1. The international outlook and trade policy environment
The international outlook
The global economy
The global economy is growing only slowly, despite expansionary monetary and fiscal policies in most major economies. The impact on wealth from falling stock values and concerns relating to corporate governance, terrorist activity, developments in the Middle East, North Korean nuclear ambitions and high oil prices are together tempering consumer and business confidence and consequently 2003 economic growth prospects.
Global economic growth in 2002 was mixed. After a promising start, the global economic recovery (following the shocks of stock market crashes and the terrorist attacks of 11 September 2001) lost momentum with most major economies showing little growth in the final months of the year. World GDP growth is estimated to be 1.7 per cent in 2002, down from just 2.2 per cent in 2001. Concern over the economic outlook and an uncertain global environment in late 2002 resulted in further falls in global stock market indexes, bond interest rates and the United States dollar.
The United States economy - the main driver of global economic growth - grew by an estimated 2.4 per cent in 2002. Gross domestic product is estimated to have grown by only 1.4 per cent (annualised) in the final quarter of 2002, with consumer demand the primary driver of growth as business profits and investment remained weak. Efforts to stimulate economic growth included significant cuts to official interest rates over 2002 by the Federal Reserve (to 1.25 per cent in November 2002) and the January 2003 announcement of tax cuts worth US$674 billion over the next 10 years.
The European Union and Japanese economies recorded disappointing growth in 2002 (estimated at 1.0 per cent and -0.3 per cent respectively). While the European Central Bank responded to the generally weak economic performance and high unemployment by cutting official rates in December 2002 and March 2003, continued economic weakness in Germany is likely to drag on future European Union growth. Ongoing deflation, low levels of consumer confidence, high levels of non-performing bank loans and weak business profitability are hindering Japanese economic growth prospects.
Non-Japan Asia continued to grow strongly, building upon firm domestic demand and increased export growth. The Chinese and Korean economies grew strongly during the year, recording GDP growth estimated at 8.0 per cent and 5.6 per cent respectively in 2002.
Latin America countries (with the exceptions of Mexico and Chile) experienced substantial currency and stock market shocks in 2002, with Brazil and Argentina seeking additional support from the International Monetary Fund. The general strike in Venezuela in late 2002 placed upward pressure on global oil prices.
Australia's policy settings
Australia's policy settings continue to underpin better than OECD-average economic growth (see chart below). The Australian economy grew by 3.5 per cent in 2002, with strong growth in gross national expenditure (6.2 per cent) tempered by strong import growth (6.8 per cent), a fall in export activity (-2.3 per cent) and the drought. The drought is estimated to detract 0.9 percentage points from economic growth in 2002-03.
The OECD's 2003 Annual Review of Australia, notes the 'judicious mix of macroeconomic and structural policies which has resulted in exceptional economic performance which is expected to continue'. The OECD projects the Australian economy to expand at a robust pace of 3.75 per cent in 2003 and 3.25 per cent in 2004.
The trade policy environment
There remain many challenges to international trade. On the multilateral front, members of the World Trade Organization (WTO) - the framework of the world trading system - are facing several major challenges. They have to deal with an increasingly complex agenda at a time when negotiations among their expanding membership are becoming more difficult and protectionist forces in major developed countries are becoming more active.
In addition to bringing new challenges to WTO members and to institutions such as the International Monetary Fund (IMF) and the World Bank, the deepening of globalisation creates pressures on countries to develop bilateral and regional associations to expand their markets and strengthen their economies.
These uncertainties underline the importance of continuing to build a stronger and more open world trading system that allows all countries to share the benefits of trade and economic growth. The WTO framework of enforceable rules and disciplines ensures fairer, more secure access to world markets for all its members. It is their best defence against arbitrary trade restrictions and unfair trading practices.
As a medium-sized economy whose prosperity depends on exports, Australia has a vital stake in keeping this system healthy and effective. The emphasis of the Government will remain on multilateral trade liberalisation. And Australia will continue to play a leading role in the WTO, defending the interest of its exporters and promoting ongoing trade liberalisation.
