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PRIME MINISTER
TRANSCRIPT OF THE PRIME MINISTER, THE HON P. J. KEATING MP
QUESTION AND ANSWER SESSION FOLLOWING LECTURE TO THE
ASIA-AUSTRALIA INSTITUTE, BRISBANE, 26 OCTOBER 1994
E& OE PROOF COPY
Q: I notice when you were talking about the focus of Australian trade you
spoke of the Asia-Pacific and including the United States, but India
was not included. Now, India is a country of 600 or 800 million now
with projections to be quite possibly the fifth largest economy in
years, you did not refer to that, is that intentional or
PM: Well, India is not a part of APEC, not that the talk was solely or
exclusively about APEC. I think there are substantial opportunities in
India, but I think that it is a market, probably, we have been a bit late in
accessing and one can't deduce from that that the opportunities have
gone. I'm sure that is not true and some Australian companies are
drifting there, as you know, one of our banks has got a major banking
facility there. But, it is only, I suppose, in recent times that the Indian
economy has started to really open up and that is probably where the
interest is starting to come. We have had Indian Prime Minsters and
Ministers coming to Australia periodically and periodically we have had
these commitments and declarations of interest in one another, but
they tend to fade away and change as Prime Ministers change.
Therefore, to get the consistency of interest there is, I think, quite a
challenge and would require a very large effort on behalf of the
government and on behalf of the private interests in this country. It
just seemed to me that for as far as I am concerned the more
immediate and obvious place to start this sort of effort in the region
was with Indonesia which is strategically more significant to us and
one which, I think, politically had languished over the years.
So, there has been that focus, the focus on ASEAN because it is part
of ASEAN and we trade with Singapore and Thailand et cetera and we
have got the big established trading linkages with Japan, Korea and
increasingly with China. And, the fact that APEC in some respects
defines them too has, if you like, sharpened our focus. But, it is not to
say that I don't think there are opportunities in India or that we won't be
exploiting them. But, I do think that working closer to home as we are
and working within the framework of APEC is a case of prioritising
one's effort I suppose.
Q: Prime Minister, I wonder if we could publicly have a response from you
to Professor Fitzgerald's response to your speech?
PM: You mean the last part of his remarks about east Asia?
Q: I mean the remarks about the potential for new and alternative
groupings to APEC to appear?
PM: I think what Stephen was speaking of was at some point an emerging
confidence in Asia about Asia itself. About an Asian Asia. That is,
one where there is a notion of some perpetuality in economic activity,
that is, self sustenance about their economic activity within the area
we broadly describe as Asia and a more intuitive understanding of
culture, cultural differences, even cultural sensitivities within an Asian
context. I think that is entirely possible and to some extent that has
always been there. APEC is not there because it is the first thing we
thought of. It is there because we don't want to see the United States
stay at home with NAFTA, we don't want to see the United States
become more inward looking, we don't want to see it's Latin agenda
overtake its international ambitions and to keep it more strategically
engaged in Asia means that we don't see the world drop into three
blocs Europe, the Americas and Asia. So, there is a sense to APEC,
it marries the United States to East Asia, it keeps the United States
from going protectionist and unilateralist and it gets them involved in a
multilateral way, it extends that strategic cover for Japan which keeps
Japan away from the development of its own strategic force which, I
think, keeps the temperature down in North Asia and at the same time
APEC gives Japan a chance to rebuild and change its political
structures and find a new place for itself in Asia and the Asia-Pacific.
Whereas, I think, an exclusively Asian structure today would subjugate
Japanese interest, or attempt to, which is not good for Japan and it is
not good for us and it is not good for the United States.
Therefore, APEC fits the bill, I think, in terms of the economic
imperative for the Asian economies, the need for strategic peace in
North Asia, keeping the US out of home and well and truly on the
streets is a very important thing, I think, to be doing at this point and
before there will be any notion of an emerging group as Stephen sees
it, will be a time further down the trail when China's power as an
economic and military power will be greater. Such a region will have a
very heavy influence on China and one couldn't be sure that everyone
else is going to sign up to that. I'm quite sure the Ambassador would
be quite happy for people to be more influenced by China over time
which is a completely reasonable national aspiration.
