Asses the impact of trade liberalisation on Australia.

Asses the impact of trade liberalisation on Australia

After the Second World War many countries were devastated both geographically and economically. A trend of protectionalism, first started by the USA was adopted by many nations in an attempt to protect their economies. This resulted in a halt in world trade as high tariffs and quotas were introduced to stop cheap imports invading the domestic market. Tariffs are taxes placed on specific imported goods, also known as import duties and quotas are physical limits on the level of imports in any one year for specific imported goods. This created huge barriers to trade and world trade was reduced to necessity goods that some countries were simply unable to produce.

In recent decades Australia has changed its outlook on the rest of the world and has changed from a very inward looking protectionalist state to a liberalised economy with multiple trading partners. Economic theory shows us that a more open, outward looking economy can deliver higher living standards than highly protected, inward looking economies. Increased competition, more efficient uses of resources, new markets and opportunities, and new technologies and higher returns to innovation all increase welfare. Economic modelling confirms that unilateral trade liberalisation is good for Australia. It is estimated that gains form liberalisation to date are around 1.5% of GDP. The removal of all tariffs would create 40,000 jobs in the short term (2 years), in all industries except the highly protected PMV and TFC sectors. These job increases would be across all areas from non skilled labourers to highly trained scientists, and across all states, including Victoria where the highly protected sectors are situated, but where there are also strong growing export industries which are held back by tariff protection. In the longer term gains would be over 1% of GDP, on average $750 per family. These modelling estimates may well be conservative, as they exclude dynamic efficiency gains, and do not take into full account the impact of removing non tariff barriers.

Since the mid 80’s, when trade barriers started to fall, Australia’s ratios of exports and imports to GDP have each risen from around 15% to 20%. The expansion of exports has strengthened Australia’s industrial base. Greater access to imports has benefited consumers and businesses by widening the choice of products available to them.

Experience from Australian industries tells us that liberalisation has reduced the cost of inputs and provided more cost effective access to leading technology to help firms become competitive exporters. Tariff reductions in Australia over the years have driven improvements in productivity and competitiveness in order to survive (manufacturing firms in particular). Containment of subsidies and assistance in competitor countries has assisted export growth (mainly agriculture). Many firms in sectors not previously associated closely with exports have outgrown their domestic markets, lifted productivity and become competitive in world markets; they are now dependant on international liberalisation continuing their own growth.

Of course there are always losers in something like this. Economic theory tells us there will be winners and losers and short term adjustment costs as well as long term benefits from liberalisation as resources move to more efficient uses. The better the economic fundamentals and economic management are, and the more open the other markets are, the easier it will be to realise the benefits of being an open outward looking economy.

Economic modelling tells us that if all remaining tariffs were to be removed, the more highly protected automotive and TCF sectors would be short term losers in terms of employment losses and plant and machine operation jobs would decrease. The biggest winners if all remaining tariffs were removed (in terms of more jobs) would be in services and some areas of manufacturers. Trade tells us liberalisation to date (both in Australia and overseas) has helped firms to improve competitiveness and, in Australia, has increased exports in many industries not traditionally thought of as exporters, especially elaborately transformed manufacturers (ETM) and processed food products.

Experience from Australian industries tells us trade liberalisation and globalisation of business increases competition from imports as well as in export markets. Many firms have emerged as winners from liberalisation processes but have experienced “costs of adjustment” in order to get there. Many firms have made efforts to move up the value added scale and in the process have invested heavily in R&D, product development, new technology and plant. Many have sought and found market niches in high value added areas. A strong emphasis on improving the training, skills and productivity of staff has also shrunk a number of jobs, thus reducing costs of production and ensuring survival of the firm. Many aspects of operations have moved offshore to find the most competitive location for the firm’s investment in the processes concerned. Such investment strategies have also enabled viable operations to be retained in Australia, this appears particularly to be the case for TCF and processed food firms. Joint ventures, strategic alliances and importing as well as exporting have commonly been employed to achieve competitiveness and maintain and expand employment. Ad protection has fallen, manufacturers have increased productivity and are making inroads into international markets.

