Pathways to Trade Liberalisation
HE Harinder Sidhu, Australian High Commissioner to India,
New Delhi, 1 June 2016
(Check Against Delivery)
I very much welcome the chance to be here today to explore with you some themes in the area of trade policy.
But firstly I would like to say, as a recent arrival in New Delhi, how pleased I am to be in India as High Commissioner for Australia. I think I have picked my time and place well.
As a major emerging economy, India has gained a heightened prominence on the world stage. At the same time, as a society undergoing many important transitions, it’s a very rich experience becoming better acquainted with what would in any case be a fascinating land.
And, as a keen observer of public policy making, I take great interest in the lively deliberations and debates taking place on what policies will serve India best for its future. These are important for India – and for others with a stake in India’s future.
Importantly too, as the Australian Government’s senior representative in India, it is pleasing to see the bilateral relationship in such good shape. Some have described it as having reached “a high watermark”.
The texture of the bilateral relationship has become much richer than it once was.
Almost half a million, out of a total Australian population of 24 million, are of Indian origin. There are 53,000 Indian students studying in Australia today, our second largest source of overseas students. And 233,000 Indians visited Australia in 2015, making India our eighth largest source of visitors.
There is an increasing network of collaborative work and other links between our universities and other institutions.
And commercial ties have developed significantly. Trade and investment between Australia and India now spans a wide range of industries, products and services – from mineral and energy commodities, to sophisticated manufactured goods; from large-scale business services and skills training, to niche products in many different sectors.
But, on the economic front, I have to say there is also a lot of unfulfilled potential in the relationship too.
One comparison that a number of observers have made is that, while Australia’s two-way trade with India is at A$18 billion, it is barely more than one-tenth of our two way trade with China, which stands at A$150 billion.
And investment, too – in both directions – is well below what it could, and perhaps should, be.
The wish to spur growth in our economic relationship lay behind the commitment in 2014 of the then Australian Prime Minister, Mr Tony Abbott, and Prime Minister Modi to reinvigorate negotiations on the Australia-India Comprehensive Economic Cooperation Agreement – or CECA.
The interest of both our countries in developing a comprehensive and commercially meaningful trade agreement leads me to the central theme I want to explore in my remarks today. And that is the importance of reducing barriers to international trade and the pathways to achieving this.
Opening our economies: introductory remarks
I want to talk today across three broad themes:
- First, I think it is worth exploring perspectives on the relationship between trade liberalization and economic development
- Second, I want to look at the different types of ‘trade architecture’ which help us move collaboratively toward trade reform
- And finally, I will briefly survey current developments in regional trade agreements and consider where these, as well as bilateral endeavours such as the CECA, might take us.
I would like to start with what is almost a truism: trade has a critical role in economic growth and, with this, in enhancing our economic well-being.
This is perhaps particularly self-evident for a relatively smaller population like Australia’s. Exposure to the wider world has been essential in providing a large market for our products and as a source of consumer goods and producer inputs. These would be costly, and in some cases prohibitively so, if supplied domestically.
In keeping with the economic precept of comparative advantage, Australia has fared best when we have allocated our productive resources to the things we do best, using part of the income from these to import things we are relatively less efficient at producing.
India, of course, has a much larger population. And there is a view in some quarters that this means India can satisfy its growth requirements through its large domestic market.
But I think India would be selling itself well short were it to take this stance. We can look at China, a country of similar dimensions to India, to see an example of the enormous contribution that international trade can make to national economic growth.
Others in East Asia, like Japan and Korea, also show the profound benefits that deeper international economic engagement can yield.
Australia’s experience with trade liberalisation
To return to Australia’s experience: we were a highly protected economy for much of the twentieth century – from the 1920s to the 1960s.
This did have the intended effect of increasing the size of our manufacturing sector. But it resulted in low productivity, fostered by an uncompetitive economy.
On the surface, on the back of strong international prices for our commodities exports, we appeared to be faring well for a time. But from the 1970s, no longer shielded by high commodity prices, we were dropping down the per capita income ranks of OECD countries.
