above: Chinese Vice Premier Li Keqiang (R) shakes hands with Deputy Prime Minister of Australia Julia Gillard at the airport in Sydney, Australia, Oct. 29, 2009. Li Keqiang began his official visit to Australia on Thursday.(Xinhua/Liu Jiansheng)
Post Accord- Trade or Industry Policy?
A Progress Report on Prospects for Manufacturing
By Sarah Howe, February 7th 2010
nb: the following essay, by Australian labour movement activist and thinker Sarah Howe, explores the issues surrounding manufacturing policy in Australia. More specifically, this is considered in light of moves to establish an Australia-China free trade agreement. Howe argues in favour of a more assertive stance by Australian negotiators than we have seen so far under Rudd Labor, and refers to the experience of previous Labor governments.
This paper seeks to consider the progress of the current Australia-China Free Trade Agreement (FTA) negotiations in investigating whether the Australian Government could best secure the future of the manufacturing industry through the mechanism of trade or industry policy.
In global terms, Australia’s manufacturing industry currently operates on a small scale and occupies a relatively vulnerable position in global supply chains. This makes Australia position in the world vulnerable with many commentators observing that a robust manufacturing industry is critical to not only economic success, but also its success is crucially important on social and environmental grounds.
Economically, China is the world’s sixth largest economy, fourth largest trader and Australia’s largest export market. Australia mainly exports primary commodities to China, while China mainly exports labour intensive, value-added manufactured products to Australia. Better relativities in the trade relationship between Australia and China must be achieved if Australia is to continue to develop as a balanced and knowledge-based economy and is to avoid an ongoing mounting and unsustainable current account deficit. In social terms, the manufacturing industry provides stable, full time and largely well paid jobs for over one million Australians (9.3% of all jobs in Australia). And in environmental terms, it is argued that we need to start thinking about the impact of export of export of coal and uranium without concern for the impact on global warning.
In the light of these challenges, does trade policy (and instruments such as FTA negotiations) present a possible policy path to encouraging the growth of a sophisticated export orientated manufacturing industry as opposed to industry policy? It will be argued that since the Accord policy period in the 1980s, industry policy in Australia has fallen away and is now not achieving the much needed capacity building in high technology manufacturing that is required to ensure its required growth and sustainability in global terms. Trade policy becomes a crucial instrument, for the Australian Government in positioning the manufacturing industry strategically to the meet economic, social and environmental challenges that face the industry.
In trade policy, bilateral trade agreements are again a force in Australian trade policy post the Howard years (they briefly disappeared from view after Rudd was first elected in November 2007 and initially vowed to focus instead on the multilateral trade rounds). While Rudd’s initial position was that Australia did not have the size, influence and power to secure significant trade deals with major trading partners at the expense of other countries- which is the inherent feature of bilateral preferential trade agreements-the global take up of bilateral agreements encouraged the Rudd Government to take a policy shift back to favouring preferential trade agreements in response to the development that in recent years they are the preferred instrument of trade policy for all of Australia’s major trade partners.
Australia must take an offensive strategy in current FTA negotiations with China to further the interests of the manufacturing sector to assist with the building of a high value added export orientated manufacturing industry. In the absence of a Rudd Government led heavy state orientated industry policy (as the Accord promised to be), our focus turns to trade policy and we pin our hopes on our Australian negotiators and their capacity to extract concessions from the Chinese to assist in boosting the export potential of the manufacturing industry, as well as protecting the existing industry through protective measures. We imagine that this may be able to be achieved by exploiting or capitalising on the insatiable Chinese demand for our iron and coal.
Trade and Industry policy experts argue a strong position for manufacturing can be achieved by taking a defensive protectionist stance via pursuit of concessions in the area of non tariff barriers. This is not about creating infrastructure for the manufacture and logistics of adding value to our iron ore (it is argued by commentator Martin Feil that we missed that boat in 1976 when it was determined we would instead just export blooms, billets and slabs of iron and steel). Rather, it is about Australian negotiators taking a hard line position on many of the key non tariff barriers that have impacted on trade for the manufacturing industry; stronger anti dumping measures, greater intellectual property protection, greater transparency in legal and financial systems, and stronger rules of origin clauses.
