CHAIR —I declare open this meeting of the Senate select committee inquiring into the Australia-US free trade agreement. The terms of this inquiry are available from the secretariat staff. Today's hearing is public. This could change if the committee decides to take evidence in private. Witnesses are reminded that evidence is protected by parliamentary privilege. Witnesses should be aware that the giving of false or misleading evidence to the committee may constitute a contempt of the Senate. If at any stage a witness wishes to give part of their evidence in camera, they should make that request to me as chair and the committee will consider that request. Should a witness expect to present evidence to the committee that reflects adversely on a person, the witness should give consideration to that evidence being given in camera. The committee will be obliged to draw to the attention of a person any evidence which, in the committee's view, reflects adversely on that person and to offer that person an opportunity to respond.

Welcome, Mr Jeffriess. Thank you for making your time available. I understand you have already been afflicted by the vicissitudes of Canberra at this time of the year. We have your submission.

Senator BOSWELL —Chair, I have to leave in a few minutes. The fishing industry, particularly the tuna boat industry, is one of the big winners in the free trade agreement. Could you explain what advantages you get from the free trade agreement as far as tuna is concerned?

Mr Jeffriess —We need volume to survive. We have no tariff protection of substance into Australia, therefore we need global volume to survive. The United States and Europe have always been shut to us because of a 35 per cent tariff in the United States and a 25 per cent tariff in the EU. This is the first opportunity we have ever had to get into the United States. We did not expect this outcome to be so positive so early. We expected, at best, a phase-down over a period because of the sensitivity of this product in the United States. It gives us the opportunity to get into what we call the boutique market in the United States. In our terms, it could substantially increase our volume.

Senator BOSWELL —Is `boutique' canned tuna?

Mr Jeffriess —In canned tuna there are two types of market. There is a boutique, upper quality market, which we would compete in and which is probably 20 per cent or 30 per cent of the total market. That is massive. Then the large volume market of about 70 per cent or 75 per cent is taken up by product that we could never compete with even at zero protection. So we are talking about competing in that upper quality canned tuna market. We already are very competitive in the United States with the high-quality tuna market—that is raw tuna—so that is not a problem for us. We have always had duty-free entry there. As I say, the tariff was 35 per cent, even for entry to the boutique market, and we would be competing against US domestic production, production particularly from US dependencies like Samoa and the free trade agreement with Ecuador, so we could never compete in that market.

Senator BOSWELL —I am glad we have a happy customer.

Mr Jeffriess —Unexpectedly, yes. The Australian tuna industry, and particularly our company, competes in three areas: the high-quality sashimi market, which we export to Japan predominantly—about $260 million of exports; a lower quality but long-line product; and the canned market. In the canned market, we are the only producer in Australia. There were five up until 1990 but then they gradually faded away. Port Lincoln is the only surviving cannery. We have about 40 per cent of the market. As I say, to survive globally in the longer term we have to have volume and this type of opportunity. We are working towards the same outcome in the European Union to get special access to the opportunities we need to achieve that volume. We employ about 300 direct employees. We are probably the largest private employer in South Australia, so it is important not just to the Eyre Peninsula but to regional South Australia. With no real tariff protection to compete against particularly Thai imports, the only way to survive is to get this kind of global access.

As I say, we produce tuna which would compete in the US boutique market. The total market is worth about $US1[half ] billion. Just the boutique market is around 20 per cent to 25 per cent of that market. So it is a massive market. We are working towards the same outcome in the European Union through another avenue—a bilateral agreement with the commission rather than a free trade agreement.

Why this is unexpected to us is that it is an extremely sensitive product in the United States. For one of their dependencies, Samoa, it is virtually their only industry. They have free trade agreements, of course, with major canned tuna producers like Mexico and Ecuador. The opposition in the US Congress was substantial—not that they are worried about us; they are worried about creating a precedent for their impending free trade agreement with Thailand. If they give Australia duty-free access, they would have no rationale really not to give Thailand the same privilege. So getting zero access on day one of this agreement was an unexpected surprise.

Senator O'BRIEN —If I understand you, your evidence in essence is your organisation's analysis of the impact of the free trade agreement on your members' industry?

