It is a pleasure to be here at the State Library this evening to make a contribution to the ‘Big Ideas Under the Dome’ lecture series.
Tonight, if you like, I am going to mount something of a defence of freer trade and investment and put the case why big thinking, even in these time-worn areas, can lead to still much greater growth and prosperity for Australia.
Over the next 10, 20 and 30 years Australia has some extraordinary emerging opportunities, as well as some challenges. In most cases, capturing these opportunities will mean Australia being far more competitive.
It will require an unrelenting focus on research and innovation, education (including life-long learning), aggressive cost reducing measures and critical infrastructure.
In this regard, the Government came to office with plenty of big ideas to position Australia to capture these opportunities, and we have lost no time in seeking to effectively implement these ideas.
In trade and investment we have concluded high quality Free Trade Agreements with South Korea and Japan, after eight years of failed negotiations.
We have progressed the China Free Trade Agreement talks with the aim of concluding talks by the end of this year, after even greater delay.
These agreements are fundamentally important because together China, Japan and South Korea take 51 per cent of all our exports.
We have concluded a multilateral Trade Facilitation Agreement at the WTO meeting in Bali in December last year. Once introduced, the agreement is estimated to increase world GDP by $1 trillion a year, and create 21 million new jobs. Most of these benefits will accrue to the developing world.
We have made real progress in the negotiations towards the twelve nation Trans Pacific Partnership, or TPP. This highly liberalising agreement will create more seamless and far less protected trade and investment between countries which make up 40 per cent of world GDP.
Successful conclusion of this TPP agreement will be of very great consequence for regional growth, regional integration and sustainable job creation.
We have led a delegation of over 700 business people to China to promote trade and investment and highlight that Australia is open for business.
I have conducted 28 investment roundtables in 10 countries, and a White Paper is well advanced on how best to develop the enormous, untapped potential across the tropical north of Australia; and
We have focussed this year’s G20 meetings, which Australia chairs, squarely on growth, driven strongly by trade and investment.
Why is this important?
It is important because all of this activity will expand Australia’s trade and investment with the world.
It means higher economic growth. And in the process it will generate millions of new personal linkages and relationships throughout the world, and especially within our region.
And this extra trade will generate billions of dollars of income for Australians and create hundreds of thousands, and ultimately millions, of jobs here at home.
But today I’m not going to talk about these “wins”; the results will speak for themselves.
First, I want to share with you the Government’s vision for our country, and in particular three things:
- Why that vision is important for improving our trade and investment performance.
- How trade and investment policy contributes to delivering that vision, and
- Identify some of the challenges and opportunities along the way – for business as well as Government.
So, what is this vision?
It’s very simple: robust, sustainable economic growth large enough to employ future working Australians in highly valued jobs.
We want to set our country up in the long term to provide jobs, and enable prosperity and peace of mind for all who seek it.
To achieve this vision, we aim to displace over-regulation and excessive government spending from centre stage in our economy, and replace it with growth largely driven by the private sector.
Over the last three years, our policy program to deliver this vision, which I had the privilege of coordinating, has been driven by four simple principles:
- To live within our means – that is, to restore the Budget to surplus, stop the growth in debt and start to pay down that debt which is costing tax payers $1 billion dollars each and every month in interest payments.
- To substantially reduce red and green tape, and reduce costs for businesses.
- To restore a culture of personal and corporate responsibility, and
- To back our strengths as a country.
The four principles are inter-related.
For example, more personal responsibility implies less reliance on the State which impacts on budget outlays and helps us live within our means.
And, backing our strengths means far better use of resources, higher growth and a boost to budget revenues.
Like any family or business, living within our means, and restoring the budget to surplus, is central to effective and sustainable economic management.
My colleague, Joe Hockey, the Treasurer, has outlined the problem in the budget delivered just over a week ago, and he announced the initial steps we judge fundamental to fixing the Budget mess.
Continuing to ignore this debt and deficit mess is simply not an option.
