companies
Automotive industry
Pharmaceutical companies
Wine industry
Construction (but not on US government contracts under $10 million)
Ship repairers
Freight Industry
No gains for...
Ill-prepared businesses
Screen producers and directors
Education providers and libraries (will pay more for extended copyright)
Shipbuilders (fast ferries)
Textile manufacturers (where yarn has been imported will not be able to export to the US)
CPAs to go
CPA Australia has developed a pilot program with Austrade aimed at helping CPAs to access export opportunities. Specifically designed to provide skills to enable CPAs to broaden the services package to their clients, the course is the equivalent of 40 hours training, including face-to-face workshopping and six one-hour online modules.
According to Austrade's Leith Doody the course enables members to assist clients' businesses to grow through export activity and other internationalisation initiatives and thereby also to grow their own businesses. It covers the big picture benefits of internationalising a business, export transactions from a legal and financial perspective, business analysis to determine export suitability, identifying opportunities and market entry strategies.
'A feature of successful export businesses is the commitment of senior management to grow their business in offshore markets,' Doody says. 'That process begins with having the right background knowledge; it's a long-term commitment of both time and money to recreate infrastructure in new markets and to develop overseas networks.'
Michael Wilson of Wilson Business Services in North Melbourne participated in the pilot program to better enable him to run the Australian office of his biggest client, a wine exporter. He says particularly useful insights from the course were in terminology. 'International trade seems to have its own language and everyone writes in abbreviations,' he notes.
Wilson also gained an awareness for the various methods of payment and assistance available.
Developing a deeper understanding of cultural differences has also proved beneficial as Wilson has learned first hand that business etiquette in other cultures may be more reserved. 'Australians are very direct. Other cultures may skirt around problems,' he advises.
For information or assistance
Austrade For a range of services to exporters including the free TradeStart program
