WHERE TO FOR AUSTRALIA 83
6 Where to for Australia
Key points
• A retreat from openness to trade in some countries may suggest to some that a rethink of
Australia’s commitment to free trade is needed. They would be wrong.
• Protectionism is not a magic wand. Protectionist trade policies would harm the Australian
economy rather than dealing with the insecurity concerns of citizens that, for many, globalisation
has come to encapsulate. But it would also be a mistake to dismiss the signs of discontent.
• The best response would be to continue to work towards freer markets. Australia can proceed
unilaterally, as most of the benefits, especially from lower non-tariff measures, do not depend on
our trading partners taking similar actions.
• But in practice, support for open markets is more likely to be forthcoming if pursued through
even-handed, rules-based, trade agreements that enable more countries to participate and benefit
from the expanded economic opportunities offered by improved market access.
• There is considerable scope to achieve better outcomes and foster public confidence in open
markets through Australia’s approach to trade agreements. In particular by:
– prioritising new regional agreements, especially those that allow benefits to a broader group of
countries and do not exclude others, and expanding the use of World Trade Organization
sector-specific agreements which have proven to promote multilateral liberalisation
– pursuing only those agreements where there is a strong case that a net benefit will result
– improving consultation processes, including providing key stakeholders access to draft treaty
text on a confidential basis during the negotiation and broadening participation in
negotiations to parties capable of offering critical assessment.
• Australia’s reputation as an attractive destination for international investors could be
strengthened through more consistent, transparent and predictable approval processes while
preserving our vital national security interests.
• Limited policy attention given to the distribution of the benefits and to the uneven costs of
adjustment associated with reducing protection is testing the social compact that underpins
open market policies.
– While Australia (like other countries) is a winner overall from open markets (and technological
change), some displaced workers struggle to find a new job.
– Continued support for open markets relies on the community seeing that the gains are shared,
and that there is effective support for those who are negatively affected by trade.
• More effective policies to facilitate adjustment, for example retraining, merit investigation and
existing policies should be regularly evaluated to ensure they deliver their intended outcomes.
• Better understanding of community concerns about free trade, improved engagement with the
community around the case for open markets and clearer communication about the benefits of
trade and the policies in place to support adjustment would also help to build community
acceptance and reduce pressures for higher protection.
84 RISING PROTECTIONISM: CHALLENGES, THREATS AND OPPORTUNITIES
6.1 Is there a case for a policy rethink?
The global trade landscape has evolved substantially in recent years. Most significantly,
following decades of support of a liberal trading order, the discourse has changed in key
advanced economies. A growing number of people in our communities are expressing
scepticism about the benefits of trade and concerns about the ‘offshoring’ of jobs. This is
once again fuelling protectionist sentiment. This is most evident in the United States,
although so far it is unclear how their trade policy will change. Likewise, in parts of
Europe protectionist protagonists have also been empowered.
Another significant development in international trade is the growing importance of global
supply chains (GSCs). These have been facilitated by technological innovations, notably in
transport, communications and logistics, and by recent trade agreements. Specialisation by
firms within GSCs contributes to productivity growth, but the displacement of jobs as
production is relocated across borders contributes to community concerns about trade.
Furthermore, the majority of new trade agreements in force, or under negotiation, cover a
vast array of policy areas. They serve to facilitate trade,23 but can also constrain national
sovereignty. While the number of preferential agreements has escalated exponentially,
progress in broad multilateral negotiations is effectively at a standstill.
These developments may suggest to some that a rethink of Australia’s commitment to free
trade is needed. They would be wrong. The earlier chapters of this report assessed the
possible impacts on the Australian economy and elsewhere of highly stylised scenarios that
depict a shift internationally towards a more protectionist and distortionary trade policy
stance. The analysis demonstrated that if Australia were to follow suit, community
wellbeing would decline because of higher prices and reduced consumer choice, and the
ability of Australian businesses to participate in GSCs would be limited — ultimately
affecting their productivity. For every $1.00 increase in Australian tariff revenue,
economic activity in Australia would shrink by $0.64 (chapter 4).
However, it would also be a mistake to dismiss the signs of discontent. For many people,
income has stagnated, feelings of economic insecurity are more pervasive and income
inequality is widening. While these developments are more closely linked to technological
disruption (Helpman 2016), and are more pronounced in other advanced economies, they
could be exploited. If not addressed, Australia’s poor productivity performance portends a
sustained period of low income growth, which could lead some to blame trade and renew
calls to protect local jobs and industries.
Even where people support free trade, there are legitimate concerns about particular trade
agreements and trading relationships. Past work of the Commission has highlighted how
bilateral agreements entail costs and have not always delivered the expected benefits or
23 Just how much they promote trade depends in large part on the stringency of the rules of origin. Stringent
rules, which require a high share of local value added, or considerable product transformation, reduce the
ability of firms to use the negotiated preferences (Crook and Gordon 2017).