Manufacturing – protection and exports

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Manufacturing – protection and exports

There must be costs to trade liberalisation and maintenance of barriers. Economic theory suggests that while trade protection can assist the protected industry, it acts as a tax on other producers and consumers. Trade protection forces businesses to pay higher prices on the goods they need to import for their production prcesses. This makes them less competitive than their overseas counterparts nad can therefore result in less export sales. Trade protection directly increases the prices of consumer goods - from school uniforms to cars - and hits the lower income groups the hardest. As well, protection can indirectly increase the costs of goods produced by firms that are using inputs subject to tariffs. So, many goods, not just those subject to tariffs, become more expensive.The higher prices paid by consumers leaves them with less to spend. This then affects all producers and service providers in Australia who are disadvantaged in favour of the protected industry. The Centre for International Economics (CIE) has estimated that, in 1996, tariff protection on cars and clothing and footwear cost each Australian family $1173, or $23 per week. Revenue to broadacre farms have been estimated by the CIE to be reduced by $2,300 per year due to tariff protection. This occurs through added costs imposed on primary producers by tariffs on their products.It is inevitable that when you reduce tariffs and liberalise the economy, there will be an increase in imports, as a result of the increased openess of the economy. There is a flip side as exports will also benefit from the increased openess of the economy. Contrary to popular belief most import is not bad news for the economy. Comsumers get access to a wider range of affordable and higher quality products, contributing to better standards of living. Producers get access to cheaper, leading edge inputs to production, in turn enabling them to compete more effectively here and overseas. And imported equipment and other inputs provide the capital and technology to put with labour in order to produce more - imports can create jobs as well as displace them. In the past decade, the ratio of exports and imports to GDP have each risen from around 15 percent to around 20 percent. The balance on trade in goods and services has actually improved over the past decade, driven mainly by improvements in our services trade balance.

The extent to which the gains from liberalisation overshadow the losses will depend on the flexibility in the economy to switch resources to more productive uses. Labour market reforms can create a more dynamic, flexible workforce capable of adjusting to changes in the economy. Reform of key sectors such as transport, energy and telecommunications can help provide Australian businesses with the competitive edge to succeed in the global environment and a competitive finance sector can help direct capital flows to growing sectors.Sound macroeconomic management, to secure low inflation and interest rates, will provide the stable economic environment necessary to allow firms to confidently make investment decisions and expand their business. There are certainly adjustment costs when protection falls and it needs to be acknowldged that some industries and firms will be losers as resources are reallocated to more productive uses.Firms that lose the protection of tariffs will lose market share to imports unless they can improve competitiveness. Other firms may become more export competitive due to cheaper imported inputs and reduced production costs as well as better access to resources. Australia's tourism industry has benefited from tariff reductions holding down prices of transport and manufactured goods that support the industry. Rigidities in the labour market can impede the movement of workers from previously protected industries to growing industries.

Trade liberalisation can only show its true benefits if all countries reduce their tariffs and open their economies. Australian exporters enjoy improved market access for their products as a result of liberalisation. Some of this has been negotiated multilaterally, bilaterally or through regional forums, and much has been achieved by countries liberalising unilaterally in recognition of the competitiveness benefits that process can deliver. There are already fewer less subsidised agricultural products on world markets and that trend will continue as Uruguay Round commitments are implemented.Reductions in non-tariff barriers have been negotiated but much remains to be done. Breakthroughs such as the extension of shelf-life of a range of processed food products in Korea and addressing quarantine-related impediments for meat products in some European markets will deliver export gains. A recent specific example is the bilateral World Trade Organization (WTO) market access package with Taiwan, concluded in October 1996. It provides important gains in access for a wide range of agricultural and manufactured goods and services. The early access will contribute to additional exports in 1997 worth in excess of $30 million. Apart from early improved access for beef, motor vehicles and horticulture, once Taiwan becomes a member of the WTO, Australian exports will benefit from an average reduction of 40 per cent on both agricultural and manufactured products. In virtually every year of the postwar period, real growth in world merchandise trade has outpaced real growth in merchandise output. The ratio of goods and services exports to GDP (constant prices) has risen from around 16% in 1974 to 23% in 1995. Globally, average tariffs on manufactures have fallen from 40% in the 1940s when the General Agreement on Tariffs and Trade (GATT) was established, to around 4%. The proportion of Australia's exports of industrial products facing zero tariffs in developed countries will more than double, from 20 to 43 per cent, when the Uruguay Round cuts are fully implemented. Comparative international studies of competitiveness reveal that countries that rank consistently above Australia in competitiveness terms also tend to be the countries that have liberalised more than Australia. Interestingly, they also tend to be countries with lower unemployment (including Singapore, Hong Kong, US, New Zealand, UK).

