5 August 2009
The Triumph of Trade Liberalisation Over Protectionism
Speech to the Sydney Institute
Thank you Gerard for that introduction.
It's great to be back here at the Sydney Institute and I seem to be on the Institute's five year rotation for guest speakers.
I last spoke here in 2004, and before that in 1999. So I look forward to seeing you again in 2014.
But seriously, I'd like to thank Gerard for having me back. The Sydney Institute makes a wonderful contribution to the public debate in Australia on a broad array of relevant and interesting issues and let's see if we can't push the envelope a little this evening.
I notice there is a growing sentiment among many leading economic commentators that the worst of the recession is over. I would not go that far but there are signs of a basis for a world economy recovery.
Beyond the coordination of stimulus measures and the creative work of the G20 we have also learnt the lessons of the past.
Government's around the world quickly and effectively injected fiscal stimulus to support their domestic economies which in turn supported the global economic community's response to the crisis.
Without that stimulus the global downturn would have been significantly more severe.
And there is no doubt that the Government's fiscal measures stemmed what could have been a significantly more severe deterioration in the Australian economy.
As the Treasurer said earlier this week one of the reasons " we are weathering the global storm better than others is early, decisive and powerful economic stimulus".
As the world plunged into recession there was significant pressure for a retreat back into protectionism and the imposition of new trade barriers.
On balance we can declare that the protectionist push stemming from the global recession has been contained.
One of the key reasons for this is because of a new realisation of the importance of trade and how central is it to the global economy. Trade is an economic stimulus. History shows world trade has grown three times faster than world output and each successful trade round has enhanced the multiplier effect.
It is why the G20 has put conclusion of the Doha Development Round at the centre of its action plan for recovery. It is now recognised as a fundamental part of the stimulus measures and critical to sustained economic growth.
It has real consequences for jobs, for incomes and for families, and it is will play a critical role in the economic recovery that we are all looking forward to.
Without open trade flows, without the multiplier effect of trade, the recession that the world is in will deepen and the global recovery will be delayed.
It is also the most effective weapon in the G20 calls to arrest the spread of protectionism.
So on one hand, I am pleased to declare victory over the latest bout of protectionism but it is also pleasing that the issues of trade liberalisation and importance of trade are now in the economic mainstream equation.
CONTROL OF PROTECTIONISM
Trade liberalisation and protectionism are being discussed at workplaces and on the airwaves.
Less than a week ago here in Sydney the debate was played out at the Australian Labor Party national conference.
In the lead-up to conference, we heard threats about trying to restrict trade negotiations and pushing for a 20 per cent advantage for Australia goods and services on Federal Government procurement contracts.
We resisted this push in the strongest terms. These issues were in fact not presented to the conference and earlier motions to support a 20 per cent price discount for local firms on government procurement were rescinded. A motion on so-called "green border taxes" was rejected.
Trade was embedded in the mainstream economic chapter of the ALP platform.
This was strong backing for findings of a report I released in June that showed over the past 20 years trade liberalisation delivered an up to $3900 a year to average Australian families.
What happened in Sydney last week at the ALP National Conference on protectionism and trade liberalisation was not an isolated incident but it was an important signal that Australia is prepared to show leadership on this issue.
Unlike the Great Depression of the 1930s, where the main response of nations was to raise tariffs - exacerbating the global economic collapse - this time the world has largely resisted the temptation.
Almost every major meeting of world leaders, since the global financial crisis began has declared the need to fight protectionism and to keep trade flows open.
As Pascal Lamy, the Director-General of the WTO has put it, 'resort to high intensity protectionist measures has been contained overall'.
Another report on protectionism by the Centre for Economic Policy Research summed it up this way "so far, so good" because there has not been large scale increases in protectionism.
In other words, we have learnt the lessons and shown strength of leadership - resisting populist calls to protect jobs through protectionism.
Why is protectionism seemingly so attractive, especially in tough economic times.
I think the main appeal is that it is so simple.
Protecting jobs is good politics.
But protectionism as the response is seriously flawed policy.
When things are going bad it is very easy to blame others - to blame foreigners for taking local jobs or forcing local factories to close.
It is simple but it is wrong - especially for a trading nation like Australia with a population of just 22 million and an economy where one in five jobs is trade related.
For us we have to trade with the rest of the world. But we will only succeed - promoting our comparative advantage - not protecting inefficient local industries.
Protectionism won out in the 1920s and 30s in the era of the Great Depression.
Back then there was a rush by nations to try and close themselves off from the contagion by raising tariffs. The US Congress at one stage authorised tariffs to be raised by 50 per cent.
This flight to protectionism exacerbated the economic downturn so national economies collapsed and unemployment was rampant. World trade during the period plummeted by two-thirds in the period between 1929 and 1934.
During the current global recession there has been some protectionist movement but not on scale of the Great Depression.
And a recurring theme from the world leaders is to fight protectionism and to keep trade flows open.
In mid-November last year the G-20 Leaders Summit on Financial Markets and the World Economy in Washington reinforced the need for free trade.
The subsequent G20 meeting in London in April ordered the establishment of monitoring to track protectionist developments.
