Review of Export Policies and Programs Key issues

The purpose of this paper is to provide information on Australia’s overseas trade and foreign investment performance in recent years and to highlight issues relevant to Australia’s export capacity, international competitiveness, trade policy and trade development programs and services.

1. Exports and the Australian economy

Exports are a significant component of the Australian economy and now comprise around 20 per cent of GDP.

Exports as share of GDP - details contained within report

In 2007, Australia’s exports of goods and services totalled $218 billion. Of this approximately 33 per cent were resources, 22 per cent services, 21 per cent manufactured goods and 11 per cent rural products.

Australia's Exports by sector 2007 - details contained within report

Australia is a global trading nation with a diverse range of trading partners. In 2007, Australia’s principal merchandise export markets were Japan (19 per cent), China (14 per cent), the European Union (11 per cent), the Association of South-East Asian Nations (ASEAN) (11 per cent), the Republic of Korea (8 per cent), the United States (6 per cent) and New Zealand (6 per cent).

The top 20 export items, in value terms, come from a range of resource, commodity and service industries. Coal, iron ore and education services are Australia’s leading exports. Other resources industries such as gold, crude oil, and agricultural commodities, are also important.

Australia's exports by major commodity 2007 - details contained within report

(a) Goods trade is on a recorded trade basis. Services trade is on a balance of payments basis.

2. Recent export performance

While exports exhibited strong growth in the period 1980-2001, reflecting technological changes and important domestic policy initiatives such as the lowering of tariff barriers and the introduction of pro-competition policies, in recent years there has been a marked deterioration in the performance of Australian exports.

Exports accounted for nearly one-third of GDP growth over the period 1980-2001, but in the 5 years to 2007 they accounted for a little more than one-eighth of GDP growth. Net exports made a positive contribution to GDP growth in only 3 of the past 11 years (1997-2007) vis-a-vis the positive contribution of net exports in 9 of the 14 years (1983-1996) before that.

Net exports contribution to GDP - details contained within report

Australia’s total export revenues grew at an annual average rate of only 6.6 per cent in the period 2001-2007, compared with 9.4 per cent in the period 1983-2001. Exports of goods increased at an annual average rate of 6.9 per cent over the period 2001-2007, compared with 8.8 per cent in the period 1983-2001.

Services exports in the period 2001-2007 grew at about half of their long term average. Australia’s share of global services markets has fallen from 1.41 per cent in 1996 to 1.17 per cent in 2006.

Exports of manufactured goods grew at only 3 per cent compared with 12 per cent over the 1983-2001 period.

Export growth - details contained within report

Growth in Australia’s export volumes in real terms over the past six years has been notably weak despite strong global demand arising from above-average world growth in that period.

Export chain volumes - details contained within report

Note: Chain volume measure is derived from a price index series and is aimed at enabling trade data to be measured in real terms.

Rural exports have been particularly affected by the drought of 2002-07. Within the resources sector there has been considerable divergence in export volumes. While other mineral fuels, by volume, have declined, significant growth has been recorded in iron ore and coal. Coal exports increased from 187 million tonnes in 2000 to 251 million tonnes in 2007, an average annual rate of growth of 4 per cent. Similarly, iron ore exports increased from 157 million tonnes to 267 million tonnes over the same period, an average annual growth rate of 9 per cent.

Chain volume exports by sector - details contained within report

Note: Chain volume measure is derived from a price index series and is aimed at enabling trade data to be measured in real terms.

Australia has recorded a trade deficit for more than five consecutive years. The deficit for the December 2007 quarter of $6.9 billion was the largest trade deficit on record. Australia’s current account deficit reached 7 per cent of GDP in the December 2007 quarter.

Australia's trade balance, current price

3. Investment

There has been a major shift in Australia’s investment pattern in recent years. Outward investment is now an important feature of Australia’s international economic profile.

In just over two decades, the stock of foreign direct investment (FDI) in Australia has grown six fold. The stock of foreign direct investment in Australia reached $357 billion at the end of 2007. The largest foreign direct investors in Australia are the United States, the United Kingdom and Japan.

Over the same period, the stock of Australian FDI abroad has increased more than fifteen fold, reaching $318 billion at the end of 2007. The principal destinations for Australian FDI are the United States, the United Kingdom and New Zealand. Just under 90 per cent of Australian outward FDI is to OECD countries. The principal destinations for investment in Asia are Singapore and Hong Kong. The stock of Australian investment in major markets such as China, Indonesia and India is small but is growing.

The increase in outward investment appears to reflect the globalisation of Australian business. Many Australian companies are expanding their presence offshore to spread market and production risks, to achieve economies of scale, to be closer to shareholders and customers, to secure access to deeper capital markets and for taxation advantages.