Mr Jeffriess —That is correct. We have a wider view as well. We have been waiting right throughout the Kennedy Round, let alone the Uruguay Round, for these types of things to happen. We believe from long experience that a lot of these advantages can only happen bilaterally, unfortunately, not multilaterally.

Senator O'BRIEN —The types of products that you are talking about are the growth in canned tuna?

Mr Jeffriess —Yes.

Senator O'BRIEN —Skipjack tuna?

Mr Jeffriess —As I said, there are two types of canned tuna—real volume made from albacore and other lower quality species, such as bonito; and a higher quality `mixed' product, as we call it—with which we would compete in the American market.

Senator O'BRIEN —A high-quality, mixed product—mixed tuna with different species of tuna?

Mr Jeffriess —In our case, we mix it with vegetables which has a special appeal in the United States. The way it is done in Port Lincoln is not done anywhere else in the world at this stage. We now know that other people would follow. We have every reason to believe we would achieve reasonable penetration. In our terms, that represents significant increases in volume.

Senator O'BRIEN —Is that because someone else is doing the same thing?

Mr Jeffriess —It is a bit like the sashimi market. The innovation in Port Lincoln is substantial enough to maintain a gap for a substantial period.

Senator O'BRIEN —I am still trying to follow: is the mixed product that you described as the opportunity for the South Australian cannery a product that is already in the US market that you are trying to emulate or is it a new product?

Mr Jeffriess —No, that type of product is not there.

Senator O'BRIEN —Is that like the flavoured tunas that we see on our supermarket shelves?

Mr Jeffriess —We call them Tempters, yes; it is the Tempters brand.

Senator O'BRIEN —And currently no-one else supplies those to the US market?

Mr Jeffriess —Thailand has been trying, like us, but the tariff protection is too substantial to allow access.

Senator O'BRIEN —What species of tuna is required for that product?

Mr Jeffriess —We produce it with skipjack tuna. There is no difference between skipjack tuna and yellowfin tuna, which is the other species used, in terms of the outcome, if your production technology is adequate.

Senator O'BRIEN —What about the availability of the resource?

Mr Jeffriess —Skipjack is probably—and there is plenty of literature on this—one of the few species which is underfished at this stage. That is not to say that the western Pacific agreement which is currently being put in place will not have to take some early action. But the amount of skipjack available to us, particularly from our own and New Zealand's waters, is more than sustainable at this stage.

Senator O'BRIEN —I am assuming from what you are saying that there is an enormous opportunity to expand the catch if you are going to take advantage of the US market—or does that mean you will transfer product from one market to another?

Mr Jeffriess —No, we would not transfer from one to the other, but we would give a security of markets—there is no question about that—which is important. The amount of skipjack that we catch to produce in Port Lincoln for the Australian market is very small compared with the western Pacific catch of skipjack, which is over a million tonnes a year. It is by far the largest fishery in the world in terms of value.

Senator O'BRIEN —So how many additional tonnes do you expect we would need to catch to take a significant share of the US market?

Mr Jeffriess —Between us and New Zealand, we currently catch about 20,000 tonnes a year. We would need to catch an extra 10,000 tonnes, which from the perspective of western Pacific's million tonnes—and this is the same stock—is a very small amount.

Senator O'BRIEN —I am not an expert on the life cycle or the travel arrangements of that species. I take it that it is the same travel pattern—that it goes through both regions?

Mr Jeffriess —The western Pacific stock is mainly in the tropical area, in countries like Micronesia and Papua New Guinea, so the fish which come down, which are carried by the eastern current or the western current into the Great Australian Bight, are essentially lost. Those lost fish do not belong in temperate waters; they belong in tropical waters. The actual catch goes up and down. But between us and New Zealand, we catch that amount.

Senator O'BRIEN —What work has been done on the availability of the species to be caught? Is there a history of catching more than we currently catch?

Mr Jeffriess —We have not needed to catch more. Because we are the only customer in Australia, we send our boats out and they catch what they are requested to catch.

Senator O'BRIEN —I am just wondering about the viability of a proposal to increase our trade into the US market if it is reliant on increased catch volumes.

Mr Jeffriess —That is the least of our problems—let us put it that way—in terms of penetrating that market. The biggest problem is the actual brand under which we would operate. That is a type of non-tariff barrier in the market itself. A simple example is the `kosher' brand required in the United States. Getting the `kosher' brand on your product is not an overnight process. All those things are the normal market challenges.

