28 February 2008, Sydney

Australia and the Multilateral Trade System – Seizing the Opportunities

Address by the Minister for Trade to The Lowy Institute

Thank you Allan.

I am very pleased to be back at the Lowy Institute. I enjoyed participating in the trade policy debate the Institute hosted during the election campaign last November. And I am pleased to return here today as the Minister for Trade in Australia’s new Labor Government.

Today I want to focus on three issues. These are:

• The economic challenges confronting the Government and the implications of these challenges for Australia’s trade performance and the direction of our trade policy.
• The twin pillars approach to trade policy for sustainable economic growth – that is to maximise the benefits of trade liberalisation at the border countries we must implement trade and economic reform behind the border. And:
• Developments in the global trading environment, particularly as they impact on Australia.

The Economic Outlook

As many of you would be aware from the publicity it received earlier this month, the Incoming Government Brief prepared by The Treasury advised the new Government that it had inherited an economy that is experiencing its longest period of uninterrupted growth since Federation, but which faces a number of short and medium-term challenges that are becoming increasingly acute.

The economic policy directions struck in the coming 12 months will be critical. The Government has a unique opportunity to initiate an ambitious economic reform agenda - including through the implementation of its election commitments - that equips the economy to face emerging economic, social and environmental pressures.

The Treasury went on to say that: seizing this opportunity will establish the Government’s economic credentials.

The Rudd Government has hit the ground running. It is seizing the opportunity to confront the economic challenges we inherited.

We are heavily engaged in determining the policy directions which the Treasury noted will be critical in the coming 12 months - including through the budget process with the 2008-09 Budget to be delivered by the Treasurer on 13 May.

Unlike our predecessors, this Government will not squander the opportunities provided to this nation by historically high levels of global growth - and a resources boom arising from the rapid economic growth of China and India.

A key challenge to which the Treasury refers is the threat posed to Australia’s continued prosperity by inflation. Recent measures of underlying inflation are running at around 3½ per cent. As a consequence of inflationary pressures interest rates are now at their highest level in eleven years.

Tackling this inflation challenge is a key priority for the new Government. It is a key policy challenge because higher inflation leads to higher interest rates. This puts pressure on working families and household budgets. It leads to higher business costs, undermining our international competitiveness. It hurts our trading sector – both exporters and importers – at a time when our export sector is already dealing with the impact of a high dollar. The inflation challenge also comes at a time when Australia’s terms of trade are higher than at any time since the Korean War wool boom in the early 1950s.

According to the RBA, the increase in the terms of trade over the last four years has lifted real national income by approximately $80 billion in the last year alone. The massive injection of income into the economy arising from the resources boom has in turn significantly increased the Commonwealth Government’s tax take. That revenue provided the former Government with the opportunity to invest in the infrastructure, the skills, education and training that our nation needs to position us for the 21^st Century. Instead, they squandered the opportunity.

The previous government’s failure to invest in our infrastructure exacerbated bottlenecks like clogged ports and congested roads. And those bottlenecks retarded Australia’s export performance despite the resources boom.

As the Business Council of Australia (BCA) said earlier this week:

“a disconnect has emerged between recent federal budgets and the strategic investments required to sustain growth in the long term”[1]

In a scathing assessment of the Howard Government the BCA also said that:

“As fundamental as the Budget is to Australia’s economy, its processes and strategies have not been subject to major review or reform since the National Commission of Audit in 1996”[2].

So the BCA is saying that in 11½ years the Howard Government failed to make any significant reform of the budget, its processes, and strategies.

That is what has made the Budget task much harder for the Rudd Government.

As the Treasurer said on Monday night[3] “fiscal policy was simply too loose and the consequence of that has been seven interest rate rises in the last three years”.

The Rudd Government will front up to the challenges ahead. To relieve inflationary pressures in the economy the Government is targeting a budget surplus of at least 1.5 per cent of GDP. Any additional revenue that may flow into the Commonwealth will be banked although it’s not clear at this stage how large this additional revenue may be.

Australia’s Trade Performance

The Howard Government’s failure to invest in the drivers of economic growth – skills, education, innovation and IT – their failure to develop an integrated trade and economic policy contributed to one of Australia’s worst trade performances in our history.

Under the last six years of the Howard Government – and despite the resources boom:

• Total export revenues grew at an annual average rate of only 5.8 per cent compared with 10.7 per cent in the 18 years following the float of the dollar in 1983;
• Goods exports grew at an average annual rate of 6.4 per cent compared with average growth of 10.3 per cent since 1983;
• Services exports grew at about a third of their long term average;
• Manufacturing export growth collapsed—growing at only 3 per cent compared to 13 per cent since 1983.