But the Government's active pursuit of regional and, in particular, bilateral liberalisation will - through the process of competitive liberalisation - help set a high benchmark for the multilateral system and support the WTO's work.
The successful launch of the Doha Round - formally titled the Doha Development Agenda - in November 2001 was only the first step in a demanding process which aims to deliver further substantial trade and investment liberalisation by the agreed deadline of 1 January 2005.
The task is challenging. There are now 145 WTO members at the negotiating table, each with its own interests to pursue. Not all are equally committed to the Round and there are wide areas of disagreement on key areas of the negotiating agenda. Australia, for example, remains convinced that all WTO members will gain most from real improvements in market access for agriculture, services and industrial products. The European Union (EU), on the other hand, places priority on developing new multilateral rules governing areas such as investment, competition policy and trade and the environment. Developing countries are generally sceptical about their prospects of gaining real benefits from the Round, especially in areas where their exports are most competitive - textiles and agricultural products.
Less than six months remain before the 5th WTO Ministerial Conference in Cancun, Mexico (10-14 September 2003), which will review progress in the Doha negotiations and set the future course. Political leadership from WTO members will be essential to bridge the gaps and bring the Round to a successful conclusion by the January 2005 deadline. The United States has played a more active part in the negotiations since Congress granted Trade Promotion Authority to President Bush in July 2002. Like Australia, the United States wants the Doha Round to deliver real market access gains within a reasonable timeframe - it is committed to pursuing agricultural trade reform as well as ambitious outcomes from the negotiations on services and industrial products.
The United States is also negotiating free trade agreements with a range of countries, including Australia. Ongoing negotiations for the Free Trade Area of the Americas (FTAA) - involving all the countries of North and South America - are a high priority for the Bush Administration. If the Doha Round negotiations languish, the United States has made it clear that it has other options and may concentrate its efforts on bilateral and regional free trade agreements.
The European Union's support for the Doha Round is tempered by its defensive position on agriculture, despite its interest in market access gains for industrial products and - especially - services. Preoccupied with preparations for the accession of ten new member states by June 2004, the EU is just beginning a difficult internal negotiation on the next stage of reform to its Common Agricultural Policy (CAP). Unhelpfully for progress in the WTO negotiations, the EU argues that it cannot commit to further agricultural liberalisation until it has settled both matters. At the same time, the EU is running an active agenda in the agriculture negotiations on non-trade concerns such as geographical indications and animal welfare, which Australia and others oppose as obstacles to genuine reform.
As a major economy with its own extensive network of regional and bilateral free trade agreements, the EU could be less motivated than some WTO members to meet the January 2005 deadline for concluding the Doha Round - especially if the outcome includes significant commitments on agricultural trade reform. While the EU acknowledges the importance of ensuring that developing countries have the opportunity to benefit from trade, it argues that preferential trade arrangements for developing countries would be more helpful than across the board trade liberalisation, despite evidence to the contrary - Trade preferences for developing countries - they must be comprehensive.
Japan is preoccupied by its slowing economy and struggling to face up to the need for economic restructuring at home. Japan's strong domestic agricultural lobby is driving a highly defensive position on agriculture in the Doha Round negotiations, where it tends to side with the EU. Japan has a substantial interest in the WTO negotiations on investment, services and industrial products. At the same time, after avoiding preferential trade arrangements for most of the post-war period, Japan has concluded a free trade agreement with Singapore and is negotiating another with Mexico. Japan is also discussing a possible free trade agreement with Korea and a closer economic partnership with ASEAN.
Developing countries now represent over two thirds of WTO members and are participating more actively than ever before. Most are more concerned to secure better market access for their products than interested in crafting new trade rules dealing with unfamiliar areas, such as investment and competition policy, and many are reluctant to reform their own trading regimes. Although development issues are at the heart of the Doha Round, many developing countries remain sceptical about the benefits poor countries can win in any WTO negotiation. Providing acceptable responses to their concerns - and the technical assistance they need to participate effectively in the negotiations - will be crucial to the success of the Round.