It is argued that by Australia toughening up our stance on non tariff barriers, negotiators will assist in Australian manufacturers in building capacity in our export manufacturing industry, so as to position us better to build a sustainable, innovative and socially just manufacturing policy. In this way, Australia will depart from a trade policy that reinforces us as a ‘quarry and farm economy’- a mere source of cheap raw materials for the rest of the world’s economies.
The Economic Imperative- The Current Account Deficit
A stable and growth orientated manufacturing sector is critical for a nation’s economic success. However, Australia’s trade and industry policy strategy since the 1970’s has not positioned Australia well in relation to building a strong export orientated, high value added manufacturing sector. In recent times, the AMWU has lamented Australia’s lack of energy in pursuing a high growth future for the manufacturing industry in various submissions to Commonwealth trade and industry policy consultations;
‘at a time when developing nations are building information technology industries from the ground up, Australia must do better than relying in trade and industry policies aimed at encouraging the exportation of low value added products. In terms of exporting high and medium-high technology goods, the only OECD economies that Australia performs better than are Turkey, Greece, New Zealand and Iceland. This is not a formula for a high wage-high growth economy of the future’
The early development of Australia’s manufacturing sector depended heavily on protection for its growth reflecting the aim of Australia’s trade policies post Federation as to diversify the economy by reducing the dominance of trade in primary products. This development strategy took a dramatic turn in the early 1970s, when with the onset of severe economic difficulties marked by slow economic growth, high inflation and rising unemployment from late 1974, pressures for structural adjustment of domestic manufacturing industry increased as the competitive problems of the sector were more starkly revealed.
Worldwide economic pressures bought a dramatic end to ‘fortress Australia’ and the protected nature of the manufacturing sector. The 1970s and 80s presented a critical re-adjustment phase for the Australian manufacturing industry. It was felt that Australia could not compete with low-wage manufactured exports from newly industrialising countries, and that we now had to factor in the increasing technological sophistication of manufacturing in leading industrial economies.
Pressure was brought to bear for Australia to liberalise its trading relationships with the Pacific region- which involved allowing for greater imports of low wage manufactured goods, in order to open up markets for agricultural and resource exports. By the end of the 1970s, the Australian Government determined to replace its ‘post war import substitution manufacturing strategy’ with a new approach that would be about focusing efforts to develop a mature high wage industrial economy with a manufacturing base that was specialised, competitive and export orientated. In moving away from its labour intensive industrial base of the motor-vehicle and TCF industries, Australia needed a strategic approach to develop a more specialised industrial structure that reflected Australia’s comparative advantages, particularly in capital, knowledge and resource-intensive manufacturing industries and in developing greater export development and orientation of the Australian manufacturing industry.
A state led industry policy would have enabled such a transition from Australia adopting a ‘defensive industry policy’ to instead an offensive industry policy- the need for ‘a shift in emphasis of the debate on assistance to manufacturing industry away from complete concentration of the tariff towards consideration of how in a tariff distorted environment, manufacturers could be positively encouraged to become more outward looking and export orientated. However, in the absence of a current account deficit at the time, the Government did not have a great impetus to reach the goal of encouraging a new ‘more specialized industrial structure’ of the sort that was needed to replace the light industry associated with the textiles and motor vehicle industries and notes that this kind of goal required massive state oversight and intervention.
In the 1970s and 80s, the Australian Government instead adopted a policy approach that was about merging free trade policies at a foreign policy level, with relatively minor interventionist policy approaches at a state level. Unfortunately, positive interventionist policies in this era remained partial and poorly implemented, reflecting weak bureaucratic capabilities, conflict over the role of the state in industry and the limited commitment of key policy makers to notions of a positive state role in industrial restructuring. This policy malaise in industrial restructuring as reflecting a lack of political will behind the manufacturing industry restructure in Government. Instead the prevailing view in Government at this time was that the resources boom of the late 1970s and early 1980s would be the key driver of national wealth creation, with the services sector providing a key area of employment growth; with manufacturing increasingly seen as an oversized and inefficient product of post-war protectionism.
