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Australian Industry Group says greater government engagement is needed to improve returns from FTAs There is no doubt that international trade is fundamental to the on-going growth of the Australian economy. Industry is aware – now more than ever – that in order to grow, it has to maximise its participation in the global supply chain.
Despite recent government efforts to secure for industry better access to export markets through the negotiation of free trade agreements (FTAs), the challenges for Australian exporters remain great. Yet the government’s trumpeting of the next FTA evokes images of bountiful treasure chests of opportunities just waiting to be scooped up. Has industry merely accepted the much lauded proposition that FTAs offer a panacea for our global trading woes? With such a proposition comes high expectations which often aren’t met.
While acknowledging that some ground can and has been gained though FTAs, the signing of such agreements simply can’t resolve all the issues that confront Australian exporters.
To truly capitalise on FTAs, the Australian Industry Group (Ai Group) sees the challenge as two-fold: on one hand increasing industry’s understanding of what agreements can deliver (which will better manage the expectations of business); and on the other, improving the capacity of industry to take advantage of the agreements that have been negotiated.
Meeting these challenges and turning the potential benefits of FTAs from a theory to a reality requires clear and strong follow-through assistance from government. Such assistance includes programs to encourage industry to look beyond these shores – an extremely costly enterprise for a small business – to develop and maintain contacts and credibility in new markets. These programs must be understood as investments in Australian productivity and ingenuity, not handouts.
Why is it so critical to get this right? Over the last two decades of unilateral trade liberalisation, Australia has become one of the world’s most open economies, with tariffs averaging less than 3.9%. This provides increased market access for importers and makes increasing our exports a critical goal if we are to avoid a balance of payments blow-out.
Beyond representing our best means to long-term economic growth, exporting forces Australian companies to increase their competitiveness. It also helps them access global innovation and technology and to develop new management and marketing techniques – a fact supported by the recent Mortimer Review into our trade performance which found that export industries, and successful exporters within industries, have higher productivity levels than those focused only on the domestic market.*
In the face of increased pressure from global competition at home and abroad, Australian industry knows that it must compete on productivity, price and quality. But to do so successfully, government must deliver domestic and foreign policy settings that support an internationally competitive and sustainable Australian export sector.
According to the Mortimer Review ‘the growth in export volumes has been markedly slower in this decade than in the previous two decades. Australia has lost global market share in manufactures, services, agricultural and resource exports’. After rising rapidly in the 1980s and 1990s, the share of exports in our GDP has also declined.
Exports of goods and services as a percentage of GDP 1987 to 2007
Export volumes growth rates 1987 to 2007
And despite our comparative resilience during the recent global financial crisis, the global economic slowdown has taken its toll on our exporters. Australian export income for the 2009 calendar year was valued at $27.4 billion - 10% lower than in 2008, according to ABS figures.
Given this reality, substantially increasing the number of exporters, as well as the volume of our exports, remains a fundamental goal for Australian industry. It also needs to be a fundamental goal for Australian governments.
In recent years, successive governments have negotiated multilaterally through the WTO - with varying degrees of success - and signed trade agreements with regional, plurilateral and bilateral partners in an attempt to deliver industry better access to export markets.
Industry recognises that the benefits of FTAs go beyond tariff reductions. Comprehensive FTA provisions can also open opportunities by addressing behind the border non-tariff barriers, such as reducing business costs and time from streamlined regulatory arrangements including licensing and reciprocal recognition of standards and qualifications.
But are the potential benefits of our existing agreements being realised? How do Australian companies perceive the outcomes of the government’s negotiating efforts?
In late 2009, Ai Group surveyed 50 member companies with annual exports valued at between $40,000 and over $1 billion in the manufacturing, construction, food and beverage, the production of metals, chemicals and coal machinery, printing and publishing, ICT, retail and homewares sectors.
On average, a little over one-third of exporters reported they had received any benefit from exporting to
destinations with existing free trade agreements.
Of the individual agreements, only 55% of respondents saw the AUSFTA as being effective, with effectiveness figures for other agreements being New Zealand, 48%; Thailand, 25%; Singapore, 18%; and Chile, 17%. 
Australia’s merchandise trade with Free Trade Agreement Partners
The United States
Thailand
Singapore
New Zealand
Chile
Source for all charts: DFAT Website
There are, of course, pockets of true success in each agreement. Members were encouraged by benefits from reduced import duties, improved market opportunities and, under some agreements, increased labour mobility. However, while existing exporters reported some moderate benefits in the markets they already serve, an agreement doesn’t necessarily motivate companies to seek export opportunities in new markets, or encourage companies that don’t currently export to do so.
On average, a little over one-third of exporters reported they had received any benefit from exporting to
destinations with existing free trade agreements.
A range of other factors are at play, including the continuing high value of the Australian dollar, domestic economic circumstances, the overall market maturity, industry capability and the usual risk factors that industry takes into account when moving into new markets, including political, economic, legal and technological risk.