I am not about to restate any of that save that the bigger the deficit, the more borrowing the government has to do, which drags in capital from abroad and puts upward pressure on the exchange rate, undermining trade and investment.
As well, the more borrowing the government has to do the more the government competes in the financial market for funds, invariably at the expense of small and medium size business accessing critical finance to rollover their commercial finance or to grow their business.
This explains many small business closures over recent years, and the associated loss of over 400,000 small business jobs.
As small business is the innovation centre of our economy, this has cost Australia dearly.
The trade and investment impact from our second principle – substantial de-regulation and business cost reduction – is self-evident.
The more Australia can lower business costs through more efficient and less regulation, the more competitive our businesses will be.
The net increase of 21,000 new federal regulations over the last six years has severely undermined Australia’s competitive position, costing investment, growth and jobs.
Our recent first regulation Repeal Day resulted in the removal of 10,000 regulations. We will repeat the Repeal Day every six months with a view to reducing the cost of complying with federal regulations by $1 billion a year.
Scrapping the carbon and mining taxes, and the welter of associated regulation, will seriously help restore our competitive position.
Again it delivers on our vision.
Reducing unnecessary regulation and cutting business costs is not just confined to activity at home – it extends internationally as well.
The Trade Facilitation Agreement negotiated under the auspices of the WTO that I signed at the Bali Ministerial in December last year was aimed at agreeing on a more seamless set of customs rules and procedures between 159 nations, and in doing so reduce business costs across the globe in a most powerful way, as I mentioned earlier.
Yet, it is the fourth principle to achieve our vision – backing our strengths as a country – that is most relevant to trade and investment policy.
It seems self-evident that by concentrating on what we do best as an individual, or as an organization, that we maximise the return – both financial and emotional – from our efforts.
In the same way, a nation that primarily focuses on its strengths will be able to prosper and have more resources to achieve all of our other goals, such as living within our means, building infrastructure and achieving better health, education, welfare and cultural ambitions.
But my 35 years in and around politics, both here and overseas, suggests that most governments spend an inordinate amount of time on a country’s weaknesses, rather than their strengths, because of the political power of the “squeaky wheel” and the ballot box.
To resist this requires strength of leadership.
So what are our strengths – what are the things we do as well as anybody, and better than most – and how do we find and encourage them?
Answering these questions goes to the core of trade and investment and underpins our framework for delivering a robustly growing Australia.
To see where our strengths are, look to where we are successful as a nation.
The success stories are most easily seen in our export industries where we directly compete against other countries.
Clearly our resource and energy sector, and our food and fibre industries are some of our great strengths; including all the services, innovation, high end manufacturing and logistics that cluster around those sectors.
But so too are others, particularly tourism and hospitality, international education and health and medical research-based industries.
When people come here to visit or study, it counts as a services export.
Education is now our fourth most valuable export earner behind iron ore, coal and gold.
Across the global we are the third largest educator of international students behind the US and the UK. We can increase this to many millions of students in the years ahead, deploying many business models.
Our success stories are many and varied but invariably relate to the myriad of services, goods or high end manufactures that cluster around these core national strengths.
And they are improving all the time.
Our wine industry is a textbook example of adding value to an agricultural commodity to earn foreign exchange.
When we export a bottle of wine we are exporting Australia’s marketing, design, IP, logistics and scientific strengths combined with our agricultural assets into a product demanded on the world market.
In fact, in 2008-9 our export earnings from wine were $2.5billion, which exceeded our exports from wool, worth $2.3billion.
Last year, wool exports at $2.9 billion exceeded the value of wine exports at $1.9 billion as the international market for wine became highly competitive. The EU, Chile and the United States all have FTAs with Korea and compete against our wine exports across North Asia.
But by securing the removal of the 15 per cent tariff on wine through our FTAs with both Korea and Japan we can get ourselves back into contention.
There are a host of new technologies and innovations that drive continued improvement in our national strengths.
Last year the McKinsey Global Institute summarised twelve potentially new technologies that could reshape the world.
