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International alert series: The BIG Issues

Free and Fairer Trade: Can trade be both free and equitable in a global economy

Tuesday 6 June 2006

Advance Australia (with) Fair Trade

Tim Harcourt* [visual presentation available here]
Chief Economist, Australian Trade Commission, Sydney
www.austrade.gov.au/economistscorner

*Edited version of a speech given to the Free and Fairer Trade Forum, June 6th, 2006:  Presentation given in PDF format - Adobe Acrobat Reader is required to view and print.  You can download a free copy of Adobe Acrobat Reader from Adobe.
 

Introduction – The Times were a-changin’

It’s a great honour to be standing here at the Adelaide Town Hall. In fact, in 1968, my Mum also stood in a Town Hall stage like this one as a candidate for the South Australian elections. Don Dunstan was keen to get more women running for Parliament. We are always very proud that South Australia was one of the first places in the world to give women the vote, but it did take a while to get a few women members elected! But remember this was 1968. It was quite a thing for a young woman to run for Parliament. And to top if of, my Mum was also pregnant with my youngest sister Rebecca (the last of her four kids). Imagine the reaction! In fact at Mum’s first press conference, the very worried (all male) contingent of journalists asked “But you’re pregnant, what are you going to do if you win the election?” Without blinking, my Mum replied “I’ll have a baby”. It was the best answer I have heard from a politician at a press conference. Luckily for me – I got to appear in a photo in local paper with my Mum holding a fire engine like all 3 year old boys did. It was my first experience of media exposure and thanks especially to The Adelaide Advertiser (or ‘The Tiser’ as we say in these parts) I have been getting a pretty good run ever since!

I think this story illustrates that the times have been a-changing since 1968. Not only social changes but also significant economic changes that we take for granted today. Think about what it was like in 1968. Most of our trade was with the northern hemisphere – mainly Europe and the USA and Japan as the first emerging Asian economic nation (we had not much to do with ‘Red’ China and a local radio identity thought the Premier’s Malaysian born wife was Japanese). We protected our industries – particularly here in South Australia. There were few overseas tourists let alone foreign students and everything was closed at nights and on weekends (some of you will remember the ‘six o’clock swill’). Women teachers had to leave work when they got married and bars were segregated on the grounds of race and sex ( I remember my Dad and his friend the late Eric Russell making appoint of drinking in the ‘black areas’ of Adelaide pubs to defy local policing and licensing laws).

Certainly a lot of economic and social reform has taken place since then and much of it we now taken for granted. However, much of it also centres on today’s topic – trade. Basically, Australia’s willingness to open up its economy to trade and technology has enabled us to make significant economic gains that have improved our living standards.

Trading Up

I want to start with trade first. In the past, we Australians ‘Once were worriers’. We were concerned about our isolation and distance from export markets in the UK and The Commonwealth (and the USA later). The famous historian, Geoffrey Blainey wrote about ‘The Tyranny of Distance’ and it affected us all. However, the rise of Asia – with Japan, the Asian Tigers (or the NICs – the newly industrialising countries) and now China has really changed all this. The ‘Tyranny of distance’ has now been replaced by ‘the Power of Proximity’ as Australia has found ourselves to be in the right place at the right time. The rise of China, in particular, has been very significant for Australian exporters. China is currently our second largest export market (to Japan) and according to UBS Chief Economist Scott Haslem may become our number one destination by the end of this decade.

Openness to trade has helped us to take advantage of the rise of Asia. Has we continued to huddle behind tariff walls, and refused to accept Asian imports, it could have been a very different story.

In fact, despite the anxiety expressed about trade and globalisation at the anti-WTO protests in Seattle, Melbourne and other places around the world, Australia’s decision to open its economy (perhaps most symbolically represented by the Hawke Government’s float of the currency over two decades ago) has really paid dividends. Australia has improved it performance in terms of per capita GDP growth – ahead of the US and other OECD nations – as a result of our decision to open up to trade and investment, along with a whole package of reforms covering tax, competition policy, education and training reform, and a whole gamut of important initiatives in health, education and social protection. It should be emphasised that embracing openness to trade is, in the economists’ language, necessary but not sufficient. Just opening up to trade on its own won’t win you gains – it’s the whole package of reforms that you introduce along with it to deal with social reform, labour market adjustment and distributional consequences as well.

However, openness is clearly an important reason for Australia’s economic success. Embracing openness has been pivotal to Australia’s capacity to grow our economy, improve wages and salaries and boost our living standards. It enabled us to embrace the growth in we saw in Asia and to make the most of our place in the region and in the world.

It’s the new economy…stupid

Related to changes in trade have been changes in technology. Again, Australia’s open stance has been beneficial. In terms of the ‘e-readiness’ stakes, Australia has fared well and has been a successful early adopter of technology. For example, in the case of the internet, Australia’s businesses knew they could conquer geography and market to the whole world. As a result, small businesses – particularly in remote and regional Australia – picked up the net quickly and became instant exporters. Australia’s decision to embrace both trade and technology allowed us to surf the Asian economic boom and to adopt the best parts of the ‘new economy’ (without getting sucked into the Internet bubble and bust).

The Quiet Revolution

But there’s also been a quiet revolution happening – at the micro level. The changing nature of the Australian exporter community is the untold story of all this economic change. Unfortunately, it often gets overlooked in the midst of all the noise about free trade agreements and the Doha Round.

The essential point is that because we have an open economy, the Australian exporter community made up of around 42,000 businesses coast to coast, is larger, stronger, more diverse and more resilient than ever before. In many ways, Australian exporters and the Australians who work for them are the unsung heroes of economic reform in Australia. Let me give you a few examples.