Increasingly a widespread view developed within the state and the wider society that the manufacturing sector’s call on productive resources and on state assistance had become a burden on the rest of the economy and a drag on national development aspiration – it was felt from a balance of trade perspective, that the significant exports generated by the resources boom, could allow for the increase of imports of manufactured goods. Australia’s strategy at this time was therefore to continue to trade with our resources, to the expense of our manufactured goods, with little commitment to the implementation of a state based manufacturing industry plan based on industrial restructuring towards high end manufacturing growth. At the same time, countries like Japan, were implementing an economic policy strategy with the development of the manufacturing industry at the centrepiece of plans.
Finally by the mid 1980s, alarm bells began to ring on this approach to trade and industry policy at Parliament House, with Australia’s reliance on rural and commodity exports in a world increasingly dominated by lucrative manufactures trade, showing up an dramatically increased current account deficit, prompting Treasurer Paul Keating’s famous statement of 1986 about the prospect of Australia becoming a ‘banana republic’. In response, the Hawke Government quickly adopted a ‘quasi corporatist’ industry policy, which built on the embryonic positive assistance measures already in place.
The Accord policy of 1987 emphasised state centric approaches to development (based on the Swedish and Japanese models) with steel, heavy motor vehicle, engineering and TCF plans being developed as well as developing new industries where we were seen to have a comparative advantage such as resource processing and in the information and generic technology industries. The Hawke Government believed that the Accord policy, coupled with the depreciated Australian dollar would combine to generate the industrial restructuring that was required in the Australian economy to boost exports and limit imports- to correct Australia’s trading problems. This policy direction is often remembered as achieving ‘too little-too late”- a move in the right direction but requiring massive state resources to enable it to turn the manufacturing industry into a high value export orientated industrial base. The Accord period generated a lot of excitement amongst social democratic thinkers, who thought it would set us on the path of the successful social democratic economies such as Sweden.
Economist Ross Garnaut argues that the Accord policy in fact did make an impact on export figures, and maintains that throughout in this policy period (between 1983-84 and 1989-90) that the manufacturing sector expanded its total share of exports and production However, on alternative figures, it is argued that since this period we have been steadily losing market share in Asian markets on our exports. Bell argues that in 1980, Australia supplied 6.2% of all Asian imports and by 1987, this figure had declined to 3.5%, including all sectors, including food. Importantly, since the Accord period, an offensive Australian policy direction on manufacturing industry policy have been further marred by a lack of policy co-ordination (for example tax and financial deregulation policies have worked against productive investment) a lack of a clear industrial vision, and a lack of integrated policy development that takes into account ‘triple bottom line’ policy considerations (economic, environmental and social issues). While the Accord model was a good start in state centred industry policy development, it petered out by the 1990s and neo-liberal policy prescriptions again took precedence.
Contemporary current account deficit
As the Australian Industry Group report in their submission on the Australia-China FTA to DFAT, the latest annual trade figures show that in 2005, China exported $21.4 billion worth of goods to Australia, the bulk of which were manufactured products such as clothing, computers, toys, games and sporting goods, and telecommunications equipment. Commodities such as iron ore, wool, copper and coal dominated the $16.1 billion worth of Australian exports to China in 2005. This $5.3 billion merchandise trade deficit with China was only partially offset by a $1.3 billion services trade surplus in our favour, still leaving Australia with an overall trade deficit of $4 billion with China.
Australia’s trade deficit with China is having a growing impact on Australia’s rapidly deteriorating and unsustainable current account deficit. However, as the AMWU contend- it is not only is the rate of growth of Australia’s trade deficit with China an increasing cause of concern, so too is the composition of the trade deficit. Australia’s exports to China are overwhelmingly dominated by primary products. Of Australia’s top ten exports to China, seven of them are primary products. Two of the remaining exports inside the top ten (aluminium and pig iron) are simply transformed manufactures with little value added.
