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FINAL REPORTAustralian trade liberalisationAnalysis of the economic impactsPrepared forAustralian Department of Foreign Affairs and TradeOctober 2017THE CENTRE FOR INTERNATIONAL ECONOMICSwww.TheCIE.com.auwww.TheCIE.com.au
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Australian trade liberalisationContentsExecutive summary11Australian trade liberalisation3Australian merchandise trade liberalisation3Liberalisation history5International trade and Australian employment8Trade-related employment823Modelling the effects of Australian merchandise trade liberalisationEconomic modelling results11134Economic scenario modelling of possible global changes in tradeprotection17Modelling the economic impact of changing protection18Understanding Australia’s tariff schedule22AB Economic analysis methodologies26BOXES, CHARTS AND TABLES1.1 Falling Australian tariffs and increasing Australian trade1.2 Australia’s increasing trade integration with the world1.3 Estimated Australian import-weighted tariff rate2.1 Australian employment related to international trade2.2 Change in Australian merchandise exports by broad product category3.1 Ad valorem equivalent tariff rates in 1986 and 20163.2 Estimated impacts of merchandise trade liberalisation over 1986–20163.3 Change in trade in 2016 due to Australian trade liberalisation over1986–20164.1 Impact of changing protection (per cent deviation from baseline)4.2 Merchandise trade in 2015 as a share of GDP — various countries andregionsA.1 Australian tariff reductions over 1986–2016456910121315182023www.TheCIE.com.auiii
Australian trade liberalisationExecutive summaryAustralia has a long history of undertaking economic reforms aimed at realising amore flexible and resilient economy. The floating of the dollar, the deregulation offinancial markets, the broadening of the tax base and corporatisation of governmentbusinesses, to name just a few reforms, have produced an economy that is betterplaced to take advantage of emerging opportunities and to weather global economicstorms.An integral part of the reform agenda has been the sustained liberalisation of tradebarriers and reduced industry protection. Throughout the 1970s, 80s, 90s and overthe last decade, Australia has embarked upon unilateral, bilateral and multilateraltrade liberalisation.This report updates a 2009 study that quantified the economic impacts of Australianmerchandise trade liberalisation over the 20 year period between 1988 and 2008.1This report, as did the previous, uses economic modelling to simulate the economicimpact of Australian merchandise trade liberalisation. This time, however, a 30 yeartrade liberalisation window (1986–2016) has been considered.Importantly, the economic modelling has only taken Australian merchandise tradeliberalisation into account — the modelling excludes Australian services andinvestment liberalisation, and any trade liberalisation undertaken by Australia’strading partners. As such, the economic modelling results can be seen asrepresenting the minimum of what has resulted from Australia’s overall process oftrade and investment liberalisation over the past 30 years.Trade is an important element of the Australian economy and accounts for 1 in5 jobsTrade liberalisation undertaken by Australia over the period 1986 to 2016 has seen Australiabecome more integrated into the global economy and more trade orientated, with tradegrowing faster than nominal GDP over the period. In 2016, merchandise trade wasequivalent to nearly 31 per cent of nominal GDP, up from 26 per cent in 1986. Overall goodsand service trade was even larger, at just under 40 per cent of nominal GDP in 2016.Trade is also important to the Australian labour market. Using the latest input-output tablesfrom the national accounts, it is estimated that around one in five Australian workers, or 2.2million people, are employed in a trade-related activity. This includes workers in heavilyexport-focused industries like agriculture, minerals and energy, but also, importantly,1See CIE (2009), Benefits of trade and trade liberalisation, report prepared for the Department ofForeign Affairs and Trade, May 2009.www.TheCIE.com.au1