This was something of a wake-up call. And the later decades of the twentieth century saw Australia move from being an inward-looking economy to embracing the rigours and the benefits of globalisation, as we carried out a sustained program of trade liberalisation and structural reforms.
Trade barriers fell dramatically. From the early-1970s to 2000, industry protection, mainly delivered through tariffs, fell from 35 per cent to 5 per cent.
These changes have served Australia well. They have produced a more competitive and more resilient economy, which has now delivered twenty-five years of uninterrupted growth.
India – trade as part of the reform agenda
And what about India’s experience? I’m sure you know your history better than I do, but I’ll just survey some pertinent facts.
India is today recognised as an emerging economic giant – now the third largest economy if measured on a purchasing power parity basis.
But it wasn’t always so. For a long time, India was almost on the periphery of the global economy. It was inward looking, operating behind high levels of protection. Its share of world trade declined from 2.4 per cent in 1947 to 0.4 per cent in 1990.
Barriers to trade, combined with other uncompetitive economic policies, came at a very real cost. Up to the 1980s, India’s GDP grew on average only by around 3.5 per cent a year, while per capita income growth averaged around 1.25 per cent.
Since the 1990s, India has, of course, undertaken substantial economic reform. The economy has become more market-oriented, including easier access for foreign investment and reductions in tariffs – albeit to still high average levels.
India has reaped substantial benefits from its reforms. GDP growth has risen to an average of around 6.5 per cent since the 1990s.
The Indian government continues to press ahead with its program to improve the workings of the economy, including in important areas such as tax reform, bankruptcy legislation and cutting red tape. Australia welcomes these efforts.
It will be equally important to achieve reform on the trade policy front.
Not just because of the benefits that flow from trade liberalisation directly, but also because experience shows that reform contributes most powerfully to national growth when it is taken forward comprehensively, across the spectrum of economic policy areas.
Increasing efficiencies and removing distortionary policies in the tradeable sector complements reforms undertaken elsewhere in the economy, overall creating a stronger dynamic for growth.
Trade agreements – moving together on trade liberalisation
I would now like to turn to trade agreements as a means achieving gains from trade liberalisation – some general comments first, and then I’d like to make some remarks relating to bilateral and regional trade agreements, including the TPP and RCEP.
With the benefits it offers, trade reform has often been undertaken unilaterally. Both Australia and India have done this at various times. And others too. The World Bank has estimated that unilateral reforms accounted for around two-thirds of the 20 percentage-point fall in average developing country tariffs over the past 20 years.
That said, the fact is that trade liberalisation also often occurs through negotiated trade agreements – be they multilateral, regional or bilateral. Over and above the benefits yielded by unilateral trade liberalization, trade agreements can provide a further stimulus to trade through the greater access they provide to trading partners’ markets.
Just a few quick observations about trade agreements –
Modern trade agreements are not just about getting tariffs down. They are much more than that. They usually cover services and investment as well as goods.
They are as much about removing barriers behind the border as at the border.
Trade agreements also deliver that most valuable commodity to business – confidence about the operating environment. They provide more certainty about the rules under which business operates.
And trade agreements should be comprehensive if the full benefits are to be delivered. They should set an environment that is broad enough for trade and investment between the partners to evolve over time – to grow into new areas, beyond products and services already traded between the partners.
I’d also like to make some observations about things that are not the case with trade agreements. Some ideas gain currency but don’t stand up to scrutiny when more carefully considered.
Firstly, trade agreements are not about balancing bilateral trade flows between the partner countries. In a multi-country world, and one where imports from one source are often the inputs for exports to another destination, it makes no sense to try to ‘even up’ the exports and imports between individual countries.
Australia recently concluded free trade agreements (FTAs) with our three major North Asian trading partners – China, Japan and Korea. We run substantial trade surpluses with all these countries. Essentially, that’s because we export mineral and energy resources to them that, in turn, drive their manufacturing industries which produce exports sent to other trading partners.