Senator O'BRIEN —Does that mean that the fish have to be processed in a certain way?

Mr Jeffriess —Yes.

Senator O'BRIEN —In a way that is different to the current processes, I take it?

Mr Jeffriess —It is a minimal difference in our case. Our processes have always been of that high quality anyway, simply because we have had to make the capital investment because of our labour costs.

Senator O'BRIEN —Total canned tuna exports for 2002-03 were 183 tonnes, worth $1.29 million, but only 62 tonnes of canned fish in total—I do not know how much of that was tuna—went to the United States. Do you know how much of that was tuna?

Mr Jeffriess —To the United States?

Senator O'BRIEN —Yes.

Mr Jeffriess —Nil.

Senator O'BRIEN —Nil?

Mr Jeffriess —That is right.

Senator O'BRIEN —The 183 tonnes we exported in 2002-03 would come from the 10,000-tonne catch? Is that how I should understand those figures?

Mr Jeffriess —What is canned tuna in that small amount is exports to New Zealand and Singapore. It is essentially test marketing.

Senator O'BRIEN —That is what the Australian fisheries statistics tell me was the tuna export in 2002-03: 183 tonnes.

Mr Jeffriess —Of canned tuna?

Senator O'BRIEN —Yes.

Mr Jeffriess —As I say, most of it goes to New Zealand and small markets like Singapore where we are test marketing all the time.

Senator O'BRIEN —What happens to the other 10,000 tonnes?

Mr Jeffriess —It is all marketed domestically. Our brand has 40 per cent of the Australian market. Imports obviously have 60 per cent.

Senator O'BRIEN —Do we import any fish from the United States?

Mr Jeffriess —For canning?

Senator O'BRIEN —Canned fish from the United States.

Mr Jeffriess —Not to my knowledge. Some people may import from particular boutique canneries—canned sardines, for example. Canned salmon, of course, we import. We market that ourselves; we just do not produce the product.

Senator O'BRIEN —What is the impact of the free trade agreement on those imports into Australia?

Mr Jeffriess —They have always had duty-free access. The only tariff remaining in Australia is the five per cent and that is effectively abolished by the Thai free trade agreement with Australia.

Senator O'BRIEN —Does the fish that is imported now have a five per cent tariff?

Mr Jeffriess —If you import loins to make into cans, yes; but if you import the cans it is five per cent for some countries and not others. Effectively, the global competitor is Thailand and under the free trade agreement with Thailand that tariff is abolished from 2008.

Senator O'BRIEN —A story appeared in the Australian of 10 February this year which quoted the Port Lincoln tuna processors as saying that they expected a jump in income of $20 million within 12 months and would need 50 extra staff. On 13 February Mr Vaile used the $20 million number but said it was conservative and referred to an increase in staff of 70. Which is the correct number, or is that still a matter of art, not science?

Mr Jeffriess —Those things are estimates. It depends on the time it takes to get into that market—the instant capacity we have. We have been more successful in the domestic market than we could have imagined and that has absorbed a lot of our capacity. Access to the American market and the EU market is the only way we can survive in the long term.

Senator O'BRIEN —I am just trying to rationalise what you just said: you said you have been more successful in the Australian market than you could have imagined but your long-term survival is dependent on the US and the EU markets. Are you underselling the domestic market?

Mr Jeffriess —No. What I am taking is a realistic view of the import competition. Once the Australia free trade agreement with Thailand enters into force and the current five per cent tariff is abolished it will be very difficult for anyone to compete with the Thai product. The next supplier is mainland China, which will follow in the next decade. That is a realistic view. The only way we can survive in many industries in South Australia is to be niche marketing into markets like the United States. An opportunity was never available before.

Senator O'BRIEN —In the case of Thailand that five per cent tariff is not a nuisance tariff?

Mr Jeffriess —No, not at all.

Senator O'BRIEN —Its removal will make us uncompetitive with the Thai?

Mr Jeffriess —No, it makes it much more difficult to compete—we are not necessarily uncompetitive. Once mainland China gears up that has its own challenges for us.

Senator O'BRIEN —Is there a significant fish stock there that we do not have access to?

