Australia’s Trade Performance: Speech by Kevin Rudd

This is the text of a speech on Australia’s trade performance by Kevin Rudd, shadow minister for Foreign Affairs.

Text of Kevin Rudd speech to National Union of Workers Conference.

I want to use the opportunity today to address two key challenges confronting Australia’s trading regime:

  • Australia’s continuing poor trade performance; and
  • The impact of China on the future of Australian exports.

Australia’s Trade Performance

The Federal Parliamentary Labor Party remains strongly of the view that Australia’s engagement in an open international trading system is an overwhelmingly positive force for our community, our workers and our economy.

The reasons are numerous:

  • One in five Australian jobs rely on exports. In rural and regional Australia one in four jobs rely on exports.
  • Exports are good for workers with exporters on average paying higher wages and salaries than non-exporters. This is because exporters are often more innovative than non-exporters, investing in technology and using advanced management techniques and their workers are typically highly skilled. The higher productivity generated enables exporters to pay higher wages.
  • Given Australia’s strong demand for imports as inputs into our production base, including in the production of goods for export, or for domestic consumption, we need export income to meet our import bill.
  • Exports are also a way of reducing what has traditionally been a balance of payments constraint on Australia’s economic growth. While an increase in exports is not the only means by which our balance of payments constraint can be reduced, it is an important means.
  • Exports are also good for the long-term competitiveness of firms.

Australian exporters competing in the global market are more likely to adopt leading-edge business practices, innovative techniques, new technologies and so on.

Knowledge transfer arising from exports contributes to economic growth. As exporters benefit from ‘learning by doing’, their knowledge and access to technology will potentially spill over to the rest of the economy. This will lift the competitive performance of all firms and improve the efficiency of the Australian economy.

International evidence shows that exporters help the long-term survival of firms in the economy. According to AusTrade economist Tim Harcourt, this is because they enjoy faster sales and employment growth than non-exporters, enabling a higher rate of survival and contributing to overall allocative efficiency in the economy.

Labor understands the imperative of Australia’s engagement with the international economy and that is why the Hawke and Keating Governments opened up the economy to international trade in the 1980s and 1990s.

Over the course of thirteen years, Labor implemented a major reform program enhancing the capacity of our economy to respond to internal and external shocks and contributing to what is now the 15th consecutive year of economic expansion.

As I have said before, those reforms were not easy by any means.

Some generated great opposition in the community.

They challenged business and employees to respond to the opportunities they provided.

But they were right for the country and they were in our long-term national economic interest.

Those reforms included:

  • Floating the Australian dollar;
  • Deregulating interest rates;
  • Cutting tariffs – transforming Australia from a highly protected inwardly focussed economy to an internationally competitive economy;
  • Major tax reform – cutting the very high marginal tax rates and corporate taxes we inherited from Treasurer Howard;
  • The deregulation of the financial services, communications and aviation industries;
  • The introduction of competition policy in 1995; and
  • Industrial relations reform that contributed so much to productivity growth in Australia.

They were no small matters.

Each reform contributed to the overall policy framework.

Their implementation required the expenditure of substantial political capital – political capital the Hawke and Keating Governments were prepared to spend in the long-term interests of our economy to enhance our international competitiveness and prosperity.

In contrast, most within the economic commentariat would agree that the Howard Government has failed to build on the economic reform legacy it inherited from Labor.

Reform fatigue that has reached such a point that Professor Garnaut characterises it as the “great complacency of the 21st Century” – a reform challenge that must be addressed if Australia is to stem the decline in our productivity and international competitiveness.

Through the combination of an activist trade policy supported by appropriate industry policy, education and skills initiatives along with investment in research and development, Labor revived Australia’s trade performance generating particularly strong export growth.

Strong export growth that has not been maintained by the Howard Government at considerable cost for Australian jobs, workers and the broader community in terms of lost exports, lost opportunities and lost national income.

For far too long, the Howard Government has relied on debt-financed domestic consumption and government expenditure to shore up economic growth, ignoring the contribution exports can and must make.

The Government has been saying that there will be a rebalancing of economic growth from domestic to external sources based on the full flow-through of record commodity prices.

If and when it does occur, there is an open question as to how sustainable this will be.