2Australian trade liberalisationincorporates the many tens of thousands of employees who each day work to bring importedgoods into Australia and to distribute them to consumers and businesses who need them.Trade liberalisation has increased overall GDP and average Australianhousehold incomesThe economic modelling undertaken for this report suggests that the merchandise tradeliberalisation over the 1986 to 2016 period has benefitted the Australian economy, with realGDP being 5.4 per cent higher in 2016 than it would otherwise have been (with no tradeliberalisation).For the average Australian family, this period of trade liberalisation is estimated to have seenreal income being A 8448 higher in 2016 than otherwise.Increased tariffs would be detrimental to the Australian economy and labourmarket outcomesOver the last few years, there have been increasing calls to rollback decades of tradeliberalisation and renegotiate, or even tear-up, previously agreed to trade agreements. Thesecalls have been made on the basis of an argument that trade liberalisation has beenundertaken at the expense of local jobs and a loss of sovereignty, to the net detriment of theliberalising country. In response, a number of modelling simulations were conducted for thisreport to investigate the economic impact should tariffs be increased globally.The economic modelling suggests that if tariffs on manufacturing imports were raised suchthat there was a 10 per cent price increase in such products across the world, real GDP inAustralia would be 1.8 per cent lower; while global real GDP would be 3.5 per cent lower. Iftariffs on all merchandise imports were increased to raise all import prices by 10 per cent, realGDP in Australia would be 2.2 per cent lower, and global real GDP 4.1 per cent lower. Theshort-term impacts of tariff increases would see job losses in Australia, while over the longerterm, real wages for Australian workers would be lower, in turn cutting householdconsumption and Australian living standards overall.In contrast to the impact of raising tariffs, further liberalising global merchandise trade wouldact to grow economic activity. The modelling suggests that lowering tariffs such that importprices fall by 10 per cent across the world would see real GDP in Australia being 0.6 per centhigher, and 1.1 per cent higher globally. Short-term employment would grow, and in thelonger-term, Australian real wages and living standards would increase.www.TheCIE.com.au
Australian trade liberalisation1Australian trade liberalisationAustralia has a long history of undertaking economic reforms aimed at realising a moreflexible and resilient economy. The floating of the dollar, the deregulation of financialmarkets, the decentralisation of the industrial relations system, the introduction ofcompetition policy, broadening the tax base, and corporatisation of governmentbusinesses have produced an economy that is better placed to take advantage of emergingopportunities and to weather global economic storms. The economic reforms have alsobenefited Australian households, with higher wages, higher levels of wealth, andimproved living standards.An integral part of the reform agenda has been the sustained liberalisation of tradebarriers and reduced industry protection. In 1948 Australia became a founding memberof the General Agreement on Tariffs and Trade (GATT), the multilateral organisationoverseeing the global trading system prior to the establishment of the World TradeOrganization (WTO) in 1995. And throughout the 1970s, 80s, 90s and over the lastdecade, Australia has embarked upon unilateral, bilateral and multilateral tradeliberalisation.Economic modelling has been used to quantify the contribution of Australianmerchandise trade liberalisation over 1986–2016, and the resulting integration into theglobal economy, to Australian economic activity in 2016.The report is structured as follows. A brief history of Australia’s trade liberalisation andour growing global integration is provided below. Estimates of the number of people whoare directly employed in trade-related activities are presented in Chapter 2. Themodelling of the merchandise trade liberalisation undertaken by Australia between 1986and 2016 and the resulting economic impact is presented in Chapter 3. In Chapter 4,consideration is given to what recent calls for increasing protection mean for workers andthe economy in Australia and elsewhere.There are two appendixes. Appendix A provides details on the Australian tariff schedule;while Appendix B discusses the economic analysis methodologies employedAustralian merchandise trade liberalisationMovement towards economic deregulation and trade liberalisation in Australia began inthe mid-1970s. It accompanied large changes in the world economy following on thebreakdown of the Bretton Woods system of fixed exchange rates and the turmoilassociated with the first oil price shock. These events, which were outside of Australia’scontrol, led to an increased consciousness that Australia faced an uncertain externalenvironment. Australia needed to be competitive and responsive to maintain its place inthe world. This continues to be the case today.www.TheCIE.com.au3