Mr Jeffriess —No, but there is significant processing capacity in China. We are aware of that. People are already doing that. For example, if the Norwegians export salmon to the rest of Europe they often send it to China for processing and then bring it back to Europe. They are the economics of global production. We are putting in capital equipment now which has to be amortised over 20 years. You have to be realistic about that amortisation period. That is what we are trying to be. The only way we can survive is volume.

Senator O'BRIEN —How much canned tuna would we need to export to the United States to make the trade worth $20 million?

Mr Jeffriess —That would be an increase in the Port Lincoln production of about 30 per cent. As I said before, as a percentage of the American market it is miniscule.

Senator O'BRIEN —Does that mean an increase of about 3,000 tonnes?

Mr Jeffriess —A bit more—3,500 tonnes. That is in fresh fish equivalent, which are the terms we always talk in.

Senator O'BRIEN —Are there any safeguards in place for tuna products in the agreement?

Mr Jeffriess —There are the normal safeguard clauses, which are common to every trade agreement. We have them in the Thai trade agreement. The meaningfulness of them is doubtful. The Americans are not worried about Australian competition. As I say, it is only niche marketing. What they are worried about—it is in the publicity already—is the pending free trade agreement with Thailand. They are worried that the Thai will, obviously, insist on the same treatment. That is what worries the American industry and their political representatives.

Senator O'BRIEN —Do you think that that is going to block the endorsement of the US-Australia free trade agreement from the US point of view?

Mr Jeffriess —No, not at all. They are now moving on to the negotiation of the agreement with Thailand. That is where the problem occurs. I cannot overemphasise the dependence of these US dependencies on that particular US market. You are talking about the whole of American Samoa depending on that particular access. They know they cannot compete with Thailand in that market without that kind of preferential access.

Senator O'BRIEN —With regard to the opportunity for Australian product from the Port Lincoln cannery to get into the market, what market research has been done on the products that you propose to sell there?

Mr Jeffriess —We have done a lot of market research. One of the ways you make an assessment of these things is by looking at the interest from the potential American marketers, and that has been very substantial. At this stage the product that Port Lincoln produces is unique. As I said, others will no doubt follow. The Thai are trying to match the quality of that product now and they will eventually do it. We are confident that we can be competitive in the American market, but we need volume to do it. We need more volume than we have now. That, in turn, makes you more competitive in the domestic market. It is quite a straightforward process.

Senator FERRIS —Mr Jeffriess, there has been a good deal of evidence to this select committee on bilateral versus multilateral. I notice in the summary section of your submission you discuss the amount of time—you say it is decades—for the Uruguay and Doha rounds to deliver any benefits to your industry. Can you just take us through what has happened in those rounds in relation to industries such as yours? Obviously you have said it is preferable to wait for a bit longer with Seattle and Cancun and all the rest of them, but can you just talk us through the bilateral versus multilateral? We have had a lot of evidence which suggests that multilateral is preferable to these bilateral arrangements.

Mr Jeffriess —In our case, bilateral action targeting access for specific products is really the only way to best achieve market access. I believe this applies to most processed rural products, and New Zealand is a good example of where this has been successful. New Zealand is a far superior operator to Australia in this area, with special bilateral arrangements even when they are outside full trade agreements. We are trying to organise the same thing, and the Australian rock lobster industry has done the same thing with the EU. These products in the United States and the EU, particularly now in Spain, are so sensitive to local political pressure that they get lost in the maze of a multilateral agreement. It is only by targeting them in a bilateral agreement that you can best achieve these outcomes. It is not the only way of course, but it is the best way to achieve them.

The actual tariff protection to the United States industry since Kennedy, first, and Uruguay has actually increased, because what they have done is adjust the actual terminology they use in the tariff itself. So ours has gone from something like 20 per cent to 35 per cent. There are other products where multilateral negotiations are probably superior, but certainly not in, I would say, rural processed commodities.

Senator FERRIS —In relation to your industry—given that you are the only cannery in Australia and given your proximity to the clean water, the tuna farms and so on that have been developed—to what extent would you say the failure of Uruguay and Doha has held back the natural development of your industry? If it had been successful at multilateral levels, can you just sketch for me how you would see your industry operating now? What markets would you see it would be in? You said you had 300 employees. What number of employee do you think there might be?

