As the Lowy Institute points out in its selection
of the topic of my address today, the global
economy is experiencing a period of unusual
uncertainty, with debt crises in Europe, further
quantitative easing in the United States and
overheating in China.
In the aftermath of the deepest global recession
since the Great Depression, global imbalances
are especially large.
A huge excess of spending over saving in the
United States and Europe is mirrored by a
big excess of savings over spending in China
and other surplus countries.
The sluggish post-recession growth in the
United States and Europe and deep import penetration
of Chinese manufactures into the US market
hasn't led to the greatly feared outbreak
of protectionist trade wars.
But it has contributed to currency wars.
My first message today is this: currency wars
are no substitute for trade liberalisation.
At best, currency wars can only redistribute
income and jobs; in a global context they
can create neither.
Why play this zero sum game when the positive
sum game of trade liberalisation is available
— where total global income and jobs are
increased through the gains from trade made
possible by specialisation?
The Gillard government is vigorously pursuing
trade liberalisation at home and abroad.
Domestic economic reform is essential to lifting
productivity growth and through it the international
competitiveness of Australian businesses.
But even if Australian businesses were the
most competitive in the world as a consequence
of domestic economic reform and their hard
work and ingenuity, it would amount to nought
if they are shut out of foreign country markets.
That's why the Gillard government will continue
to devote enormous energy to opening up other
countries' markets, gaining market access
for our exporters.
For Australia and the world, 2011 can be the
Year of Trade.
The coming year can be one during which the
Doha Round of Multilateral Trade Negotiations
can be brought to a successful conclusion,
the Trans-Pacific Partnership of nine APEC
economies can be advanced ahead of the US-hosted
November APEC meeting in Honolulu, a trade
agreement with Korea can be finalised, an
agreement with Japan can be advanced, deadlocked
negotiations with China can be unlocked, further
liberalisation with countries like Indonesia
and Malaysia and the Gulf states can be progressed
and perhaps negotiations with India and a
number of Latin American countries can be
commenced.
These multilateral, regional and bilateral
negotiations would constitute a hugely ambitious
trade agenda.
Actual progress on some may be disappointing
and, frankly, Australia will pursue negotiations
with those partners who are genuine about
liberalisation.
As Trade Minister, I am interested in results
for our country and the global trading system,
not in appearances of looking busy, mired
in interminable processes that simply enable
us to say that negotiations are proceeding.
Nor am I interested in collecting trophies
for the national mantelpiece, empty vessels
engraved with the words free trade agreement
if they are nothing of the sort and of token
value to our country.
But if Australia is to achieve even half of
its ambitious agenda of increasing jobs and
prosperity through trade liberalisation, we
need a coherent, guiding philosophy and a
derivative set of principles against which
to judge the proposed content of these various
agreements.
As Microeconomic and Trade Policy Adviser
to then Prime Minister Bob Hawke, I was involved
in the development of such a philosophy.
But during the period of the Coalition government,
that philosophy was subjugated to foreign
policy considerations and, towards the end
of the Howard era, it almost completely disintegrated.
Before you conclude that I am being misty-eyed
about economic reform and trade policy in
the Hawke-Keating era and that I have failed
to acknowledge that the world has moved on,
the Hawke and Keating Labor governments did
not invent an economic philosophy; they adopted
one from orthodox economic thinking.
Much of that thinking in Australia had been
done by academics such as Sir John Crawford,
Professor Heinz Arndt, Professor Max Corden,
Professor Richard Snape, Professor Ross Garnaut
and leading members of the various predecessors
to today's Productivity Commission.
This body of intellectual thought and rigour
was a vital counterweight to the protectionism
within the business community and the broad
labour movement at the time.
In the 1970s this economic philosophy was
sneeringly described as neo-classical economics.
By the late-1980s its opponents had condemned
it as economic rationalism.
But as Bob Hawke would ask of his anti-reform
critics: "what are they in favour of — economic
irrationalism?"
Upon entering parliament in 1998, I was counselled
by friends that my proposal to describe myself
as an economic rationalist in my first speech
amounted to an overly long political suicide
note.
By economic rationalism I meant advocacy of
policies to increase national income that
is then available to support the needy and
create opportunity for all.
Now, 12 years later, as Australia's Trade
Minister, I remain one of those horrible economic
rationalists; one who is hard headed and soft
hearted.
At its essence, Labor's guiding philosophy
of economic reform has been a commitment to
markets and competition — a commitment reaffirmed
by Julia Gillard as Prime Minister.
Of course there can be a role for government
intervention to correct for market failure,
including anti-competitive behaviour and inadequate
private incentives for research and development.
But the presumption must be that competition
is good, more competition is better and markets
are better than governments in allocating
scarce resources among competing commercial
uses.
