Speech to The Melbourne Business School Critical Issues 2008: The China India Dialogue

India and China: Australian engagement at multiple levels

10 April 2008

Introduction

Thank you Bob [Edgar].

It is a great pleasure to be here at the Melbourne Business School's Critical Issues Conference.

I'd like to thank the School and the Centre for Business and Public Policy for inviting me to speak this evening.

The Business School's role as high-quality business and management educators - and the ‘bridging' function which you perform between government and business - will only become more important in the current economic climate.

I can think of no more appropriate topic for this year's Critical Issues Conference than the impact of China and India on Australian business and trade. These two Asian powers are helping to shape the global and regional trading environment in which we operate.

The challenge for us is to ensure that our trade and economic policies are appropriately attuned to engaging with the opportunities and challenges they present to us.

Tonight I want to

• outline the Government's trade and economic policies and how these will help position us for maximum competitiveness and access in the global marketplace; and
• look at some of the specific challenges and opportunities which China and India's rise will pose for Australia and how we intend to engage with them at multiple levels.

The Government's Trade Policy

The National Accounts released on 5 March showed that there was no productivity growth at all in Australia in 2007.

That is, zero productivity growth for 2007.

For a country seeking to compete in a competitive international environment that is not a sustainable situation to be in.

We cannot continue to rely on the resources boom - driven largely by China's and to a lesser extent India's demands - to deliver increasing amounts of income year after year.

We need to position Australia onto a sustainable footing beyond the resources boom.

Engaging with the growth in global trade is essential to securing a sustainable economic future.

World trade has grown 27-fold in volume terms since 1950, three times faster than world output growth.

Every multilateral negotiating Round - from the Dillon Round in 1961 to the Uruguay Round in 1994 - has boosted world trade growth well beyond output growth - and the gap between trade growth and output growth is widening.

As the IMF said in its World Economic Outlook released overnight, "rising trade has been a key source of the recent strong performance of the global economy".

So the message is clear - trade liberalisation and pursuing the opportunities it generates - is an essential part of securing a sustainable economic future.

But over the past decade Australia hasn't taken full advantage of these opportunities. Net exports made a positive contribution to Australia's economic growth in only two of the past 11 years.

In contrast, during the previous Labor Government net exports made a positive contribution to growth in 10 of the 13 years.

The Rudd Government is therefore committed to the implementation of a trade policy that will restore Australia's level of productivity, international competitiveness and export growth.

This is to be pursued in the context of the twin pillars approach to trade policy for sustainable economic growth.

That is, trade liberalisation at the border will be complemented by economic and trade reform behind the border.

There is little point making progress on the tough fight to secure improved market access opportunities at the border if we are not productive and competitive enough behind the border to take advantage of that access.

In terms of market access at the border, the Government has recalibrated Australia's trade policy so that multilateral trade liberalisation, via the WTO, will be the central component of trade negotiations.

The Government is doing all it can to get a conclusion to the Doha Development Round of trade negotiations.

I went into this in some detail at a speech I gave to the Crawford School of Economics and Government at the Australian National University on Tuesday.

I will not repeat what I said on Tuesday apart from making a couple of key points.

We all know that the Doha Round has reached a critical point.

In my judgement, the Doha Round is doable and we're closer now to a successful conclusion than at any point previously in the negotiations.

As noted by the IMF, a renewed push on trade liberalisation is essential given its importance to the global economy.

A successful conclusion to the Doha Round will give a much needed confidence boost at a time of an uncertain global economic outlook.

Through the Doha Round we will establish a strong framework for deeper liberalisation efforts at the regional and bilateral levels.

At the regional level, the Government will seek to complement trade liberalisation gains derived from the multilateral process via APEC and ASEAN+6.

At the bilateral level, comprehensive FTAs can further advance and deepen liberalisation measures.

On this front, the Government is continuing to pursue FTA negotiations with a number of trading partners including Japan, China, ASEAN/NZ, Chile, Gulf Cooperation Council and Malaysia.

But as important as trade negotiations are at the border, real benefits will only be maximised if countries, including Australia, tackle ambitious reform agendas behind the border.

This is the second pillar of our trade policy and it is where trade policy becomes critical to the broader economic debate.

To focus only on trade negotiations - as exciting as they are for some of us - would consign trade policy to the margins of the broader economic debate.

That's not conducive to ensuring that trade policy receives the attention it warrants nor conducive to using all arms of policy to meet the economic challenges we are confronting.

So the key focus behind the border is to develop a whole of government approach in which all facets of policy are utilised in a comprehensive and strategic manner.

