An international trade perspective on user pays road network charges

8 March 2021
From our ‘Thinking outside the box’ series
James Bushell posits that if the road sector is subsidised by the wider economy in a non-equitable way, this could become an area of trade risk for Australia if it is seen as inconsistent with World Trade Organization (WTO) rules.

The Australian agricultural sector, in particular barley producers, were shocked when China applied import tariffs on exports to China, on the basis that Australia was dumping barley into Chinese markets.  These tariffs appeared to be geopolitical, coinciding with Australia’s calls for an independent investigation into the source of coronavirus.  However there are other factors at play, including food security and protection of the Chinese domestic economy, and it may be that China would have levied these tariffs anyway.  There are many possible ways of arguing a dumping action, but they are all basically about whether goods sold into a country are done so at less than cost.  This cost may be influenced through a range of factors, but a common one is government support (direct or indirect).

Funding provided through government programs may be one such trigger in the barley case.  As reported, the Sustainable Rural Water Use and Infrastructure Program was originally an environmental one, but subsequently altered to address social and economic problems too.  In doing so, the door may have been opened to foreign governments to make a case that these programs were being used as back door support to industries.  Now this case is perhaps weak - there are claims that clear evidence in Australia’s favour has not been considered by China, (e.g. the impact of domestic corn and wheat subsidies, extensive pricing data provided by Australia to China, and that the above program targeting irrigation productivity would have had very little impact on a dryland crop), But it seems that China has stepped through that door, even if to test the waters, and in doing so, harmed the Australian barley industry by levying tariffs, and denying the Chinese market to Australian barley producers.

But what does this mean for Australian roads and road user charging?  Under current institutional arrangements, Australian roads are funded through a multitude of mechanisms, but none of these related to direct road use.  We don’t yet have a truly user pays, equitable system of road funding where the users of the road pay for that road.  Instead we have a complicated mirage of a system where different road users cross subsidise each other.  State government grants, local road maintenance budgets, and Federal government funding allocations all form the basis of road funding but there is little reference when planning that spending to who benefits from this underlying use or need.  And in all cases, without a clear nexus to the returns that would have been earned directly from users.  In our system, not everyone pays their equitable share. 

Up to now, this has been a hard equity mismatch to solve, and in reality has probably not been much of a problem, given that the two-part charge of registration and fuel taxes has covered the investment and maintenance cost of our road network and the net funding for roads has been close to or above cost recovery. Proving a case of road investment being backdoor industry support would be hard in most cases.  Linking spending on roads to particular beneficiaries and that the spending was purposefully for those beneficiaries is a difficult, potentially impossible task. The data to do so isn’t in the public domain and even then, isn’t cut in ways that make this analysis clear.  In many cases, the significant benefits to private traffic over and above commercial/industrial traffic would offset and obfuscate the matter. 

However, road funding budgets are soon tipped to require government funding (which may have already happened under a coronavirus impacted economy).  Meaning that absent any change to funding structures, the road sector will be subsidised by the wider economy.  This may open the door to complaints that some road funding may be trade supportive and may not be consistent with WTO rules. 

As noted, most cases would be hard to prove, however there are some examples of programs, such as the NSW Fixing Country Roads program and the Northern Australia Beef Roads Program , that do target specific infrastructure and/or industries, and if not correctly administered, may be an area of trade risk. Foreign governments with their own barrows to push may not let those details get in the way of a protectionist action.  If some of these programs are seen to be somehow directly supportive of industries that compete with their own, and as is possibly the case with these barley tariffs, they may selectively choose facts in order to make their case and justify their actions.  This could lead to the imposition of protectionist mechanisms that will penalise our industries, quite possibly unfairly.

The barley tariff case is yet to be heard and decided upon at the WTO, and a number of defences are being pursued, but the damage of tariffs is already happening regardless of their legality.  Ensuring that the door is closed to challenge is just one way in which we can ensure that our trade channels are not compromised.  And the implementation of an equitable, cost reflective, user funded road user charging mechanism would be one way to close the door to potentially damaging WTO actions.