So, with Japan, we often say it and it is worth saying again, Japan is
Asian, but it is not part of Asia and before it signs up to be part of Asia
there is going to have to be a lot of political change in Japan and it's
not here yet. The very interesting thing is the Stephen referred to
the Malaysian proposal which has a lot of the antecedence about it
that APEC has. But you see Japan won't touch it, because for the
reasons, I think, that I am saying and that is that Japan wants to keep
US strategic cover and US engagement militarily and economically in
the region, though, I am sure it has sympathies with the general
proposition which Malaysia has put.
Q: Prime Minister, this is not so much a question as an addition to your
comment on India. That is, that now as you said the doors are being
opened, Austrade is in the process of establishing three trading places
in India for the first time. As you know it all costs money and
fortunately you gave me a very generous minister in Bob McMullan
and when we submitted to him the need to be represented more
directly in India he agreed to meet the bill. But this is happening right
now, so I thought you would might like to..
PM: Interesting for the audience and for me.
Q: Prime Minister, I am delighted at your enthusiasm for APEC which we
are all familiar with. As you know we invented it at our research
school.
PM: Everybody says that.
Q: That's right, but I think Ross Garnaut and Peter Drysdale would make
a claim to it.
PM: No, I think the people that make a claim to it I could tell you where
APEC came from. It came from Sandy Hollway in Bob Hawke's office
and it came from someone in the department. That's where it came
from and the Heads of Government meeting came from me and that is
the end of the story.
Q: As a professional historian I find it very interesting to watch history
being created. The question I was going to ask was when we look at
APEC, of course, we are all inclined to a great enthusiasm and
optimism. But, there are those who look at our region and see other
more worrying things on horizon in particular there are some people
very concerned that about extensive defence modernisation programs
in the region, whether or not one feels this really constitutes an arms
race. Certainly there are offensive capacities being built and I wonder
if you would like to speak for a few minutes about your picture of the
strategic environment of our region over the next few years?
PM: That is a very tough subject, I think, to be crystal ball gazing about or
to be talking prescriptively about how that will change. I don't find it
too difficult to understand that with the cold war, bi-polarity taken away
and some of the regional tensions becoming more manifest that people
take some defensive steps in terms of their own strategic capacity. It
doesn't surprise me. We are seeing some substantial expenditures in I
the area, but again, where it matters in North Asia the Japanese
political system is largely confining its interests again to a self defence
force. It still spends a substantial proportion of its GDP on it, but
again, it is a very clear political commitment to maintaining the force as
a self defence force without an offensive capability. China is spending
a substantial proportion of its national income on modernisation of its
defence force. This, countries generally do. There is some concern in
the region about the extension of Chinese maritime capacity. I'm sure
everyone will continue to keep an eye on that. The nuclear capacity of
North Korea is a matter of concern, but again, I think the agreement
which has been brokered with the United States will go a substantial
way to coming to terms with that and I think the other sub-regional
expenditures within ASEAN and those other places are such as I think
probably most countries with any financial capability will choose to
upgrade their armed forces and to select modern and appropriate
equipment. I think the change in the capacity of countries in this
region to improve their military capabilities is, in fact, a function of their
wealth. As their wealth has risen so has their capacity to do things.
Not everyone has done it well as you know. There is a lot of junk
around the world and the thing not do is buy junk because in the end if
what modern conflicts are showing us is that it is the razor's edge that
matters. But, because the strategic environment is so quiet, I think,
people can see the effective life of the stuff through and they'll come
out the other side during a phase when, I hope, Australia will be a
substantial supplier of defence products.
So, I don't find a remarkably uncertain or inexplicable development on
our hands.
Q: Prime Minister, I just wonder if I could ask you a question about the
forthcoming APEC summit. There was a report that China has rejected
the notion that APEC should promote binding agreements that it would
only agree to a general goal rather than any binding agreement. My
question is in two parts. Do you see the APEC leaders producing a
binding agreement or merely a loose declaration of a general goal and
what is your position, in principal, on the debate about whether APEC
liberalisation should be on a Most Favoured Nation ( MEN) basis or on
a preferential basis?