From 3D printing to mobile technology and new generation genomics, there is a host of new ideas all being tried and applied across the world and here at home.
Some of these new technologies might be particularly relevant to our circumstances and strengths.
For example, new gene sequencing techniques are not only important for a better health outcome in an aging population, but the same technology is highly relevant to agriculture.
So there are many new opportunities as our strengths keep evolving with technology advances.
And evolve they must because staying ahead of the competition, and capturing the extraordinary opportunities associated with the explosion of the middle class in the region around us, requires constant innovation.
But it is up to individuals and firms to realise and continually grow these strengths for the reasons I outlined earlier.
The role of government is to create an enabling environment so these forever evolving strengths can emerge, not shackled by unnecessary regulations, taxes or inflexible workplace laws, or constrained by the lack of infrastructure.
To foster these continually evolving strengths we have to set up an economic system that allows a 'thousand flowers to bloom'.
To do that we have to ensure our economy is open to international trade and investment.
We have to ensure we are 'open for business'; that we feel the chill winds of competition, and that we invite the power of foreign capital and new perspectives to help further develop our strengths.
To see this I have to explain why exports are among our main strengths.
The secret is to see that our exports are also good for the people who buy them.
People in China, Korea, Japan and elsewhere do not have to buy Australian beef, iron ore, coal or dairy products or come here for a holiday or education - they have a choice.
When they choose to buy our exports it must be that those purchases are better value for money than from anyone else.
The Japanese, Chinese and Koreans judge themselves to be better off.
They gain from being able to buy a product or service on better terms than from anyone else - either from their own producers or from one of Australia's competing suppliers.
If they weren't better off they wouldn't buy our products or services!
So we gain and they gain; it is a mutually beneficial exchange.
But if overseas countries gain from buying our exports it must be that we gain from buying their exports.
Their exports to us, that is our imports, must be better value for money for us.
That is, it must be that also importing their products makes us better off.
Again it is a mutually beneficial exchange.
The notion that imports are bad and exports are good is one of the major misunderstandings around the world today.
Too many people do not accept that imports make us better off.
They see competition from abroad as making it hard for local producers, and that jobs are lost.
But it is this competition, whether it is selling beef or architectural services in China against say American suppliers – or competing on home soil to sell high value medical devices against Japanese or Korean products – it is the competition which drives excellence, and which ensures that our strengths keep evolving.
Just imagine what the standard of our rugby team would be if we never played the All Blacks or the Springboks.
We would never rise to the standard of the being the best - and nor would they.
It matters not whether we play them here or over there, it is the competition that provides the constant spur to improve and be the best.
Of course some people are quick to observe that the playing field is not level – that the competition is unfair because other countries help their industries.
And because they help their industries, we should do the same.
The observation that the playing field is often not level is true, and it is true that it could be considered unfair.
But the conclusion that Australia should also tilt the playing field because other countries subsidise and protect their industries is dead wrong.
I need to explain why to clear up this second major misunderstanding about trade.
First, we can note that the key thing that drives all trade is that there is a price or quality difference from one market to another.
It matters not why there is a price or quality difference: whether from a good season, innately fertile soils, a better made product, economies of scale, a knowledge-based economy, or government subsidies,
All that matters is there is a difference and that means there are potential gains from trade.
So why don't we just subsidise industry and artificially create some more trade?
The trouble is someone has to pay for it.
Those subsidies, whether from some taxpayer subsidy, or a tariff on imports or the hidden help through some change to the rules favouring one firm over another, means someone pays.
The question is whether the national benefits exceed the costs.
Let's consider the economics of what would happen if we decided to save those jobs when Holden and Toyota announced they were going to close production in Australia.
That would have meant either another multi-billion dollar subsidy from our taxpayers or an increase in tariffs on imports.
But a subsidy would mean the deficit would be higher, taxes would have to go up or spending fall elsewhere.
If the deficit goes up that means more borrowing, more debt, higher interest payments and ultimately more taxes later to pay for all this.
