Trading Nation: Advancing Australia's Interests in World Markets

Trading Nation

MIKE ADAMS is a former Department of Foreign Affairs and Trade (DFAT) economist with extensive experience in trade-related aspects of e-commerce, free trade agreements, climate change and agricultural protectionism. Mike was Australia’s economic counsellor in Beijing from 2000 to 2004 and commercial counsellor in Wellington from 1989 to 1992. He holds a PhD in economic history from the University of Hull. His most recent book covers the experience of British prisoners of war on the Thailand–Burma railway during and after the Second World War.

NICOLAS BROWN headed DFAT’s branch responsible for analysis and strategic advice about trade and economic issues for five years to 2008. He also headed the Canada and Latin America Branch over 2009 and 2010 and was Australia’s Deputy High Commissioner to Malaysia from 2000 to 2003. Nic joined DFAT in 1996 from the Department of the Prime Minister and Cabinet and worked in the Australian Bureau of Statistics (ABS) in the early part of his career. He holds a Masters degree from the London School of Economics.

RON WICKES was Director of the Trade Analysis Section of DFAT from 1999 until 2008. Before that, he worked in the APEC Branch, and in the East Asia Analytical Unit. Ron has a PhD in International Relations from the Australian National University and a graduate qualification in econometrics from the University of New England. In 2005, he was awarded a Public Service Medal for contributions to trade policy.

For our families, especially Pauline, Suzanne and Sharelle

Trading Nation

Advancing Australia’s interests in world markets

MIKE ADAMS, NICOLAS BROWN and RON WICKES

A UNSW Press book

Published by

NewSouth Publishing

University of New South Wales Press Ltd

University of New South Wales

Sydney NSW 2052

AUSTRALIA

newsouthpublishing.com

© Mike Adams, Nicolas Brown, Ron Wickes 2013

First published 2013

This book is copyright. Apart from any fair dealing for the purpose of private study, research, criticism or review, as permitted under the Copyright Act, no part of this book may be reproduced by any process without written permission. Inquiries should be addressed to the publisher.

National Library of Australia Cataloguing-in-Publication entry

Author: Adams, M. G. (Mike G.), author.

Title: Trading Nation: Advancing Australia’s interests in world markets/Mike Adams, Nicolas Brown, Ron Wickes.

ISBN: 9781742234014 (paperback)

9781742246680 (ePDF)

Subjects: Commercial policy.

International economic relations.

International trade.

Other Authors/Contributors:

     Brown, Nicolas, author.

     Wickes, Ron, author.

Dewey Number: 382.3

Design Josephine Pajor-Markus

Cover design Xou Creative

Cover images Thinkstock

All reasonable efforts were taken to obtain permission to use copyright material reproduced in this book, but in some cases copyright could not be traced. The authors welcome information in this regard.

Contents

Foreword by Gary Banks AO

Preface

Introduction

Part I:  Australia’s global and domestic pressures

1   The changing international environment

2   Australia’s trade story

3   The evolution of Australia’s trade policy

4   The relevance and influence of Australia’s trade policy in the 2000s

Part II:  Prospects to 2025

5   The global trading environment

6   Will Australia’s luck hold?

Part III:  Australia’s future policy options

7   The contribution of trade policy to economic reform

8   Dealing with the complexities of the multipolar world

9   Multilateral negotiating challenges

10   Negotiating better free trade agreements

11   Final thoughts

Acknowledgments

Glossary

Notes

References

Index

Foreword

‘No policy area is more domestic than international trade policy.’ George P Shultz, who made this remark in a book he coauthored with Kenneth Dam in the 1970s, was well placed to know, later becoming Secretary of State in the Reagan Administration. The early exclusion of agricultural trade and then textiles from the GATT (now WTO) and the emergence of ‘voluntary’ export restraints for auto trade were early manifestations of this reality at work. And yet the United States and most other countries have generally acted as if trade policy were indeed international, its outcomes dependent on the negotiating skills of trade diplomats in Geneva, or New York or London.