Many economists argue that the current account deficit and foreign debt levels are an unsustainable economic situation for Australia. While China’s demand for resources from Australia is currently providing a ‘boom for some parts of the Australian economy’, the successful economies of the future will not be sustained on the exportation of resources. It is argued that Australia must do more to encourage the growth of strategic high value added manufacturing. Ross Garnaut has also argued that Australia cannot go on running a persistently large current account deficit, arguing that our current account deficit (one of the largest in the Western world) places Australia in an increasingly unsustainable precarious position and dependant on foreign markets rolling over debt.
Ken Henry, the current Department Secretary of Treasury, argues that Australia, structurally, has no choice but to keep borrowing and running current account deficits far into the future. Henry argues that Australia cannot afford the high investment associated with building manufacturing capacity and argues that Australia’s population is ‘too small to be able to adequately fund an abundance of investment opportunities’.
Given that this is the current ethos of the Rudd Government as well (there are no signs that Australia is going to return to the Accord style policies of the 1980s, in building state capacity in the high value added end of the manufacturing industry to improve our balance of trade position) what could be a possible role of trade policy in providing a solution to the malaise facing manufacturing exports?
The glaring social and environmental imperative for a new approach to manufacturing policy also underpins the urgent need for policy review at a Commonwealth level. At the end of 2009, 50,000 manufacturing jobs were lost in that year. Manufacturing jobs tend to be well paid, stable, full time and skilled jobs- the decline of the manufacturing sector has led to Economist Bob Gregory to note in the Australian context, as in the US- evidence of a 'hollowing out' of the wage/employment structure – the growth of low paid jobs and high paid jobs with a 'disappearing middle' in the distribution of work and living standards. This trend is often associated with the decline of the manufacturing sector.
In environmental terms, Tim Flannery has argued that Australia needs to take more responsibility for the environmental, social and political impact across the globe of exporting coal and uranium-moving away from a current approach of ‘buyer beware’ in our export policy. He also argues that with the resources and agricultural sectors so entrenched in Australian politics and economy, we are missing the opportunity to turn to manufacturing and exporting renewable energy technologies that can reduce greenhouse gas emissions.
It is therefore crucial from not only an economic standpoint, but also a social and environmental perspective, that a strong position is taken in the Australia-China FTA negotiations so that trade policy may provide the policy platform for a new look manufacturing policy for Australia.
Australia-China FTA negotiations
Against this policy backdrop, in April 2005, formal negotiations commenced between China and Australia in negotiating an Australia-China Free Trade Agreement. Australia’s official position was that it felt that it may be able make some ground on ‘new’ trade issues, such as investment, intellectual property rights, competition policy, government procurement, mobility of natural persons, labour and environmental clauses, scientific and technical co-operation and e-commerce. Given that the average import tariff levels have gradually fallen over time, especially on manufactured goods, it was felt that broad band elements may compensate in presenting additional areas where FTA parties are looking to open up and integrate their economies close together.
Australia had traditionally adopted a defeatist position on ‘broad band’ non tariff barrier issues, lacking the leverage to extract significant concessions in these areas. Thus, under Howard FTA negotiations did not proclaim to be offensive in economic terms and instead were focused on a combination of political motives (broader foreign policy and strategic interests) and defensive economic objectives that were about preserving existing market access for our existing export trade, such as in the case of the Gulf CC negotiation where the aim of the Australian Government was to protect our export market for passenger motor vehicles.
Under Rudd, and with the lesser emphasis upon the multilateral process, what have been the prospects for Australia to take a more offensive economic position of bargaining for the manufacturing industry under the new bilateral regime, in the context of the Australia-China PTA? Given Australia’s low level of tariffs and open economy, it is placed in a weak position at the outset to pursue offensive interests on behalf of the manufacturing industry (for instance in overcoming many of the non trade barriers identified by manufacturing industry interests in submissions to DFAT).
It is argued that Australia has lost much of its bargaining power and started off on a weak footing in negotiations, with Australia awarding China market economy status prior to negotiations starting. Australia departed from the European Union and the United States who did not accede to China’s request to be granted market economy status.