It is this philosophy that guided the Hawke
and Keating governments in opening up Australia
to competition, refashioning it from an economy
supplying a small, domestic market protected
by high tariff walls to an open, competitive
economy supplying global markets.
Competitive forces were applied to the exchange
rate, financial markets, product markets and
government business enterprises.
Trade policy and microeconomic reform were
integral components of the overall economic
reform program, intertwined and bound by the
open, competitive philosophy.
Reducing tariffs and eliminating quotas were
tools of trade in fashioning the open, competitive
economy, essential in exposing Australian
business to international competition.
At no time did the Hawke and Keating governments
regard reducing tariffs and other trade barriers
as bad for Australia, a necessary evil in
extracting concessions from trading partners.
Although painful for those directly affected,
tariff reductions were considered to be in
the national interest, part of an overall
program of increasing national jobs and prosperity.
And adjustment assistance was provided to
those who were adversely affected by the necessary
tariff reductions.
It is for these reasons that Hawke and Keating
pressed ahead with scheduled tariff cuts through
the teeth of the deep recession of 1991 and
why, in that year, they legislated even greater
tariff reductions.
These policies required enormous political
courage and the understanding of a visionary
trade union movement.
But, as an essential part of the overall economic
reform program, they helped lay the platform
for almost 20 years of sustained economic
growth.
As a result of those far-sighted Labor government
market-opening policies, continued by the
Howard government after an early freeze, general
tariff rates fell from more than 15 per cent
to 5 per cent or zero, the combined tariff
and quota rate on automobiles fell from 85
per cent to 5 per cent and tariffs on clothing
and some textiles fell from maximum rates
of 180 per cent to 10 per cent with a further
reduction to 5 per cent scheduled for 2015.
Tariffs on footwear and some other textiles
have in fact already gone to 5 per cent this
year.
At no time under Hawke was the elimination
of automotive quotas conditional upon other
countries eliminating their quotas; it was
seen as good domestic economic reform policy
in its own right.
At no time under Hawke or Keating was the
legislated reduction in automotive tariffs
conditional upon other countries reducing
their tariffs; again it was seen as a sound
economic reform for Australia's sake.
And at no time were reductions in general
tariffs or tariffs and quotas on textiles,
clothing and footwear conditional upon other
countries reducing their tariffs.
This unilateralism in tariff reductions incidentally
gave Australia credibility in international
trade negotiations way beyond the relative
size of our economy.
To this day, Australia's views are sought
and valued in global and regional trade negotiations.
Beneath the maximum auto tariff of 5 per cent
are zero rates for imports from the United
States and Thailand and a third major auto
producer, Korea, is also pressing for the
elimination of Australian automotive tariffs.
Clinging to the 5 per cent tariff as a bargaining
chip to be played to extract tariff reductions
from trading partners would be a repudiation
of the unilateralism of the Hawke and Keating
governments.
That is not to say that Australia should not
fight tooth and nail to bring down trade barriers
confronting our exporters of goods and services.
The Gillard government will vigorously fight
protectionism against our exporters in all
its forms.
The principle of unilateralism does not oblige
Australia to accept trade deals in which other
countries can continue to impose high tariffs
against us.
If so-called free trade agreements that contain
ongoing trade restrictions against us are
not in Australia's national interest then
we should not conclude them.
And trade agreements that enable our trading
partners to impose high tariffs against our
exports of key products are unlikely to be
in Australia's national interest.
The trade liberalising reforms of the past
quarter of a century have yielded very substantial
income gains for Australians.
A study by the Centre for International Economics
found trade liberalisation in Australia had
increased real household incomes by an estimated
$3,900 by 2008.
These gains came not only from exporting more
but from being able to buy imported goods
more cheaply than they could be produced in
Australia.
This analysis helps debunk the mercantilist
notion that exports are good but imports are
bad.
Australian consumers have voted with their
purses and wallets in favour of imports that
are less expensive than domestically produced
items.
And less expensive imports that are inputs
into Australian made goods and services, destined
for local and global markets, help boost the
competitiveness of those industries.
Yet, following the end of Labor rule in 1996,
the notion has gradually crept back in that
Australia's small remaining tariffs are good,
that removing them is bad and that such evil
should only be contemplated as bargaining
chips in negotiations for future trade deals.
As Trade Minister, I want to reconnect with
the Hawke-Keating governments' first guiding
principle in economic reform that competition
is good, and dispense with the bargaining
chip approach to the remaining Australian
tariffs.
Australia should make its offers, our trading
partners should make theirs, and where appropriate
we should encourage them to go further.
But if the final deal is not in Australia's
national interest we should not accept it.