WHERE TO FOR AUSTRALIA 85
earned the broad support of the community (PC 2010). Arguably, the limited policy
attention given to the distribution of who benefits and to the uneven costs of adjustment
associated with reducing protection is testing the social compact that underpins open
market policies.
The current environment thus presents a timely opportunity for Australia to evaluate its
approach to international trade, and other relevant policy measures. What should Australia
do in the face of the new swing towards protectionism? Are there strategies for avoiding
the risk of backsliding on protection? How can the costs of adjustment be minimised and
the benefits of liberalisation made more inclusive?
This chapter draws on the stylised scenarios and the Commission’s model used in previous
chapters, and on other analytical work, to discuss the actions that Australia might take on
trade and foreign investment policy. It outlines a three-pronged strategy to help achieve
better outcomes for all Australians, foster public confidence in open markets and reduce
protectionist pressures. The first prong is to continue to work towards freer markets
(section 6.2) and to pursue even-handed, rules-based trade agreements (section 6.3). The
second prong is to focus on the broader policies that strengthen the workforce’s
adaptability to changes taking place in the global economy, not just trade (section 6.4).
And the third prong is to improve how governments engage with the community about
trade and investment (section 6.5).
CONCLUSION 6.1
Rising protectionist sentiment and actions in some countries may suggest to some that a rethink of
Australia’s commitment to free trade is needed. They would be wrong. However, there is a case to
better understand and respond to the insecurity concerns of citizens about jobs and incomes that,
for many, globalisation has come to encapsulate. The current environment presents a timely
opportunity for Australia to evaluate its approach to international trade and investment and other
relevant policy measures.
6.2 Continue to work towards freer markets
Substantial scope exists to lower existing trade barriers
Tariff protection for Australian production averaged about 30 per cent at the start of the
1970s, but has since fallen markedly. The first major reduction was in 1973 with a cut in
all tariffs by 25 per cent. In the late 1980s and early 1990s there were further substantial
reductions in both tariffs and other forms of protection (figure 6.1). Tariffs are now at or
below 5 per cent across the board. Importantly, the bulk of the cuts to protection over this
period was the result of the unilateral decisions made by Australia.
86 RISING PROTECTIONISM: CHALLENGES, THREATS AND OPPORTUNITIES
Figure 6.1 Rates of assistance to manufacturing and agriculture have
fallen significantly in recent decadesa,b
Per cent
a Refers to selected agriculture activities up to and including the year 2000-01. From 2001-02, estimates refer
to division A of the Australian and New Zealand Standard Industrial Classification which covers agriculture,
forestry, fishing and hunting activities. b TCF refers to textiles, clothing and footwear; PMV refers to passenger
motor vehicles.
Source: Commission estimates (PC 2016b).
Despite these reform efforts, protection in Australia remains higher than in many other
developed countries (figure 6.2). Australians would be better off if remaining tariffs were
reduced further. However, the bigger prospective gains lie with lowering non-tariff barriers
(NTBs) and barriers to services trade in Australia. These barriers take multiple forms
(chapter 5) and estimating how much assistance is provided is challenging. For example,
requirements that firms bidding for government contracts source or produce locally
provide protection, although to what degree is uncertain. However, even using
conservative assumptions, some of these barriers to trade are high in Australia and in
comparison with other developed countries.
Figure 6.2 Protection remains higher in Australia than other developed
countriesa,b,c,d
Per cent tax equivalent
a Non-tariff barriers are a subset of the non-tariff measure (NTM) estimates included in the figure for goods.
b Service barriers are much higher due to differences in statistical estimation; the service values likely include
other trade frictions not related to restrictive trade policy as noted in Fontagné, Mitaritonna and Signoret
(2016). c Due to differing input data sources, goods data is aggregated with 2009 Comtrade data whereas
services uses 2011 GTAP data. d Small revisions were made to this figure on 27 July 2017.
Data sources: Fontagné, Mitaritonna and Signoret (2016); Kee, Nicita and Olarreaga (2009); PC Global/GTAP
9 bilateral trade values; UN (2017).
WHERE TO FOR AUSTRALIA 87
Australia could proceed unilaterally to lower barriers
The previous chapter demonstrated the potential lift in living standards that would come
from reducing NTBs and barriers to services trade. These would flow even if no marked
rise in protection eventuated in other countries (PC 2010). There is no reason why
Australia could not proceed unilaterally to lower these barriers. Lowering barriers to all
countries on a most favoured nation (MFN) basis would confer larger benefits than
lowering them preferentially to a relative few. This is because preferential agreements can
result in trade diversion, where it is the preferential treatment that makes the agreement
partner country the cheaper supplier, giving them an advantage over the lower cost
suppliers.