The Howard Government’s poor trade performance bequeathed Australia:

• A trade deficit for more than five consecutive years;
• A trade deficit for the December 2007 quarter of $6.9 billion which was the worst quarterly trade deficit on record;
• 69 consecutive months of goods and services trade deficits;
• A current account deficit at record levels of around 6 per cent of GDP;
• Soaring foreign debt of $554 billion in 2006-07; and
• Net exports making a positive contribution to Australia’s economic growth in only two of the past 11 years while during the previous Labor Government’s net exports made a positive contribution to growth in 10 of the 13 years.

This is a sorry story and like so much of the Howard legacy a squandered opportunity.

It is critical that as part of the economic reform agenda the new Government does all it can to restore Australia’s trade performance:

• to ensure that our trading sector once again becomes a positive contributor to economic growth
• to ensure the Australian economy will be sustainable beyond the resources boom.

The Twin Pillars of Trade Policy for Sustainable Economic Growth

It is those two key factors – both the economic challenges confronting the Rudd Government and Australia’s poor trade performance over the past decade – that will shape the future direction of Australia’s trade policy.

The Rudd Government is committed to the implementation of a trade policy that will restore Australia’s level of productivity, international competitiveness and export growth. This will be pursued in the context of the twin pillars approach to trade policy for sustainable economic growth. That is, trade liberalisation at the border will be complemented by economic and trade reform behind the border. There’s not much point making progress on the tough fight to secure improved market access opportunities if we are not productive and competitive enough to take them up.

Multilateral Efforts

In the context of today’s event – commemorating the 60^th anniversary of the GATT – multilateral trade liberalisation via the WTO Doha Round will once again be the central focus of Australia’s trade liberalisation efforts.

Multilateral trade liberalisation will be a central component of the first pillar for sustainable economic management. We will be pressing for multilateral liberalisation across all sectors – agriculture, industrial products and services.

Since the establishment of the GATT, the international trading system has evolved and strengthened over the past six decades. It took eight successive—and often painstaking—negotiating rounds to make the progress we have made. And the gains have been profound:

• World trade growth has consistently outstripped world economic growth.
• World trade is now worth around one-quarter of global GDP.
• And world trade has been growing twice as fast as world output over the past five years.
• Tariffs have been steadily reduced. The first GATT round produced tariff cuts covering some 40 percent of world trade.
  • By the end of the Uruguay Round in 1995, developed countries’ average tariffs on industrial goods fell to only 3.8 per cent.
• The Uruguay Round, which established the WTO, for the first time opened up trade in world agriculture and services, as well as establishing a regime to deal with trade-related intellectual property rights
• The Uruguay Round also established the WTO’s dispute settlement system to rule on trade disputes and to enforce its rulings.
  • The WTO’s disputes system has been one of its unsung successes.
    • Since 1995 the system has delivered over 100 rulings. In many other cases, the system has encouraged members to resolve their disputes informally.
    • The system is used increasingly by developing and well as developed countries to enforce trade gains.

The evolution of the WTO is still a work in progress. And the system will continue to broaden and deepen further as new issues emerge - for example, on trade and environment.

The international economy is currently facing a degree of uncertainty. Expectations are that China and India will continue to grow strongly. However the potential fall-out from the US sub-prime crisis in the US is still uncertain.

A successful conclusion to the WTO Doha Round would help to provide a much-needed degree of certainty and a confidence boost to the global outlook. As I have said on a number of occasions securing an outcome this year will be difficult, however I believe it is doable.

I am encouraged by the political commitment that was displayed at the Davos meeting I attended in January. The strength of that political commitment will be apparent over the next few months as we seek to make real progress.

Certainly the increased WTO membership of 151, the diversity of this membership, and the breadth of the agenda makes the task more difficult. But that is why coalitions and groups within the membership are now so important.

I am committed to again providing strong leadership of the Cairns Group and effective representation of its interests, recalling that it was the last Labor Government which established the Group and provided it with the leadership it needed to pursue its interests in the Uruguay Round. As Chair of the Cairns Group I will not only be working to press the group’s interests but will reach out to other groups to see where common positions lie and where differences remain.

If we are to complete the negotiations this year, Ministers will need to meet soon to narrow the differences on agriculture and industrial products and to make progress across other issues – in a so-called ‘horizontal’ discussion. I have for some time also been calling for a Ministerial level signalling exercise of services liberalisation commitments amongst those countries in a position to do so.

Sixty years ago Australia was one of the founding members of the GATT – through the support of the Chifley Government. Today, the best means of contributing to the multilateral trading system is to conclude the Doha Round successfully – and that is a goal within our reach.

Complementing the WTO

Labor will seek to complement trade liberalisation gains derived from the multilateral process at the regional level through APEC and the ASEAN plus 6 - that is ‘WTO plus’.

