Address by The Hon Alexander Downer, MP, Minister for Foreign Affairs, to the ABN AMRO Hoare Govett - Rothschild Conference, "South America - Resources and Infrastructure Investment Opportunities", Sydney, 17 March 1997.

Introduction

I am delighted to be here this evening.

I am particularly pleased to accept the invitation to be Keynote Speaker tonight because it gives me an opportunity to speak about the Government's broad foreign policy approach to South America.

South America is a region of growing economic and political weight in world affairs, and one which has considerable potential as a major partner for Australia.

When this Government came to office a little over one year ago, we made no secret of the fact that we would be pursuing a foreign policy focused sharply on advancing Australia's national interests.

That implied, of course, a continuing strong engagement with our immediate region - the Asia Pacific - one characterised by stronger bilateral relationships underpinning region-wide structures such as APEC.

However, the Government was determined - and remains determined - not to see our natural and necessary engagement with the region as a 'zero sum game'. Australia is a country with global interests, in particular with a strong interest in a secure and prosperous global system. Our foreign and trade policies need to be aimed at achieving these practical outcomes.

The Government's approach is above all realistic and results oriented. Foreign policy is often an area where an investment in time and energy may only pay off some time later. We accept that there are several areas - international trade liberalisation is one example - where the short term returns may be slight, but, over the longer term, there are substantial benefits.

While the Government's highest foreign policy priority is engagement with our immediate region, a very important component of the Government's foreign policy stance is the reinvigoration of our traditional links with the United States and Europe, both regions of considerable importance in strategic, political and economic terms, and both somewhat undervalued over the past decade.

The Government has also sought to enhance our relations with the emerging countries and regions of the world, including South America, a region which - not long ago - was largely unknown in Australia. I am pleased to see that - judging from the attendance at the conference and from the calibre of tonight's guest list - that those days are well behind us.

But while the recognition level is better, we still have some way to go in building a strong and enduring series of relationships between Australia and the countries of South America.

In my speech tonight, I intend to set out the Government's foreign policy approach to Latin America. In doing so, I will:

First, reflect on the process of economic reform in South America;

Second, examine recent trends in Australia's trade and investment links with South America, and the problems and prospects for the future;

Third, outline the measures that the Government is implementing to support the expansion of our commercial links with South America; and

Fourth, describe the enhanced cooperation between Australia and Latin America at the political level.

Economic Reform in South America - Opportunities

Doubtless you are well aware that the last decade in South America has been characterised by sweeping political and economic reforms. These reforms have seen most countries in the region adopting or returning to democratic forms of government and beginning the process of liberalising their economies.

The effects on the commercial environment of the region have been profound - reduced barriers to imports, more liberal foreign investment laws, improved export performances and a generally reduced government role in economic activity.

Expanded economic integration arrangements within the region assist in consolidating trade liberalisation, leading to increasing intra-regional and extra-regional trade flows.

The region's average tariff rates have fallen sharply. Non-tariff barriers have also fallen since the late 1980s. The region enjoys one of the fastest growing import markets in the world. It is also attracting a large share of global foreign direct investment (FDI) to meet growing market demands.

Foreign direct investment in the region represents about one third of total FDI in developing countries and 8 percent of the world total. The annual average of FDI flows entering the region increased from US$8.5 billion over the period 1986 to 1990 to US$18 billion in the period 1991 to 1995.

Notwithstanding the 1995 Mexican peso crisis, economic growth for the region is forecast at 4-6 percent for the rest of the decade.

As South America's focus has turned from being inward to outward-oriented, its relations with the rest of the world are being transformed. All South American countries have adopted the outcomes of the Uruguay Round of GATT negotiations and are active participants in the World Trade Organisation. In the Western Hemisphere, the Leaders of the Americas have committed their countries to negotiate a Free Trade Area of the Americas by 2005.

The countries of South America are also placing a greater emphasis on their political and economic links with the Asia Pacific. Both regions clearly have an expectation that significant spin-offs can be obtained gain through greater contact and linkages.