PM: The very nature of the APEC meeting is that it is unstructured that the
leaders meet themselves without officials. And if one looks at the
success in Seattle with the adoption of a second meeting therefore
giving the APEC leaders some form as a forum, and the adoption of
trade investment, investment agreements, trade facilitation issues et
cetera, I think, the lesson from that is that the leaders when they get
together, if they wish, can get things done and that is what I hope will
happen at Bogor.
Again, this will be a very fluid thing and it will be fluid right until the
moment it meets. It is a most ambitious undertaking. Two years ago,
let me tell you this, I first raised the notion of the APEC area meeting
at heads of government or leaders level with George Bush when he
came to Australia on new years day 1992. That is to answer my
friends question here, that is where it started. I then opened it up with
President Soeharto, with President Kim Young Sam and others around
the region. That was just a couple of years ago, but already we have
got it to the point where we have been able to have a first meeting at
President Clinton's invitation where it has gone to a second meeting at
the behest of President Soeharto and where we have already adopted
a substantial trade liberalisation agenda. Now, this is taking APEC a
long way in a very short time, but, I think, Australia has been hungry
for change and ambitious for it. We have supported President
Soeharto in his attempt to move the agenda to trade liberalisation.
There is now quite a deal of support for that. One of the things that
surprised me is how quickly this has been internalised in Australia.
People have stuck that in their pocket as though it is a fait accompli:
' oh that's that bit done, what's next?' The sort of rampant naivety of
this and I am not suggesting this is your view Greg ( Sheridan) because
it isn't, but the rampant naivety of this is I mean it is a terrible thing
in the Australian media that everything has such a short span of
attention now, that serious and complex issues are dealt with quickly:
one night on television, a follow up story in the day's paper done
that's it. Well, big issues like this just go on and on and I hope that we
can get to a declaratory position at Bogor. At this stage, it looks like
there is every possibility that we will, but let's get there first before we
accept it and internalise it and take it as part of the commercial wall
paper of the region.
So, there is that about it. When leaders meet and decide something
like this, it is not a loose or waffly declaration, it will mean something.
When you sit half the world's population and half the world's GDP
down and they agree to something, what greater authority needs to be
brought to bear to make it firm? Now, what happens then in its
facilitation is a different question, but that's an entirely subordinate
question to the primary one about the doing of it in the first place.
There are some who in this country who argue about this question
about MFN ( Most Favoured Nation) and preferential, that this needs to
be decided first before you can make any declarations. Well, none of
these people have ever been around cutting tariffs. I'm the only one in
the Australian debate still around who has been in the tariff cutting
business and it is a pretty tough caper to be in let me tell you.
Therefore, the observation I would make is that when one looks at the
very high tariff levels in Asia and the non-tariff barriers, the task of
getting them down is so great that what I say is let's get cracking on
the task, make sure the task whatever we do is GATT consistent and
then worry about whether a particular country wants to extend the
preference or not. That is, whether it's MFN or its preferential. But,
you would swear blind the way some people speak, we have already
got the tariffs down and we are now deciding whether we are going to
let the world in to have a crack at it, have a piece of it or are we going
to keep it to ourselves. At the moment, the task is untouched. So, I
think the first thing is to in the minds of the APEC leaders, understand
that the velocity of trade and investment will be improved by lower tariff
and non-tariff barriers, to declare that they wish to bring them down on
a phased basis over a period of time and then the third task is to get
on and do it and including in that whether in fact countries want to
extend the preference outside or to contain it.
Now, for my part, I have said tonight and let me repeat. I don't think
that there is any value for us in seeking to develope a bloc in Asia
because that is the thing we are trying to avoid. The whole point of
putting the Americas together with Asia in APEC is not to produce a
preferential area. But, not all countries will take that view. Well, that's
all right, the world isn't simple, but some of this academic debate that
says we've got to tidy that up first before we can move on with the
primary debate is naive and immature in my view. This is a real world
tough issue and it is going to take a long time to work our way through,
but the end result can be a massive improvement in wealth in this
region and we have just got to take the chance and go and do it.
