The enduring fight for free trade

| November 15, 2018

NSW Premier and free trade advocate George Reid once opposed the state joining a proposed Australian federation which embraced tariffs, as it would betray NSW’s liberal economic ethos. He quipped it would be like a reformed alcoholic setting up house with five drunkards and leaving the question of beverages to be decided by a majority vote.

Despite this, NSW did join a federation which maintained a strong set of protectionist policies until the late 1960s. Free trade reforms were led by the Tariff Board – which became the Productivity Commission – and were implemented by Gough Whitlam’s government and his successors from both parties. The country saw major tariff cuts under Labor in 1988 and 1991, and reductions continued through the Howard administration.

I’ve spent 20 years working on Labor trade policies and the following three factors have remained constant over that time.

Firstly, there’s the continuing difficulty of convincing the general public that open markets benefit them. Samuelson put it well when he said that free trade is the best example in the social sciences of an argument which is both true and not trivial.

We accept the notion of comparative advantage when we pay a professional to cut our hair or service our car, but we are reluctant to accept the same concept of comparative advantage when it comes to where things should be made. The case for free trade must be made and remade with every successive generation, rather than taken for granted.

Secondly, despite recent reverses, we are still in a world in which tariffs remain relatively low compared to much of the 20th century. Industrial tariffs average around 5% for many countries, despite threats of international trade wars.

Thirdly, the trade agenda has constantly broadened to include a range of issues over the last 20 years. There were debates about investment treaties and intellectual property and calls to bring environmental issues into trade deals at the Seattle World Trade Organization Summit in 1999 and the trend continues today.

Trade deliberations are increasingly divorced from what economists would term their core purpose of ‘first, best trade negotiations’ to bring down barriers and lower import taxes. These deals therefore have wider ramifications. Agreements amend the degree of intellectual property protection across borders, sometimes to the advantage of one country at the expense of another, which can pose significant challenges for nations and economies alike.

The expansion of the trade agenda has continued from issues of investment, the environment and intellectual property to encompass labour standards – introduced to the Trans-Pacific Partnership by Barack Obama – and immigration provisions. The public debate on the Australia-China free trade agreement saw bipartisan consensus on the trading of goods, although political heat was generated by changes to immigration provisions.

Questions about the extent of labour market testing required and which sectors would be allowed to have labour brought in attracted considerable attention and will continue to do so in other agreements. So, while the core agenda has been achieved, with tariffs now 5% rather than the 20% of the mid-20th century, the trade agenda is far more crowded with issues than it used to be.

Australia still undertakes more trade in goods than services, but the value of the latter is rapidly catching up. Services now account for a quarter of global trade, and their growth is still accelerating. Australia exports education, law and architectural services to the rest of the world, and the best Sydney schools, lawyers and design firms service clients around the Asia Pacific. The American stock market is now dominated by giant services companies, rather than the manufacturing giants of the past.

Another major change is the increasing importance of tax. Many people around the world feel that global technology and service companies are not paying their full share of tax on their vast revenues, however much they enjoy the goods and services of Apple, Google, Facebook and Amazon.

These companies channel their massive wealth through tax havens to avoid paying national taxes in ways which begin to undermine the legitimacy of the global trading system. When people see multinational firms ignoring national rules and exploiting tax loopholes that are not available to local small businesses, they lose their trust in global trade and are less inclined to acknowledge its benefits.

The conversation on digital trade is a vital one for Australia’s future. The question of where the jobs of the future will be created is often raised at community forums, but economists are better at identifying the jobs which will disappear. Jobs will come from plugging into Asian supply chains, exploiting the region’s growing prosperity and by ensuring that more Australians have the skills to meet the needs of the expanding Asian middle class.

Labor has produced a Future Asia policy which advocates better understanding of Asia on company boards and more teaching of Asian languages to Australian pupils. The policy builds on the Australia in the Asian Century white paper published in 2012 and engages with business to explore ways to increase Australian prosperity in the future. Labor is serious about its commitment to Asia, as regional trade in goods and services is the key to creating Australian jobs and prosperity.

This is an edited summary of the speech delivered by the Hon. Dr Andrew Leigh MP at GAP’s Annual Economic Summit at NSW Parliament House in Sydney.