Australia is not alone in opening its markets

Many people in austrlia feel uneasy as they feel they sould wait for other countries to reduce tariffs too, no one is ever willing to be the first as the losses are so large if it all goes wrong. There are 3 major reasons as to why it would be better for Australia to move ahead with liberalisation rather than waiting for the rest of APEC to liberalise. Although Australia might initially benefit in GDP terms (by saving adjustment costs) by waiting, the benefits are short-lived as the benefits of moving ahead with our own liberalisation soon outweigh the short-term adjustment costs. Economic modelling suggests that by 2003, Australia would be enjoying double the GDP benefits we would have had if we had waited. With employment, the results are even more convincing - by 2003 we would be enjoying quadruple the employment growth we would have had if we had waited for the rest of APEC to liberalise. By 2005, Australia could be attracting less capital (due to lower returns) if we waited for others in APEC to liberalise rather than move ahead straight away. International studies ranking the competitiveness of business environments indicate that the early liberalisers are ranked ahead and suggest that investors find those locations more attractive places to do business. The ability of labour and capital to flow to efficient uses is critical in yielding the benefits of liberalisation, and underscores the importance of microeconomic reform.

The gains from liberalisation are much greater if we liberalise firstly rather than wait for the gains to Australia from liberalisation by other countries. Between 80% and 90% of the long term gains to Australia of APEC liberalisation come from Australia's own liberalisation. Australia is not the only country to have recognised this. Others have moved to liberalise unilaterally in order to gain benefits, thereby opening up markets for Australian exports without our having had to negotiate the barriers away. Obviously we don't liberalise for the benefit of others, but strict reciprocity is unlikely to be either effective in opening the markets of others, or in our interests. Australia simply doesn't have enough bilateral weight to prise open difficult markets and, overall, our own market is not of sufficient size to buy the sort of market access Australian exporters need. In reality we rely heavily on countries like the US, EU and other countries to drive the opening of markets. But of course we should use our own liberalisation efforts to try and secure market access from our partners - and we do this successfully.

A good example is the Information Technology Agreement; The Government, with support from industry, agreed to phase out remaining tariffs (now 5%) on a wide range of IT items, but insisted that our regional partners and other global traders do the same - and they have, with 93% of world trade in IT products covered. What is often not appreciated is the extent to which Australia is able to take advantage of access negotiated by the heavyweights of trade. If the US did reciprocal deals with Japan on beef or coal using their bilateral weight, how much would we be able to sell? The USA and others normally don't do this because of the rules of the multilateral trading system.

While protection benefits certain industries and individuals, there are also significant costs for producers, exporters and consumers. Jobs in protected industries can mean loss of jobs in unprotected industries. Many factors affect jobs and protecting an industry does not necessarily protect jobs in that industry, and worse, it can impose costs that mean lost jobs in other industries. The increased costs of the current levels of tariffs on imports for Australian exporters have been assessed by the Centre for International Economics as an average of 3 per cent. In some sectors those additional costs are higher than 3 per cent holding back output, exports and jobs growth. In the Textile, Clothing and Footwear (TCF) industries in the decade 1974 to 1984, when protection increased dramatically by 12 per cent a year, employment fell at 3 per cent a year. Case study research indicated that in some firms where employment had been lost, the view was that liberalisation and subsequent productivity improvement had saved the firms.