Australia’s record current account deficits and foreign debt expose us to a sudden downturn in global economic growth, or adverse shifts in international investor sentiment.

Our trade figures tell a sorry story:

  • Australia has now recorded 46 monthly trade deficits in a row – the longest run of any Australian government.
  • Australia has recorded significant trade deficits during the past eight years – including our largest ever trade deficit last year of $25.5 billion – compared to a deficit of only $864 million
    in 1996.
  • Australia’s current account deficit last year of $57 billion is the highest ever on record.
  • As a result, our foreign debt keeps getting higher and higher – blowing out to $430 billion.
  • Export volumes have been flat for the last four years right across the board – commodities, agriculture, manufactures and services.
  • Net exports have now made a negative contribution to economic growth for four years in a row – another dismal record.
  • Australia’s share of world exports is now at a historically low level – falling from a high of 1.22 per cent in 1989 to 0.99 per cent in 2004.

This performance has occurred despite strong global economic growth, historically high commodity prices and our best terms of trade in 30 years.

As Access Economics said recently “the best global growth in a generation is passing us by”.

What is more alarming is the decline in Australia’s export performance when compared with the growth we got in the 1980s and 1990s.

  • Annual export growth under the Howard Government is 5.3 per cent – less than the 10.8 per cent achieved by Labor.
  • The performance on all manufactured exports is even worse – 3.7 per cent under the Howard Government compared to 13.7 per cent under Labor.
  • If exports had continued to grow at the rate achieved by Labor, Australia would have recorded a trade surplus last year of $12 billion rather than a deficit of $26 billion – that is a $38 billion turn-around.
  • That is a lost opportunity for Australia – lost exports, lost income, lost jobs.

The trade figures released earlier this week point to a worrying reversal in a more recent short-term improvement in the trade performance, with the trade deficit for August blowing out again by
$300 million to $1.6 billion.

Worryingly, exports declined by 3 per cent in August compared to the previous month.

This is despite buoyant terms of trade arising from the flow through of higher commodity prices – fuelled in part by the rise of China.

This begs the question of what will happen to Australia’s export performance once there is a downturn in global commodity prices.

That is not the type of picture that indicates an improvement on the trade front is just around the corner.

If Australia is to once again become a strong trading nation we need a NEW EXPORT STRATEGY – of the type I outlined in an address to CEDA in Perth last month, and I’d draw extensively on those remarks today.

A NEW EXPORT STRATEGY that rebuilds the skills of our nation – the skills demanded by Australian exports industries.

A NEW EXPORT STRATEGY that lifts R & D.

A NEW EXPORT STRATEGY that plans properly for our national infrastructure needs – rather than standing passively by while infrastructure bottlenecks occur.

A NEW EXPORT STRATEGY that lifts export promotion.

A NEW EXPORT STRATEGY that rebuilds Australia’s export culture.

Labor has been developing detailed policies in this area over the past year, including the Skills and Schools Blueprint released by Kim Beazley last week.

The Skills and Schools Blueprint proposes fundamental changes to secondary schooling in Australia to offer young people better choices by teaching trades, technology and science in first class facilities.

Apprenticeships in Australia will be overhauled, including through the establishment of a Trades in Schools scheme to double the number of school-based apprenticeships in skill shortage areas and to provide extra funding per place. A $2000 Trade Completion Bonus will also be paid directly to traditional apprentices.

Labor is also committed to tilting the balance back towards training Australians first rather than having to rely on skilled migration.

John Howard relies on skilled migration to cover up the skills shortages he has produced.

Labor will review the skilled migration program to assess the needs of companies reliant on skilled migration and will put in place the right incentives to encourage those companies to train Australians first.

To support our Skills and Schools Blueprint, Labor will also address the infrastructure crisis confronting our country via the establishment of Infrastructure Australia.

Infrastructure Australia will be charged with responsibility for developing a strategic blueprint for our nation’s infrastructure needs over coming years and facilitating its implementation, in partnership with the States, Territories, local government and the private sector.

Above all, we need more innovation and R&D. That’s the research that is most likely to generate wealth, and it’s where we’ve had the worst performance in the past decade.

Labor will examine the reasons for the significant declines in our levels of innovation and R&D and mechanisms for restoring R&D to the levels previously achieved by Labor Governments.