The emergence of GSCs strengthen the case for unilateral action. Today, the research,
design, component making, assembly and marketing required to create a product often
happen in different parts of the world. Some links in the chain provide services, others
provide goods, but they all contribute to the value of the final product. Overall, a
significant share of the value embodied in a good exported from one country to another is
created in other countries. In the case of the iPhone, for example, only about 5 per cent of
the value is added in China and 95 per cent comes from elsewhere (box 6.1).
88 RISING PROTECTIONISM: CHALLENGES, THREATS AND OPPORTUNITIES
Box 6.1 The case of the ‘made in the world’ iPhone
Looking at where the components of a final product are made alters the way in which trading
relationships are viewed. A frequently cited example is China’s exports of iPhones to the United
States.
The value of finished iPhones is recorded as Chinese exports and as imports by the receiving
country. However, China only contributes around 5 per cent of the value added embodied in an
iPhone, mainly in the form of assembly services. The remainder of the value added originates in
other countries that supply components and software: Taiwan, Korea, the United States, Germany
and others. As such, the iPhone is not made in China as much as ‘made in the world’.
When measured in value added terms, the trade deficit in the US–China iPhone trade is very small.
More generally, if the overall US–China trade deficit is recalibrated on a value added basis, it would
be reduced by 25 per cent. However, a country’s aggregate trade balance is not altered by
measuring trade on a value added basis.
Sources: Dervis, Meltzer and Foda (2013); WTO and OECD (2012).
Because of Australia’s location and its specialisation in the export of raw materials, the
foreign value added content of our exports, at around 15 per cent (figure 1.5), is relatively
low and primarily lies in mining products shipped to China. For example, Australian iron
ore and coking coal exported to China are used to produce steel that is exported to the
United States and other countries. Ultimately, however, the benefits for Australia engaging
in GSCs do not depend on the type of activities undertaken in the supply chain, but on the
extent to which we can become more efficient and extract the full potential from the
activities where we have a comparative advantage. Moreover, these activities are not static,
domestic reform could reveal new areas of comparative advantage, even if only in one task
of the total value of a product or service.
From a policy perspective this means the focus should be on the total value that firms
generate and not the share that is being produced domestically. It also means that the
ability to participate in GSCs depends on being able to competitively source foreign inputs;
foreign inputs are a complement to domestic value added in exports rather than a substitute
for them. Openness to foreign investment is also critical as a way into a GSC, as well as
bringing in new technologies.
In a world of GSCs, the mercantilist approach that regards tariffs and market access as
negotiating coin to be used in exchange for access to a partner’s market misses the point
and is clearly self-defeating. Maintaining protectionist measures against imports is the
trade policy equivalent of shooting yourself in the foot. Australian export oriented
businesses depend on trade and investment openness as well as reliable and competitive
energy supplies, efficient customs, port procedures, logistics, communication and
transportation networks. Most of the benefits that flow from lower barriers could be
achieved sooner with unilateral action, as they do not depend on our trading partners taking
similar actions. For example, if Australian energy policy led to reliable and cost-effective
supply, the costs of doing business would be lower.
WHERE TO FOR AUSTRALIA 89
Australia could take a range of unilateral actions. One option would be to extend tariff and
other concessions made in preferential trade agreements (PTAs) to other trading partners
— that is make them MFN. This would remove the costs associated with complex rules of
origin. Another option is to address the many non-tariff measures that add to the cost of
doing business across borders. The economic benefits from being a first mover would be
predominantly and widely distributed across Australian households and businesses.
CONCLUSION 6.2
The best response to rising protection and other trade developments would be to continue to work
towards freer markets.
Australia could proceed unilaterally to lower trade barriers, as most of the benefits do not depend
on our trading partners taking similar actions. Scope exists to extend concessions made in
preferential trade agreements to other trading partners, and to address the many non-tariff
measures that add to the cost of doing business across borders.
The economic benefits from being a first mover would be predominantly and widely distributed
across Australian households and businesses.
Barriers to foreign investment
As with non-tariff trade measures, barriers to investment are hard to measure on a
consistent basis, due to the myriad ways a government might discriminate against foreign
investors. There may be outright limits in specific sectors on equity ownership by
foreigners, greater conditionality attached to regulatory approvals, or poor review
processes that can act to stop a potential cross-border investment from even proceeding to
the approval stage. Also as with non-tariff measures, Australia’s foreign investment policy
regime is motivated by legitimate objectives. Specifically, they aim to prevent foreign
direct investments (FDI) that are not in the national interest, for example, if they pose an
unacceptable risk to national security or may erode the tax base. They are not meant to be a
barrier to foreign investment that brings net benefits to Australia but can often result in as
much without any transparent or explicit cost–benefit analysis.