The increase would also appear to reflect the growth of services as a major export, and particularly the globalisation of the financial services sector. A number of Australian investment banks and private equity firms are actively engaged in offshore investment across a wide range of industry sectors. These trends raise a number of issues regarding the framework of trade policies and programs that Australia should maintain in the future.

4. Improving competitiveness

Improving Australia’s international competitiveness will be critical to our capacity to succeed in international markets and to attract foreign investment. International competitiveness is determined by a range of factors, including the cost of inputs, productivity levels and the capacity of firms to penetrate markets and to gain access to global supply chains and networks.

Productivity is, in the long term, the key to building a more internationally competitive Australian economy. Australia has recorded a decline in its productivity growth since the late 1990s. Australia was ranked behind 14 other OECD nations in the OECD comparison of whole economy productivity in 2006. The most recent national accounts show that Australia recorded zero productivity growth in 2007, and over the last five years, average productivity growth has been lower than in any other equivalent period in the last 16 years.

A number of organisations and corporations have highlighted the importance of improving Australia’s export capacity and international competitiveness. The Business Council of Australia has released issues papers on services industries and reforming the Federation and the Australian Industry Group (AiG) released a paper on 3 March 2008 highlighting the productivity challenge facing Australia.

There are a number of areas where sustained policy focus has the capacity to promote improvements in productivity, which in turn can generate a stronger export and investment performance. Key issues include promoting higher education and skill levels of the workforce, improving the availability of infrastructure in transport, energy and telecommunications, addressing red tape and regulatory burdens, lifting the quality of management and boosting research, development and innovation.

The level of competition in the domestic Australian market is also an important element in stimulating an improved productivity performance. Openness and engagement with the global economy has delivered stronger economic growth for Australia than would have been possible under more restrictive policies and is essential to long term productivity growth. Australia’s integration in the global economy is beneficial both in terms of securing access to export markets and investment flows as well as in promoting a more competitive and dynamic economy with the capacity to respond to future economic challenges. It is noteworthy that Australia recorded significant productivity growth in the 1980 and 1990s at a time of trade liberalisation and major microeconomic reforms.

Climate change will be a particularly important competitiveness challenge for Australia in the future. The impacts of climate change and the policies adopted to address them will have implications for Australia’s international competitiveness across the economy and for a number of key export sectors.

The implementation of an Australian emissions trading scheme is expected to promote innovation and investment in low emission production techniques. This holds out the prospect of Australia becoming a leader in the commercialisation and export of goods and services that deliver a lower carbon footprint. At the same time, it is important that the emissions trading scheme keep the total cost of reducing Australia’s emissions as low as possible so as not to undermine Australia's competitiveness.

5. The role of trade policy

Trade policy has a central role to play in improving export performance.

There is little doubt that considerable impetus for ongoing growth in international commerce stems from trade liberalisation. The lowering of trade barriers, combined with improvements in international communication, technology and transportation has led to increasingly interdependent and trade-exposed economies. The realisation of the opportunities presented by a competitive global marketplace for the world’s consumers, producers and service providers has maintained the momentum for governments and business to continue the push for trade liberalisation.

A key objective of trade policy is to reduce and, to the extent possible, eliminate barriers in order to unlock future commercial opportunities. Common barriers to trade in goods are tariffs and quantitative limitations such as quotas. Non-tariff measures are also a major issue; these are wide-ranging in character and include standards and technical regulations. Barriers to services trade include discriminatory measures between local and foreign service suppliers, such as foreign equity limitations or residency and nationality requirements.

Securing new and improved market access opportunities through the elimination of barriers to trade in goods and services is a key focus of multilateral, regional and bilateral agreements. Such agreements provide a legally binding framework to advance Australia’s market access objectives.

The multilateral trade system, embodied in the World Trade Organization (WTO) is widely recognised as the most efficient and effective forum for delivering trade liberalisation at the global level. Chart 1 illustrates the fact that world trade has grown significantly faster than world output growth since the early 1970s.

Chart 1: Growth in Global Trade and GDP 1960-2004 - details contained within report

The Chart identifies the major negotiating rounds that took place under the auspices of the WTO’s predecessor organisation, the General Agreement on Tariffs and Trade (GATT), specifically the Dillon, Kennedy, Tokyo and Uruguay Rounds. These negotiations helped to deliver a considerable amount of trade liberalisation at the global level, although progress has been uneven and success limited in some areas, most notably agriculture. The current WTO negotiating round, the Doha Development Agenda, was launched in 2001 and covers a wide range of issues including agriculture, services, industrial products, intellectual property, anti-dumping and other WTO rules issues, dispute settlement, and some trade and environment issues. These negotiations are to provide a basis for further trade liberalisation and will address the elimination of agricultural export subsidies for the first time.