Australian trade liberalisationIn this report we look at the impacts of Australian tariff liberalisation for merchandisetrade over the 30 year period from 1986 to 2016. This time period is chosen for a numberof reasons. Despite tariff reductions in 1973, trade protection peaked in the mid-1980swith industry assistance measures introduced for the textiles, clothing and footwear(TCF) and passenger motor vehicles (PMV) sectors. The period from 1986, therefore,presents a 30 year window of near consistent reduction in trade protection. Using the1986–2016 period also excludes the significant short-term swings in the Australian dollarthat occurred in the years immediately after its float in 1983. The implications of tariffreductions under a fixed exchange rate are quite different from those under a floatingexchange rate. Finally, gaining access to the relevant data in earlier years is challengingand acts as barrier to detailed analysis.Over the past 30 years the average (import-weighted) tariff rate applied in Australia hasfallen from over 7 per cent to less than 1 per cent. Individual tariffs have declined from amaximum of nearly 90 per cent down to a maximum of 5 per cent. Despite themaximum, most tariff lines are duty free. In 2016, 79 per cent of all imports (by value) toAustralia attracted no tariff. Almost half of all product categories were tariff free for allcountries and least developed countries enjoy tariff free access on all goods.The period of declining tariffs has coincided with increased trade — both merchandiseimports and exports — and increasing integration of the Australian economy with therest of the world. Chart 1.1 shows the volume of merchandise imports and exports overtime alongside the Australia’s (import-weighted) average tariff rate. Aside from somevolatility around the time of the 2008 Global Financial Crisis, trade has increasedconsistently for 30 years.2Falling Australian tariffs and increasing Australian tradeMerchandise exports (LHS)Merchandise imports (LHS)Tariff 152016Per cent (%)1.1A billion4Data source: ABS Cat. No. 5368.0 (Table 2) and CIE calculations based on ABS Cat. No. 5368 (Table 2), and Budget Paper No. 1 invarious Budgets (www.budget.gov.au/past budgets.htm).2The greater volatility in exports compared with imports is associated with the impact ofseasonal conditions on Australian agricultural exports, and volatility in mineral exportmarkets.www.TheCIE.com.au
Australian trade liberalisationIncreased trade volumes are both a driver and consequence of economic growth. Chart1.2 shows how total — merchandise and service — trade is becoming an increasinglyimportant part of the Australian economy. As a share of GDP, both imports and exportshave increased since 1986. Total exports have increased from being equivalent to 15.1 percent of GDP in 1986 to a peak of 22.3 per cent in 2008. Total imports have increasedfrom 17.7 per cent of GDP in 1986 to a high of 23.5 per cent in 2008, and currently sits at20.2 per cent of GDP. Total trade was equivalent to 39.7 per cent of GDP in 2016.1.2Australia’s increasing trade integration with the world50Total exportsTotal importsTotal trade (exports plus imports)4540Share of GDP 20072008200920102011201220132014201520160Data source: ABS Cat. Nos. 5206.0 (Table 3) and 5368.0 (Table 2), and CIE calculations.Liberalisation historyAustralia has pursued trade liberalisation through three different avenues — unilateralliberalisation, regional or bilateral liberalisation, and multilateral liberalisation under theauspices of the GATT and then the WTO. As can be seen from chart 1.3, the varioustrade liberalisation avenues pursued by Australia has lowered the average (importweighted) tariff rate from around 7 per cent in 1986 to under 1 per cent in 2016.www.TheCIE.com.au5
Australian trade liberalisation1.3Estimated Australian import-weighted tariff rate8Australiantariff cut Australiantariff cut7UruguayITA65Tariff (%)Australiantariff cutAUSFTATAFTASAFTA43ChAFTAAustraliantariff cutJAEPAKAFTAAustraliantariff te: ITA Information technology agreement, SAFTA Singapore-Australia FTA, AUSFTA Australia-US FTA, TAFTA ThailandAustralia FTA, ACFTA Australia-Chile FTA, AANZFTA ASEAN-Australia-New Zealand FTA, MAFTA Malaysia-Australia FTA, JAEPA Japan-Australia Economic Partnership Agreement, KAFTA Korea-Australia FTA, ChAFTA China-Australia FTA.Data source: CIE calculations based on ABS Cat. No. 5368 (Table 2), and Budget Paper No. 1 in various Budgets(www.budget.gov.au/past budgets.htm).Liberalisation efforts started with unilateral liberalisation cuts in the 1970s. At that timeAustralia was using a fixed