The Australian manufacturing industry had pinned its hopes on Australia taking a hard line position on many of the key non tariff barriers that affected trade for the manufacturing industry such as ensuring stronger anti dumping measures, cracking down on IP rights infringement by Chinese companies, ensuring transparency in legal and financial systems and simplifying the now complex multitude of conflicting rules of origin clauses, that are complex and costly for exporters. However, Australia’s capacity for a hard line position in negotiations with China on broad band issues and non tariff barriers has already proven difficult given early concessions made by the Australian negotiators.
This was a disappointing development, as China had two major agenda items for negotiations with Australia; to lock in supply of energy resources and raw materials from Australia at relatively stable prices and to request market economy status from Australia and subsequently to use this to request to the EU and US to follow suit, which would ease the disadvantaged position of China as an economy in transition for fifteen years in anti-dumping cases under the WTO .
As already outlined, China has already made significant progress on the second of its key offensive issues; achieving market economy status, before negotiations had even commenced. This has significant implications for the Australian manufacturing industry, with a key reform that they were seeking (stronger anti-dumping measures) being now constrained by this concession. Furthermore, in relation to market economy status and energy resources, China does not have many strong offensive interests in the FTA with Australia, as it has already achieved a few major energy cooperation agreements outside the FTA framework and does not necessarily need to use the mechanism of an FTA to further these negotiations.
In the context of Australia’s low bargaining position, and China’ lack of offensive interests, negotiation’s have been marked by their ‘glacial pace’ and frustrations on the Australian side, in the lack of significant progress on any of its key non tariff barrier trade issues.
There has been lack of progress on non tariff barriers such as regulatory and behind the border issues such as China developing a legal system, lack of capacity, the relationship between central and provincial governments and in particular enforcement of intellectual property rights. For instance in relation to IPR, China prefers the intellectual property chapter to be minimalist and non binding, focused on general principles, co-operation and information exchange, and strongly resists going beyond its existing international commitments. Australian negotiators on the other hand argue that its manufacturers cannot benefit from the Chinese market because of the inadequate IPR protection in China. Negotiations have stalled on this important Australian agenda item.
With the recent announcement from Prime Minister Rudd that he seeks the conclusion of a free trade agreement with China to occur as "rapidly as possible" following talks in Canberra, and with may outstanding issues still on the table for an Australian offensive position, it would appear that the political and foreign policy considerations are again overshadowing commercial and trade issues in this agreement.
Australian industry policy agitators are already calling through the Australian media for alternative economic modelling to justify the expense of Australia entering into these kinds of agreements, which they argue (based on independent modelling) are not economically advantageous, but rather are about promoting other non-economic, diplomatic and regional interests.
Conclusion
There was clearly a strong economic, social and environmental imperative for the Federal Government to enter negotiations of the Australia-China FTA seeking trade policy solutions around promoting the growth of a strategic high value added manufacturing industry in the Australian context.
In reviewing Australia’s trade policies since the late 1970s to date, it becomes apparent that apart from the Accord policies of the mid 1980s, that little in the way of state industry assistance to building a sustainable high valued added manufacturing industry has occurred. This policy malaise has set the scene for Australia’s current economic difficulties as evidenced by an unsustainable current account deficit, of which the Australia- Chinese economic trade imbalance plays a big role in generating.
In examining the extent to which Australia may have been able to rectify this trade imbalance through the mechanism of a bilateral preferential trade agreement with China, it has been seen that Australia’s offensive positioning has been compromised by it granting China market economy status prior to negotiations even commencing, thus undermining the capacity for Australian negotiators to extract leverage over China’s need for stable prices of energy and raw exports. Thus, Australian reform agenda items on non tariff barriers, such as intellectual property protection, transparency in legal and financial systems, rule of origin clauses, have not gained traction in negotiations.
The Australia-China FTA will most probably ironically set back the manufacturing industries export growth, with if by Australia granting China’s market status- this enables greater ease in dumping cheap imports on the Australian market.