The OECD publishes information on statutory foreign ownership restrictions, which shows
that the degree of investment restrictiveness in Australia has eased over the past couple of
decades, but remains at a relatively high level (figure 6.3). This high score partly reflects
equity ownership limits in the aviation and communication sectors, but is mostly linked to
Australia’s screening and approval provisions. FDI proposals subject to screening are
rarely rejected, but they often have conditions attached. More broadly, the OECD–
UNCTAD monitoring of foreign investment restrictions for the G20 also reveals no
evidence of backtracking by countries on their largely open investment policy regimes.
However, existing restrictions on FDI have costs. An OECD study reported that ownership
barriers could be depressing FDI stocks by between 10 and 80 per cent, depending on the
restriction considered (Nicoletti et al. 2003). A study by the Australian Treasury found
90 RISING PROTECTIONISM: CHALLENGES, THREATS AND OPPORTUNITIES
large negative impacts would follow from restrictions to foreign investment inflows (Gali
and Taplin 2012). And a Commission inquiry (PC 2016b, p. 527) into the regulation of
agriculture concluded that the lower screening thresholds for proposals relating to
agriculture introduced in 2015 ‘increase the cost and complexity of investing in Australian
agriculture — and ultimately risk deterring foreign investment in the sector — without
offsetting public benefits’. The consequence of this may mean Australia’s growth potential
and export capacity is lower and our ability to participate in GSCs is curtailed, as often a
direct investment is essential to trade.
Figure 6.3 Australia has relatively high restrictions on FDIa
OECD FDI Regulatory Restrictiveness Index, Selected countries, 2016
a The FDI Regulatory Restrictiveness Index measures statutory restrictions on FDI across 22 economic
sectors. Restrictions are evaluated on a 0 (open) to 1 (closed) scale. The overall restrictiveness index is the
average of sectoral scores.
Data source: OECD (2017c).
The Commission considers that Australia’s FDI screening processes lack consistency and
merit policy attention. The screening thresholds vary by sector and by country, and are
generally higher for those countries with which Australia has a preferential trade
agreement. One option to simplify the process would be to extend the higher threshold to
other trading partners. Some of the screening criteria, particularly when national security
concerns are raised, are broad and vague, making regulatory approvals less predictable.
National security concerns have led to the Australian government considering banning
outright foreign investment in rail, energy and port assets, as well as creating a Critical
Infrastructure Centre to assess the risks of foreign investments in infrastructure. The Centre
was created in early 2017, and its work is intended to inform the assessments carried out
by the Foreign Investment Review Board. Such a Centre, as well as screening all
WHERE TO FOR AUSTRALIA 91
investments, should follow clear and transparent guidelines that would help to achieve
consistent and predictable approvals for large investments while preserving our vital
national security interests.
CONCLUSION 6.3
Australia’s reputation as an attractive destination for international investors could be strengthened
through more consistent, transparent and predictable foreign investment approval processes while
preserving our vital national security interests.
6.3 A better rules-based trade system
In the event of a global rise in protection, Australia would face intense political pressure to
follow suit and lift its own barriers to trade and foreign investment. While there is no
economic justification to join a trade war and Australians would benefit more, and more
quickly, from unilateral action, resisting these pressures would be easier if Australia was
part of a coalition of open economies that acted together to pursue freer trade. (The
previous chapter illustrated the benefits of a scenario where Australia pursued a strategy of
strengthening economic engagement with the fast-growing and like-minded countries in
our region.)
Well-designed trade agreements can enable more people to participate in and benefit from
the expanded market access opportunities they offer. As demonstrated in the previous
chapter, this would help to offset the losses from higher protection elsewhere. The largest
prospective benefits would come from agreements negotiated with an extensive group of
economies on a multilateral basis.
On the multilateral front, the Doha Round of negotiations occurring under the auspices of
the World Trade Organization (WTO) has come to a standstill, and this situation is highly
unlikely to change. Moreover, the ‘single undertaking’ nature of the negotiations means that
items cannot be agreed separately — ‘[n]othing is agreed until everything is agreed’
(WTO 2006, p. 1) — and that all members are bound by outcomes in all areas of the
negotiations. In the current environment, prospects for consensus at the multilateral level are
remote with the possible exception of sector-specific agreements (discussed below).
In response, larger groupings are taking on smaller agendas. The 2015 WTO Ministerial
Decision on eliminating agricultural export subsidies and progress towards a Trade in
Services agreement are examples of this activity. And many countries are negotiating in
smaller groupings, or on a bilateral basis, to make progress where they are able. Australia has
been a player in this trend, and has a growing number of PTAs, which lower barriers for
agreement partners relative to others (box 6.2).
As well as becoming more numerous, preferential agreements have also become more
complex and often lack the institutional and legal strengths of the WTO-led system. The
92 RISING PROTECTIONISM: CHALLENGES, THREATS AND OPPORTUNITIES
majority of new agreements coming into force in the past decade have provisions covering
10 or more policy areas, including standards, environmental laws and public procurement.
These areas serve to remove obstacles to trade, notably in services, but can also constrain
sovereignty.
