Free Trade Agreement with the USA – What’s in it for ACASPA Members? ______

The official press release from the Department of Foreign Affairs and Trade makes much of the export opportunities opened up for Australian manufacturers, particularly in the automotive industry. The main reason why is that 97% of Australia’s non-agricultural exports to the USA (excluding textiles and clothing) will be duty free from day one of the agreement. Tariffs on textiles will be phased out, with all trade in goods free of duty by 2015. This is a two way street, meaning that similar Australian tariffs affecting US imports to Australia will also be removed.

Apart from some large manufacturers, such as Gale Pacific and Nylex, the opportunities for export to the US are limited by the inherent nature and function of the Industrial Fabrics industry in this country. For the very same reason, as well as competitive disadvantages compared to Asia, opportunities for US exporters are limited, with the exception of specialist or niche textiles and componentry.

The post war dominance of the US in the textile industry has long been destroyed by the Asian tigers, driven by the latters’ lower labour costs and the former’s removal of tariffs on finished goods. Weavers and finishers of commodity products, such as canvas, have either disappeared, or diversified into specialist fabrics. An example is Glen Raven, which is by far the largest manufacturer of woven solution dyed acrylic in the US, and whose main competition is sourced from Europe. Companies like this have already had success importing into Australia, despite tariff barriers.

On a smaller scale, a similar thing has happened in Australia. Even amalgamation of our largest mills could not stave off the inevitable, and local production of yarn and woven fabric is but a fraction of what it once was, basically due to the attrition of the local customer base. The mills that do remain tend to focus on finishing imported greige or weaving imported yarn into fabric for niche markets, such as breathable rainwear. Some have already had success exporting to the US, again despite tariff barriers.

For exporters from both countries, the main effect of tariff reduction will be to reduce the landed cost of their product, which theoretically should increase their market share, particularly against European or Asian sourced competition, still required to pay high rates of duty on woven or knitted textiles. The impact on local Australian producers will be reduced if their product’s raw material (e.g. yarn), which is also subject to duty, is sourced from the US.

Reinforced PVC is subject to a much lower tariff, and even its instant removal is unlikely to affect the competitive position in this country of US made products. These are mostly laminates, competing at the lower end of the market with Korea and China, which have lower FOB and transportation costs relative to the US, advantages not offset by tariff removal. In this context, the value of the US dollar is the barometer of competitiveness.

For the Australian converter, the obvious effect of tariff removal will be on prices, which will most certainly be driven downwards, especially in those areas where US made materials are competitive enough to exert pressure on other foreign imports. He has little to fear, however, from competition from US convertors.

This is because, in the industries that ACASPA represents, the majority of work undertaken by convertors, with the exception of flag, bag, marquee and tent manufacturers, is ‘custom’ made, that is fabricated and fitted for a particular job. This is an inherent barrier for any overseas fabricator attempting to enter the Australian market. Whilst it is possible for agents to measure up and install finished products, such as a tension structure, there are other issues such as warranty and other contractual issues that will still pose problems. What end-user is going to procure from an undercapitalised agent, who legally has to accept liability for performance guarantees, but whose fabricator is 10,000 kilometres away? It is one thing to expect a foreign fabric manufacturer with deep pockets, and a commitment to export, to support performance guarantees made on their behalf by an agent, but quite another to expect a small fabricator, particularly when quarantined in a practical sense from legal action. This is a two edged sword, for exactly the same logic applies to Australian fabricators attempting to enter the US market.

Australian tent, flag and bag manufacturers have already been exposed to the chill wind of foreign competition from Asia, exacerbated by anomalies in tariff structures. For example, a fully fabricated camping tent can be imported at a duty rate of around 5%, but the material to make one attracts a duty of 15%. With Australian labour rates significantly higher than Asia, the outcome is inevitable, and it is little wonder that few, if any large scale manufacturers of flags, tents and bags remain. Those that do, specialise in particular niche markets, or mainly fabricate other custom made products. They are unlikely to be further affected by imports from the US, where labour and raw material costs are essentially similar to Australia.

It must also be remembered that although the countries are very similar in culture and outlook, there are subtle differences between the US and Australian markets. For example, most road transport trucks in the US are aluminium sided, with rear door access only. There are very few ‘curtain- siders’ on the road, and unlikely to be so, since most loading and unloading facilities are geared precisely to the existing truck format. Clearly, this limits the potential for Australian truck curtain manufacturers in the US. On the other hand, they are unlikely to experience US competition in their own backyard.

Similarly with the marquee industry. The attitude of US marquee hirers is still very much “use and throw away”, mainly because the cost of locally produced ‘no frills’ PVC laminates is very much less than the PVDF or acrylic coated products. As yet the perceived value in longer life and cleanability is not accepted anywhere near to the same extent as in this country. Whilst there are US coaters with the capability of producing the quality of raw material expected here, it is most likely that US fabricators attempting to penetrate this market would need to use European product. In which case, they will also need to claw-back US import duty, or meet minimum local content requirements. Given the tyranny of distance, it is unlikely that they will be any more a competitive threat than that currently experienced from New Zealand manufacturers.

The awning industry, with its amenity towards standardisation, is probably the most likely to be affected. Because of harsher winters, the awning industry in the US is much more counter-cyclical than in Australia, and the US purveyors of ready-made product will be eager to exploit an opportunities in the off season, particularly to off-load (for them) discontinued lines. But again, there are differences between the markets, such as in materials used, typical fastening systems and electrical standards for motors.

In general, the immediate effect on a particular industry segment will depend on the level of tariff currently levied. Sails, for example, attract a duty rate of 2%, too small to make a competitive difference to sailmakers in either country. In the longer term, competitive pressures will be exacerbated by new entrants, as major players seek to establish themselves into a market particularly amenable in language, culture, and outlook, made even more so by few capital movement restrictions and harmonised taxation arrangements. This too has a silver lining, as the easiest way to establish is through acquisition, making financially efficient successful local businesses more valuable.

In summary, the effect of the FTA agreement on this industry’s imports is likely to be limited, the main losers being importers of Asian and European textile products, still forced to pay tariffs, and those local manufacturers competing head to head with US made equivalents. Even then, the pain will be gradual, as the tariff reductions will be phased in over ten years.

The effect of the FTA agreement on this industry’s exports to the US are likely to be similarly limited, mainly due to lack of vertical integration, and relatively inefficient economies of scale of local manufacturers, as well as the “custom made” nature of the converting process. There are some obvious exceptions to this, particularly in materials that have been proven to be successful here, but as yet have little penetration in the US (eg knitted shadecloth and coated polyolefins); and in niche markets with well designed finished products (eg wind resistant market umbrellas).

However, the slipstream effects of the FTA on this industry should not be underestimated. Whilst the overall impact on the Australian Economy has not been quantified, it will have a significant effect on GDP growth. The very fact that an agreement has been reached will stimulate interest of US investors in this country. If the New Zealand / Australia experience with the “closer economic relations” agreement is replicated, the FTA could have a significant impact on closing our trade deficit. All these factors auger well for Australian prosperity, and therefore increased demand for our industry’s products. Most of the opposition to this agreement, widely touted in the media, has come from vested interest groups, some of whom, such as the entertainment and sugar industry, are amongst the most pampered in the country, in terms of artificial market intervention, taxation concessions and financial support from all levels of government. The Federal Opposition, pandering to these groups and eager to display its anti-US credentials, has threatened to vote against the agreement in the parliament, if it can find any devil in the detail, despite the unequivocal support given to the FTA by every Labour dominated State and Territory government.