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ECONOMIC AND SOCIAL OUTLOOK CONFERENCE, MELBOURNE
The opening up of Australia’s economy, including the dismantling of barriers to trade, has been one of the most important reforms of the modern era.
It has built today’s dynamic and competitive Australian economy.
It has improved the living standards of millions of Australian working people.
And it has stimulated the growth of innovative and entrepreneurial Australian businesses.
In Government, Labor has pursued trade liberalisation for four decades – from Whitlam’s across the board tariff cut, to Hawke and Keating’s dismantling of protectionist barriers, to Rudd and Gillard’s pursuit of bilateral and multilateral trade agreements.
In Opposition, we will scrutinise the Abbott Government’s trade policies to ensure they deliver the best deal for Australia.
But we will not abandon our long-standing support for freeing up trade and opening our economy.
Labor knows that we won’t improve living standards and opportunities for working people by pulling down the shutters.
A modern, competitive, innovative and productive nation must be open to the world – and engaged with the world.
Our approach is to empower more Australians so they can share in the opportunities of an increasingly globalised world.
Trade policy should be complemented by investments in our people, in skills and capacities, in innovation and research.
It’s well known that the global economy’s centre of gravity is shifting to our region.
This will create extraordinary potential for Australia.
Realising this potential will require a range of economic reforms, including trade agreements which open markets, increase cross-border investment and foster deeper international integration.
The Asian region is growing more rapidly than the rest of the world and it will continue to do so for decades to come.
As a progressive political party, and a party of the national interest, our job is to ensure more Australians benefit from that growth and more Australians are able to participate in the globalised economy.
That is why I say to people who want Labor to back-track on free trade, or to sign up to the anti-globalisation movement – think again.
Trade drives economic growth.
It creates skilled, rewarding and well-paid jobs for the future.
It gives consumers lower prices and greater choice.
And it extends economic frontiers everywhere, lifting millions of people around the world out of poverty.
THE PROGRESSIVE CASE FOR TRADE
Nearly two hundred years ago, David Ricardo illustrated the principle of comparative advantage with his famous example of Britain and Portugal trading cloth and wine.
There have been considerable developments in the economic analysis of international trade since then.
Economic theories now reflect a more sophisticated understanding of the nature of modern trade, including the roles played by economies of scale, the growth of intra-industry trade, the increased role of large multinational firms, and the emergence of global supply chains.
However, in the spirit of Ricardo, I want to use a pair of traded goods to illustrate the benefits Australia has secured from trade liberalisation – and the opportunities for the future.
My examples are not cloth and wine, but socks and stents.
Socks can be made in factories in developing countries where the wage rates for workers can be less than $1.00 an hour.
As Craig Emerson has pointed out, this means Australia would have to impose a tariff of more than 1000 per cent to cancel out the cost advantage of low wage countries.
Tariffs like that would make it more expensive for low income earners in Australia to buy socks and other clothing for their families.
They would also amount to an economic strategy of competing with the world’s poorest countries on wages alone – a strategy of locking more Australians into jobs on the minimum wage.
That is not a progressive policy.
A progressive economic strategy is for Australia to compete in goods and services which require advanced skills and cutting-edge technologies – because this will deliver better paid, more interesting and more secure jobs.
In the mid-1980s, Australia’s textile, clothing and footwear industry was sheltered behind protectionist barriers with effective rates of assistance approaching 160 per cent.
Back then, the industry employed 120,000 people.
Today that number is down to 40,000.
The job losses and business closures and downsizings have been painful – but Labor Governments provided structural adjustment assistance to help those affected through the change.
Today the TCF industry produces higher-value products, competing on quality, design, brands, logistics and marketing.
And while employment in the TCF industry has declined, new businesses, new industries and new jobs have been created.
Take the company Cook Medical in Brisbane, which designs, manufactures and exports medical devices like endovascular stents.
Stents are small woven mesh tubes, grafted into blood vessels to treat serious health conditions like aneurysms.
Cook Medical customises stents for individual patients, based on scans sent by doctors from around the world.
Its Australian operations are part of a global supply chain made possible by an open world trading system, advanced technology and reductions in transport costs.
And the employees who make the stents at Cook Medical are former TCF workers – now using their skills in complex and fine sewing procedures to make life-saving medical devices.
This is just one example of how trade liberalisation has transformed Australia’s economy.
Different countries have different economic resources and capacities.
By specialising in activities where they have an advantage, like making stents, and by trading these for things other countries can produce at a lower cost, like socks, all countries will be better off.
Trade is also a powerful force for improving the competitiveness of domestic industries.