Mr Jeffriess —To answer the question, the problem for us is that because of the delay in Doha, for example, to invest in a big purse seine to catch this type of fish for canning is $20 million. You really have to be very confident it is going to happen. After the failure of the Uruguay Round, where we specifically targeted this product to try and get some Australian negotiating coin, that was a major blow to us. You cannot invest the kind of money that we are required to invest without some type of surety. We did not believe, frankly, that this bilateral agreement would achieve such an early outcome because of the political sensitivity of this product in the United States. So, to some extent, it will take us some time to gear up to achieve the types of outcomes which Senator O'Brien was referring to.

Senator FERRIS —That was going to be my next question. In terms of extra infrastructure investment, I imagine, both perhaps in the farms and also in the processing plant—which I am happy to say I have visited several times—can you just take us through how you would see yourself gearing up? I think Senator O'Brien asked about whether you had done any market research, but what about upward structural adjustment, I suppose you would say, to take up the opportunities that this agreement will offer your industry?

Mr Jeffriess —It can only happen over a period of two or three years. That kind of investment is substantial now the market is opened up. When competing internationally in the United States and anywhere else, currency movements and a whole range of things come into play. What we are talking about is major investment of, considering it is rural South Australia, tens of millions of dollars. To some extent, that is cross-subsidised by the success of tuna farming and the profits from there, but these people who own this cannery are willing to put those types of dollars in. Anyone who goes there can see how successful it is.

Senator FERRIS —It is actually owned by local families, isn't it?

Mr Jeffriess —That is right.

Senator FERRIS —Are you telling us those families are ready and willing to make this investment to enable your industry to take advantage of these extra opportunities?

Mr Jeffriess —Yes.

Senator FERRIS —You do not see that there is likely to be increased pressure from any other companies in Australia that might set up?

Mr Jeffriess —No. It is not conceivable that anyone else could set up a cannery in Australia.

Senator FERRIS —How will this change the face of Port Lincoln?

Mr Jeffriess —It underpins the security. When you are competing in a domestic market with a tight free trade agreement, it will make it that much more difficult to compete et cetera.

CHAIR —We have a division in the Senate. We have to suspend proceedings for a minute or two.

CHAIR —Mr Jeffriess, you were completing an answer to a question from Senator Ferris. The proper thing is to allow you now to complete your answer.

Mr Jeffriess —Basically the question was along the lines of: are the people who own the cannery willing to gear up to handle that type of volume? Yes, they are.

Senator O'BRIEN —Over what period?

Mr Jeffriess —That would depend on how quickly we could establish a brand. We do not own the brand under which we market in Australia—that is, the John West brand, which is owned by Simplot. We would need to establish our own brand or operate through another current American brand. Those negotiations are taking time.

Senator O'BRIEN —If I understand you, the process of investment will follow the process of establishing or registering or acquiring a brand.

Mr Jeffriess —The catching capacity we already have. The manufacturing capacity we would have to expand, yes.

Senator O'BRIEN —What is the lead time on such decision making?

Mr Jeffriess —The implementation of those decisions, once we establish the brand, can be made within months.

Senator O'BRIEN —So it is just purchasing more cooking equipment?

Mr Jeffriess —That is correct. The cooking equipment we have; it is the production line, space and those types of things that we do not have.

Senator O'BRIEN —Will this mean a diversion of product from the Australian market or other markets?

Mr Jeffriess —No, it would not.

Senator O'BRIEN —Will it mean different production techniques as against the two products?

Mr Jeffriess —No, it would not. The product is attractive in its own right.

Senator O'BRIEN —So whatever changes are made will be applied to the Australian market as well?

Mr Jeffriess —The benefit for our domestic marketing gives a more competitive cost structure.

Senator O'BRIEN —I am asking you whether you will modify all the product or you will be running different product runs—one for the United States and one for Australia?

Mr Jeffriess —No, we would not.

Senator O'BRIEN —Which of those two propositions?

Mr Jeffriess —It is the same product.

Senator O'BRIEN —You would be running the same product, so whatever changes you have got to make to fit the United States market for kosher branding, I think you said—

Mr Jeffriess —Kosher approved—

Senator O'BRIEN —What does that mean?