Q: One of the hallmarks, I think, of your Government and Prime
Ministership has been the opening up of trade and links with Asia and
so on. I think that has been something which is very desirable, but
one of the pieces of legislation which has been passed has been the
foreign investment funds legislation or ElF, I think, the intention that,
quite admirably, is to try and capture the Bonds and Skases of the
world, but the way that it has been implemented has been to, on the
ground, to greatly restrict the range of choices for ordinary Australians
to invest in overseas markets and particularly the Asian markets and I
wonder if you'd like to comment. I don't know whether you are aware
of that, but the reality is that we now have, the business that I am
involved in, an enormously lesser choice available to us as a result of
that legislation and I think that the costs of it are far greater than the
government would ever earn in terms of tax and whatever was
intended to be achieved by the passage of it.
PM: Essentially it was a tax efficiency thing. I mean, the alternative is to
run a foreign tax credit system where you bring your dividends home
upon which the local tax has been paid and then you top it up to the
Australian corporate rate. So, if you pay whatever it is, 18 per cent in
Hong Kong or where ever it might be and you bring the dividends
home you top them up to 33. Now, the problem for us was that if you
look at the OECD area, you have Australian companies in Germany, in
France, in Britain running a European business say, where in one
country the corporate rate is 36, the rate in another country is 35, in
another country it is 38, so there is an enormous accounting task
bringing these dividends home and accounting for it if there isn't to be
any primary tax paid here. So, what we said was let's make this
simple, we'll have a white list, if you bring dividends home from
countries on the white list we will assume that the company tax has
been paid there and you don't need to top it up here. But, if it is not on
the white list it is obviously on the back list. The white list extends
through all of the OECD area, that's the 24 member states of the
OECD, and a large part of Asia and we also have an active income
test and a passive income test so if you are a hole-in-the outfit in Hong
Kong with your name on an accountants door, you don't pass the
active income test, but if you are like Pioneer Concrete and you are
making concrete in Hong Kong you do pass it. So, even though it may
be regarded as tax haven, we don't require a topping up to the
corporate tax rate for the dividends here if you are actively involved in
that country. But, if people are involved there because it is simply a
tax haven or it is low taxed then if it is not on the white list we tax you
on an accumulations basis. That is, not even on a distribution, we tax
you on an accumulations basis.
If you ask most Australian companies are they better off with that
system than a foreign tax credit system, I'm sure they'll answer they
think they are better off with that system. Let me say in some places
take Indonesia where they have specific tax holidays for tax free
development zones or in Malaysia where there are development
zones, under our double tax agreements we recognise tax sparing. In
other words, we regard as legitimate for the purposes of development
of those countries, income earned in those particular parts which are
free of tax or have very low tax rates. So, if you go through the white
list, all the OECD, a large part of Asia, no problem about bringing
dividends home. If you are in a tax haven and you can pass the active
income test, no problem. If you are in a developing country which has
got a development preference, if we give it tax sparing under our
double tax agreement you have got no problem either. That means
that if you have got an active business somewhere and you believe
that the country should be white listed or alternatively that you can
pass the active income test, then I don't think it is much of a problem.
But, there is no doubt there are some countries that are not on the
white list and people can still operate there, it's just that they are taxed
on an accumulations basis as they earn their income and they'll get
assessments from the tax office as that income is declared.
The alternative is to junk the system and go back to a foreign tax credit
system. For major public companies accounting for tax variations of 1
or 2 or 3 per cent across say Europe, or even around this part of the
world is, I think, too much of a burden. Largely I thought this system
was largely working not too badly. I'm not saying that your example is
not without some justice, it may well be, but in all tax things there is no
perfection. You have got to make some rule of thumb issues and the
rule of thumb in making this work is a white list and if you are not on
the white list, well, you know what list you are on.
ends