Small is beautiful

Once upon a time exporting was just done by blue-chip corporates at the top end of town. But the changes we have seen in trade and technology have really opened up export opportunities for small business. According to the Australian Bureau of Statistics (ABS), around 86 per cent of exporters in Australia are small and medium sized enterprises (SMEs). The large corporates still earn the lion’s share of our export revenue – particularly in the resources sector – but SMEs play an important role in spreading export wealth throughout Australia and engaging in the diffusion of technology and knowledge transfer promoting improvements in productivity.

Destination Anywhere

The diversity of our export markets has spread too. Now we have exporters engaged in trade in all corners of the world. My organisation the Australian Trade Commission (Austrade) has responded to this demand by expanding and deepening our network. We now have 117 locations in 58 countries in a network that stretches from Adelaide to Zagreb. SMEs too are part of the action – especially in Asia. As many Australian SMEs export to China as to the whole of Continental Europe.

Industrial Strength

Whilst we go through endless debates about Australia just being a farm and a quarry, the evidence shows that Australian exporters come from all walks of life. In addition, our traditional sources of comparative advantage in mining and agriculture have led to new opportunities in areas like services to mining, agribusiness, mining and agricultural technology (we are an example of being ‘new economy’ in ‘old economy’ clothes). In addition, the economic reforms we undertook gave our manufacturing and services exporters a break for the first time with impressive results – especially over the 1990s (the first ‘post-reform’ decade).

From the Suburbs to the Sea Changers

Exporters are not just in the big city or the bush, you can now find them in the inner-city, the outer metropolitan areas (the so-called Kath and Kim effect) and in Australia’s fast growing coastal regional centres (the Sea changers). Many regional centres have played key strategic roles as export hubs for regional areas (accordingly Austrade has based its Tradestart office in these centres of export excellence).

Exporting helps the bottom line

For SMEs in particular, engagement in trade has made for better companies. Exporters, on average, are faster growing, more efficient, achieve higher productivity and deliver a better bottom line with higher profits than non-exporters (and the same businesses before they became exporters)

Exports are good for workers

So what about the workers? This is good news for Australian workers too as the evidence shows that on average, exporters pay higher wages, provide better occupational health and safety, better conditions and more job security than the rest of the business community.

Growing the heartland

Importantly, economic reform has also enabled us to build a “heartland” of Australian exporters – or a core exporter community if you like. According to research by Austrade and the ABS around 68 per cent of exporters now export on a regular basis compared to around to 55 per cent in the mid 1990s. We now have a strong robust group of exporters who can withstand fluctuations in exchange rates and commodity prices and can lead the way in emerging markets (forming crucial ‘beachheads’ for others to follow).

The exporter heartland also provides a useful means of measuring exporter sentiment. We regularly poll them in the DHL Export Barometer and find that they tend to be more bullish than the rest of the exporter community, have strong bullish views about China, and ASEAN too, think free trade agreements are useful (particularly as they learn more about them) and are keen on joint ventures and strategic alliances as well as more traditional forms of exporting and importing. The exporter heartland has a long term commitment to exporting – they generally do not reduce output or investment when exchange rates change – and they are finding fewer and fewer trade barriers in their way (so the Australian trade negotiators are doing a find job, notwithstanding the need for further agricultural reform in the Doha Round).

In short, when it comes to trade, Australian exporters – and their workers are the unsung heroes Australia’s economic reform story.

Australia and the rest of the world

So the Australian story is a good one but what about the rest of the world? According to the economic evidence, when it comes to global commitment, we’re not Robinson Crusoe. Look at China. In 1968, they were in the midst of the Cultural Revolution, closed off to the world. As a result of Deng Xiaoping reforms – which started in 1979 – China became a more open economy and is now the third largest exporter in the world. India too, went through its economic nationalist period under the Nehru-Gandhi dynasty but is now an emerging economic player – particularly in services. Countries who remain closed have struggled – look at Albania and North Korea. Of course, openness cannot work wonders on its own. Its introduction depends on the package of reforms that accompany it – particularly in terms of social protection, economic adjustment and measure aimed at providing an economic environment conducive to innovation and entrepreneurship. As Harvard economist Dani Rodrik has shown, economies that are open also have robust social institutions – particular in the labour market. Countries need to show how openness to trade can help in terms of growth, efficiency and equity and providing. Furthermore, providing social protection through the right set of social institutions helps to build community support for openness in rich and poor countries alike.

Conclusion

In conclusion, openness to trade can be both free and fair, provided it is introduced with right mix of reforms – particularly in terms of social protection. Australia, for one, has showed that opening up to the world can be beneficial, particularly with the right mix of policies to promote both efficiency and equity. Income distribution and social institutions matter too. In short, openness is necessary but not sufficient for economic success and social cohesion.

So where does that leave the protests and public anxiety about trade (and the scenes we saw at the anti-WTO rallies in Seattle)? I think a lot of it comes down to public discourse and the roles that economists play. I believe that economists should engage the public and not be dismissive. Economists may not agree with the protestors’ logic but they should not turn a blind eye to their concerns and anxieties. After all, one reason that the great economist John Maynard Keynes was so effective is that he was a great persuader and a great communicator of economic ideas. Fortunately in Australia, economic communication has been better than most and if Kim of the ABC’s Kath and Kim is now saying: “Exporting makes you effluent..and I want to be effluent Mum” then I believe we can be confident that the message has spread far and wide throughout the land.

Thankyou.

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