Some may hold the view that this sort of approach
is naive; that our regional trading partners
are all hiding behind high tariff walls, ready
to reap the benefits of our liberalisation
without offering anything themselves.
But that is not the reality.
Among Australia's key trading partners in
the APEC region, which account for 44 per
cent of global trade and 70 per cent of Australia's
exports, average applied tariffs have been
lowered over the last quarter of a century
from more than 25 per cent to around 5 per
cent.
APEC has helped establish the confidence necessary
for economies to undertake unilateral trade
policy reforms — a confidence in the knowledge
that tariff reductions made sense from a domestic
reform perspective and that regional partners
were doing the same.
Nevertheless, it is true that substantial
trade barriers remain in place for agriculture
in a number of APEC economies and much work
remains to be done in reducing behind-the-border
restrictions on services exports.
But overall, good trade liberalising progress
has been made within APEC.
The second guiding principle of the Hawke-Keating
era was that of non-discrimination.
It is incorrect to suggest that the Hawke
and Keating governments pursued only global
trade liberalisation.
Those governments negotiated bilaterally as
well.
But in doing so, they did not seek preferential
access to markets, only an opportunity to
compete.
The principle of non-discrimination is the
foundation stone of the World Trade Organization's
global trading rules.
Unfortunately, owing to the proliferation
of preferential bilateral and regional trade
agreements, the non-discrimination principle
nowadays is observed more in the exception
than in the rule.
Discriminatory trade agreements can divert
trade away from more efficient, excluded producers
to less efficient parties to the agreements.
Like currency wars, trade diversion amounts
to no more than a redistribution of jobs and
prosperity instead of the creation of more
jobs and prosperity.
Worse, trade diversion is inherently job-destroying
and income-destroying from a global perspective.
As countries in the global trading system
have gradually reduced tariffs over the last
three or so decades, the trade-diverting effects
of any particular discriminatory deal are
not as great as they would have been 30 years
ago.
But the number of such discriminatory deals
has exploded from less than 10 half a century
ago to almost 300 in force and many more under
negotiation.
Consequently, the total value of trade diverted
from more efficient to less efficient producers
could have increased substantially.
The empirical evidence is inconclusive.
We can argue till the unsubsidised Australian
cows come home about how much trade is being
created by discriminatory trade deals relative
to the value of trade diverted — but there
is no good reason for discrimination and therefore
no good reason to sacrifice jobs and income
through trade diversion.
As Australian Trade Minister, I therefore
re-embrace the second great Labor principle,
the principle of non-discrimination.
In negotiations with trading partners we neither
seek exclusive nor preferential access to
other countries' markets.
I would like to be able to tell you that this
is pure economic altruism.
In reality it is because non-discriminatory
trade agreements offer better long-run returns
for Australia — they are more likely to
result in trade creation instead of diverting
trade from other countries that, in the absence
of tariffs, would be lower-cost producers.
It's also worth mentioning that this approach
doesn't mean Australia is obliged to repeat
an error made in one concluded trade agreement
in negotiating future agreements.
Provisions that are in Australia's national
interest obviously should be extended to other
countries willing to settle high-quality,
trade-creating agreements but those that are
not in the national interest should not be
extended to others for the sake of reaching
a low-quality agreement.
For example, an intellectual property clause
which extends the duration of foreign copyright
in one agreement and doesn't offer obvious
economic benefits to Australia should not
be part of a later agreement just because
we had already used it.
Many other countries do not embrace the principle
of non-discrimination.
We can encourage them but we cannot force
them.
Consequently, Australia is likely to conclude
further preferential deals in the future.
But we should not insist on receiving preferential
treatment but rather, an opportunity to compete
on level terms.
The third great Labor principle of the Hawke-Keating
era was to maintain a clear separation between
trade policy and foreign policy.
During the mid- to late-1980s, when the United
States augmented its agricultural production-subsidising
Farm Act with an export-subsidising Export
Enhancement Program, or EEP, even the conservative-leaning
National Farmers' Federation urged the Hawke
government to put the US-Australian bases
on the negotiating table.
Hawke refused.
I well remember Hawke, in meetings with President
Ronald Reagan and George Bush Snr, running
Australia's arguments against American agricultural
subsidies hard but then moving on to a separate,
positive discussion about the Alliance and
foreign policy.
The Howard government set about deliberately
entangling trade policy and foreign policy
— to the point where any Labor criticism
of the likely or actual content of the Australia-US
Free Trade Agreement was branded anti-American
and un-Australian.
Never mind that the Howard government's acquiescence
to the exclusion of sugar from the Australia-US
FTA, after promising our farmers it was a
non-negotiable inclusion, has left a bitter
taste in the mouths of Australian sugar producers.
