"Second-guessing the negotiators"

Abstract

The owner of a dairy product trading firm succeeds in changing a market access agreement after the Uruguay Round is completed. By using the support of his own industry association and by tapping into the interests of import competing manufacturers in the target market, this company managed to get the terms of the agreement changed before it had been scheduled in the GATT.

Peter Lavery was puzzled by the tone of self-congratulation in the fax from the trade ministry. It was early November 1994: after 8 years of negotiation during the Uruguay Round, the market access negotiations with the United States - his company's main market - had just concluded with an agreement between the two governments. The Australian government negotiators had accepted an offer from the USA that looked good on the surface: and the fax indicated that they thought they had done pretty well.

But the deal made little sense, commercially: the US was offering to expand access for a product - bulk Cheddar cheese - that offered the least profit opportunities in the US market. The problem was, every cheese maker in the USA - or nearly every maker - made Cheddar. Although protected by high tariffs and quotas, the US market for Cheddar cheese was a highly competitive, commoditized domestic market. It did not offer big returns to importers, even with a lower import duty.

The cheese tariff schedule

Among the most important of these specialized varieties were those that fell under tariff categories known as 'NSPF' - that is: 'not specifically provided for' - in the US tariff. It was a typical 'catch-all' category in the tariff schedule: but in the case of the US dairy tariff, it was a category with relatively low duty rates.

Working with US importers, he had found dairy product lines - such as cheese types used for processing by the US food industry, or milk powders with specific qualities - that benefited from these lower levels of protection. His company also worked with the biggest Australian dairy manufacturers to create new cheese types - particularly hard-grating type cheeses - that would find a profitable market in the US but would be classified in the US tariff schedule as 'NSPF' cheeses.

"Tariff schedules are sometimes quite specific about product characteristics," Peter explained. "The tariff can vary according to the physical characteristics and the composition of the cheese, the manufacturing process, the ratio of fat to solids, how much moisture, the maturation times... Some common dairy products in the tariff schedules of the USA and other countries that are defined quite narrowly. But sometimes there are also 'other' categories: the 'not specifically provided for' categories. That's where we've been able to find products that have a good market in the US."

The access 'deal'

But the fax from the trade ministry suggested differently: the USA had offered to expand access (to the 'low-tier' tariff quota) by 2500 tonnes of Cheddar cheese - the most basic US commodity cheese product. Australian officials had agreed to the deal, supposing that a 60% expansion of Australian's access to the US cheese market would be a good outcome for Australian exporters. Peter Lavery knew that this would not necessarily be the case: once past the tariff wall, there was much less value in additional access to a commodity product market than to the specialized markets that his company - and others - were developing.

It looked like the tariff 'deal' between the governments had been done, however: the bilateral market access negotiations took place in a rush at the closing stages of the much-delayed Uruguay Round negotiations. There had been no opportunity to properly consult with the Government. Negotiators on both sides had 'signed off' on the balance of concessions: what more could be done?

A call to the importers he worked with in New York established that the US regulations to implement the agreements would not be published for several months. By February 1995, the new Clifton Administration was rushing legislation through the Congress to approve the historic Uruguay Round agreement. Once both governments had approved the agreement it would be scheduled in the GATT as a 'bound' tariff concession which would be difficult to alter.

But until then, it might still be possible to make some changes.... Perhaps the industry could convince governments on both sides of the Pacific to approach the changes in a different way. The Australian industry wanted access to some of the smaller, more specialized product lines: maybe the US industry, too would welcome reduced competition in their main product market. At least, it seemed to Peter Lavery that it would be worth finding out.

The 'swap'

The next step was to approach the US industry groups who might be willing to support a 'swap' of one product type for another in submissions to the US government. If the US industry opposed the 'swap' then there was no hope of making changes. Lavery asked his New York importers to help: after all, they stood to gain, too, if there were access for more profitable 'NSPF' types. The importers contacted farmer and manufacturer groups in the USA. "I knew the positions of almost all of the US industry groups", Peter Lavery said. "After all, I've been selling cheese to the US market for thirty years. But I guessed it would look a lot better if the idea of swapping some of the Cheddar for NSPF types was being suggested by someone with an American accent. People naturally get suspicious when a foreigner says that he wants to do you a favour!"

It took several weeks of lobbying with US industry groups, discussions with some of the big firms producing Cheddar cheese in the USA - particularly those that had a representative in Washington. With the Australian industry association's support, Lavery also got good cooperation from the commercial staff at the Australian embassy who helped set up meetings with US officials in the Agriculture and Trade and Treasury departments. When the US officials checked on support for the idea from the US industry learned and that the Australian government had no objections, the change became merely a 'stroke of a pen'.

Why it worked

"The US manufacturers also got something out of it", Lavery continued. "They were happy to have less foreign competition at low tariff rates for the market they depend on most: the bulk Cheddar market. They aren't as interested in the small markets for the 'hard grating types': so, if they had to have more import competition, they'd prefer it to be in those products."

"That was the key to our success, I think. The fact that we found a way to make the idea attractive to both sides. Its a highly protected market, and the US industry is used to getting its way, most of the time, with the regulators. It was essential that they buy into the 'swap' or we would never have succeeded in getting the regulations changed. Of course, we had to compromise with the other Australian manufacturers as well, leaving about half the new access in Cheddar as agreed."

"The other key was involving the industry association. One way to look at that is that obtaining the agreement of all of the Australian manufacturers 'cost' me the opportunity to arrange a swap of all of the Cheddar access. I was able to swap only half of it because some of the smaller manufacturers and those who don't export regularly to the USA wanted to keep open the 'easy' option of trading in a product that they know. But I'm still a lot better off than I was with just half of the Cheddar swapped for NSPF, and there would have been no chance that the Australian government would have agreed to change an international agreement just to suit my little company."

By April 1995, the 'swap' had been arranged. Half the agreed Cheddar access to the 'low tier' tariff quota had been 'swapped' for an equivalent additional quota of 'NSPF' cheese types.

Its in the schedules: take a look for yourself!