We believe that the previous Government dropped the ball on APEC. It didn’t provide it with the attention, energy or drive necessary over the past decade. It squandered the opportunity last year as host of APEC to truly position APEC within the region.

Labor is committed to restoring APEC as the pre-eminent regional forum. I have already had detailed discussions with this year’s host of APEC – the Peruvian Government – along with Singapore, Japan and the US who will be hosting in coming years. It was the last Labor government that initiated and sold the idea of APEC to the region, and drove its liberalisation momentum via the Bogor Goals.

We will also take every opportunity provided by the ASEAN plus 6 to pursue deeper integration into the region and use these forums to pursue our trade and economic objectives.

At the bilateral level comprehensive FTAs can further advance and deepen liberalisation measures – that is ‘WTO plus plus’.

This year also marks the 25th anniversary of the Australia-New Zealand Closer Economic Relations Trade Agreement (CER) – signed by the Hawke Government in 1983. CER is considered to be the model bilateral agreement, because of its quality, depth and its comprehensiveness. It is perhaps the best example of what can be done with a truly comprehensive approach to bilateral trade liberalisation. It is a model to which I frequently refer in my discussions with other trading partners with which we are currently in FTA negotiations. The anniversary is an opportunity for us to build on its success to date.

The opportunity is emerging to bring the development and economic integration benefits of trade liberalisation to our Pacific neighbours through the "PACER Plus" discussions on a new and comprehensive free trade agreement between ourselves and New Zealand and Pacific island countries. Officials will be commencing exploratory discussions shortly.

The success of the trans-Tasman CER experiment should encourage us to set high shared ambitions for boosting island countries' trade opportunities in very practical ways, and for deepening their economic integration with us and with the global community. Given our responsibilities in the region, it is incumbent on Australia and New Zealand - the CER side of the discussions - to do everything we can to make these talks succeed. A key element of this will be our spelling out clearly and persuasively why stronger trade links and their quantifiable benefits are vital to the Pacific region's future prosperity.

It will take time to lay the groundwork in capacity-building and structural adjustments so that island countries - with very diverse trading interests - are all in a position to benefit from such a process. But unless we start, and start with vision, Pacific island countries will continue to fall behind other developing countries and regions and miss out on the brighter future to which their people rightly aspire.

We are also currently engaged in intensive efforts, with New Zealand, to integrate with ASEAN, through the ASEAN-Australia-New Zealand FTA (AANZFTA) negotiations. The origins of this negotiation date back to the efforts of the last Labor Government, first begun in 1994, to link Australia, New Zealand and the ASEAN region – it took the last Government until 2005 even to commence these negotiations.

I’m committed to bringing together a comprehensive AANZFTA agreement – that is supportive of the multilateral trading system and will establish a solid platform for our ongoing economic engagement with the region.

I discussed these initiatives with New Zealand Prime Minister Helen Clark during her visit to Canberra yesterday. I will also discuss them in more detail with my New Zealand counterpart, Minister Phil Goff, during his visit to Melbourne next Wednesday.

We are also continuing FTA negotiations with Japan, China, the Gulf Cooperation Council, Chile and Malaysia.

FTA studies are also either being conducted or are under consideration with Korea, Mexico, Indonesia and India.

The Rudd Government has recalibrated Australia’s trade liberalisation policy back to where it should be - back to where Australia’s trading interests really lie.

The previous government reversed the order. They put all of their eggs in the FTA basket – squandering the opportunity to achieve substantial gains for Australian industry by making a real commitment to the Doha Round.

So this government will make the Doha negotiations our central trade priority – as they should be – complemented at the regional and bilateral level by the other liberalisation efforts.

Behind the Border

Important as trade negotiations are, the real benefits of liberalisation will only be maximised if countries tackle ambitious reform agendas behind the border. That is another key message I have been delivering in the bilateral visits I have undertaken since I have been the Trade Minister. And it is a message that has been extremely well received. So much so that following an address to the Mumbai Chamber of Commerce in Mumbai in January I was asked by the Chamber to convey the importance of behind the border reforms to the Indian Government in Delhi – in particular, the message that all arms of economic policy must be working together to drive productivity growth.

Productivity growth is central to international competitiveness. And international competitiveness is, in turn, key to a strong and prosperous trade performance.

When it comes to trade and economic reform Labor has form. The Hawke and Keating Governments modernised the Australian economy from 1983 to 1996 via comprehensive economic and trade reforms of which tariff cuts in 1988 and 1991 were significant components. We opened up the economy, we floated the Australian dollar, we cut the tariffs, we deregulated the financial sector, we achieved wage restraint via the Accord with the trade union movement to lock in low inflation, we secured retirement income reform, we instituted a national competition policy, we made significant cuts to company and personal income tax and we won greater independence for the Reserve Bank.