Fortunately, Australia took a different path to trade liberalisation, one that was essentially unilateral. This was partly pragmatism, given that our traditional export interest was off limits at that time to negotiation, but it mainly came through recognition that Australians would benefit from reducing protection, regardless of the actions of other countries. Thus the 25 per cent tariff cut of the Whitlam era, and the deeper and more sustained reductions of the Hawke–Keating era, and indeed most of the subsequent reforms in the services sector, were not contingent on obtaining reciprocal ‘concessions’ from our trading partners. Australia’s more recent pursuit of preferential trading agreements has not really changed the essential story. Relatively little liberalisation has occurred through these compared to the domestically initiated reforms. The extent to which enhanced foreign market access has occurred is another matter, with some deals scoring better than others.

Import barriers provide a shelter for inefficiency extending well beyond those industries directly competing with imports. Australia’s liberalisation efforts of the 1980s ultimately drove a change in ‘mindset’ throughout the business community from seeking assistance from government, to seeking ways of becoming more productive and competitive. Some of the biggest obstacles were policy-related. Reforms to our inefficient government infrastructure monopolies and hidebound industrial relations systems were important early achievements. The benefits that flowed from these pro-competition reforms saw them extended through the National Competition Policy. Finally, reform efforts were ramped up in areas of ‘social infrastructure’ with the aim of enhancing human capital and reducing social disadvantage. All this began with tariff reform and arguably would not have occurred without it.

The interdependencies between international trade policy, domestic policy and national politics, and the benefits of having these pulling together, make it vital that we do not rest on our laurels or, worse, slip back to old ways. This book contains welcome recognition of this, drawing on the insights of three ‘insiders’ from the trade bureaucracy with many years’ experience. In a way, it provides a reconciliation between the world of trade diplomacy and the domestic policy world that ultimately determines what diplomatic efforts can achieve.

It also represents a welcome departure from the ‘negotiating coin’ mindset that has traditionally (and perhaps understandably) been exhibited by trade negotiators. In other countries, this has seen domestically beneficial liberalisation held back in the hope of using it to leverage ‘concessions’ from others. Most countries have stored up so much of this negotiating coin over time that if this were indeed the key to achieving good outcomes the Doha Round would have been a raging success!

Policies that impact on trade are typically put in place in response to domestic political pressures and needs. (This is essentially where the ‘negotiating coin’ comes from.) And it is these pressures that have to be countered if we are to achieve lasting reform, whether in international or domestic settings. As Australia’s own experience has shown, this is a never-ending task, because the pressures never go away. As long as there is hope that government will provide support, it will be sought. International commitments merely determine the field of play.

Considerable creativity has accordingly gone into finding ways of ‘supporting’ local industries that do not run foul of obligations under the WTO or other agreements. So these days the name of the game in industry/trade policy is rectifying ‘market failure’, with new forms of government support to domestic firms and industries being offered to promote ‘adjustment’, enhance innovation, lessen environmental externalities, and so on. The automotive industry is a classic instance of how a politically influential player has been able to sustain government support through such avenues, notwithstanding the decline of its principal traditional protective instrument, the tariff.

That the tariff, though much diminished, remains in place, is an issue in its own right. Not so much because of its direct costs any more, though these are larger than is generally believed, but because it is a symbol of the legitimacy of protection and thus of efforts to secure more of it. Its complete removal, as proposed by the authors, is highly desirable and would provide an important signal. Instead, there have been signs of movement in the other direction, with the recent strengthening of anti-dumping provisions and weakening of long-standing tariff exemption provisions for certain imported inputs.