It would appear that Australia’s large trade deficit with China, and growth in its manufacturing sector will not be resolved through a bilateral process through the mechanism of an Australia-China FTA. The best prospects for the manufacturing industry are possibly best served by a shift in policy emphasis by the Commonwealth away from trade policy to micro management through an emphasis on innovation policy, investment in major infrastructure, further liberalisation of Australia’s investment regime, and measures to enhance Australia’s capacity to participate in global supply chains (picture a revamped Accord with triple bottom line planning on a massive scale). This would entail a reallocation of public resources away from Trade to other portfolios such as Industry and Innovation, with DFAT becoming further dominated by foreign policy agendas.
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Endnotes
AI Group, Australia-China Free Trade Agreement, Feasibility Study, DFAT, 2004
Australian Workers Union, Inquiry into Manufacturing in Australia, Victorian Parliament, August 2009
Flannery, T in Mark Lawrence- hhtp://marklawrence.blogspot.com/2006/09/quarry-and-farm.html
Capling, A, Preferential Trade Agreements as instruments of foreign policy: an Australia-Japan free trade agreement and its implications for the Asia-Pacific Region, Pacific Review, Vol. 1, No 1, March 2008
Feil, M, We Must Export More Than Fresh Air, The Age, Wednesday March 28th, 2008
Australian Manufacturing Workers Union, Submission to DFAT concerning a possible China-Australia Free Trade Agreement: June 2005
Bora and Pomfret, Policies Affecting Manufactruing, Australian Trade Policies, 1995
Bell, Australian Manufacturing and the State: The Politics of Industry Policy in the Post War Era, 1993
Bell, ibid, 1993
Bell, ibid, 1993
Bell, ibid, 1993
Bell, ibid, 1993
Bell, ibid, 1993
Bell, ibid, 1993
Bell, ibid, 1993
Ross Garnaut wrote an influential Report entitled Australia and the Northeast Asian Ascendancy : Report to the Prime Minister and Minister for Foreign Affairs and Trade, Commonwealth, 1989 – In the Report Garnaut argues that on ETMs (exports) we did very well, arguing a jump of 3%- 1982-3- 10 per cent to 13 % in 1990-91
Bell, ibid, 1993
Australian Industry Group, ‘Australian Manufacturing and China: Deepening Engagement’, August 2006
Australian Manufacturing Workers Union, Submission to DFAT concerning a possible China-Australia Free Trade Agreement: June 2005
xx AMWU, ibid
xxi Garnaut, in Colebatch, T, Balance of Power, The Age, October 24th, 2009
Henry in Colebatch, ibid, 2009
ABC, Manufacturing survey predicts further job losses, 2nd March, 2009
Gregory B in Belchamber, G, Disappearing Middle or Vanishing Bottom? A Comment on Gregory, Economic Record, Vol 72, 1996
Flannery in Lawrence, M Farm and Quarry at http://marklawrence.blogspot.com/2006/09/quarry-and-farm.html, September 8th, 2006
Ravenhill, J, ‘The new bilateralism in the Asia Pacific’, Third World Quarterly 24, 2 pp 219-317, 2003
Capling, ibid, 2008
Ravenhall, J, Preferential Trade Agreements and the Future of Australian Trade Policy, Australian Journal of International Affairs, Vol 62, No2, June 2008
Jiang, Australia-China FTA: China’s domestic politics and the roots of different approaches to FTAs, 2008
Jiang, ibid, 2008
Jiang, ibid, 2008
AAP, Australia, China seek free trade deal, 2009
Feil, M Martin Fiel argues that of the four FTAs that Australia is signatory to, currently in force a common feature has been their impact on trade flows. The feasibility study modelling claims that the benefits expected to accrue to Australia of a free trade agreement with China were in the vicinity of $24.4 billion over ten years. Yet, it has been suggested that the figures concerning service and investment are unreliable (and further have negative employment outcomes for Australian joins) that the gains for manufacturing are in further liberalisation of merchandise trade at the expense of strategic manufacturing industries such as in the automotive industry
Capling A, Australia’s trade policy dilemmas, Australian Journal of International Affairs, Vol. 62, No.2, pp 229-244, June 2008
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