If we use a tariff on car imports to reduce competition from abroad, it is just another tax that is paid by consumers.
That means consumers have to pay more for their cars.
But that must mean less to spend on other things so business activity elsewhere is lower and there are fewer jobs elsewhere.
Often the people buying motor vehicles are other Australian producers like farmers, plumbers and accountants.
Faced with higher vehicle costs they try to pass them on.
For many groups they can and do pass on those costs.
But one group that cannot pass costs on is our exporters.
The minute an exporter tries to pass on a cost increase they risk losing a sale to some other exporter in the world.
So a cruel irony is that a barrier on imports (read tax) becomes a hidden tax on exports.
By protecting domestic industries we penalize exporters the most, the very industries we are most successful at.
If we penalize success we have less success!
That means less prosperity and fewer jobs and that is not the vision we have for our country.
No matter how it is done, artificially saving a job means a job is lost elsewhere, and because of the deadweight loss of administering and reviewing any scheme, it turns out that to save a job, mostly more jobs are lost than saved.
To get to that conclusion I haven't had to invoke some economic ideology or quote any of the great economists like Adam Smith or David Ricardo.
All I have had to do is apply some logic and common sense to how we lose out if we try and shield industry from competition.
After all, the trade between Sydney and Tokyo is no different from the trade between Sydney and Melbourne.
Our Founding Fathers knew the value of free trade and wrote it into the Constitution.
In a nutshell, to back our strengths we have to make sure we have our own house in order, so that we are as competitive as we can be, without unnecessary and self-imposed, unique costs such as the carbon tax, the mining tax, tariffs, taxpayer subsidies or highly inflexible workplace laws such as our ridiculous coastal shipping regulations.
This would mean that we are running our economy as efficiently as possible, consistent with our social and environmental goals.
An efficient economy is one where we are using our resources most productively.
That comes about where there is open competition.
This competition (or the threat of it) is one of the key drivers of innovation, productivity and prosperity.
Following our four principles is essential for promoting our best trade and investment performance, as well as helping to deliver our vision of sustainable growth sufficient to employ all working Australians.
But even suppose we have our own house in order – and we still have some way to go – Australia still faces barriers to exports in overseas markets.
Reducing these barriers to overseas markets is important because that is where the growth is going to be.
How big is this longer term global opportunity?
Credible projections suggest that over the next 25-30 years the 600 million people in the middle class in the region around us – from India to China, and every country in between – will grow by at least one and a half to two billion people.
That means today's 1.8 billion global middle class consumers will more than double over the next 25-30 years.
It implies (roughly) the global demand for food and energy will double, the demand for education will double, and so will the demand for accountants, tourist operators, health services and so on.
There will be variations on this theme, for example rising incomes implies a switch in foodstuffs towards meat and other protein.
But the over-riding effect will be a huge rise in global demand for goods and services over the next 25-30 years.
That is an enormous opportunity for Australia to supply that growing world market. It is the century of food, water and energy security.
Realising that potential means we have to ensure the infrastructure is in place and that most access is gained to global markets.
If more tourists and overseas students are to come here we have to build a second Sydney airport - now there's a big idea. The Government has decided to get on with this and build the airport at Badgerys Creek.
If we are to expand food production, the millions of hectares of arable soil across Northern Australia must be developed – there's another big idea.
We can double Australia’s output of food by developing the tropical north and applying 21st century technology and innovation to our traditional, temperate region agricultural industries.
There is up to 17 million hectares of arable soil in a mosaic across northern Australia with vast tracts restricted to running only cattle.
As well, sixty per cent of all the water that falls in Australia falls across the tropical north. Currently we capture only two per cent of that water.
The Government has already started on a white paper to spell out how the private sector will lead this northern development. The paper is due within months.
Let’s suppose we get the infrastructure and policies in place to realise the growth potential, we are still left with trying to get barriers to our exports down.
How do we reduce those barriers?