Another challenge is to examine carefully the Government’s role in export promotion in this country.

In its first budget, the Howard Government either abolished or substantially cut back many of the export promotion programs put in place by the Hawke and Keating Governments. We need to review the impact of those cuts, along with the contributions of the programs currently in place.

In that regard, Labor is assessing the results of the Review of the Export Market Development Grants program to see if there is not more that can be done in the trade promotion area.

Finally, if we are to restore our export performance to where it should be, a key challenge will be to engender an export culture right across Australian business.

An export culture that was developed under Labor but has been allowed to wane under the Howard Government.

Four years ago, the Deputy Prime Minister and Trade Minister, Mark Vaile, established a national target to double the number of Australian exporters from 25,000 to 50,000.

This target was to be achieved by 2006. Over the last two years, according to the ABS, the number of exporting firms has actually declined from just above 31,000 to just below 31,000 – this is not exactly heading in the right direction. It does not say a lot for the Government’s practical implementation of its rhetorical commitment to the development of a widespread Australian export culture.

An important component in establishing an export culture will be to ensure that Australia has the foreign language skills necessary to provide the next generation of entrepreneurs with the best possible chance to excel in the international market.

Regrettably, the Howard Government abolished a national program initiated by the then Federal Labor and State Governments (Labor and Liberal) back in 1995 – the National Asian Languages and Studies Strategies for Australian Schools.

This was truly an inter-generational project. The Commonwealth and the States agreed to a 12 year program. They invested half a billion dollars together over eight years resulting in 750,000 school children studying one of the four priority languages of Asia by the year 2003.

Then the Howard Government decided unilaterally to pull the plug on federal funding. And this is the Government that says it’s committed to establishing an Australian export culture that focuses on the expanding economic opportunities of our region.

Australia China Free Trade Agreement

As part of its regional trade efforts the Government has embarked on free trade agreement negotiations with China. When announcing that FTA negotiations would begin Trade Minister Vaile stated that:

“Engaging more closely with this emerging industrial power will enable Australia to set the terms for our future trade and tackle current trade impediments, including many “behind the border” issues that act as serious barriers to our exporters and service providers in the Chinese market.”

The stated purpose of this FTA is to help shape our future trading relationship with the fastest growing, large economy in the world, particularly by assisting exporters gain a competitive edge in the Chinese market.

The Government’s trade policy is the pursuit of FTAs.

That is unfortunate as FTAs of themselves will not correct Australia’s woeful trade performance in the short-term.

Labor’s trade policy priority is the WTO Doha Round of negotiations.

The Doha Round offers the best opportunity to open up new export access for Australian business and new jobs for Australian workers.

The Government has nonetheless gone down the FTA path.

That being the case we need to look at the opportunities that an FTA with China may present.

China’s Impact on the World Economy

If not for China’s contribution, world economic growth would have been significantly weaker in recent years.

China is already, and is likely to remain, the single greatest source of growth in the world economy, surpassing the United States in that role in 2004.

China accounted for 13 per cent of world output in 2004 (up by 2 percentage points in just 4 years), dwarfing France, Italy and the United Kingdom.

A Goldman Sachs report of 2003 suggests China could overtake Germany within the next four years and Japan by 2015, making it the world’s second largest economy. And by 2039 China could overtake the US as the world’s largest economy.

Longer-term projections of this nature are, of course, subject to considerable caveats and assumptions however they remain a useful guide to give us some idea of the order of the international economy in a generation’s time.

As noted by the Australian Chamber of Commerce and Industry, China, by its sheer size as an importer of commodities and an exporter of basic manufactures, is also having a profound impact on the world economy through its capacity to influence relative prices and international terms of trade.

China’s exports to the world more than doubled from $US278 billion in 2000 to an estimated $US583 billion in 2004.

Between 2000 and 2003, China accounted for all of the world’s growth in demand for aluminium, copper and steel.

In 1990, China accounted for 7 per cent of world imports of cotton and by 2004 that figure had increased to 25 per cent.

In 2004, China produced 40 per cent of all personal computers manufactured in the world that year.

In the same year, China also manufactured 50 per cent of all digital cameras, and 60 per cent of all microwaves, photocopiers and DVD players produced in the world.