Australia - part of the fast growing Asia Pacific - is ideally positioned to take advantage of these increasing opportunities.

Trade and Investment Links - Trends and Prospects

Commercial links between Australia and South America have gained a new momentum in recent years. The overall magnitude of these links is still modest, but the trends are clearly positive.

Australian investment in South America - particularly in the mining sector - has been the trend-setter in the overall economic relationships between Australia and South America.

Investment has increased sharply since 1990, and now stands at over A $ 2 billion. The revenue generated by Australian foreign direct investment in South America outstrips the revenue from our direct exports to the region.

Much of this investment is located in the mining sectors of Chile and Argentina and - more recently - Peru. Notable examples include MIM and North's share in the massive Alumbrera copper and gold mine in Argentina, and BHP's share in the La Escondida copper project in Chile. Several other Australian companies have substantial involvement in the region's mining industries.

Australian investment in South American infrastructure projects is also expanding. Two good examples of this are TNT's transport interests in Chile, and P&O Australia's interest in ports in Argentina.

That the Australian corporate sector has led the way is not only commendable, it also means that Australia now has a foothold in these emerging markets which can be matched only by the major economies of Europe and the United States. It is one of our key assets in the market and we should be aiming to turn that advantage into expanded trade flows.

This is vital because - at the moment - two-way trade flows are quite modest, although they are growing.

Australia's merchandise exports to the region increased at an annual rate of 14.8 per cent between 1990-91 and 1995-96, twice the rate of total exports. And, significantly, manufactured goods and services have assumed growing importance in our total exports to the region, accounting for over 21 per cent of total exports to the region in 1995-96.

Our services exports, in particular, are emerging as one of the success stories of our trade with the region - with the mining and transportation sectors leading the way.

So, Australia is well-placed - and the demand is there - but, make no mistake, the competition will be fierce both from within South America and from the NAFTA economies.

This makes it imperative that Australia retain and expand its competitive edge, a goal of central importance to this Government and an area where we are making substantial strides forward.

At the heart of the Australia's economic strategy is a commitment to increase domestic savings in order to achieve faster economic growth over the long term without the constraints of rising current account deficits and inflation.

Achieving this goal, while maintaining low inflation, will produce progressively a climate for low real interest rates, which in turn will stimulate investment. In the 1996-97 budget, the Government moved decisively to cut Australia's underlying budget deficit, and we are committed to achieving a balanced budget by 1998-1999.

The Government has a comprehensive microeconomic reform agenda that will push aside inflexible and inefficient work and business practices - creating a more flexible labour market, reducing the burden of regulation and improving efficiency in the provision of infrastructure services such as the waterfront, aviation and energy.

In short, the cost of doing business in and with Australia will be reduced, making Australia and even more attractive investment destination and making Australian companies more competitive abroad.

Against this background, the new complementarities between the economic reform programs in South America and Australia are very clear. Australia is now a natural partner for South American companies in sectors where Australia can offer special expertise and competitive advantage such as resource development and infrastructure, telecommunications and agribusiness.

South American governments are actively seeking foreign capital to develop natural resources such as copper, gold and coal. Infrastructure development is a priority for most governments in the region because of the need to make up for decades of low funding levels.

The World Bank estimates the region must invest around US$50 billion a year over the next decade to address this so-called "infrastructure deficit". Annual requirements in South America's infrastructure sector up to the year 2000 are estimated at US$13 billion for electricity projects, US $7 billion for roads, US $10 billion for water supply and sewerage, and US $5 billion for telecommunications.

These are staggering figures, and Australia has the capabilities and expertise to play a prominent role in helping to meet South America's infrastructure requirements.

More than that, suitable Australian investment will lead to flow-on opportunities for Australian exports of goods, technology and services. For example the Australian Geological Survey Organisation recently concluded a contract for the airborne survey of mining areas in central Argentina - a contract worth around A$ 4 million.

Australian Government Initiatives to Encourage Trade and Investment Ties

Now I would like to mention several of the more significant initiatives that the government has taken to turn these opportunities into concrete realities.