The trade imbalances with these countries were not something that had to be “solved” through our FTAs with them. And we don’t tend to hear very much about trade deficits from these countries these days given broad recognition of the mutual benefits of our two-way trade.
This leads me to a more general point applicable to trade agreements, as it is to all trade. And that is that the simple arithmetic of imports and exports doesn’t shed much light on who is really gaining from trade.
The fundamental insight on trade is that both parties can benefit from the one commercial transaction.
Trade is not about winning more than the other party. It’s about win-win.
And this is so whatever the relative size of the partners. A bigger economy might have bigger markets, but it will probably also have more consumers, more businesses to benefit from global inputs, and more exporters ready to enter new markets.
Australia’s longest-standing FTA is with its close neighbour New Zealand, with an economy around one-eighth the size of Australia’s. We also have FTAs with the world’s three largest economies, the United States, China and Japan. These FTAs have all been negotiated to deliver mutual benefits despite the asymmetries in the economic sizes of the parties.
Multilateral, regional and bilateral approaches
Given the benefits of an open trade environment, we can see continued efforts over time to develop the institutional means to better achieve those benefits.
On the multilateral front, the General Agreement on Tariffs and Trade – the GATT – was first created in 1947. At that early stage it was a relatively modest system, involving just 23 countries – perhaps more accurately described as a plurilateral, rather than multilateral, agreement.
Further developments saw the eventual emergence of the World Trade Organization in 1995, which now has a membership of over 160 states covering most of the globe.
Australia, like India, sees the multilateral route as the ‘first-best’ option to achieve trade liberalization and reform.
We believe that maintaining a strong and effective multilateral trading system should remain a core trade policy objective for us all.
That said, at the present time there seems no viable prospect of a big multilateral deal.
There have been fifteen years of negotiations in the WTO Doha Round with minimal progress – notwithstanding the tangible but limited outcomes recently at the Nairobi Ministerial, including on agricultural subsidies and on the trade facilitation agreement.
Nonetheless, the benefits from a more economically integrated international environment still stand.
It is therefore sensible to look to other pathways to achieve progress in international trade and investment reform – while also remaining committed, as Australia is, to exploring what is possible in the WTO in the absence of progress on the Doha Round
Bilateral and regional FTAs represent a major part of international trade architecture in the world today.
There are now over 300 FTAs globally, with a rapid expansion in the number over the past twenty years.
Trans-Pacific Partnership Agreement (TPP)
In a major development, the Trans-Pacific Partnership Agreement – a regional trade agreement of unpreceded scope and ambition – was signed in February.
The TPP involves twelve countries representing almost 40 per cent of global GDP, including the United States, Japan and Australia.
Its outcomes include new market access opportunities among its members by establishing a more seamless trade and investment environment across the twelve countries.
The TPP will eliminate more than 98 per cent of tariffs among these countries.
It will facilitate trade in other ways too. Customs procedures are to be made more transparent and efficient. And it will establish regional rules of origin and a single set of documentary procedures for products traded under the TPP. This will support the development of regional supply chains.
There are to be mechanisms to address non-tariff barriers impeding trade, centred on enhanced transparency, cooperation and the promotion of good practice for technical regulations.
In keeping with its badging as a ‘21st century agreement’, the TPP will address a range of contemporary trade challenges, including in areas such as e-commerce, state-owned enterprises, and SMEs.
Just briefly on these –
State-of-the-art e-commerce provisions are to help drive the information economy. For example, TPP parties have committed to allow the movement and storage of data across borders, providing a platform for growth in ICT trade.
Ground-breaking rules on state-owned enterprises principally engaged in commercial activity are aimed at ensuring purchasing and sales decisions are based on commercial considerations and on a non-discriminatory basis.
And the TPP is the first FTA to explicitly recognise the significance of SMEs – indeed, with a separate chapter on issues specific to SMEs. One key initiative is that TPP parties are each to create a website for SMEs that provides user-friendly information on how they can take advantage of the agreement.