We have three broad international strategies to deal with reducing trade barriers – multilateral; bilateral and regional.
Our multilateral efforts at reducing barriers to trade and investment are under the auspices of the World Trade Organization or WTO.
The current round of trade talks is the Doha Round.
But apart from the Trade Facilitation Agreement I mentioned before, there has been no substantive multilateral trade liberalisation for 20 years.
Negotiating a freer multilateral trading world based on an agreed set of rules gives certainty to traders and investors to develop trade and grow prosperity.
It lowers costs.
It is first best trade policy.
It ensures that trade is non-discriminatory between the signatories to any agreement and so encourages the most competition and innovation.
But global co-operation in trade has proved elusive.
With large unemployment in many countries the prospects will be challenging at least.
A large part of the problem is the misunderstanding about the gains from trade I explained at length.
The problem is the reluctance of countries to lower barriers to imports, often because of the local politics involved from influential vested interests.
Apart from the Trade Facilitation Agreement mentioned earlier to reduce the substantial costs of customs, there has been no deal in the long-running Doha Round of trade talks.
Nothing has been put on the table because of the wrong-headed view that to remove an import barrier is seen as a 'concession' and 'giving something up'.
Allowing more imports is seen as a 'loss' while better access to another's market is seen as a gain.
This is dead wrong as I explained earlier.
We gain from removing our barriers to trade.
This mistaken view of trade goes to the core of the deadlock in the talks.
But what do we do about it?
Australia should not put all our trade initiatives in the one basket.
Faced with this multilateral deadlock, countries have resorted to a series of bilateral, regional or plurilateral so-called free trade deals.
Australia has embraced this approach.
Take our recent Free Trade Agreement with Korea.
Before that agreement, the United States, the world's largest beef producer, faced an import tariff into Korea of 38.5%, falling to 0% when its FTA with Korea is fully implemented.
The US already has a 5.4 per centage point tariff advantage over Australia, and this would have increased by 2.7 percentage points every year we delayed signing an FTA with Korea.
Whose beef was Korea going to import?
America's of course, that is, until we also signed an FTA with Korea.
Now we have levelled the playing field and removed a discrimination against our exports.
You can see why New Zealand’s revenue from exports of dairy products into China, following the conclusion of their Free Trade Agreement with China in 2008, have grown by $2.2 billion – a ten-fold increase – while Australia’s have grown by less than $70 million.
We have missed out.
That is why we are ramping up our Free Trade Agreement talks with China.
It’s why we have achieved Japan’s first comprehensive free trade agreement with a major agricultural exporting country.
The government is currently negotiating the Trans Pacific Partnership or TPP for short.
This agreement embraces 12 countries of the Pacific Rim, responsible for nearly 40 per cent of global GDP and more than a third of global trade.
It would be a huge achievement if we can pull it off successfully.
In the absence of multilateral agreements being concluded, I see all of these bilateral and plurilateral agreements as a very positive step.
Each agreement forces poorly performing sectors within the participating countries to adjust somewhat.
The agreements act like bricks in a wall, with each brick or agreement forcing more and more structural adjustment in different countries until the growing wall heads towards a virtual multilateral-type outcome.
In conclusion, let me summarise.
The government does have a vision for a robustly growing and sustainable Australia, where highly-valued work is available for all.
And we have four principles at the core of a framework to deliver that.
- Live within our means
- Substantially deregulate and reduce business costs
- Restore a culture of personal and corporate responsibility and
- Back our strengths.
These four principles are fundamental to our trade and investment performance, the most important being the fourth principle of backing our strengths; and so, encouraging competition and innovation by being open to world trade and investment.
In turn, improving our trade and investment performance, by gaining better access to world markets, on fairer terms, offers the potential for large gains and helps deliver our vision of private sector-led sustainable growth.
Big ideas are important, but big ideas such as much freer trade, are not always new ideas.
- Ends -
- Trade Minister's Office: (02) 6277 7420
- DFAT Media Liaison: (02) 6261 1555