At the bilateral level, air services agreements have been concluded with Argentina and Chile. These agreements have put in place a framework for our airlines to expand air services to and from South America, which to date has been one of the major impediments to doing business.

Australia has concluded investment protection agreements with Peru and Chile and - in January this year - with Argentina. These agreements provide a more predictable environment for investors. We are in the process of negotiating double taxation agreements with Argentina and Mexico.

I should also mention that Argentina was included as a feature market at the successful National Trade and Investment Outlook Conference (NTIOC) held by the Australian Government in December last year. The Argentine delegates gave well-received presentations on investment opportunities in their mining and telecommunications sectors. Brazil, Mexico and Chile were featured markets in previous NTIOCs.

At the regional level, Chile and Mexico are both APEC members, and others in the region - notably Peru - are interested in joining the organisation. That all points to the growing pattern of links across the Pacific, from South America to East Asia.

I want to say a few words about one particularly promising initiative, a dialogue on political and commercial issues between Australia and New Zealand on the one hand and the important South American customs union known as Mercosur comprising Brazil, Argentina, Paraguay and Uruguay .

Australia's objective for the dialogue is to support and advance our expanding commercial interests in the group as well as influence the pace and scope of regional integration developments in South America.

Australia also sees great value in the dialogue with Mercosur as a way of consolidating and widening the already excellent trade policy cooperation we enjoy at the multilateral level with many South American countries, for example on agricultural trade issues through the Cairns Group, and more generally across the full spectrum of issues on the World Trade Organisation's agenda.

Enhancing Political Links

Of course, trade and investment links cannot be successfully pursued in isolation from other important elements of our international relationships. Cooperation at the political level between Australia and South America is proving to be productive and valuable.

The type of political cooperation I am talking about is a relatively recent phenomenon. It began in earnest when the Cairns Group was formed in the mid-1980s. Although the Cairns Group has had a specific function - to encourage international agricultural trade reform - it was also significant in generating a habit of consultation and dialogue between Australia and South American countries.

In many ways it showed that there are a range of issues where Australia and the South American countries have similar perspectives as middle-ranking powers and commodity-based economies.

In an international climate where the major powers are expanding their power bases, Australia has little choice other than to look to construct permanent and issue-specific coalitions to advance our objectives.

South American countries continue to play a prominent and constructive role in the multilateral system - they often adopt similar stances to Australia on key arms control, disarmament and environment issues. South American countries were well represented in the group of states supporting Australia's successful initiative last year to salvage the Comprehensive Nuclear Test Ban Treaty at the United Nations General Assembly.

Building closer political ties with regional groupings in South America is a key feature of our strategy. Australia has recently commenced a regular dialogue with the Rio Group - South America's premier institution for regional political consultation and dialogue with other regional groups.

At the inaugural dialogue meeting in New York, I had a wide-ranging and productive exchange with Rio Group ministers on important issues such disarmament, sustainable development, narcotics and regional integration.

Australia also collaborates closely with Argentina, Brazil, Chile and Uruguay through the Valdivia Group - a coalition of temperate southern hemisphere countries working together on environment issues of common concern.

These are just a few examples of the practical way in which the Australian Government forms issues-based coalitions with countries in South America that share common interests and policy goals in the international arena. The Australian Government is determined to make these links even stronger.

Conclusion

In conclusion, over the next fifteen years, Australia's relations with South America will expand across the board.

To ensure that we have the right policy framework in place to make the most of these opportunities the Government will release a major study in May into Australia's trade and investment relations with South America.

The results of this study will help the Government and the business sector focus sharply on practical and effective ways to expand trade and investment in the years ahead. The challenge for government and business is to take the vital next step and convert the new complementarities and opportunities into real long term benefits.

Despite high levels of Australian investment in South America's mining sector - and growing investment in the infrastructure sector - I sometimes hear the complaint that the Australian public and corporate sectors are not sufficiently aware of these new opportunities.

But, if this evening is any guide, the level of interest in the Australian corporate sector is high and of good quality. That promises much for the future.

I look forward to working with you all in promoting improved linkages between Australia and South America.