Past work of the Commission has highlighted how bilateral agreements have not always
delivered the expected benefits or earned the broad support of the community (PC 2010).
In part, this is due to long phase-in periods for tariff reductions in the most sensitive areas
and the costs of navigating multiple agreements with complex rules of origin and
regulations, which limit their use by businesses. Recent analysis concluded that rules of
origin ‘have become a pernicious barrier to trade for Australian businesses’ (Crook and
Gordon 2017, p. 3).
Box 6.2 Australia’s bilateral and regional trade agreements
Australia currently has nine active preferential trade agreements and one regional agreement (with
New Zealand and the Association of South East Asian Nations). Negotiations are in train:
• in regional forums — the Regional Comprehensive Economic Partnership, the Pacific
Agreement on Closer Economic Relations Plus and with members of the Trans-Pacific
Partnership
• on bilateral agreements with the European Union, India and Indonesia (plus, potentially, Hong
Kong, and on amending the agreement with the United States).
Australia has also entered numerous bilateral agreements on other aspects of trade. Investment
treaties form a majority share of these treaties with 21 bilateral arrangements (AustLII 2017).
Australia’s bilateral and regional trade agreements in force
There is considerable scope to improve Australia’s approach to trade and investment
agreements. Prioritising regional and sector-specific agreements, rigorous upfront due
diligence on the impacts of prospective agreements and their net benefits, and better
consultation processes would help to achieve better outcomes and foster public confidence in
open markets.
Regional and sector-specific agreements should be prioritised
Regional or plurilateral agreements can be a pathway towards securing the benefits of
multilateral reform. Initiatives of this kind are on an entirely new scale and can be a world
apart from traditional bilateral preferential arrangements. As long as participating countries
account for a large share of world trade and remain open to additional participation by
WHERE TO FOR AUSTRALIA 93
countries committed to meeting these standards, a regional approach to cooperation
complements and brings many of the benefits of multilateral agreements.
To date, perhaps the sole leading example of this genre of trade agreement is the Agreement
on Trade Facilitation, which recently came into force. Regional agreements such as the
Trans-Atlantic Trade and Investment Partnership and the Trans-Pacific Partnership come
close in some respects, although neither are in force and the future of the Trans-Pacific
Partnership without the United States is unclear, as is that of the Trans-Atlantic Trade and
Investment Partnership.
In the near term, a more prospective area for reaching consensus for further liberalisation lies
with sector-specific agreements. These are plurilateral agreements negotiated between
subsets of WTO members and can be inclusive or exclusive (box 6.3). The inclusive variety
has less restrictive trade preference arrangements, and exclusive agreements negotiated
under the auspices of the WTO offer some benefits. In particular, they provide a pathway
through which non-participant countries can subsequently opt to accede to a completed
agreement. WTO processes also potentially make the content of agreements more
transparent and the application of WTO dispute settlement processes could lead to more
coherent and consistent outcomes.
Box 6.3 Types of sector-specific agreements
There are two main types of sector-specific agreements.
• Inclusive (or critical mass) agreements are negotiated on a most favoured nation (MFN) basis
and typically come into effect when signatories account for 90 per cent or more of world trade in
the product area in question. The Information Technology Agreement is an example, and
illustrates the potential for plurilateral agreements to act as a stepping stone to multilateral
liberalisation. Partners to the original agreement, concluded in 1996, numbered 29. Over time, the
number of participants has increased to 82, accounting for 97 per cent of world trade in
information technology products (WTO 2017a, p. 1).
• Exclusive agreements are negotiated on a non-MFN basis. Benefits are restricted to
participants, making them easier to negotiate. The Trade in Services Agreement currently under
negotiation is an example; the Agreement on Government Procurement is another.
Source: Draper and Dube (2013).
Australia is a participant in plurilateral negotiations on a Trade in Services Agreement (in
conjunction with 23 parties including the European Union and the United States)
(DFAT 2016c), and an Environmental Goods Agreement (involving 18 participants
representing 46 countries) (DFAT 2016b). Australia also participated in the expansion of the
Information Technology Agreement, agreed to by over 50 WTO members in 2015, and has
sought accession to the Agreement on Government Procurement (DFAT 2017c). Australia
should continue to work with like-minded countries in the WTO to pursue the groundwork
needed to secure genuine multilateral trade liberalisation through the development of
inclusive plurilateral and sector-specific agreements. The importance of strengthening in an
94 RISING PROTECTIONISM: CHALLENGES, THREATS AND OPPORTUNITIES
even-handed manner the rules-based system governing international trade, which has
underpinned the growth in world trade and prevented backsliding into protectionism for the
last 70 years, cannot be underestimated.