Mr Jeffriess —They are approved by certain religious groups in the United States.

Senator O'BRIEN —I thought that was what you meant.

CHAIR —The Jewish community, to be precise.

Senator O'BRIEN —Whatever changes you have to make would apply to all the product that you supply to the Australian market. Does that differentiate your product from other imported product in any way?

Mr Jeffriess —In the United States?

Senator O'BRIEN —No, here.

Mr Jeffriess —No. The product is the same. Kosher requires slight changes in production technology. We would use the same protection technology. It does not produce any kind of a different product.

Senator O'BRIEN —Where can we access the information about the availability of the additional catch?

Mr Jeffriess —Through the South Pacific Commission documents, or I can supply them.

Senator O'BRIEN —I would appreciate it if you could help us out that way.

Mr Jeffriess —I will supply the web sites. It is quite freely available. It is in the Australian literature as well.

Senator O'BRIEN —Thank you.

CHAIR —I have a couple of questions. You are aware of the dolphin tuna case for the WTO?

Mr Jeffriess —Yes.

CHAIR —As I recall, that is a case that arose in an argument about the collateral catching of dolphins in catching wild fish.

Mr Jeffriess —Catching wild yellowfin tuna, yes.

CHAIR —Are you aware of whether the question of dolphin detectors on fishing boats was raised in these negotiations?

Mr Jeffriess —It would not have been raised, because dolphins do not move with skipjack tuna, which is the tuna we can in Australia. Dolphins only move in one place in the world with tuna—that is, in the eastern Pacific off Mexico and other Latin American countries—and that is with yellowfin tuna. That is the only tuna, for some reason, that they mix with. There is plenty of literature on that in the western Pacific where we source our fish—only skipjack.

CHAIR —So are you telling me that Americans did not raise the question in this case because they believed your fishery was exempt from the potential of catching dolphins with the tuna?

Mr Jeffriess —We would be subject, like anybody else, to the same audits but they are not audits which would provide any more than just a nominal approach, simply because the type of fish that we can does not mix with dolphins. In fact, in the whole western and central Pacific dolphins do not move with any tuna alone but skipjack.

CHAIR —With regard to the American distributors that you are negotiating with to take advantage of this opening in the market if the free trade agreement goes through, can you tell us whether the cans on the supermarket shelf will have `Australian tuna' on them or whether they will not indicate the country of origin?

Mr Jeffriess —It compulsorily will include the country of origin under American labelling regulations. It will say in any case `Made in Australia' even if it was not compulsory. We are a strong believer that that is a seller in the global market.

CHAIR —Yes, and so am I, but there is always a potential in the United States for people to restrict their purchases to US products. There are campaigns at state level to encourage that, which may inhibit market penetration. I do not know whether those particular buy-local campaigns are prohibited under this FTA.

Mr Jeffriess —I would not have thought that the normal approach like the `Made in Australia' campaign and logo, which is quite normal in the United States, could be prohibited at all. It is not in any way contra to WTO requirements et cetera.

CHAIR —I was asking with respect to this agreement.

Mr Jeffriess —I know of nothing in the agreement which says that. I have not read anything in the agreement to that effect.

CHAIR —It has been put to us that the ISO quality standard will not apply in this market. Are your companies qualified to the ISO standard, do you know?

Mr Jeffriess —No, because we believe genuinely that ISO 14000 or 9002, which are the appropriate ones, are basically a waste of time.

CHAIR —So you are not qualified to those standards?

Mr Jeffriess —We satisfy other much higher standards in our view, which are required by AQIS. That standard is far superior to ISO. ISO is a very subjective, very subjectively audited branding of a product and we do not believe that it has any real meaning, because it does not have the government imprimatur.

CHAIR —Are you satisfied that you will meet American quality standards?

Mr Jeffriess —Well in excess of their quality standards, yes.

CHAIR —You have checked that?

Mr Jeffriess —We have checked every aspect of the market that we can. We satisfy all the regulations that we are aware of, yes.

CHAIR —So you have checked that you will meet their quality standards and the answer is yes?

Mr Jeffriess —Yes.

CHAIR —I have no further questions for you, Mr Jeffries. Thank you.

[4.29 p.m.]