As Bill Carmichael points out, the main gains from trade liberalisation come not from access to overseas markets, but from exposing domestic markets to international competition. [i]
This drives productivity in our economy.
It means trade policy is not just about transactions with other countries, but is also a central element in any domestic micro-economic reform agenda.
Trade improves productivity by opening up larger markets for domestic businesses, generating economies of scale as companies increase production to expand into export markets. [ii]
Export opportunities encourage firms to invest in new products and processes – and this innovation raises productivity, generating still further gains from trade.
Australian exporters provide more secure jobs with higher wages, better training and stronger workplace safety records. [iii]
The Centre for International Economics estimates that household incomes in Australia have increased by $3900 a year due to the dismantling of trade barriers since the late 1980s. [iv]
And there are significant gains to be secured in the future.
Trade not only improves living standards at home – it helps tackle poverty abroad.
In summary, the progressive case for trade is that it drives economic growth, improves living standards, creates better jobs, and reduces poverty, both at home and abroad.
THE GLOBAL TRADE ARCHITECTURE
So the case for further trade liberalisation is clear.
The question is how to get there.
The largest benefits come from freeing up trade multilaterally, through World Trade Organisation agreements which reduce trade barriers for all countries.
By contrast, bilateral or regional trade agreements deliver second-best outcomes.
Lower trade barriers between countries entering preferential trade agreements create more trade between those two countries.
But they also divert trade away from countries not covered by the preferential agreement.
This means the benefits of trade creation can be eroded by trade diversion.
This effect can be seen in the Government’s modelling of the Korea-Australia Free Trade Agreement.
The modelling finds that KAFTA will increase Australia’s exports to Korea by 25 per cent.
But this increase in exports to Korea is offset by decreases in exports to other countries, as more of Australia’s output is directed to the Korean market.
The net result of these trade creating and trade diverting effects is that KAFTA increases Australia’s total exports by just 0.1 per cent. [v]
Preferential agreements also lead to red tape.
To qualify for preferential access, Australian exporters have to show that their goods originate from this country.
This is not a simple matter when manufacturers use inputs sourced from abroad as well as at home.
The rules of origin in preferential trade agreements are complex, and can vary from one agreement to the next.
A recent survey found a majority of Australian exporters are not taking advantage of trade concessions because of red tape under preferential trade agreements.[vi]
By contrast, multilateral agreements extend concessions to all countries – so there is no trade diversion and no need for convoluted rules of origin.
It is true that progress in the WTO’s Doha round has been disappointing.
And while that remains the case, countries will pursue bilateral and regional arrangements.
But although Doha may not be the first priority, it must not be abandoned – the benefits of multilateral trade liberalisation are too great to give up.
Labor’s Trade Minister Craig Emerson showed what can be achieved when a country like Australia plays a creative role.
In 2011, he proposed a plan to get Doha moving by dividing the round up into a series of separate negotiations.
Australia won support for this “new pathways” approach from key players like the United States and China.
As a result, WTO members finalised a Trade Facilitation Agreement at the Bali Ministerial conference in December 2013.
This was the first multilateral trade agreement finalised in 20 years.
It will boost trade through faster and cheaper customs and border procedures.
This outcome shows that the Doha round can be – and needs to be – revived.
But this will require political leadership.
In November, leaders of the G20 countries will meet in Brisbane.
This is a valuable opportunity to breathe new life into Doha and to create new ways of promoting trade multilaterally.
As this year’s G20 chair, the Australian Government must ensure this is one of the main outcomes of the meeting.
It must demonstrate more ambition for the G20 summit on trade than we have seen to date.
A successful G20 outcome would see leaders agreeing on opportunities and processes not only to revive the WTO negotiations but, just as importantly, to invigorate the global trade regime.
That would see G20 leaders, for example, committing to the principle that preferential trade agreements must support the multilateral trading system.
The Australian Government should also secure agreement to remove protectionist measures adopted during the global financial crisis and to implement the WTO’s Trade Facilitation Agreement speedily.
As the Lowy Institute’s Mike Callaghan and others have argued, trade must be at the centre of the G20 growth agenda.
AMBITIOUS FREE TRADE AGREEMENTS
The second-best nature of preferential trade agreements means they need to be as ambitious as possible.
And they should be capable of being integrated into the multilateral framework in the future.
Labor will be a constructive, but not uncritical, participant in the trade debate.
We will scrutinise free trade agreements negotiated by the Abbott Government to ensure they are genuinely liberalising arrangements, not just political trophies.