That Australia continues to struggle to contain protectionist tendencies, despite our past reform successes, is indicative of the challenges internationally. It is generally recognised that without the dogged work over many years of the IAC (and its successors through to the Productivity Commission), our own achievements are likely to have been considerably less. Thus the authors rightly emphasise the importance to liberalisation efforts of continuing to explain the benefits to the community, which otherwise may only hear about the costs. This is ultimately a political responsibility, calling for good leadership, but it has been assisted in Australia by the consultative and evidence-based advice of the Commission.

There is no institutional counterpart in other countries to the processes that have enabled the Commission to support Australia’s liberalisation efforts. (The exception is our closest OECD neighbour, New Zealand, which established its own Productivity Commission just two years ago.) At one stage in the Uruguay Round, momentum seemed to be building for an agreement on ‘transparency’ principles for trade-related policy making nationally. But this got diverted into an international informational vehicle within the WTO (the Trade Policy Review Mechanism) that has proven useful, but still remote from the policy drivers in national capitals.

If George Shultz was right about the origins of trade policy, which the evidence strongly confirms, then it seems inescapable that advancing liberalisation internationally, and indeed holding the line on past gains, will require that more attention be paid to domestic policy-making settings. It is no longer reasonable to expect that external negotiations among countries based solely on reciprocity can do the trick, even among subsets of the so-called ‘like minded’. Would sovereign countries collectively agree to impose greater disciplines on their own decision-making processes? Depending on how these are framed, I think they might, given that an enhanced capacity to understand the domestic consequences of trade policy choices would have to be in each country’s own best interests. I also think that, notwithstanding more recent slips from the ‘high ground’, Australia remains well placed to advocate this internationally.

Whatever other countries decide to do individually and collectively, Australia’s economic fortunes will continue to be shaped predominantly by our own policy actions. Gaining new footholds on the slippery path of reform remains the biggest challenge we face.

Gary Banks AO

Dean and CEO

The Australia and New Zealand School of Government

Preface

The idea behind starting to write this book was simple. Having spent collectively almost 90 years working on different aspects of Australia’s trade and economic policy, it was a way of making sense of our own experiences within government, contextualising disparate policy, economic and technological threads, and explaining to ourselves in the first instance how these threads are shaping and reshaping the modern Australian economy.

At the outset we planned to focus on Australia’s transition from a protected and increasingly irrelevant country to a more open, prosperous and relevant one with some discussion on medium-term risks and policy choices. But soon into the process of writing, researching and reviewing ideas with officials and experts from business and academia, we found ourselves in a privileged position to write a more ambitious book. Generous access to leading policy makers and analysts inside and outside of government enabled us to write with more authority on the efficacy of current trade policy and tackle more confidently big questions like the global and regional risks to Australia’s trade and how trade policy is entwined with foreign policy in shaping and promoting Australia’s regional and global interests. It also enabled us to examine (again more confidently) some of the big policy options facing Australia in engaging more closely with the Asia-Pacific region, salvaging outcomes from the wreckage of the Doha Development Round of multilateral trade negotiations and preparing for a potentially bumpy ride on international markets in the decade ahead.

Five years after the onset of the Global Financial Crisis, the global and regional trading environment remains uncertain and throws up daunting challenges for Australia as the country moves towards the end-phase of the minerals boom. These uncertainties go well beyond the almost daily evidence of volatility in Europe. The strength of the US recovery is a work in progress. Japan’s belated attempts to deal with high levels of indebtedness and deflation depend ultimately on whether its political leaders have at last found the conviction to sustain and deepen productivity-enhancing reform over time – something they have shied away from for most of the last two decades. And China’s attempts to realign the drivers of its economic growth and move up the value chain should be successful based on recent history, but the danger of falling into a middle-income trap is not trivial.

There also are major uncertainties in the policy framework for global trade and investment, with questions over the effectiveness of international processes in an increasingly multipolar world, the death of the Doha Round in terms of its original mandate and competing regional frameworks for trade in East Asia and the Asia-Pacific region more broadly. At the same time, global business continues to be transformed through finer global value chains. This greatly increases efficiency while increasing the potential for quickly transmitting localised disruptions in production to other links of the chain.