Progress on agricultural trade reform will be the focal point for most developing countries, given the important place agriculture occupies in their economies - though market access for their industrial products (particularly textiles) and, increasingly, services, will also be important for their long-term development prospects. Developing countries also need to have their concerns addressed in areas such as their capacity to implement their WTO commitments, special treatment that takes account of their economic circumstances, and trade-related technical assistance. Access to medicines will remain a politically important issue to developing countries.
Although developing countries share many common interests in the WTO, their core priorities differ significantly according to their size, level of development and economic circumstances. Their varied interests in the negotiations are likely to lead to the formation of new coalitions - including coalitions of developed and developing countries, such as the Cairns Group of agricultural fair trading countries. The least developed countries have very different concerns (e.g. on public health) from those of larger, more developed economies such as India, Brazil and China.
India is an influential developing country leader in the WTO. Although it has little enthusiasm for many areas of the negotiating agenda, its large and varied economy is well placed to benefit from further improvements in market access. India is beginning to engage in the services negotiations and shares Australia's concerns over high levels of agricultural subsidies and protection in developed countries.
Brazil, another influential developing country, actively supported the launch of the Doha Round. A decade of economic reform and deregulation has given Brazil a more open, market-driven trade and investment regime. Brazil's diverse export interests underpin its interest in improving market access for its products and services, as well as its commitment to the rules-based multilateral trading system. As a major agricultural exporter and member of the Cairns Group, Brazil's first priority in the Doha Round negotiations is agricultural trade reform. Brazil is a member of Mercosur and places a high priority on further South American economic integration. It is also participating in the FTAA negotiations.
China is new to the WTO. China supports the Doha Round but argues that it has already made its contribution to the negotiations in view of the commitments made on its recent WTO accession. As an influential developing country with a large, diversified economy, China is likely to play a more active role as the negotiations proceed. While China has many affinities with developing countries, its interests may be more aligned with those of developed countries in some sectors, reflecting its well-developed export strengths, particularly in manufactured products.
APEC
and regional /international trade forums
Trade preferences for developing countries - they must be comprehensive
Trading arrangements that give preferences to exports from developing countries are a longstanding feature of the international trading system. Such schemes are designed to assist poor countries to gain more from international trade by providing stable and preferential access to markets. They often serve as a building block for developing countries - helping them gain the knowledge and export base to develop competitive industries and participate more effectively in the international trading system. This is a major tool in the struggle to raise incomes and reduce poverty.
At present, all developing countries have a 5 per cent tariff preference in the Australian market. This means that the average tariff rate for Australian imports from developing countries is 3.9 per cent. Australia's preferences for developing countries complement efforts at global trade liberalisation through the WTO by giving the poorest countries a 'leg up' into markets to ensure they can benefit from lower trade barriers that will result from a successful round of WTO negotiations.
Distortions arise when these preferential arrangements are restricted to certain sectors and products. This is the case, for example, in most of the EU's arrangements with African, Caribbean and Pacific (ACP) countries, where those developing countries find that preferential access to the EU for unprocessed goods (mainly in the agriculture sector) tends to lock them into those industries.
In recent years many developed countries have introduced market access schemes directed specifically at the Least-Developed Countries (LDCs). Australia will implement such a scheme from 1 July 2003, when all exports from LDCs will receive duty-free and quota-free access to our market. The Australian scheme will comprehensively cover all traded goods. In contrast, preference schemes offered by other major developed countries exclude sensitive sectors such as agriculture or textiles. For example, the EU's 'Everything but Arms' initiative does not grant duty-free access to the EU market for rice, sugar or bananas - products that LDCs are very competitive in - until 2008. The US preference scheme excludes many textiles and clothing products - again, mostly products where LDCs can compete.
Minister's Foreword
1. The International Outlook and Trade Policy
Environment
2. Multilateral Trade: The Doha Development
Agenda
3. The Bilateral and Regional Policy Framework
4. Bilateral and Regional Trade
5. Helping Australian Exporters
6. Australia's 2002 Trade Performance
7. Trade and the Australian Way of Life