exchange rate regime, with the tariff reductions acting as amacroeconomic management tool and used to limit currency appreciation. They alsoallowed increased imports into Australia — addressing shortages of goods and inflationarypressures. Overall, goods purchased in Australia became more affordable.After significant economywide tariff cuts in 1973, a recession in 1975 put pressure on thegovernment to support Australian manufacturers. The government increased tariffs onPMVs and introduced import quotas. The TCF industry was also protected by tariffs,bounties and import quotas. By the 1980s, however, there was general recognition thatAustralian manufacturing was not internationally competitive. As Australia’s IndustryMinister, John Button, said in 1983:Australian manufacturing industry was still focused on the domestic market. Factories wereclosing. People were not prepared to think much about longer term solutions. There was no exportculture.3Further economywide unilateral tariff reductions followed in 1988 and 1992.4 By this stagethe Australian dollar had been floated which meant adjustments from any further tariffreductions would flow through the economy faster. It also meant that tariff reform became amicroeconomic instrument.3Button 1998, in Emmery, M. 1999, Australian Manufacturing: A Brief History of Industry Policy andTrade Liberalisation, Department of the Parliamentary Library Research Paper No. 7, Canberra.4Economywide tariff cuts referred to here exclude the TCF and PMV industries. Tariffreductions in these industries followed a different schedule (see box A.1 in appendix A).www.TheCIE.com.au
Australian trade liberalisationThe 1992 tariff reductions were implemented during a recession and time of highunemployment. Prime Minister Hawke highlighted that past tariff protection in Australiahad led to: inefficient industries that could not compete overseas; and higher prices for consumers andhigher costs for our efficient primary producers. Worse still, tariffs are a regressive burden — thepoorest Australians are hurt more than the richest.5Prime Minister Hawke’s point was that the tariffs that support domestic industries are paidfor by the consumer through higher prices for both imported and domestic products(compared to if the goods were imported without tariffs, or produced efficientlydomestically). The benefit of unilateral tariff liberalisation is removing this burden onconsumers and allowing for efficient resource allocation within the economy. In addition tothese sources of benefit, a reduction of trade restrictions can: improve dynamic productivity by providing greater incentive for firms to innovate andimprove reduce unemployment effects through a more competitive labour market avoid administrative costs associated with managing tariff systems.Through the late 1980s Australia also participated in the multilateral trade negotiationsthrough the GATT. The outcomes, while binding, had no material impact on Australiabecause of the larger unilateral cuts in applied tariffs that Australia had alreadyimplemented.6 The WTO succeeded the GATT in 1995, with multilateral negotiationscontinuing in the WTO’s Doha Round from 2001. However, the Doha Round negotiationsstalled in 2008 and the Round has not yet been concluded.Since the mid-2000s Australia’s trade liberalisation efforts have shifted towards bilateral orregional agreements, as well as continuing to implement unilateral tariff reductions in TCFand PMV. Australia is currently party to 10 agreements spanning a total of 16 tradingpartners, with some trading partners being party to numerous agreements. A further 10multilateral, regional and bilateral agreements are under negotiation, or finalised but havenot yet entered into force. Most provisions in earlier agreements with New Zealand (startingin 1933) and Canada (implemented in 1960) have been superseded by tariff reductionsachieved by negotiation in the WTO and subsequent bilateral agreements.7Australia’s current tariff schedules reflect all of these various liberalisation efforts.Appendix A provides a discussion of the detail and complexity of the resultant tariffschedules, and the challenges in estimating the effective tariff rate applied to Australia’simports.5Commonwealth of Australia 1991, in Emmery, M. 1999, Australian Manufacturing: A BriefHistory of Industry Policy and Trade Liberalisation, Department of the Parliamentary LibraryResearch Paper No. 7, Canberra.6At the Tokyo and Uruguay rounds members agreed to reduce bound tariff rates. Thesereductions were less than the unilateral reductions in applied tariffs implemented by Australiaaround the same time. Therefore, Australia’s applied tariff rates were not affected by themultilateral negotiations.7See -brief.aspx, -trade-agreement.aspx.www.TheCIE.com.au7