But in some cases, an agreement when implemented hasn’t been able to deliver the liberalisation agreed to because of old, or new, behind-the-border measures that act as barriers to free trade.
Exporters to FTA markets still face serious non-tariff barriers, such as quarantine and other health, safety and environmental measures, and standards which are used at the border to protect domestic industries.
In addition, FTAs are extremely detailed, complex agreements which are crafted in legalistic language making them particularly difficult for SMEs to decipher and to comprehend exactly “what’s in it for them”.
In essence, the potential benefits of the agreements are not being fully realised –whether in reality or perception - by Australian industry.
There is a serious disconnect between the level of government resources invested in negotiating necessarily complex FTAs and the resources applied to ensuring their successful application. This is a cause for concern and an opportunity for engagement.
The Department of Foreign Affairs and Trade (DFAT) says that ‘it is too early for any econometric modelling to be conducted with any confidence on the impact of Australia’s FTAs’. But it has become clear to industry that the hard work of increasing exports actually starts when an agreement comes into force. So the importance of maximising an agreement’s effectiveness through post-implementation strategies cannot be underestimated.
Success will require better engagement by both government and industry. Industry is willing and able to do some of the heavy lifting. Ai Group is already working with its members to improve their knowledge and understanding of FTAs, and is working with government through continuous feedback on what is happening “in the field”.
Industry’s desire for greater government engagement is not all about financial assistance, like export development programs. It also reflects the need for a more strategic, long term coordinated approach to export development rather than an ad hoc programmatic (essentially, budget to budget) management of trade policy.
Greater engagement within, and across, government is also needed. The Mortimer Review concluded that the trade functions of DFAT and Austrade should be adequately resourced to enable the continued provision of high-quality policy advice, and the delivery of programs and services.
We’d go one step further. Better internal and cross-departmental coordination is necessary to break down the silos created by “need-to-know” information management. It’s vital that the different trade divisions within DFAT know what each are negotiating for to deliver the “best” outcome possible.
Finally, creating a closer policy bridge between DFAT and Austrade is essential. This will better inform negotiations and subsequently allow for increased tailoring of Austrade program delivery based on the specific gains achieved in market access through the agreements.
Ai Group supports Mortimer’s recommendation to deepen the policy coordination arrangements across the Foreign Affairs and Trade portfolio. “Such arrangements need to reflect that, while both agencies have specific responsibilities, there are clear advantages in maximising cooperation and cross-pollination—for example, through joint forward planning processes; joint formulation, implementation and evaluation of bilateral market development plans for priority markets; and personnel exchanges.”
More generally, creating a closer, formalised policy development relationship with Austrade would provide a mechanism to promote more regular feedback. Intelligence garnered when exporters express their concerns to the Austrade and DFAT overseas networks needs to be better harnessed. This would allow deeper consideration of the daily battles fought by exporters on the ground, some of which could be addressed during the negotiation of future agreements.
FTAs should be seen as only one part of a much larger strategy of increasing Australian exports – not a strategy in and of themselves; equipping Australian firms with the tools required to seize better market access opportunities is equally important as negotiating FTAs.
Support for export market development plays a huge role in industry’s ability to actually capitalise on market access gains delivered by FTAs. This is where industry also needs greater engagement from government.
Now more than ever, government programs such as the Export Market Development Grants Scheme, TradeStart and Enterprise Connect are crucial to assist Australian businesses explore the potential of entering new markets more successfully. These programs provide highly effective support mechanisms to small and medium Australian enterprises to grow their exports.
The Mortimer Review reported that the Federal Government devotes a modest $675 million per year to trade and investment programs and services. The need for Federal Government action to strengthen the linkages between market access negotiations, trade and investment promotion and facilitation and market development was clearly identified. While understanding the current fiscal pressures on the Budget, it is imperative that the current level of support for exporters isn’t diminished.
While FTAs cannot alone resolve all the barriers which confront Australian companies in the international trading environment, the potential benefits of existing FTAs are not being fully realised by Australian exporters.
Efforts to change this are even more important when viewed in light of the recent global trend towards a return to protectionism. The World Bank reported, disappointingly, that 17 out of the G20 economies had implemented new trade-restrictive measures at the height of the global financial crisis in the six months prior to April 2009.
Locally, such protectionist positions merely fail to fully appreciate the importance of open world markets for Australia’s development and prosperity.
Ai Group continues its strong and constant support for the principles of free trade, which can create a more level international playing field, and calls for greater government investment in resources to strengthen the linkages between market access negotiations, trade and investment facilitation and market development.
There is an important responsibility to better educate industry about the opportunities that these agreements present. Doing so will greatly improve Australian industry’s ability to capitalise on these agreements, which is key to their effectiveness. Industry welcomes its role in sharing this responsibility with government across all levels.
* “Winning in World Markets: Review of Export Policies and Programs”, by David Mortimer AO, 1 September 2008, commissioned by the Department of Foreign Affairs and Trade.
** “Review of Bilateral and Regional Trade Agreements”, Submission to the Australian Productivity Commission by the Department of Foreign Affairs and Trade.
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