CONCLUSION 6.4
A plurilateral approach to trade negotiation can bring many of the benefits of multilateral negotiation
and may be a stepping stone to multilateral liberalisation. Australia should continue to invest effort in
the development of plurilateral or sector-specific agreements, especially those that allow most
favoured nation treatment and that can be incorporated into the World Trade Organization.
Only preferential agreements with net benefits should proceed
Despite the issues raised by PTAs, they are an option for reducing barriers to trade and
investment in partner countries in situations where broader agreements are unlikely to be
reached. The benefits will vary with the characteristics of the agreement and of the trading
partners. They are likely to be higher from non-preferential agreements that adopt the MFN
principle. Where there are a large number of parties to an agreement, cumulation
(treatment of inputs from any partner country as local content in calculating the rules of
origin) can come close to MFN treatment, as it expands the share of exports that are eligible
for the preference (usually through lower tariffs).
Given the complexity and diversity of agreements, the Commission and others have
previously argued the case for adopting a more evidence-based approach to developing
trade agreements (JSCTIG 2015; PC 2010, 2015b). It is important that the benefits and
costs of a proposed agreement are assessed upfront, and compared with the net benefits of
other options for achieving similar reductions in trade and investment barriers.
Australia’s approach to the assessment of PTAs could be much improved. Current
processes fail to assess the impacts of prospective agreements adequately and they do not
systematically quantify the costs and benefits of agreement provisions and alternative
arrangements, such as unilateral reform (PC 2010).
CONCLUSION 6.5
Preferential trade agreements are an option for reducing barriers to trade and investment in partner
countries. They should only be pursued if a strong case can be made that there is a net benefit and
in situations where broader agreements are unlikely to be reached. Agreements that adopt the
principle of most favoured nation or cumulation (treatment of inputs from any partner country as
local content) have been shown to generate higher benefits.
WHERE TO FOR AUSTRALIA 95
Consultation processes could be improved
The increasing depth and breadth of issues covered by trade agreements has amplified the
importance of good consultation processes in their negotiation. Australians would benefit
from processes that enabled greater consultation and transparency in the development of
trade agreements. A Commission study in 2010 identified a range of concerns with
Australia’s processes for developing PTAs, including a ‘lack of transparency, coverage and
pace of consultations (particularly once negotiations have begun)’ (PC 2010, p. 301). Five
years later, a Parliamentary inquiry drew a similar conclusion, noting ‘[t]here is potential …
to make these processes more transparent and open to involvement from business’
(JSCTIG 2015, p. vii). Greater transparency, the inquiry argued, ‘would assist government
decision making during the negotiation process, increase public confidence, and facilitate
business planning based on likely benefits and opportunities’ (JSCTIG 2015, p. vii).
The Department of Foreign Affairs and Trade provides information and avenues for
interested parties to contribute to the development of PTAs. However, the information
provided limits the ability to engage in a meaningful manner and falls short of community
expectations. For example, participants in the Commission’s inquiry into intellectual
property arrangements voiced substantial concerns regarding lack of transparency about
what is being negotiated in international trade agreements, and inadequate opportunities for
public input (PC 2016a), as did contributors into an inquiry into the Trans-Pacific
Partnership (JSCOT 2016).
While not everyone can be in the negotiating room and there are risks of succumbing to
vested interests, consultation processes could be enhanced. For example, confidentiality
agreements could be used to enable formal consultation on draft treaty text with
stakeholder bodies during the negotiation process. This would help to identify where
benefits are likely to lie, and where costs might be imposed. Similarly, engaging with
parties capable of offering critical assessment of proposals, not just parties seeking an
advantage or protecting a constituency, would improve the process.
Once a draft agreement is completed, exposing it to public scrutiny before it is signed into
law would also help meet community expectations for a more inclusive consultation
approach. Giving interested parties the opportunity to evaluate and comment on an
agreement draft would build a better understanding of the role of trade in the economy as
well as a better appreciation of the choices and their respective pros and cons. This would
help to combat perceptions that secrecy during negotiations leads to sub-optimal outcomes
for some members of the community and to build support for open markets.
96 RISING PROTECTIONISM: CHALLENGES, THREATS AND OPPORTUNITIES
CONCLUSION 6.6
Trade policy making and processes for negotiating trade agreements need to become more open
and consultative about the pros and cons of proposed agreements. Confidentiality agreements
should be used to give a much broader range of stakeholders — including those capable of critical
assessment — access to draft treaty text during the negotiation phase and draft agreements should
be exposed to public interest assessment before being signed into law.
6.4 Making trade work for all
Australia and other countries have reaped substantial benefits from trade liberalisation, but
trade policy alone cannot ensure that the full potential benefits of liberalisation are realised.
Structural change, whether driven by trade, technology, or other factors, means that some
people have to change jobs, imposing costs upon them, and some capital loses its value
unless it can be repurposed. This dynamic is not new, nor is it unique to Australia. Indeed,
the process of resource reallocation is the basis of improved economic performance and the
lifting of living standards. However, structural adjustment is slow and rarely happens
smoothly. The more drawn out and disruptive the process, the larger the costs. Policies that
facilitate adjustment can reduce these costs.