In a global economy – where Australia can make stents for patients half-way across the world – our businesses need FTAs which are wide and deep.
Wide in the sense that they reduce trade barriers across a comprehensive range of goods and services, not just a handful of commodities.
And deep in the sense that they go beyond traditional trade barriers and tackle “behind the border” barriers.
Behind the border issues like customs procedures, domestic subsidies, technical standards, regulations, and taxation can stifle trade just as much as tariffs at the border.
Deep trade agreements should foster economic integration.
Production is increasingly being organised into global value chains – this is why trade deals should encourage the integration of Australian companies into global supply chains.
Deep trade deals should also encourage investment, removing unnecessary barriers to cross-border flows of capital as well as goods.
BRIDGING THE MEGA-REGIONALS
The emergence of prospective “mega-regional” trade agreements, properly designed, could go a long way towards resolving the debate in trade policy about bilateralism versus multilateralism.
Proposed agreements like the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership would see increased market opening across large numbers of countries.
But these mega-regionals also run the risk of fragmenting the global trading system into rival preferential trading blocs.
A lot of the action is in the Asia-Pacific where mega-regional trade liberalisation is unfolding on two tracks. [vii]
A Pacific track is centred on the Trans-Pacific Partnership negotiations.
A parallel Asian track is centred on ASEAN; China, Korea and Japan; and proposals for pan-Asian free trade agreements.
Australia is engaged in both tracks as a party to negotiations for the Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership.
The TPP involves a dozen countries from both sides of the Pacific – it includes the United States, but excludes China.
The RCEP brings together the 10 ASEAN nations and six non-ASEAN countries in the region – it includes China, but excludes the United States.
Labor supports the TPP’s goal of reducing barriers to trade and investment within the Asia-Pacific.
It is important for this to be a high-quality agreement which also tackles investment, competition policy and behind the border barriers.
It is also important that the TPP is not perceived as shutting out China.
If Beijing construes the TPP in this way, it may respond by negotiating its own preferential agreements, creating significant trade diversion for TPP countries.
This is why Australia should place as much emphasis on the RCEP negotiations as the TPP.
Australia’s strong relationships with key RCEP players mean we can contribute to a successful outcome.
Australia is also in a unique position to help bridge these two emerging mega-regional deals.
This would ultimately lead to a free trade area covering the whole Asia-Pacific region.
But we are only likely to achieve that by championing trade reform and economic cooperation from both sides of the Pacific, through both the TPP and the RCEP.
Because it is in Australia’s interests for both China and the United States to be committed to a liberalised regional trading regime.
And it is in Australia’s interests – and the world’s interests – to support China’s continued commitment to the multilateral trade system and regional trade and economic cooperation.
AUSTRALIA-CHINA FREE TRADE AGREEMENT
As China’s economy continues to grow, there will be opportunities for Australian businesses well beyond the resources sector.
Opportunities for our farmers and our food processors.
For our services industries like finance, education, tourism, infrastructure, and environmental services.
And for our manufacturers, who can use their skills in research and development, design and technology to partner with Chinese businesses.
An ambitious free trade agreement between Australia and China is in the national interest.
An ambitious FTA with China should achieve better outcomes for Australia’s agricultural industry than those contained in the China- New Zealand FTA.
Meaningful improvements in market access should be secured for Australian sugar, cotton, canola and grains.
The FTA should also address the realities faced by Australian companies seeking to do business in China.
I met several Australian business representatives in Beijing earlier this month.
Their main day to day problems were not barriers at the border but navigating local regulations and policies, which can change frequently.
Accordingly the FTA should include mechanisms allowing the Australian and Chinese governments to update the agreement to reflect changing policies in China in coming years.
Investment is also a key issue.
Beijing wants Australia to increase the thresholds which trigger Foreign Investment Review Board screening.
The Abbott Government’s approach to foreign investment has been characterised by inconsistency and incoherence.
We had Treasurer Hockey’s retrograde decision against the proposed Archer Daniels Midland takeover of GrainCorp.
We have Nationals MPs pushing for any FTA with China to impose restrictions on Chinese investment in the agriculture sector.
And we have the Government establishing an inquiry on foreign investment in real estate.
The Government must not allow protectionists in its ranks to jeopardise a free trade agreement with our biggest trading partner.
Australia has always built its economy with investment funded by a mixture of domestic and overseas capital.
We are a capital-hungry economy which has relied on foreign investment to create jobs and business opportunities and to boost growth.
Labor will support moves to put China, our biggest trading partner, on the same footing as the United States when it comes to investing in Australia.