These are enormous influences on the demand and supply of internationally traded commodities and manufactured products. Benefiting many countries through higher export prices and also alleviating inflationary pressures through lower priced imports.

Impact on Australia

Australian economic growth is currently underpinned by record commodity prices and our best terms of trade for 50 years.

This is largely a result of China’s insatiable demand for our resource exports.

For example in 1995, China accounted for 5 per cent of world steel imports, by 2004 it had doubled to 10 per cent.

Consistent with that, Australia’s exports of iron ore to China increased by 41 per cent in 2004 with significant increases in our exports of coal, copper, nickel and other ores.

In 2004, China overtook the United States as Australia’s second largest export market and it is also now our third largest trading partner.

Trade statistics released this week also show that China has now overtaken the US as our largest source of imports.

In coming to grips with China’s emergence, Australia must define what it means by a strategic economic relationship with China.

At present our relationship is dominated by the energy and resources sector. This of course is not necessarily a bad thing given our comparative economic advantage.

But within those parameters, we must also resolve how we are going to deal with difficult, diplomatically sensitive and commercially significant factors including long-term resource pricing, Chinese anxieties about security of supply as well as where our national interests lie on the question of resource ownership.

Beyond the energy and resources sector, Australia also has a clear interest in a strategic economic relationship which includes elaborately transformed manufactures, the new technology industries (particularly biotechnology) as well as burgeoning demand in the services sector – including financial and legal services, education and tourism.

As someone who has been in and out of the China business for the last twenty years or so, I understand fully that there are already a plethora of economic framework agreements. But what I am talking about is something qualitatively different.

What I am talking about is Australia identifying strategically what we are likely to be best at in our long-term economic engagement with China, to harness our national political and commercial resources accordingly, and to go for it.

That is why I have argued at length for the development of an Australia-China 2025 Engagement Strategy.

In that strategy, Australia must:

  • define (as I have noted above) what it means by a strategic economic relationship with China;
  • articulate in absolutely clear cut terms to Beijing our enduring alliance relationship with the United States;
  • dedicate our diplomatic resources to the core task of avoiding conflict;
  • leverage Australia’s new found position as an inaugural founding member of the East Asian Summit and prospectively of the East Asian Community where we will come together in the region with China in the absence of the US;
  • engage China with a consistent approach on human rights, and the environment;
  • transform Australia into the most China-literate and Asia-literate economy in the Western community of nations; and
  • accelerate rapidly the breadth and depth of our bilateral diplomatic relationship with Beijing.
  • Regrettably, there is little evidence that the Howard Government is engaging in this level of strategic analysis on our country’s long-term engagement with China.

    Australia cannot afford for this type of complacency to continue. The interests that we have at stake are simply too great.

    As we know, the Howard Government has initiated negotiations with China for a possible Free Trade Agreement.

    Labor’s final position on the China FTA will depend on our assessment of whether it is in the overall interests of the Australian economy.

    The devil will lie very much in the detail.

    As the negotiations proceed, and the FTA begins to take shape, we must look at the opportunities the FTA could provide Australian business, workers and the broader community. And we must also look at the costs.

    Many countries, including Australia, are now positioning for the next phase of China’s development, particularly the emergence of an expanding middle class with a growing appetite for Western goods and services.

    This has broadened Australia’s export profile to China. Although resources still account for around 60 per cent of goods exports there have been continuing increases in Australian agriculture, manufactured and services exports.

  • Australia currently supplies around one quarter of China’s dairy imports. It is our third largest market for sheep meat in North Asia and our second largest global offal market. Growing affluence will strengthen demand for higher value-added foodstuffs from Australia.
  • Australian exports to China of STMs and ETMs have grown at an average 27 and 19 per cent respectively each year since 1998. Between 1999 and 2003, Australia’s manufactured exports to China increased by 134 per cent vis a vis a 13 per cent increase in our manufactured exports to the rest of the world for the same period.
  • Australian services exports to China are now more than $1 billion. In 2004 China was expected to be our third largest source of tourists, nearly 60,000 Chinese students study here each year (20 per cent of all foreign students) and Australia is also well placed to provide many other services China desperately needs such as insurance, banking, and telecommunications.
  • China’s tariffs (average 10%) and other barriers have been cut following WTO accession but border protection is still higher than in Australia (average tariff 3.8%).
  • China’s highest tariffs apply to agriculture products (average 15.6%) with the highest applying to wool and wool tops (above quota 38%) although this is not applied in practice.