Those measures achieved the strong productivity growth of the 1980s and early 1990s that contributed so much to double digit growth in Australia’s exports. As a result Australia emerged as one of the most open, flexible and competitive economies in the world.

As the second pillar of sustainable economic growth, Labor will again build on our economic and trade reform record to restore our level of productivity and international competitiveness and to restore our trading performance.

As the Treasurer outlined in a speech to the Business Council of Australia on Tuesday we have already made a good start.

In addition to ratifying Kyoto as the very first act of the new Government – and climate change has major implications including real opportunities for our trade and economic interests – we have:

• Outlined a comprehensive five point plan to fight inflation;
• Begun genuine Commonwealth-State financial reforms which will rationalise Special Purpose Payments eliminating waste and duplication;
• Strengthened the independence and transparency of the RBA;
• Announced measures to make the banking system more competitive;
• Introduced legislation to establish Infrastructure Australia, headed by Sir Rod Eddington;
• Begun implementing our deregulation agenda, to reduce the overall regulatory burden; and
• Begun identifying additional savings in the 2008-09 Budget.

All of these are reform measures designed to meet the short and medium term economic challenges confronting our nation, the most immediate being the threat of inflation.

Trade Policy Review

Given the challenges we are confronting in the global environment, and given Australia’s poor performance on trade over the past decade, now is the time to review how we should be shaping our policy approach for the 21^st Century.

This is a review for the future. It will assess how we can again improve our productivity and competitiveness to ensure we can take up emerging trade opportunities.

We need to learn from the success of the 80s and 90s in meeting the challenges of the future. We need to look at what is needed for the new millennium, with all the intervening challenges and opportunities.

One of my expectations for the Review of Export Policies and Programs that I announced last week is to receive advice on the formulation of a more strategic whole-of-government approach to advancing Australia’s international economic and commercial interests. We must look at how we formulate our domestic policy settings in a way that ensures they are all working towards enhancing our level of productivity, international competitiveness and export performance.

The Rudd Government’s Cabinet will have a specific focus on Australia’s level of international competitiveness and the review’s advice will be instrumental in that process. The review will also make an assessment of the challenges and opportunities currently facing Australian exporters and international business. It will assess the investment revolution that has been occurring within Australia and globally. It will look at what is happening in terms of both inward and outward investment in Australia.

As noted in a CEDA report prepared by Dr John Edwards last year, Australian direct investment abroad now rivals foreign direct investment in Australia. In just 20 years the stock of Australian direct investment abroad increased from 32 per cent to 92 per cent of the stock of foreign investment in Australia. Given these trends it will not be long before Australian business assets abroad exceed foreign business assets in Australia.

This is not Australian companies exporting jobs. Rather it is ensuring that they are a part of the global production and supply chains.

As John Edwards pointed out, offshore investment reflects specialisation rather than size. The intellectual property, marketing, management skills and business concepts that have been successful in Australia can be replicated elsewhere. Globalisation allows midsized specialists to compete with national heavyweights.

I am delighted that John – who is here today – has agreed to be part of the review panel which will be chaired by David Mortimer. I am also delighted that Invest Australia and its functions have moved to my portfolio and will be managed by Austrade. This will give us a real opportunity to ensure that our trade and investment policies reflect the needs of our business community in the 21^st century.

Conclusion

One of the enduring legacies of the GATT is the belief in openness as a means to improve economic welfare.

Labor doesn’t have to prove its credentials on multilateralism and trade liberalisation. We are just delighted to have the opportunity to apply them again creatively - ensuring that we make every effort to conclude successfully the current Doha Round of trade talks, in order to continue to build and strengthen the WTO system.

We come to office at a critical time in the Doha talks. We must build the political will to conclude it. We owe it to the world – particularly the developing countries – to make Doha happen.

We look forward to re-engaging again at the regional and bilateral levels to open markets for Australian goods and services – completing the unfinished business begun two decades ago by a Labor Government.

Trade policy is more than trade negotiations. It is integral to our economic sustainability beyond the resources boom. It’s about ensuring that our nation diversifies and secures growth though the expanding opportunities presented in world trade.

And that means meeting the challenge of building a productive and competitive Australia.

That is the challenge I want the review to assist us to meet. And that’s a challenge - together with my Ministerial colleagues - that I intend to meet head-on.

[1] BCA Budget Submission 2008-09 pg. 3
[2] BCA Budget Submission 2008-09 pg. 1
[3] Treasurer Wayne Swan, 7.30 Report 25 February 2008

Media contact: Mr Crean's Office (02) 6277 7420 - Departmental (02) 6261 1555