That means a threshold of $1.078 billion for Foreign Investment Review Board screening of proposed investments in non-sensitive sectors.
Lower thresholds should continue to apply for investments in sensitive sectors or by state-owned enterprises, where issues of national interest can arise.
But Labor does not agree with the Abbott Government’s policy of imposing more restrictive rules on foreign investments in agriculture.
If we are serious about significantly expanding our food exports to Asia, we must front up to the reality and necessity of foreign investment in our agricultural sector.
It is inconceivable that we will be able to scale up production to fully tap into the growing consumer markets of Asia without foreign investment.
Placing hurdles in the way of foreign investment in our primary production industries will only jeopardise their growth.
That is why Chinese investment in agriculture should be treated in the same way as investment in other non-sensitive sectors.
Looking further ahead, once Australia has a $1 billion-plus threshold for FIRB screening for investors from the United States, Korea, China and New Zealand, it is hard to see why we should discriminate against other major trading partners.
Accordingly, Australia should consider unilaterally extending the FIRB screening rules offered to these FTA partners to all countries.
Foreign investment proposals would still need approval from competition and corporate regulators, just like domestic investments, to maintain competitive markets and protect shareholder interests.
And for proposals worth more than $1 billion, the government would retain its powers to scrutinise investments on national interest grounds.
But for a country that thrives on investment, it makes no sense to impose unnecessary red tape, costs and barriers on investors looking to build businesses and create jobs in Australia.
Over the years, Labor Trade Ministers have played important roles in dismantling protectionist barriers.
John Dawkins founded the Cairns group of agricultural exporting nations, an important bloc in the WTO which has advocated for freeing up trade in farm goods.
Peter Cook helped bring the WTO’s Uruguay Round to a successful conclusion.
Simon Crean negotiated Free Trade Agreements with Chile, ASEAN and New Zealand.
And Craig Emerson negotiated an FTA with Malaysia, helped launch negotiations for a global Trade in Services Agreement and opened new pathways for progressing the WTO’s Doha round.
I am proud to embrace this Labor legacy.
I want to see more opening of our economy, on a wider range of fronts, with deeper integration into our region and the world.
Because freer trade will improve living standards for working people and deliver growth for Australia.
And, around the globe, free trade will continue to lift millions out of poverty and to reshape the world economic order.
In coming years, this reshaping of the global economy will give Australia the chance to replace the tyranny of distance with the advantages of proximity.
If Australian policy makers handle this shift intelligently it will deliver great economic benefits for future generations.
The Gillard Government’s Asian Century White Paper set the goal of ensuring that Australia’s economy becomes more integrated with Asia, with goods, services, capital, ideas and people flowing more readily between Australia and the economies of our region.
If this can be achieved there will be tremendous opportunities for Australian businesses and investors in countries like China and India.
But it won’t just happen by itself.
It will require getting a raft of policies right.
Not just in trade, but also in industry and innovation, education and science, investment and infrastructure.
Because if you are serious about boosting Australia’s trade performance, you have to be serious about boosting productivity and competitiveness.
Declaring that Australia is “open for business” requires more than signage on a lectern.
It requires continuing economic reform.
Labor wants an innovative, competitive, dynamic and outward-looking Australian economy.
Freeing up trade is an essential ingredient in the policies needed to realise this vision.
Labor has delivered on trade liberalisation in the past.
We will continue advocating for free trade in the future.
Australia’s future is in the world, and there is no turning back.
[i] Carmichael, Bill (2014) “Trade as a foreign policy or driver of growth?’, The Australian, 9 April 2014.
[ii] Melitz, Marc and Trefler, Daniel (2012) “Gains From Trade When Firms Matter”, Journal of Economic Perspectives, 26(2), pp 91-118.
[iii] Harcourt, Tim (2000), “Why Australia Needs Exports: The Economic Case for Exporting”, Discussion Paper, Austrade-Centre for Applied Economic Research.
[iv] Centre for International Economics (2009) Benefits of trade and trade liberalisation, Report for the Department of Foreign Affairs and Trade, May 2009.
[v] Centre for International Economics (2014) Australia-Korea Free Trade Agreement: Implications for Australia, Report prepared for Department of Foreign Affairs and Trade.
[vi] Callick, Rowan, “Fix FTA fine print, says business”, The Australian, 7 April 2014.
[vii] Petri, Peter A. and Plummer, Michael G. (2012) “The Trans-Pacific Partnership and Asia-Pacific Integration: Policy Implications”, Peterson Institute for International Economics, Policy Brief PB12-16.
Media contact: Sacha Fenton 0467 784 528