• John Quiggin

26 August 2004If the US blocks changes to the free-trade deal, Labor should seek to renegotiate the whole agreement, writes John Quiggin.

IT’S looking increasingly possible that the conflict between the pharmaceutical benefits scheme (PBS) and the Australia-US Free Trade Agreement will become the key issue of the election. It’s also apparent that the FTA and the PBS are in mortal conflict. In the long run, only one of the two can survive.

A year ago, those who suggested the PBS was even an issue were denounced as ‘scaremongers’. The government assured us that the PBS was ‘not on the table’ and that the Americans knew better than to interfere in such a central aspect of our health policy.

The first crack in the government’s position came with the passage of a Medicare Bill through the US Congress in December. Buried in the bill was a clause requiring the Bush administration to update Congress on ‘progress in opening Australia’s drug pricing system’. This is code for the abolition of the PBS.

At about the same time, the government subtly shifted its position, saying that it would stand firm against any terms that would affect ‘the ability of the Australian government to provide inexpensive medicine to its citizens’. This left open the possibility that Australian taxpayers would have to pay more.

When the agreement was finally announced, the clauses about the PBS raised concerns, but the government maintained that it had either stared the Americans down or dudded them. The pharmaceutical lobby had wanted a right of appeal against adverse decisions from the Pharmaceutical Benefits Advisory Committee. All they got, we were told, was an essentially meaningless right of review.

Following the announcement, most attention was paid to sugar and beef and to the battle between competing models of the economic impact of the agreement. This battle ended in a draw, with the best estimate being that the net benefit to Australia was about $50 million a year, close enough to zero for all practical purposes.

Labor’s amendments, which initially appeared to be a face-saving way of covering a backdown, have now focused attention on the issue. The government’s reluctance to accept the amendments, which turned what would have been a huge political win into a defeat, has become comprehensible in the light of the American reaction.

The US trade representative indicated ominously that the US had chosen not to intervene in Australia ‘at this point’. Last week, US ambassador Thomas Schieffer stated that the US may not certify the Australian legislation as consistent with the FTA.

The government, and pro-government commentators, have also changed their line. The PBS clauses are now seen as integral to the deal as a whole. Several commentators have raised the possibility of an ‘October surprise’ scenario, in which the US announces rejection of the agreement just before election day.

Writing in the Australian on 21 August Christopher Pearson made some particularly interesting observations regarding other remedies available to the US in relation to Labor’s amendments. He pointed out two other possible courses of action.

One is based on the fact that trade agreements are negotiated on the basis of ‘standstill’. In other words, once an agreement is reached, the parties are expected not to introduce legislation that would alter their relative positions. The other is that the Americans could argue that the amendments are likely to give rise to a dispute under the ‘reasonable benefits’ clause, in the event that their drug companies are unable to realise benefits that they anticipated would flow from the agreement.

It is critical to observe that these points have nothing to do with the specific content of Labor’s amendments. They apply to any legislation concerning the PBS that an Australian government might seek to introduce in the future and, arguably, to any administrative decisions made by ministers. That is, if Pearson’s analysis is correct, the FTA gives the Americans an effective veto power over anything we might attempt to do to improve the functioning of the PBS.

It is critical for Labor to hold its ground on this issue. Even without the threat to the PBS, the agreement was a bad one for Australia. If the Bush administration refuses to certify the amended legislation, Labor should announce its intention to renegotiate the entire deal, this time on more equal terms.

Professor John Quiggin is a federation fellow in economics and political science based at the University of Queensland and the Australian National University. His web site is at http://www.uq.edu.au/economics/johnquiggin and his weblog is at http://johnquiggin.com. This article first appeared in the Australian Financial Review.

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