As with all FTA negotiations there will of course be sensitivities for both sides to address. China is concerned about Australia’s request for greater access for agricultural produce.

Australia’s legitimate sensitivities relate to areas of the manufacturing sector exposed to increased competition from China. Although it is important to note that given the relatively low tariff levels in Australia we are already confronted with strong competition from China even without an FTA.

Labor does not believe in simply sending all of our manufacturing offshore.

While Australia’s services, agriculture and some manufacturing sectors may benefit, including sectors covered by the National Union of Workers, there will certainly be additional pressure on our textile, clothing, footwear, passenger motor vehicle and car component sectors.

Reflecting this, the Australia China Business Council has noted that this may:

…in effect, highlight the need for different policies and strategies under a broad agreement that encourages and facilitates greater emphasis on joint ventures and other collaborative arrangements between Australian and Chinese firms. Moreover, the challenge that the growth of Chinese productive capacity will pose for Australia’s manufacturing sector highlights the need for a clear articulation in Australia of an overarching national policy and framework in support of manufacturing.

Concerns have also been expressed in relation to:

  • Whether or not an Australia -China FTA could be conducted on an equitable basis.
  • Whether or not an Australia-China FTA would do permanent damage to Australia’s manufacturing industry while providing little in the way of additional benefits to Australia’s primary industries – bearing in mind our manufacturing industry is already competing with China regardless of the FTA.
  • Whether or not the growing trade deficit on manufactured products with China reflects illegitimate cost advantages that contribute to growth in China’s manufacturing exports to Australia – and whether or not there are problems with domestic policy settings which limit the export and import-competing potential of Australian industry. Australia’s current overall export performance strongly suggests there are problems with our policy settings.
  • Whether or not China’s currency arrangements gives it an unfair advantage – although it has recently adopted more flexible currency arrangements setting a clear direction for policy in this
    area.
  • In addition to these concerns, AIG research indicates that some 68 per cent of Australian manufacturers believe China is a critical issue for the future of their business. Manufacturers have to again rethink their business. The challenge is clearly on companies to lift competitiveness – a shift that involves game changing strategies – continuous improvement models alone are not sufficient. The fact is China, with or without an FTA, will simply not just go away.

    Conclusion

    In prosecuting the FTA, the Chinese will prove to be very tough-minded negotiators. They have been in the past.

    Australian negotiators must be equally tough-minded in their approach to these negotiations with the object of producing an FTA which is to our genuine mutual economic benefit.

    The Australian Government should not under any circumstances accept an FTA with China at any price – that is an FTA for the sake of having an FTA for the political reason of simply adding to the list of other bilateral FTAs the Government has negotiated.

    A concern for many in the union movement is China’s failure to adhere to fundamental labour standards and continuing human rights abuses that occur in China.

    While labour standards are not normally addressed in trade agreements – the US FTA was an exception – we believe that we should be using all appropriate opportunities to raise labour standards and human rights abuses with relevant Chinese officials. That fact is that while improvements have occurred, abuses remain widespread.

    While we are not negotiating the FTA – that is the prerogative of the Government – against the backdrop of the FTA negotiations Federal Labor will continue to raise these matters with the Chinese Government in a manner conducive to encouraging a more positive attitude from China.

    In concluding, I would like to emphasise that the FTA negotiations with China are in the very early stages and it may take many years, perhaps two to five or even more, for the negotiations to be completed.

    The final outcome of those negotiations is still to be determined and it is too early at this stage to assess whether or not the outcome will be in Australia’s national interest.

    But I reiterate, the devil will very much be in the detail.

    But whether or not these FTA negotiations succeed, an FTA is no substitute for the development, articulation and implementation of a longer-term strategic economic relationship that we believe to be so important to Australia’s long-term interests in China.

    That is why Australia needs an Australia-China 2025 Strategy.

    And that’s also why we also need a NEW EXPORT STRATEGY for Australia to once again take on the world.

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