EXAMPLES OF PROTECTIONISM
One of the most glaring examples of protectionism was the decision by the European Union early this year to introduce dairy export subsidies. The Australian Government protested strongly and I personally raised the issue with the European Trade Commissioner Catherine Ashton.
At the time I said this would invite retaliatory action and it did. Towards the middle of the year the US announced its own dairy export subsidy program.
We condemned these moves and we continue to protest against them but it is an example of what can happen - subsidies further undermining already depressed world dairy prices and corrupting the market.
The bad news is these dairy export subsidies are perfectly legally under the current trade rules. The good news is that under a concluded Doha, export subsidies are outlawed.
Another major example of protectionism was the US Congress early this year backing the "Buy America" campaign which mandated only US iron and steel could be used in federally funded projects.
The Australian Government led the protest against Buy America and President Barack Obama showed great leadership in forcing Congress to makes changes so it complied with international trade agreements the US had signed - including the Australia-US Free Trade Agreement. But so he should have. The US signed up at the G20 to opposing any reversion to protectionism.
Again the rules based system together with peer group pressure provided an important discipline.
Here at home in Australia, we had the potential for the contagion to spread. The New South Wales State Government in its State Budget in June proposed a 20 per cent price advantage to Australian companies bidding for State Government contracts.
I condemned it when it was first announced and I condemn it again tonight. The ultimate losers from this flawed scheme will be the people from New South Wales who will pay higher taxes.
But what is very pleasing is that there is little sign that others are trying to follow the lead of the New South Wales Government. In fact, some - such as the Premier of Victoria, John Brumby, have shown considerable leadership in ruling out such measures.
The ALP National Conference did not endorse the measure. It in fact, overturned previous decisions calling for it.
The containment of protectionism is arguably a factor in our strong trade performance.
Today the Australian Bureau of Statistics released figures showing Australia produced record exports of $285.7 billion in 2008-09 and a record trade surplus of $5.8 billion.
The financial year surplus of $5.8 billion is not only the first since 2001-02, it is also the largest on record.
It is a great achievement in the midst of the worst global recession in 75 years.
But there will always be the threat of protectionism and that is why concluding the Doha Round is so important.
Concluding Doha is essential for two reasons. One, it's an economic stimulus, two, a strengthened rules based system is the best insurance against protectionism.
I am pleased there is new political momentum for the conclusion of Doha.
It commenced in June in Bali with a meeting I chaired of the Cairns Group of agricultural exporting nations, followed up by a meeting I chaired at the OECD in Paris. This was reinforced by a strong commitment by the APEC trade ministers meeting last month in Singapore. Early next month, India is hosting a meeting of trade ministers in New Delhi in preparation for the meeting of G20 leaders in Pittsburgh in late September.
APEC leaders will discuss Doha later in the year when they meet. Our hope is that the renewed political momentum and the realisation we are now in the end game will enable conclusion in 2010 as called for out of the recent G8+ meetings in L'Aquila. We must ensure those clear messages at the political level are acted on in Geneva.
As we discuss protectionism, it is worth speculating about the future and the threat posed by so-called green border taxes or green tariffs.
Green border taxes were discussed in detail at a major OECD conference that I attended last month in Singapore as well as the ALP National Conference last week.
There is growing international awareness about this issue and recognition that it offers the potential for backdoor protectionism.
As the world moves towards a global scheme on cutting emissions there is a real need to address the issue of carbon leakage.
The so-called alternative of green tariffs or green border taxes that penalise countries that do not cut emissions is not the way to go.
The implementation of green tariffs would be an administrative nightmare because of the complexity of trying to measure carbon usage on products and then set a tax rate at the border, quite apart from factoring in the common but differentiated factors in the assessment. On top of this, there is no doubt it would invite retaliation - exacerbating a downward spiral of protectionism.
We have spent too much time and effort breaking down protectionist tendencies to create a new basis for protectionism under the guise of combating climate change.
Combating climate change should not be seen only through the prism of the threat of global warming. It also must be viewed through the prism of opporunity - for growth and jobs, through green jobs.
During 2007 and 2008, 441 renewables deals were announced globally with a reported value totalling US$70.3 billion.
Under the Rudd Government, Australia has made a strong commitment to the environment and announced a number of initiatives to stimulate the growth of the clean technology sector in Australia.
AUSTRALIA WELL POSITIONED
Away from protectionism and on the broader economic front, Australia is very well positioned.
This nation, unlike almost every other developed nation, has avoided technical recession.
Australia's GDP grew by 0.4 per cent in the March quarter, making us the strongest performing major economy in the OECD.
There is no doubt the Government's swift and effective response to the crisis - with some $77 billion allocated to interventions to support jobs and the economic activity has played an enormous role.
That stimulus has insulated us from the worst of the crisis, it will also put us on the front foot in readying for the recovery and helping Australian companies to secure better market share.
Australia's stable, well-regulated banking system has served us well during the global financial crisis.
Our banks are well-capitalised and profitable. Of the 11 large banks in the world with a credit rating of AA or above, four are Australian.