Moreover, even though the nation overall is better off from trade liberalisation, not
everyone, or every community is a winner. While much of the adjustment associated with
trade liberalisation reform in the 1990s is now likely to be complete, further liberalisation
of both tariffs and other barriers to trade would create further adjustment pressures. The
adjustment burden associated with past liberalisation was often concentrated on particular
groups (while the benefits were spread more diffusely). Lower skilled and older workers
employed in sectors where competition with imports intensified tended to be harder hit.
Furthermore, those who lost employment were often concentrated within industries and,
sometimes, geographic areas, with limited alternative prospects. History shows that these
workers typically had a difficult time regaining employment. And, when adjustment costs
extend to the local community, they can instil a feeling of being left behind. Assessment of
the costs and benefits of potential new agreements would help to identify those who would
lose from further liberalisation.
More generally, economies are always being buffeted by shocks. Today, new digital
technologies are one of the major sources of adjustment pressure, although for many the
perception remains that Australia’s economic problems are attributable to open trade
policies. In one recent survey, only half of Australians stated that they saw globalisation as
a force for good (Wade and Ting 2017). In another, while nearly 80 per cent of respondents
thought that globalisation was mostly good for Australia, only 55 per cent thought that free
trade was good for creating jobs (Oliver 2017). Regardless of its source, rapid change and
a sense of economic insecurity have contributed to erosion in community trust towards
globalisation and to pressures for protection from international competition. These
WHERE TO FOR AUSTRALIA 97
pressures have so far been less evident in Australia than in some other advanced
economies, thanks in part to Australia’s well targeted social safety net.
Successive governments have attempted to manage the adjustment costs and build support
for reform through a range of other policies. These include the suite of policies that support
macroeconomic stability and growth, the education and training policies that aim to build
solid foundation skills and enable participation in further training and reskilling for
displaced workers, and the labour force policies that influence how readily firms can adjust
the size and composition of their workforce. Moreover, housing, taxation and investment
policies can influence geographic labour mobility. Governments can consider a range of
reforms to improve the effectiveness of these policies in supporting structural adjustment
(PC 2014).
These companion policies can serve to lessen the disruptive impacts of reform, create an
environment that spreads the benefits of globalisation more widely, assist those who lose
their jobs to find new work as quickly as possible, and provide a reasonable standard of
living for those for whom the process of regaining employment takes longer. They have a
vital role to play as the second prong of a strategy that responds to the rising pressure for
trade and investment protection.
CONCLUSION 6.7
Trade policy alone cannot ensure that the potential benefits of liberalisation are fully realised or
widely distributed. Companion policies are needed to manage the impact of reforms (and other
disruptive developments), create an environment that spreads the benefits of globalisation, and
assist those who lose their jobs to find new work.
However, the policies supporting structural adjustment should be effective whatever the
source of the adjustment pressures. And if those policies are not working well for workers
(and stranded capital) displaced by liberalisation, they are unlikely to work well for
workers (and stranded capital) displaced by other external and internal sources of structural
change.
There is only limited and mixed evidence on how effective policies are in supporting
adjustment to change and in extracting the maximum potential from open markets. This is
because policies have rarely been evaluated to establish what works well (see, for example,
PC 2017).
The evidence that is available suggests that the targeted social safety net generally works
well (OECD 2016b). Similarly, recent analysis suggest that the suite of companion policies
designed to facilitate and smooth adjustment work well, but there is scope to improve their
effectiveness. For example:
• the OECD (2016a) noted that Australia has been relatively successful in providing new
(albeit sometimes lower quality) jobs to displaced workers. Among the OECD’s
98 RISING PROTECTIONISM: CHALLENGES, THREATS AND OPPORTUNITIES
recommendations were greater targeting of assistance to individuals’ needs, expanded
provision of training for displaced workers, a longer period of notice for collective
dismissals and piloting of intensive employment services
• a Commission assessment of impediments to geographic labour mobility concluded
that reform of taxation and housing policies and of occupation licensing would lessen
impediments to labour mobility (and have broader economic benefits) (PC 2014).
The most effective strategies to facilitate adjustment merit investigation and existing
policies should be regularly evaluated.
There are also some policies and government decisions that act to prevent change from
occurring. These include localisation rules, regulatory measures that favour domestic
companies and products and an increased propensity to use trade remedies (anti-dumping
duties, countervailing measures and safeguards) in response to perceived unfair
competition by others. They focus on protecting existing jobs and capital, egregious misuse
of which amounts to protectionism by stealth. While they may provide some palliative
respite, they do not encourage activity based on real comparative advantage and risk
triggering reprisals.