8Australian trade liberalisation2International trade and Australian employmentThis chapter shows that trade is important to the Australian labour market. Drawingon input-output tables produced by the Australian Bureau of Statistics, it is estimatedthat around 1 in 5 Australian workers are employed in trade-related activities.Employment in Australia grew by 72 per cent between 1986 and 2016, increasing fromjust under 7 million employed persons to nearly 12 million in 2016. However,employment growth has not been consistent across all (aggregated) sectors of theAustralian economy. Reflecting longer-term trends in Australia and elsewhere in thedeveloped world, over the 1986–2016 period, employment in the agricultural andmanufacturing sectors fell by 26 and 17 per cent (respectively). Meanwhile, employmentin the mining and service sectors grew by 121 and 97 per cent (respectively).The varying employment growth rates reflect the fact that employment is mobile withinan economy, and as employment has contracted in one industry it has increasedelsewhere.Total employment depends on the overall level of economic activity and sectoral mix,and not just on the volume of imports or exports. Indeed, population growth,technological change, growing household wealth and shifting consumption patterns canalso be expected to influence employment.Trade-related employmentInternational trade plays an important role in the Australian economy, and as will beseen below, many Australians are employed in trade-related activities. Trade-related jobsare not only associated with exports, but also imports, which require people to movegoods from the port of entry to the end user.To calculate the number of jobs that are related to international trade, ABS input-outputtables produced for the national accounts are used. The tables allow us to trace theproduction of exports to their source and to account for import use. A description of themethodology underlying the analysis is provided in Appendix B.Since 1989-99, it is estimated that the number of people in the Australian economyemployed in trade-related activities has increased by 15 per cent, to reach around 2.2million in 2013-14, representing 20 per cent of the total number of people employed (seetable 2.1). The analysis therefore suggests that 1 in 5 jobs in the Australian economy arecurrently related to international trade.8, 98One in every 5.1 workers.9Similar work undertaken for Canada found that 17 per cent of employment was due to exports,higher than Australia’s 14 per cent due to Canada’s greater share of exports in GDP (32 perwww.TheCIE.com.au
Australian trade liberalisation2.1Australian employment related to international Total exportsImportsTotal trade2013-14Trade-related employ.Share of total employ.Trade-related employ.Share of total employ.‘000 peoplePer cent‘000 peoplePer 9826.581 286.2151 566.914655.18671.261 941.3222 238.120Source: CIE calculations based on ABS 1998-99 and 2013-14 I-O tables.As table 2.1 shows, of all people employed in export-related activities in Australia in2013-14, the greatest number were employed in service industries. This is primarily dueto the significantly higher total employment accounted for by the service industries.10The individual industry with the greatest number of people involved in export activitieswas the Professional, Scientific and Technical Services industry with 188 900 people.This is greater than the total export-related employment in agriculture or mining.In terms of trade-related share of employment, however, the mining sector has thegreatest export-orientation, with 67 per cent of all jobs estimated to be related to exportactivities. This share has declined from 81 per cent in 1998-99 due to: a declining export-orientation share across all mining a more significant share of total mining employment (26 per cent) is associated withthe (relatively less export-oriented) Mining Exploration and Services industry.The relative decline in export-related mining and manufacturing employment has beenpartly offset by an increase in the share of export-related employment in the agriculturesector. Export shares in the agriculture sector are highly variable because of the sector’sexposure to weather events. In a year of poor seasonal conditions and low output, theexport share would be small.In addition to export-related jobs, many Australians are employed in services related toimports. ABS input-output tables suggest that around 38 per cent of all goods in theAustralian economy were imported in 2013-14. Using that share and