We are also well positioned because of the Labor legacy from the 13 years of the Hawke and Keating Governments that were committed to engagement with Asia and structural reform.
During those years, Australia laid the foundations that have buttressed our economy during these difficult times.
Under Labor, Australia undertook major, economy-wide structural reforms.
We internationalised and modernised our economy.
Through the Accord we negotiated money wage restraint in return for social wage improvements to lock in low inflation and low interest rates as well as using it to establish enterprise bargaining.
At the same time we were pursuing tariff reductions, floating the dollar and opening the door to foreign banks.
The combination of these initiatives led to the biggest step-up in productivity the country has ever seen with the Labor governments of Bob Hawke and Paul Keating delivering productivity gains of more than 3.3 per cent through the 1990s.
Sadly productivity dropped off under the previous Government because of its failure to continue that strategy of investing in the drivers of economic growth - innovation, infrastructure, skills and education.
There was also no push for cooperation in the workplace to encourage cooperation based on enterprise with the offer of sharing the rewards from increased productivity.
There is therefore unfinished business for this Government and that is why it is pleasing that as part of the stimulus package 70 per cent of the money is going to projects that invest in the key drivers of economic growth.
Infrastructure Australia is also required as part of its mandate to recommend projects that improve our international competitiveness.
On the trade front, we have also advocated and actively promoted a twin-pillars approach to trade reform. The first pillar is reform at the border through trade agreements the second is the behind the border issues of structural reform.
There is no point opening borders if we are not competitive enough or productive enough to take advantage of market opportunities.
The drive and commitment to structural reform and improving our competitiveness must never cease.
I have also conveyed in all my trade dicussions that structural reform is an essential ingredient of sustained economic growth.
For developing countries, I believe our aid-for-trade must focus much more on capacity-building to help them achieve their structural reform.
Importantly, we have have re-orientated our trade and diplomatic focus towards Asia underscored by the creation of the Asia Pacific Economic Cooperation or APEC.
In short, we opened the economy up to the world and boosted productivity to position Australia to take advantage of the growth in Asia we have seen over the last 20 years.
That reform and engagement with Asia have been critical cushions for the Australian economy during the global recession.
It also gives us great opportunity as Asia, now more than ever, is emerging as the centre of world economic growth.
That is one reason why we have been negotiating greater access for Australian exporters to these markets but also engaging in commercial promotion.
It's also why I am constantly on the move in the region. As Trade Minister I have visited China six times, Indonesia four times, Singapore and Thailand multiple times. Vietnam last month, and I met the Malaysian minister this week in Melbourne following my visit there last year, and I am off to India next month.
It is Asia where there is growth and huge opportunity in dynamic markets.
China has a population of 1.3 billion, India 1.1 billion and there are 600 million people in the ASEAN region.
Australia has signed a Free Trade Agreement with the ten ASEAN nations and that comes into force on January 1, 2010.
As Trade Minister I am determined to strengthen and deepen our trading relationship within Asia and in Asia there is no bigger market than China.
My last visit to China, was not to Beijing but again to the regions, this time with Innovation and Industry Minister Kim Carr which had a focus on the automotive industry.
China is the world's largest market for new cars and recently become the world's biggest manufacturer of passenger vehicles.
The scale of industry and the pace of economic development in China is truly impressive.
China, according to the latest International Monetary Fund Outlook, is forecast to grow at 7.5 per cent this year and 8.5 per cent next year and Australia is there reaping the benefits.
China is one of Australia's top two trading partners and certain to be the world's fastest growing economy this year, next year and probably the year after.
China is a huge buyer of Australian iron ore and coal and the volumes have increased recently because much of the Chinese fiscal stimulus is focussed on the infrastructure and steel making which fuels demand for our raw materials.
At the same time, China is becoming a more consumption-led economy and this will open up new opportunities for Australian companies.
That is why I have travelled to China to promote agribusiness in Yunnan, sustainable urban planning in Wuhan and Yunnan and most recently, autos in Anhui and Hubei provinces as well as a follow-up Memorandum of Understanding on urban planning with the city of Wuhan.
And while I would have liked much faster progress with Free Trade Agreement negotiations with China, we are not standing by waiting for it to completed.
We are adopting a two-track approach getting out into the regions to promote commercial links with provincial governments as well as negotiating with Beijing.
Some of our political opponents have criticised our close economic engagement with China but I reject this out of hand.
Our strong trading relationship has helped insulate us during this crisis and there is enormous potential going forward in the trading relationship with China as well as wider Asia.
To close, we are resisting protectionism and actively championing trade liberalisation. The task ahead is to conclude the Doha Round at the multilateral level, to consolidate the regional structures, ensuring the ASEAN FTA comes into force on January 1, and ensuring the Trans Pacific Partnership and PACER Plus negotiations go forward.
At the bilateral level we are pushing on with negotiations with Korea, Japan, China , Malaysia and we have concluded a deal with Chile.
It is a cascade approach - using the regional and bilateral opportunities to build on the platform of the multilateral round in a WTO plus way.
The push to liberalise global trade is a never-ending challenge but I have the perseverance and the persistence to keep moving forward. There is no alternative. And now I look forward to hearing your views.