Regional adjustment funds that support a targeted sector or provide area-specific assistance
for individuals and businesses disrupted by trade have been a fairly common response to
structural change, but past experience with such schemes has not been positive (IMF, WB,
WTO 2017). ‘Although government expenditure on projects can create short-term
employment, it often does little to support transition and long-term sustainable growth in
regions’ (PC 2017, p. 2). Strengthening the social safety net would generally be the
preferred approach to support those who are adversely affected by structural change.
Moreover, there is an inherent inequity in providing special assistance to those whose job
loss can be traced to international competition while denying access to other workers
facing similar adjustment pressures linked to other causes. They may also set an unhelpful
precedent, reduce worker incentives to retrain or move and business incentives to innovate
(slowing adjustment), and be difficult to end. Recent analysis by Forbes and Barker (2017,
p. 12) found that:
… policy interventions that focus on the skills and mobility of people who were previously
employed are likely to be more effective in ensuring re-employment than supporting businesses
to stimulate local employment.
If in exceptional cases adjustment packages are used by governments, then it is preferable
that they focus on supporting people in regional communities or workers in affected sectors
to adapt, rather than helping businesses or industries, and that they are based on clear
principles. Work by the Commission and others (OECD 2005; PC 2017) has outlined such
principles. In particular, regional packages should be: compatible with generally available
safety net measures; built on a region’s strengths; centred on developing the capacity of the
community and the connectivity of the region to domestic and international markets; focused
on re-employment; time limited; cost effective; transparent; and have governance
WHERE TO FOR AUSTRALIA 99
arrangements that ensure accountability for taxpayer funds used. Similar principles apply for
packages aimed at assisting workers in affected sectors.
CONCLUSION 6.8
Australia’s targeted social safety net generally works well and strengthening it is the preferred
approach for supporting those who are adversely affected by structural change. The suite of policies
that foster macroeconomic stability and growth, workforce, education and training policies as well as
taxation and investment policies that influence geographic mobility also have a vital role to play.
The most effective strategies to facilitate adjustment merit investigation and existing policies should
be regularly evaluated to ensure they deliver their intended outcomes.
6.5 Better engagement with the community
The third prong of a strategy to lower pressure for higher protection centres on better
engagement with the community around the case for free trade and about the policies in
place to manage the costs of adjustment and to support a more inclusive sharing of the
benefits from open markets. This is needed to build community acceptance for open
markets, which too often is taken for granted. Without this acceptance, it will prove very
difficult for governments to continue implementing trade and investment liberalisation
policies.
Public misconceptions about international trade abound. Surveys show that public opinion
is often based on skewed views about competitive advantage and perceptions of fairness.
Lowering obstacles to trade is often seen as benefiting other countries, and most people
oppose free trade agreements if they believe they will lead to the loss of existing jobs, even
if the community benefits overall and the net effect on employment is positive (Baron and
Kemp 2004; Rho and Tomz 2017). But research also shows that when individuals
understand the implications of protectionist trade policies, they are more likely to support
free trade (Rho and Tomz 2017).
Governments are beginning to recognise that the case for open markets cannot be taken for
granted. The promise of a long term growth dividend from structural reform is not enough
to allay concerns about the future. Governments are becoming aware of the need to engage
the community in an open discussion about trade. The OECD (2017b, p. 18) has recently
expressed this sentiment:
We have to change how we engage. In the impact of trade, context matters, geography matters.
So we need to go local and engage with people where they live. We need to work much more
upstream to extend understanding beyond the trade community and before specific agreements.
We need to bring trade debates to everyday forums, and reconnect it to everyday experience.
Engaging more at the local level may also help better upstream understanding of the likely
impact of trade reforms on communities, including in the context of other factors affecting
100 RISING PROTECTIONISM: CHALLENGES, THREATS AND OPPORTUNITIES
people at the same time, such as housing and credit markets, alternative employment
possibilities, and the availability of social services.
In Australia there has been limited investigation of community concerns about trade and of
the more recent consequences of freer trade for Australia. One notable exception is recent
work by the Department of Industry (Tuhin and Swanepoel 2017). Taking advantage of
previously inaccessible data on the ABS business register, they were able to illustrate that
exporters are more productive and pay higher wages than firms focused solely on the
domestic market.
More work of this kind is needed to understand how trade affects our economy, how
governments, businesses and households have responded and how different groups in the
community perceive these effects.
For engagement to be meaningful it must not just focus on the positive news stories. It will
be important that the Government acknowledges that, while the community overall will
benefit, there will sometimes be members of the community who are losers. At the same
time, the community needs to understand what is at stake if tariffs and barriers to trade are
reinstated. The Government needs to explain how, and why, the community benefits from
trade liberalisation.
CONCLUSION 6.9
Better understanding of community concerns about free trade, improved engagement with the
community around the case for open markets and clearer communication about the policies in
place to manage the costs of adjustment are needed to build community acceptance of open
markets.