Export growth and its contribution to economic growth means jobs for Australians. A survey in 1996 of Austrade's exporter clients showed that nearly 60 per cent had either increased employment or expected to do so as a result of exporting. A 1996 Australian Bureau of Statistics (ABS) survey of the growth and performance of small and medium-sized enterprises showed that a higher proportion of exporting businesses increased employment than was the case for non-exporting businesses. Modelling by hte CIE suggests that a 1% increase in major agricultural, mining and manufacturing commodity exports could result in over 16,000 additional jobs. Many issues affect job creation and job growth. Despite creation of new jobs in export industries, the coincidence of trade liberalisation and growing unemployment in recent times has meant that export growth has not always been associated with jobs growth in the public's mind. This is because structural adjustment, rapid technological change and productivity improvements have been driving a countervailing process of job shrinkage, particularly in unskilled segments of the labour market. Often, job losses that are driven by technological change and productivity improvement deliver greater export competitiveness. In the longer term, more demand can lead on to more jobs - jobs that are sustainable and higher paying. Many industrialised countries have experienced relatively high rates of unemployment in recent years. Many European countries have double digit unemployment, some as high as 20 per cent. In some cases, the benefits of export growth have been translated into higher wages rather than more jobs. Without export growth, unemployment rates are likely to have been higher and the benefits to workers lower during this period of major change. These points were backed up in case study research by the Department of Foreign Affairs and Trade. Some firms say that more open markets here and offshore have led to growth in exports and growth in employment. (Firms in agriculture, food processing, household products, TCF, shipbuilding, motor vehicles, autoparts, pharmaceuticals, education and training, software, heavy engineering, tourism, health services, environmental services and telecommunications indicated this during case study research). Even more firms, however, said that productivity improvements meant that more open markets had not delivered increased employment but had enabled employment levels to be maintained in the face of tough competition. Enhanced job security had resulted with possible employment growth to come (firms in forest products, food processing, tourism, electrical equipment manufacture, autoparts, IT, building and construction, mining, engineering and specialist equipment manufacture). Some firms remain at much lower employment levels than was the case before liberalisation and associated productivity improvements (firms in processed food, TCF, financial services, metals manufacture, autoparts, specialist machinery, electrical equipment). Still others say that employment is down and unlikely to grow for quite some time while there are still substantial productivity improvements to be made in order to deliver growth (firms in agrifood, TCF, mining, metals manufacture, autoparts, telecommunications equipment, whitegoods).

ERA- Effective Rate of Assistance

Despite perceptions to the contrary, the Australian manufacturing sector has continued to grow even in the face of substantial reductions in trade protection. The misperception is partly fuelled by falls in manufacturing as a percentage of the total economy. The service sector has, in recent years, grown faster in output and employment than manufacturing, thereby increasing its share of the total economy. This trend is not peculiar to Australia but has been experienced by many industrial economies and is due primarily to improved technology in production of manufactured goods. In employment data, many jobs that used to be part of manufacturing firms (and were counted as manufacturing jobs) are now outsourced to specialist services firms and counted as services jobs (eg in accounting, design, distribution, transport and training). The past decade has also seen improvements in the export performance of Australia's manufacturing sector. In 1985 manufactured products comprised less than 10 per cent of total goods and services exports. By 1995 this had grown to around 20 per cent. Australia has improved its competitiveness and increased exports in many industries not traditionally thought of as Australian exporters. Fastest growing exports over the past 5 years have included a range of elaborately transformed manufactures (ETMs) such as electricity distributing equipment (average annual trend growth since 1991-92 of 30.8 per cent); sporting goods (28.3 per cent); heating and cooling equipment (26.5 per cent) computer equipment and office machinery parts (25.1 per cent); industry-specific machinery (24.9 per cent); medicaments, including veterinary (22.4 per cent); medical instruments (20.4 per cent); telecommunications equipment (19.8 per cent); computers (19.6 per cent). Taking IT products as one of the abovementioned examples, while Australia is a net importer of information technology and telecommunications products, exports in this sector are growing very rapidly, having doubled between 1992 and 1996 to more than $1.8 billion, and there are significant further benefits for Australia in the Information Technology Agreement (ITA) in the WTO, which will create new employment opportunities for this fast-growing export industry. Reducing Australia’s tariffs on basic business inputs such as information technology and telecommunications equipment, would also lower costs for Australian industry. Processed food products have also grown strongly such as milk and cream products (20.4 per cent); cheese (17.7 per cent); alcoholic beverages (14.1 per cent); cereal preparations (10.1 per cent). Some industries that many think Australia is uncompetitive in have actually displayed above average export growth (such as engines, other car parts and passenger motor vehicles), although these industries benefit from assistance that imposes costs on other industries. Last year (1996) automotive exports were over $2.3 billion, a five-fold increase over the level ten years ago.