Importantly, the TPP allows for new members to join in the future, which will amplify its benefits.
Regional Comprehensive Economic Partnership (RCEP)
With the TPP finalized, the focus is now on the Regional Comprehensive Economic Partnership – or RCEP – as the key regional agreement under negotiation. RCEP negotiations involve the ten ASEAN members and ASEAN’s six FTA partners, which include India and Australia.
RCEP holds significant economic potential. RCEP countries account for almost half of the world’s population, nearly 30 per cent of global GDP and over a quarter of world exports. The global importance of RCEP countries will only grow in the future.
Through commitments on goods, services and investment RCEP will provide the economic architecture to support ongoing trade and investment liberalisation in the region.
And its potential significance for India should not be underestimated. It represents a substantial market for Indian goods, services, but also for Indian technology, intellectual property and human capital.
It would help provide India access to the region’s vast pools of capital, vital to building the infrastructure necessary to support a modern, thriving economy.
From my perspective, India should have a regional voice commensurate with its size and economic weight. Australia supports India’s growing participation in the economic architecture of the region. Our increasing reference to the ‘Indo-Pacific’, rather than the earlier term of ‘Asia-Pacific’, reflects this desire to embrace India as a key contributor to building regional cooperation and integration.
RCEP provides an ideal forum in which India can contribute to shaping and influencing the rules governing trade and investment in the region. Australia is keen to work with India to achieve a sufficiently ambitious RCEP outcome.
Australia-India Comprehensive Economic Cooperation Agreement (CECA)
In addition to RCEP, the other FTA Australia and India are both currently working on is the bilateral Comprehensive Economic Cooperation Agreement – or CECA.
This is an agreement that promises to deliver substantial benefits to both countries, allowing us to meet at least some of the unfulfilled potential I referred to earlier.
For India, CECA will give improved access to the world’s twelfth largest economy – an affluent market with the world’s fifth highest per capita income.
With over half of India’s exports to Australia currently facing tariffs, it would quickly put India on the same tariff-free footing as our existing FTA partners, such as China – including for key Indian exports such as textiles and clothing, auto parts and jewelry.
And it would facilitate investment flows with Australia, which has the world’s third largest pool of investment funds under management.
FTAs – moving in the right direction
Having touched on some current FTA developments, I should, however, note that not everyone is comfortable with FTAs.
Jagdish Bhagwati’s warning about a ‘spaghetti bowl’ of FTA rules is a fair one. There are complexities that can arise from the plethora of FTAs.
And commentators have sometimes suggested that bilateral and regional agreements are a diversion from the multilateral ‘main game’, as it might be seen by some.
But an observation made in the WTO’s World Trade Report 2011 is a very telling one. The report says: “…. there has been a creative tension between regional” – under which the WTO report also includes ‘bilateral’ – “and multilateral approaches which, although often complicated, has generally advanced trade openness and economic integration”.
This is an important observation. And it underscores the important contribution that high-quality FTAs can make to maintaining momentum on trade liberalisation.
I have referred to the two free trade agreements Australia and India are both currently negotiating: the bilateral CECA and the regionally-based RCEP.
I think these negotiations are exciting developments. The World Trade Report is a reminder that we should see these things in the broader sweep of history.
I see CECA and RCEP, along with other such trade liberalisation endeavours, as critical ways of moving forward. Of testing ourselves on what we can do to open our economies. Of learning how we can achieve gains.
These may be smaller steps than a major outcome in the WTO. And they are not easy steps either. These are complex negotiations with many parts and many interests to consider – which is why our ambitions on timelines for completion are not always met.
But they take us in the right direction.
They can be thought of as planks in a bridge that is constructed over time. A bridge to carry us to a world with increasingly lower barriers to international economic activity. With the important benefits this will deliver – globally, and especially for developing countries.
I look forward to a further strengthening and deepening of the economic partnership between Australia and India – including through the mutually beneficial opportunities these agreements will deliver.