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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 which may be addressed in submissions.

1.         Exports and the Australian economy

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

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 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. 

(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.

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. 

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. 

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.

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.

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 effective forum for delivering trade liberalisation at the global level.  Chart 1 identifies the major multilateral trade negotiating rounds and illustrates the fact that, as global trade has liberalised, world trade has grown significantly faster than world output growth since the early 1970s.

The current WTO negotiating round, the Doha Development Agenda, was launched in 2001 to provide a basis for further trade liberalisation. 

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 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.

Topics for input and comment

The following are key areas on which comments and input are invited.

1.  General 

2.  Structural and supply side factors

3.  Trade negotiations and market access issues

Multilateral trade system

Free trade agreements (FTAs)

Regional efforts

4.  International business development

5.  Trade development programs and services 

Export Market Development Grants Scheme (EMDG)

Small and medium-sized enterprises (SMEs)

Services

6.  Financing exports

7.  Investment promotion and facilitation

8.  Maximising the effectiveness of trade development resources