The WTO also provides the certainty of rules-based trade and a binding global trade dispute settlement mechanism to protect countries’ existing trade liberalisation commitments. The WTO’s dispute settlement procedures were strengthened considerably as a result of the Uruguay Round of negotiations and the dispute settlement mechanism has been used extensively since the WTO was established in 1994, not least due to the increased activity by developing countries.

Some trade issues are more effectively addressed at the bilateral and regional level than multilaterally. Bilateral and regional free trade agreements are intended to result in the elimination of tariffs and discrimination against services suppliers on substantially all trade between the parties. That said, there are concerns at the risk of such agreements diverting trade rather than creating it, and to increased transaction costs for business as a result of multiple rules of origin. The WTO’s rules are aimed at promoting comprehensive agreements that minimise distortions, but the rules are ambiguous and have been difficult to implement effectively.

Bilateral agreements are also effective in addressing issues which are of particular bilateral interest, such as the recognition of conformity assessments and professional qualifications. Free trade agreements also often establish a framework for ongoing cooperation on regulatory and policy actions that affect trade and investment.

Australia has concluded free trade agreements with New Zealand, the United States, Singapore and Thailand and is currently negotiating with ASEAN (jointly with New Zealand), China, Japan, Chile, Malaysia and the Gulf Cooperation Council. Feasibility studies on possible free trade agreements are being conducted with India, Indonesia and the Republic of Korea.

The Asia-Pacific Economic Cooperation forum (APEC) has played a valuable role in addressing ‘behind the border’ impediments to trade and investment, for example in areas such as customs procedures, standards, business mobility, intellectual property rights and competition policy. In 2007 APEC adopted a program of actions to strengthen regional economic integration, including an examination of the options and prospects for a Free Trade Area of the Asia-Pacific (FTAAP).

Improvements in the trade policy environment negotiated by governments can create a more favourable environment for two way trade and investment. Within that environment, governments can seek to provide assistance to enterprises to maximise the commercial returns from new market opportunities. Such measures can take a wide range of forms and these are outlined in more detail below.

6. Government programs and services

Across the Commonwealth and States and Territories trade-related programs and services are delivered by a number of agencies and organisations.

At the Federal level, the Foreign Affairs and Trade portfolio has responsibility for trade policy, market development, trade promotion and international business development. The Australian Trade Commission (Austrade) provides advice and services to assist Australian businesses succeed in international business. This includes assisting business to take advantage of better conditions for trade and investment negotiated and facilitated by the Australian Government and administering the Export Market Development Grants scheme (EMDG). The Export Finance and Insurance Corporation (EFIC) assists Australian companies exporting and investing overseas to compete internationally by providing finance and insurance facilities to support their overseas contracts and investments.

Export-related programs and activities are also provided through the Department of Innovation, Industry, Science and Research (DIISR), Australian Education International (AEI), Tourism Australia (TA), the Defence Materiel Organisation (DMO) via the Defence Export Unit, the Australian Customs Service (ACS), and the Australian Quarantine and Inspection Service (AQIS). A range of trade-related assistance measures is also provided by State and Territory Governments, primarily focussed on export preparation and promotion, market entry strategies and investment.

Terms of Reference

1. Despite the rapid economic growth of China and India generating unprecedented global demands for energy and mineral resources, Australian exports have underperformed in recent years. Across all major export categories, the growth of export volumes in the past six years has been below the historical average since the floating of the Australian dollar in 1983. While export revenues for resources have grown in the past six years, there has been a slowdown in resource export volumes over that period.

2. In the last Labor Government, net exports made a positive contribution to economic growth in 10 of 13 years. Under the previous Government, net exports made a positive contribution to growth in just 2 out of 11½ years. The export slowdown over the past decade reflected a failure to develop an integrated approach to trade policy and a failure to achieve the necessary productivity gains to drive Australia’s international competitiveness.

3. In this context, the Australian Government has commissioned Mr David Mortimer AO and Dr John Edwards to conduct a comprehensive review of export policies and programs, in consultation with a broad range of industry stakeholders. The review will examine export policy and programs across all Government portfolios and agencies and their linkages to State/Territory programs. It will cover goods, services and investment. This review is to take place in parallel with an analysis of Australia’s recent bilateral free trade agreements to assess their net benefits and to develop new benchmarks for Australia’s future bilateral and regional trade agreements.

4. The review will examine Australia’s trade performance over the past two decades including factors impacting on export growth. It will identify measures to maximise Australia’s export competitiveness potential. The review will contribute to the formulation of a more strategic whole-of-government approach to advancing Australia’s international economic and commercial interests.

5. The review will bear in mind the Government’s desire to optimise the overall economic performance of the Australian economy through productivity gains and deeper integration of the Australian economy and business with the global economy. It will also take into account the Government’s commitment to the rules-based multilateral trading system and in particular the World Trade Organization (WTO) Doha negotiations.

