Free trade could be expensive for Australia

We should always pay considerable attention to the balance between government intervention and market forces on many issues, including our promotion of freer trade.  

Sure Australia’s recent greater adherence to freer trade has brought success with Australia recording an average 3.3 per cent GDP growth in the 17 years from 1992 (one of the highest levels amongst developed nations). In response to the changing demands of the international economy, Australia has benefited from policy reforms intended to make the Australian economy more competitive, including lower taxation and tariff rates along with labour market reform.

Yet, Australia’s economic response has hardly been in strict accordance to principles of free trade, despite the Industry Assistance Commission’s 1973-74 Annual Reportrightfully declaring that Australia’s industries needed to be made accountable for the assistance they received. 

First, it is a myth to suggest that Australia adhered to free trade just because the average effective rate of tariff assistance for manufacturing and agriculture was lowered from about 35 and 28 per cent in 1970 to around 5 per cent by 2005-6. While difficult to evaluate the true extent of non-tariff barriers (NTBs), a 2003 study of nine countries estimated NTB levels to be less than 10 per cent for Canada and the US across different industries; 12 to 18 per cent for Italy, Australia, and Germany; in the 30s for Belgium, the Netherlands, and the UK; and 58 per cent for Japan. In 2008-09, Australia’s motor vehicle and parts sector alone received an estimated $1.596 billion of net combined assistance of a total $8.295 billion provided to manufacturing, while agriculture received $1.755 billion and mining $420 million.

No wonder India during 2009 sought an integrated database through the WTO that will compile all non-tariff barriers existing worldwide.

Second, while WTO data indicates that manufactures still represented 66.5 per cent of world merchandise exports in 2008, compared to 8.5 per cent for agriculture and 22.5 for fuels and mining, Australia has benefited from the greater rise in the value of fuels and mining since 2000. Hence, during the period 2000-2008, the percentage of Australia’s merchandise exports from fuels alone increased from 20.9 to 31.8 per cent.

In other words, as indicated by Table 1, rising prices for coal alone since 2000 have helped offset a further decline in our proportion of global exports for agriculture and manufacturing.  

Table 1: World Merchandise exports: agriculture, fuels and manufacturing (billions of $US)

And despite the hopes for services (with that sector’s exports still about a quarter of merchandise exports in 2009-10), Australia’s future economic well-being increasingly relies on the economic fortunes of authoritarian China. A 2010 article indicates that 53 per cent of Australia’s 1.6 per cent GDP growth in 2009 came from exports to China. Further, data since 2005 indicates why the Australian sharemarket and Australian dollar are now heavily influenced by the prospects for China’s growth.

No wonder Prime Minister Gillard, when asking the US Congress to promote free trade further, suggested that the global economy “is not a zero-sum game”, and that “there is no reason for Chinese prosperity to detract from prosperity in Australia, the US or anywhere in the world”.

But Australian political leaders are dreaming if they think that industry protection will go away. While an Australian government site notes China’s efforts to comply with WTO trade commitments given that its average tariff rates on imports dropped to 9.8 per cent by 2007, with agricultural products at an average of 15.3 per cent and industrial products 8.95 per cent, it also noted that “a variety of non-tariff trade barriers still remain which impedes access to the China market”.