7 August 2004

Free Spin Agreement

Milking the free trade deal for all it's worth
Australia and the United States announced their intention to legislate a bilateral trade deal in February, and at that time Goldman Sachs JBWere asked its company analysts to consider who might be affected.

Like its investment banking competitors, Goldman Were concluded quickly that the economic consequences of the deal in the near and medium term would be muted. And it discovered few specific impacts on listed Australian companies.

Listed beef producer Australian Agricultural Co and Futuris, which owns Elders, would benefit over time from better access to US markets, Goldman Were said, adding that there was another "small positive" for Futuris's vehicle air-conditioning business because residual US tariffs on car parts would go.

It thought also that higher trade volumes and business activity between the two nations would also provide long-term support for transport groups including Qantas, Toll Holdings and Patrick Corporation. One possible casualty of the FTA deal was identified in CSL: the drug and plasma group's exclusive fractionation agreements in Australia will be reviewed between now and January 2007 as part of the FTA deal, and could be opened to competitive tender.

In most cases, however, the investment bank discovered that for listed companies, the FTA simply doesn't matter. Slightly lower barriers to entry to the US would, for example, have "minimal impact" on car-parts maker Ion, which already had secure contracts with US groups. The phasing out of 3 per cent tariffs on US imports of Australian wine would have "immaterial impact" on the short-term earnings of local wine groups, and any impact of the financial sector depended on the outcome of a two-year scoping study under the FTA umbrella.

Writing their own scripts
Ironically, the Government's major argument against accepting Labor's amendment to its free trade legislation to protect against evergreening is that it would inhibit research - an argument which is the reverse of the truth, Henry says.

'As a result [of evergreening], we've had a flattening off of the drug discovery process for many diseases. We're not getting many new drugs. If you look at what manufacturers are making, it's things like new versions of Viagra, which the world doesn't really need.'

An example: no new class of antibiotics has been produced since the 1970s - though some have been tweaked - despite the rapid increase in the number of germs resistant to the old drugs (due in part to the over-prescription of antibiotics and to the fact an estimated 70 per cent of antibiotics are given to farm animals, but that is another story).

'The drug companies don't make as much money from drugs that you only take for five or six days, like antibiotics, compared with antidepressants or Viagra, which people take for 10 years,' Henry says.

Australians pay less for drugs than almost anywhere else in the world - far less than Americans do - and the Pharmaceutical Benefits Scheme, which keeps prices down by subsidising only the most effective drugs and acting as a monopoly buyer and provider of them, is the major reason for that. The drug companies hate it, which is the reason they wanted it included in negotiations for the trade deal.

The Government, of course, insists there is nothing in the agreement with the US to worry about. In the words of Dr Ruth Lopert, the senior Health Department official advising on the trade agreement, it neither 'encourages nor prevents' evergreening.

But the deal includes measures placing new obligations on the makers of generic drugs and gives the drug makers greater involvement in the processes of the Pharmaceutical Benefits Scheme.

More and more the whole thing feels like an exercise in shadow politics where the real costs and benefits of the preferential trade deal disappear in favour of guesswork about what might please the electorate. The economic benefits are nowhere near as great as the thing's supporters say and evergreening is not a significant threat under the deal, although the PBS as a whole may come under US pressure.

There's also the interesting question about whether Labor's amendment on local content can override the text of the treaty itself and the much more interesting question of why a 21st century constitution allows the prime minister to sign and ratify a treaty without parliamentary approval.

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