Uncertainty on international markets and the prospect that markets will remain volatile for much of the next decade, and maybe longer, highlights the urgency for Australia of domestic economic reform if real incomes and living standards are to continue rising now that the route to higher incomes from higher terms of trade appears to have been cut off. The Australian economy has been one of the world’s most strongly performing developed economies, thanks to the extensive reforms of the 1980s and 1990s and the minerals boom. But the challenges we now face underline the imperative of more economic and social reform to lift productivity.

There is no magic formula for doing this, but strengthening Australia’s whole-of-government systems within and between all levels of government is vital. Trade and international perspectives need to connect more smoothly with the priorities and strategies for domestic economic and social reform and with the needs and capacities of business. This applies as much to ensuring that the right hard and soft infrastructure is developed, as it does to achieving ‘modest’ 21st-century objectives like scrapping remaining tariffs, putting services on the trade and economic pedestal they deserve, and using effective social policies and targeted public diplomacy to facilitate structural change.

Managing the uncertainties of the multipolar world will be Australia’s most important foreign and trade policy challenge in the years ahead. Advancing core national interests will depend increasingly on the quality of Australia’s ideas on the world and region, turning serious ideas into explainable policy and having the arguments (when needed) to put together coalitions to advance national interests. This requires fundamentally high-level political engagement with ideas and interest in contestable policy. It also requires a willingness to focus analytical work within government on more than the immediate briefing needs of ministers. Even in these financially straitened times, more investment is required to strengthen analytical capacity. Leveraging assets across key departments of state, the overseas network of embassies and trade posts, business, think tanks, and relevant community groups to provide ideas, assessments and analytical support would be one costeffective way of doing this.

Responding effectively to the many domestic and international challenges calls for more openness and flexibility, more focus on building skills, more careful explanations of why reform is necessary, and more careful integration of economic, trade and foreign policy. This book is offered as a modest contribution to charting the way ahead.

Introduction

For more than 200 years, trade has been central to Australia’s economic development. During the 19th century, wool and gold emerged as major exports critical to maintaining jobs and attracting immigrants to the colonies: indeed, in the early 1950s wool still made up around half of Australia’s merchandise exports. Since then, the structure of Australia’s trade has been transformed, so that minerals and energy now make up the largest share of exports, with significant contributions from services, manufactures and rural exports. After declining between the early 1950s and early 1970s, trade’s share of output increased again so that exports and imports together now constitute more than 40 per cent of gross domestic product (GDP). A little over one in five jobs are related to either exports or imports.¹

This book is about Australia’s trade and our trading future. It has three broad aims. The first is to explore the history of our trade and the current stance of our trade policy. In addressing these questions, we look at Australia’s trading patterns going back as far as Federation and at the forces in the global environment that have shaped the changes in our trade. We also look at the evolution of Australia’s trade policy and the effectiveness of policy in the World Trade Organization (WTO) Doha Round of multilateral trade negotiations, in our free trade agreements (FTAs) and in driving domestic productivity growth.

The second broad aim is to look at what the future might hold for Australian trade in the medium and long term. We examine possible scenarios for the world economy out to 2025 and what these might mean for the international trading environment. We also look at whether Australia’s current good fortune is likely to hold. This includes examining whether Australia’s current relatively high terms of trade are likely to persist and the future of our trade in minerals and energy, agriculture, manufactures and services.

The third aim is to examine how trade policy should be shaped in order to promote Australia’s interests. We look at the role trade policy can play in giving renewed impetus to domestic microeconomic reform and at how it might respond to the changes in international influence that are occurring as a consequence of rapid growth in emerging nations, particularly in Asia. We consider too what can be done with the Doha Round and what outcomes Australia might expect from FTAs currently under negotiation and from negotiations that deserve serious consideration, such as an Australia–European Union FTA. We look also at whether more could be done in a range of other areas, from boosting trade with specific countries and regions to constructing a trade narrative and associated reform agenda that might resonate better with wider community interests and concerns.