6. The review will make an assessment of the challenges and opportunities currently facing Australian exporters and international business. In making this assessment, the review should examine:

a) Australia’s export performance over the past two decades, identifying factors that are inhibiting export performance, domestic productivity, productive investment flows and international competitiveness;

b) the extent to which Australia’s trade policies adequately reflect Australia’s interests in the contemporary global economy; and

c) the coverage, coherence and effectiveness of current trade development services and programs, and the extent to which they adequately address the needs of exporters, importers and investors.

7. The review will make recommendations on any of the issues identified, including:

a) measures required to improve export performance, including the relationship with domestic policy settings and productivity-enhancing policies;

b) measures which will improve the capacity of new and existing exporters to expand their export base and take optimal advantage of the expansion and evolution in international trade and investment;

c) measures to encourage more small businesses to begin exporting or to expand their export operations;

d) measures to promote an improved services export performance, including financial services;

e) policies and programs that will promote high value added exports, enhanced levels of productivity and improved international competitiveness;

f) measures to expand market access opportunities for Australian exporters of goods and services; and

g) measures to promote a more concerted and coordinated national approach to lifting export performance.

8. In its recommendations, the review will be mindful of the Government’s overall approach to budget policy, Australia’s international commitments, the Government’s support for the multilateral trade system and the initiatives the Government is in the process of implementing.

9. The review will include specific recommendations about the continuation of the Export Market Development Grants scheme (EMDG), pursuant to section 106A of the EMDG Act 1997.

10. The review is to release a scoping paper for stakeholder consultations by April. The final report will be provided to the Minister for Trade by 31 August 2008.

Review Panel

Mr David Mortimer AO is Chairman of Leighton Holdings Ltd, Australia Post, Crescent Capital Partners and the Defence Procurement Advisory Board. He is a Director of Macquarie Infrastructure Investment Management Limited and Petsec Energy Limited and a Governor of the Australia Israel Chamber of Commerce. In 1996-1997, Mr Mortimer led a major review for the Federal Government of Business Programs that resulted in “The Mortimer Report”. He was previously Managing Director of TNT Limited. Following the merger of TNT Ltd with the KPN Group in 1996 he remained as Chairman and CEO of the Asian Pacific Region until 1997. From 1992-1996 he was Deputy Chairman of Ansett Australia Holdings Limited. He was also a Director of Ascham from 1989 to 1997 and of Adsteam Marine Limited from 1997 to 2007. He was Chairman of Sydney Airports Corporation from 1998 until 2002 and a Director of the Australian Tourist Commission from 1997 to 2004. He was formerly a director of the Australian Graduate School of Management and is presently on the AGSM Advisory Council. He is also a member of the Board of Governors of the Committee for Economic Development of Australia (CEDA). He was appointed as an Officer of the Order of Australia in 2005.

Dr John Edwards has been chief economist for HSBC in Australia since 1997. Between 1991 and 1994 he was Senior Adviser (Economic) to Treasurer and then Prime Minister Paul Keating. He has worked in other banking roles, first as an adviser at Macquarie Bank and then as chief economist for Societe Generale. Dr Edwards was Washington correspondent for the Sydney Morning Herald. Dr Edwards’ role at HSBC includes the provision of economic views and advice to the commercial bank and the treasury and capital markets group. Dr Edwards is currently on a short term assignment at the Commonwealth Treasury.

FTA reference panel

Professor Kym Anderson is the George Gollin Professor of Economics and formerly foundation Executive Director of the Centre for International Economic Studies at the University of Adelaide, where he has been affiliated since 1984. Previously he was a Research Fellow in Economics at ANU's Research School of Pacific and Asian Studies (1977-83), following undergraduate studies at the University of New England in Armidale (1967-70). He has worked at the GATT Secretariat and has been a regular participant in WTO dispute settlement cases as an expert panellist. He has been Lead Economist (Trade Policy) in the Research Group of the World Bank in Washington DC for the past several years.

Mr Andrew Stoler is the Executive Director of the University of Adelaide-based Institute for International Trade. He served as Deputy Director-General of the World Trade Organization (WTO) from November 1999 to October 2002. Prior to this, he spent slightly more than ten years as the Deputy Permanent Representative of the United States to the WTO and its predecessor, the GATT.

Mr Peter Gallagher is Managing Director of Inquit. He was formerly the CEO of the Australian Dairy Industry Council and was a senior officer for 20 years in the Department of Foreign Affairs and Trade. In 1996, he was appointed to the faculty of the Business School of the University of Melbourne - where he helped establish a program on international trade for MBA students.

Dr Nicholas Gruen is CEO of Lateral Economics. He is an economist with an impressive record of achievement and experience in the public sector, business groups and academia. He was previously an economic policy adviser to two Federal Government Ministers, Director of the Business Council of Australia's innovative New Directions economic reform project and influential participant in economic and industry policy formulation, notably in the automotive sector.

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