applying it to thenumber of Australian workers employed in the distribution industries associated with themovement of goods in the economy (transport and storage, wholesale and retail trade),we estimate that around 671 200 employees are associated with getting merchandiseimports to end users.11 This is 6 per cent of total Australian employment.cent compared to 19 per cent in Australia). See Cross, P. 2016, The importance of InternationalTrade to the Canadian Economy: An overview, Fraser Research Bulletin, October. Available omy-an-overview.10 The service industries accounted for 78 per cent of all employment in 2013–14.11 671 200 is 38 per cent of the total employment in distributional services (1.7 million).www.TheCIE.com.au9
Australian trade liberalisationWhile trade has increased over time, the share of workers involved in trade-relatedactivities has remained relatively constant at 20–22 per cent.12 This reflects two factors.Firstly, an increase in exports will typically increase employment in export sectors.However, the composition of those exports is important. Chart 2.2 shows howAustralia’s merchandise trade has increased since 1995, and also shows the dominance ofthe mining sector in the increased trade volumes. Mining, however, is less labourintensive than the rest of the economy. For example, labour expenses account for just 22per cent of value added in mining compared to 52 per cent in services. The changingcomposition of exports will therefore affect the share of economywide employmentaccounted for by exports.Secondly, trade will also have an income effect. Increased economic activity due to tradeliberalisation will increase overall demand in the economy. Services are by far the largestsector in the Australian economy, so the higher level of economic activity will increaseemployment in the service sectors. The service sectors are not overly export focused, andare more labour intensive than many of Australia’s export sectors (such as mining). Theexpansion of labour intensive and less export-orientated sectors therefore sees the share ofemployment in export-related activities potentially being smaller, even though theabsolute number of people employed in export-related activities has increased.2.2Change in Australian merchandise exports by broad product category300Agriculture, forestry and fisheryFoodstuffsMineral ProductsManufacturing250Exports (A 9960199510Note: Merchandise exports falling under HS Chapters 97 (Works of Art, Collectors’ Pieces and Antiques) and Chapters 98 and 99(Special classification Provisions) have been excluded from the chart. Australia’s exports of products falling under HS Chapters 97, 98and 99 amounted to A 7.8 billion in 2016.Data source: Global Trade Atlas.12 The ABS I-O tables for years 2004-05 and 2008-09 also suggest that 20 per cent of totalemployment was trade-related.www.TheCIE.com.au
Australian trade liberalisation3Modelling the effects of Australian merchandise tradeliberalisationEconomic modelling of Australian merchandise trade liberalisation over 1986 to 2016has been undertaken in this chapter to understand the contribution of increasedopenness to the Australian economy in 2016. The modelling suggests that themerchandise trade liberalisation over the 1986 to 2016 period has benefitted theAustralian economy, with real GDP being 5.4 per cent higher in 2016 than it wouldotherwise have been (with no trade liberalisation). For the average Australian family,the trade liberalisation is estimated to have seen real income being A 8448 higher in2016 than otherwise.It is important to note that the economic modelling undertaken here only includesAustralian tariff liberalisation. It does not model any Australian service trade andinvestment liberalisation, nor any trade liberalisation undertaken by Australia’s tradingpartners. As such, the modelling results can be seen as representing the minimum of whathas resulted from Australia’s overall process of trade and investment liberalisation overthe past 30 years.As already noted, over the last three decades Australia has undertaken substantial tradeliberalisation — in 2016 the average (import-weighted) tariff was under 1 per cent, versusover 7 per cent in 1986.However, and as can be seen from chart 3.1, these average tariffs mask considerablevariation at the product level. In 1986, tariffs ranged between 0.5 per cent (forestryproducts
and service trade was even larger, at just under 40 per cent of nominal GDP in 2016. Trade is also important to the Australian labour market. Using the latest input-output tables from the national accounts, it is estimated that around one in five Australian workers, or 2.2 million people, a