In spite of the importance of trade to the Australian economy, there are relatively few studies on Australian trade. Those that exist are mainly concerned with the history of policy or with specific questions such as the role of FTAs. To our knowledge, this book is unique in terms of the breadth of the questions it asks and its focus on the future of Australia’s trade. It is unique too in that the authors have all spent long periods working on trade issues in the Australian Department of Foreign Affairs and Trade (DFAT). One objective in writing this book is to add to the academic literature. But the main objectives are to contribute to discussions among economic and trade policy makers and to increase knowledge more broadly about trade policy among general readers who are interested in political economy issues.

The term ‘trade policy’ can, of course, be understood in different ways. Taking the term literally, to mean any government policies or actions affecting the import and export of goods and services, would draw in an enormous range of policies going well beyond the scope of this book. Here we use the term to refer, on the international side, to policies aimed at removing distortions and impediments affecting Australian trade and barriers faced by Australian-based enterprises in other markets, and on the domestic side to policies which affect tariffs or other barriers to trade. It also includes policies which aim to shape domestic economic policy settings that directly affect trade (for example, by improving the productivity and efficiency of firms based in Australia). We also look briefly at trade promotion and its links with broader economic policy. Even with this narrower definition, trade policy has wide implications (see box 0.1).

In looking at Australia’s trade and its trading environment, we also take account of foreign investment. Internationally, the expansion of foreign direct investment (FDI) has been one of the factors transforming the way in which business is conducted. In Australia, inward FDI has long been important in shaping trade with other countries, most obviously in the mining industry, but also in some areas of agriculture, manufacturing and services. Its role, and especially the benefits which flow from it, remain widely misunderstood, however. Australia’s FDI in other countries has also become increasingly important. In the services sector, sales by majority-owned affiliates abroad have for some time been recognised as a form of services trade. More generally, outward FDI can be crucial to securing and expanding markets for Australian goods and services and can play a significant role in building global value chains (GVCs). We look, at a number of points in the book, at policies towards investment in the context of a broader discussion of trade policies. For example, investment is now an important aspect of many FTAs and it is a core component of the Asia-Pacific Economic Cooperation (APEC) agenda.

A key part of the development of trade policy is to contend with and reconcile as best as possible the interests of domestic stakeholders on the one hand and international actors (mostly other governments) on the other. On the domestic front, business and various civil society groups maintain a close interest in trade policy. Consultations with these groups are part and parcel of good trade policy, not only because they are affected by trade policy, but because they are often the best source of information on the impediments to trade and investment which they face. In this book, we do not discuss in detail these disparate interests in trade policy – which would surely require another book. But they are very much part of the background contributing to our assessments.

Box 0.1   Why trade and trade policy matter

Trade has always mattered. This was true going well back in human prehistory, even before the development of agriculture. It matters because clans and tribes, cities and states have never had all of the resources and skills they need to produce the things they want when they require them. The benefits from trade are evident in almost every product and service we use. The humble pencil might be the product of timber from New Zealand, graphite from central Europe, zinc and copper from Australia, oil-based products (for the eraser) from Southeast Asia, and processing machinery from the United States.² A computer is the product of complex and fast-evolving regional and global value chains. Increasingly, final products and services are the outcomes of unravelled, specialised production processes and trading in tasks.

Trade policy also matters. It too has always mattered at least since cities and states discovered the expediency of taxing silks and spices and exchanges of wool and wine, and governments learnt how the sinews of evolving industrial states could be supported by taxing triangular trades in manufactures, slaves and sugar. It might be thought that trade policy matters less now than in the past: technological change and trade liberalisation have transformed global business over the last three decades. But that assessment would be wrong.