My criticism of the prospective deal as Shadow
Trade Minister earned the wrath of the Howard
government, the US Administration and even
of a number of my own Shadow Cabinet colleagues.
I have never been anti-American or un-Australian,
but we should always retain the right objectively
to scrutinise proposed trade deals to assess
whether or not they are in the national interest.
So the third great Labor guiding principle
is to maintain a separation between trade
policy and foreign policy — the separation
principle.
As new Trade Minister I have been given a
stream of advice that I should initiate so-called
free trade negotiations with countries of
strategic importance to Australia.
It's as if the very announcement of the commencement
of negotiations performs the task of affirming
a strategic, geo-political relationship, with
barely a moment's thought given to the prospects
of concluding a successful, truly-liberalising
agreement.
Criticism by a home government or farming
and business organisations of the foreign
government's intransigence in negotiations
can hardly be conducive to friendlier relations,
but by that time, when the trade ministers
and officials are slogging it out and industry
associations are venting their frustrations,
the foreign policy urgers have moved on to
the pursuit through trade policy of another
strategic, geo-political alliance.
Obviously this does not mean that Australia
shouldn't conclude trade deals with strategically
important countries.
That would be absurd.
But it's the quality of the deal, not the
quality of the strategic relationship, that
should determine whether the deal is worth
having.
The formation of discriminatory trading blocs
for geo-political reasons contributed to the
outbreak of the Second World War.
The application of two great Labor principles
of non-discrimination and separating trade
policy from foreign policy should ensure that
no Labor government contributes to the creation
of such tensions in the future.
So how does a country like Australia decide
which countries should be prospective partners
in bilateral trade negotiations?
Applying the principle of non-discrimination,
the answer is easy: any country that is genuinely
interested in reducing its trade barriers
is eligible, subject only to the opportunity
cost of deploying Australia's negotiator talent
in those negotiations.
The good news is that this approach would
save taxpayers the cost of absurdly hypothetical
computable general equilibrium studies on
the gains from so-called free trade agreements
between the two countries.
These studies, commissioned by advocates of
particular bilateral trade deals, will inevitably
report enormous potential gains to both countries.
Modellers are handed the assumptions by government
officials and the computer models produce
the results sought.
This process is best described as an expensive
farce designed to hoodwink the public.
The only value in such modelling would be
analysis of a concluded deal — not a hypothetical
deal.
This fourth Labor principle of trade policy
could be titled the 'no-bull principle' or
less provocatively, the transparency principle.
The fifth and greatest principle is the grand
unifying principle: that trade policy and
microeconomic policy are as one; that they,
in harmony with sound fiscal policy, constitute
an economic reform program designed to lock
in and increase prosperity and provide the
dignity of work for all those who seek it.
Guided by the grand unifying principle, the
best trade policy is domestic economic reform:
a productivity-raising, competitiveness enhancing
microeconomic reform program supported by
responsible fiscal policy.
Applying this grand unifying principle, Australia
must not wait for other governments to reform
their economies before reforming ours.
Australian economic reform is good for jobs,
good for prosperity.
As reformers, we have never waited for the
world and we need not wait for the world now.
Productivity growth accounted for 80 per cent
of the increase in national income over the
past 40 years.
In an ageing population and a two-speed economy,
productivity growth will need to do most of
the heavy lifting over the coming 40 years
too.
Yet productivity growth began to slide from
the turn of this century, starved of a new
productivity-raising reform program to build
on the Hawke-Keating Labor reforms.
Reviving productivity growth through a new
economic reform program is core business for
the Gillard government.
Economic reform at home and securing better
market access abroad work hand-in-glove in
creating jobs and prosperity.
Australia's approach to trade policy should
therefore be reviewed against the five Labor
principles that have stood the test of time
and served our nation well: unilateralism;
non-discrimination; separation; transparency;
and the grand unifying principle of trade
policy as an indivisible part of overall economic
reform.
Guided by these principles, I will be conducting
a review of Australia's future trade policy
framework for release around the end of the
first quarter of 2011.
A Productivity Commission report on the existing
approach to trade policy will be released
in the near future and will provide valuable
input into that review.
Conducting the review will not put on hold
Australia's present trade policy priorities
such as our efforts to complete the Doha Round
of Multilateral Trade Negotiations and the
proposed trade deals with Korea, Japan, China
and members of the Trans-Pacific Partnership.
Of course, the review can have a bearing on
the Government's approach to finalising some
of these and other agreements.
But it won't stall them.
It will bring policy coherence to our negotiations.
And it will reaffirm Labor's commitment to
ongoing trade liberalisation designed to lock
in and increase prosperity and jobs in Australia,
and around the world.