Trade policy matters because borders still impede markets. The impediments have changed over the years: tariffs have come down; behind-the-border regulatory obstacles have become more prominent as trade has become more closely linked to investment and establishing an overseas commercial presence. Impediments wax and wane with the moods of political economy. Some impediments are protectionist in intent. Many are justified for other public policy reasons – to promote industry adjustment, a better environment, safer food standards and so on – but still may distort trade and investment flows. The job of holding back and removing protectionist measures and of designing policies to meet important national objectives with less distortion of trade and investment is endless.

Trade policy matters because trade enhances growth and productivity, which in turn can be linked to increasing jobs and higher living standards over the medium term. Credible enabling environments for productive and efficient businesses are built around the indivisible relationship between trade policy and domestic economic policies.

And it matters also because trade has long been a vehicle for building links and understanding between nations and cultures and widening the horizons of those participating in it.

One of the central themes of this book is that, while Australia’s current trading position is at first sight fortunate thanks to the minerals boom, there is a significant risk of a tough international trading environment, both in the medium term and further out to 2025. Near-term risks are focused on sovereign debt and bank solvency issues in Europe, as well as sovereign debt problems in other major developed economies. High levels of public and private debt may mean slow growth in much of the developed world for a decade or more (most notably in Europe, but perhaps also in the United States). If this occurs, it should dampen growth among major emerging economies such as China – indeed, China’s growth has already slowed appreciably. It is quite possible that there will be adverse knock-on effects, including increased protection and trade conflict. Risks have been accentuated by the virtual collapse of the Doha Round of multilateral trade negotiations and by the impact on global decision making of the historic shift of power to key emerging economies which has brought different perspectives to the negotiating table. In these circumstances, Australia may be in for a bumpy ride.

Australia’s trade policy has been debated for almost as long as Australia has traded. Protectionism emerged as a major issue in the second half of the 19th century in the aftermath of the gold rushes, when Victoria sought to build up a wall of tariffs to shield domestic manufactures and create employment. Difficulties created by differing tariffs continued to be a source of discord among the colonies until Federation in 1901, when ‘protection all round’ quickly became one of Australia’s settled policies. By the late 1920s, Australia’s average tariff was second only to that of the United States among high-income countries (see chapter 3). The folly of the inefficient framework of protection that sheltered Australian industry from effective competition became clearly evident during the economic upheavals of the 1970s. The subsequent shift away from protection began in earnest under the Hawke and Keating governments over 1983–96 and, along with other reforms, contributed to a significant improvement in Australia’s economic performance.

The case for free and open trade has long been a compelling one. British political economist David Ricardo’s key insight – that differences in relative costs create the conditions for mutually beneficial gains from exchange among nations – remains just as valid now as it was in the early 19th century. Although there are some theoretical exceptions to the case for free trade (such as the infant industry argument, optimal tariff theory and strategic trade policy), in practice effective intervention is difficult to design and trade liberalisation typically promotes economic welfare (see box 0.2). Well-considered and thorough studies generally conclude that openness plays a key role in driving productivity growth and increases in economic output.³ Productivity growth is in turn a key to ongoing increases in wages and the standard of living. In Australia’s case, the Productivity Commission and its predecessors have made a strong case for industry deregulation and trade liberalisation over several decades. This helped to transform attitudes towards protection in Australia.

Box 0.2   The case for trade liberalisation

Standard textbook partial equilibrium analysis suggests that removing tariffs will result in welfare gains for the economy. In this type of analysis, the size of these ‘static’ gains depends on the domestic supply and demand curves for the product being imported and the size of the tariff. Removing tariffs can also lead to ‘dynamic gains’ such as those arising from greater competition in the economy. These are often held to be considerably larger than the static gains, but are difficult to measure.

Sophisticated economic modelling, which takes into account the myriad linkages between economic agents and industries, confirms that there are substantial gains from unilateral trade liberalisation. In Australia’s case, for example, the Centre for International Economics in a 2009 report employed a suite of computable general equilibrium models – ORANI, GTAP and CIEG-Cubed – to estimate the long-run impact of trade liberalisation since 1988. The Centre concluded that GDP was, on average, 2.5 per cent higher as a result of liberalisation, even without considering dynamic gains. When estimates of dynamic gains (partly drawing on the use of the AUS-M model) were included, the increase in GDP rose to 3.4 per cent and the increase in national income to 2.7 per cent. This amounted to an increase in real income of around $3900 per annum for each working family (CIE 2009, p. 20).

There are some theoretical exceptions to the case for free trade which are discussed at some length in texts on international trade and economics, but all have problems. They include:

The infant industry proposition: Argues for protection for industries in the initial phases of their development until the scale of their operation has lowered costs and they have become competitive with imported goods (see Feenstra 2004, pp. 240–41; Krugman & Obstfeld 1994, pp. 257–59). In practice, governments find it difficult to target industries which are likely to become competitive and equally difficult to withdraw protection once it has been granted.

Optimal tariff theory: Argues that imposing tariffs can positively influence a country’s terms of trade and that there is thus a non-zero optimal tariff which maximises welfare (see Feenstra 2004, pp. 215–20; Van Marrewijk 2002, pp. 153–58). This theory is mostly applied to large economies, although it has been used in the debate on the impact of tariffs on motor vehicles and parts in Australia. In the latter case, a key determinant of any optimal tariff is the export-demand elasticity for Australia, but this is the subject of debate among economic modellers.⁴ For contending views, see Dixon (2009), Gropp, Jomini and Salerian (2009) and Dixon and Rimmer (2010). Even if an optimal tariff of this kind exists, unilateral liberalisation may yield benefits through dynamic gains.

Strategic trade policy: Argues that government intervention for imperfectly competitive industries (usually oligopolistic) can have flow-on effects which justify it. For example, subsidising an industry that is part of a global oligopoly can result in welfare gains to the nation applying these measures if it leads to a bigger market share and higher profits for national firms (see Krugman & Obstfeld 1994, pp. 284–87; Van Marrewijk 2002, pp. 210–19). This is really only relevant to certain industries (such as the global aircraft industry) and the degree and kind of intervention required to realise gains is, in any event, very difficult to calculate.

The traditional argument for maintaining Australia’s residual tariffs is that they can serve as bargaining chips in international trade negotiations aimed at removing border protection in other economies. But this is not a strong argument given the substantial benefits which can be realised from unilateral trade liberalisation. It is, in any case, possible to liberalise applied tariffs while allowing bargaining to occur in the WTO over bound tariff rates (that is, the legal maximum rates in the WTO). Another argument is that tariff liberalisation would expose the weakest sections of the community to heightened competition. This suggests a need to undertake reform in conjunction with training for affected workers, but is not a strong argument for perpetually delaying tariff reductions. Tariffs can also be defended on the ground that they add to government revenue, though in practice cutting tariffs can deliver increased income and other tax revenues because of the spur to economic activity which this creates. This can offset all or part of the loss of tariff revenue.

The case for liberalising protectionist-inspired non-tariff barriers (whether they be phytosanitary barriers not justified by science, anti-dumping provisions which operate to restrict legitimate trade or regulatory barriers to services trade) is just as compelling as the case for liberalising tariffs. Indeed, non-tariff barriers are often less transparent than tariffs and can lead to larger welfare losses (see, for example, Van Marrewijk 2002, pp. 208–209). Phytosanitary barriers and anti-dumping remain important conduits for protectionism in Australia (see chapters 4 and 7).

Australia needs a program of economic reform that will stimulate long-term productivity growth and help it weather the shocks from the global economy that will come over the next decade and a half. Trade policy has an important part to play in executing the reforms needed. In Australia, the shift away from protectionism was one of the factors that helped to drive increased productivity growth in the 1990s. Productivity growth, in turn, helped to drive improved trade performance. In the past decade, however, productivity growth has been lacklustre. A new productivity agenda will need to go well beyond tariffs (though we argue that removing residual tariffs would be a valuable reform). It will need to encompass taxation, skills, infrastructure, labour markets and further industry deregulation, all undertaken with the objective of making Australia’s economy more flexible and efficient. If this comes about, it will have important implications for trade policy, including by broadening and strengthening Australia’s trade base, and by increasing gains that can be won with other parties in trade negotiations by binding our openness or further liberalising access to our markets.

For much of Australia’s history, the international dimensions of Australia’s trade policy – multilateral, regional and bilateral – have not attracted the same degree of intense discussion as the tariff. But this has changed in recent years with multilateral negotiations, which have held centre stage since the Second World War, being complemented increasingly by the pursuit of FTAs. This has occurred against the backdrop of rapidly spreading bilateral and regional trade agreements globally.⁵ The WTO Secretariat advises that around 240 ‘physical agreements’ (that is, counting goods and services agreements as one) are in force among those notified to the WTO (see chapter 1). For its part, Australia is a party to seven reciprocal FTAs and is negotiating another nine (see chapters 3 and 10 for a detailed discussion).

The dynamics of international negotiations are currently being influenced by the effective failure of the Doha trade round. This has increased interest in bilateral FTAs and, more recently, regional FTAs. Trade policy processes are active and complex, but the prospect for worthwhile outcomes remains very uncertain. Can something be salvaged from Doha? If a plurilateral services agreement is negotiated (see chapter 9), can it do more than bind existing levels of openness? Can prospective mega-agreements like the Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP) push the boundaries of trade liberalisation? Can these agreements turn a spaghetti bowl of overlapping arrangements into a new force for broader trade liberalisation? If they can, will they harmonise smoothly with whatever, if anything, may emerge plurilaterally? Is it reasonable to expect that, at some point, regional and plurilateral processes will feed back into multilateral ones, picking up the pieces of Doha in areas like subsidies and agriculture? And is there a solid role for APEC in this dramatically changing global and regional environment? It formed a critical part of Australia’s regional trade policies in the 1990s, but does its future as a top-tier international process now hang in the balance with growing interest in regional FTAs and the emergence of newer processes like the East Asia Summit?

There are many loose ends floating in the ether. How and if they come together is largely guesswork, may require careful reappraisal of at least some of Australia’s international trade policies and is a key theme of this book.

There are many areas where Australia’s trade and related policies need a substantial overhaul. For example, we suggest that India, given its status as an emerging economic power, warrants more attention than it has been given by either side of politics in Australia. Latin America is an even clearer case of relative neglect, with an extremely limited commercial relationship in spite of many instances where developing economic links could prove mutually beneficial. In the area of skills, proficiency in other (especially Asian) languages should be a core competency for an Australia seeking to make its way in the region and the world and this effort needs to be accorded higher priority (Australian Government 2012, p. 2), notwithstanding the fact that English is quite widely accepted as the lingua franca in Australia’s region and that Australia already has among its citizens many first- and second-generation Asian language speakers.

The organisation of the book

This book is organised around the three broad aims sketched above. It commences in Part I with four chapters that explore the history of Australia’s trade and Australia’s current trade policy. Chapter 1 looks at the main changes in Australia’s external environment, focusing on the period since the Second World War. It discusses the reasons for rapid growth in trade over this period and the changing locus of economic activity in the world economy, as well as providing an introductory discussion on the main international economic institutions, agreements and processes which figure later in the book. Chapter 2 provides an overview of Australia’s trade since Federation. It includes discussion of the significance of trade to the Australian economy over this period, as well as changes in the composition and direction of trade. Foreign investment is also discussed.

Chapter 3 examines the evolution of Australian trade policy. It includes a detailed discussion of the rise of industry protection in Australia and the subsequent shift away