That is education policy, skills training, manufacturing, industry, innovation infrastructure and IT policy are all critical in complementing our trade policy to ensure we maximise the gains from trade liberalisation.

To facilitate this the Government is is also putting structures in place to better coordinate trade policy

• As outlined by the Prime Minister and the Treasurer on numerous occasions, the Federal Cabinet considers economic decision making through the prism of what enhances our international competitiveness
• We also recently established the COAG Ministerial Council on Trade, to better coordinate trade-related activities and reforms by Australia's federal, state and territory governments.

Trade negotiations is about government to government interaction - and that's key to getting the framework right.

But you, in the private sector, have the critical role to play - because it's obviously the business-to-business relationship which drives trade.

And we also need to get the business-to -government relationship right - so that we're working together effectively to identify the opportunities that emerge and to pursue them strategically.

That's why I have tasked David Mortimer AO to undertake a review of Australia's Export Policies and Programs.

This is a forward looking review to assess how we can best shape our trade and ecconomic policies to reflect the needs of the 21st Century including ensuring that Australian business is well positioned to access and benefit from inward and outward investment flows and global supply chain arrangements.

I would urge you to engage with the Mortimer review as it will play an important role in the policy development process.

China and India - Engagement at Multiple Levels

China and India's rapid economic growth in recent years has been a huge plus for the global economy.

Never before have so many people been lifted out of poverty in such a short period of time.

In addition to the human welfare dividend - reduced infant mortality, better living conditions, significantly improved health and education standards to name a few- this has contributed greatly to economic and political stability and security in our region.

To assist these two powers to continue on their economic growth paths and to help shape their influence on the global trading arrangements we need to engage with them at multiple levels.

We are doing so in an activist and strategic manner across all fronts reflecting the importance of these two powers to our trade and economic interests.

At the multilateral level, both Australia and India were founding members of the GATT.

And under the last Labor Government, Australia was an early and strong supporter of China's accession to the WTO.

The participation of the world's two most populous countries in the WTO has been to our mutual benefit.

It has assisted China and India in their domestic economic and trade reform programs and in turn given them access to global markets - exposing them to the competitive pressures that entails.

A recent World Bank study estimated that as a result of the reforms it undertook to prepare for accession, China continues to reap rewards of about $30 billion annually to its economy.

We share with India and China a strong common interest in bringing the Doha Development Round to a successful conclusion.

Australia is the leader of the Cairns Group of agricultural exporters while China and India are both members of the G20 and the G33 groupings at the WTO.

Within these groupings and beyond them China and India will increasingly be relied upon to exercise leadership in the WTO and in bringing the round to its successful conclusion.

This responsibility is especially important given that the Round will be critical to helping other countries integrate with the world trading system.

Reflecting our joint interests, Australia has played a leading role in building support for a WTO signalling conference on services - progressing an area of key importance to both Australia and India in the Doha Round - international services trade reform

• and in the past week I have sent letters to each of the participants in the conference, including India and China, outlining Australia's objectives for the kind of improvements Australia is looking for.

We are working closely with China and India to improve the environment for international agriculture by cooperating to reduce subsidies that distort international markets.

We acknowledge China and India’s concerns for their subsistence farmers in the WTO talks and those concerns can be met

• but as WTO Members they must also contribute to agriculture market access reform.

And the work in the WTO on the "Aid for Trade" initiative - which Australia is also supporting - will help developing countries better integrate into the global trading system.

We all stand to gain considerably from the Doha package.

The negotiations are also known as the "Doha Development Agenda" - and with their rapid integration into the world economy, China and India would stand more to gain than most.

At the regional level we are pursuing our common trade and economic interests.

Australia and China are both members of APEC and have worked together in this forum for some years in the pursuit of greater regional integration.

To ensure that APEC fully reflects regional powers the Rudd Government is a strong supporter of India's membership of APEC.

I was a strong proponent of this while in Opposition and will do what I can in coming years to make this happen.

Unfortunately, the previous government missed the critical opportunity to secure India's entry when Australia hosted APEC last year.

Australia, China and India are also all members of the ASEAN plus 6 forum.

Working together through these two forums gives us the opportunity to help shape our regional trade and economic arrangements to our mutual benefit.

Underpinning what we are doing together multilaterally and regionally are stronger and broader bilateral relationships.

Australia's trade relationship with these two nations has many common threads:

• One nation - India - is our fastest-growing major export market. The other - China - is our largest trading partner.
• Both face huge food security and energy security challenges that we can help them to meet.
• Both have very large parts of their populations still engaged in subsistence agriculture and are dealing with the impact of transition in this sector as other sectors develop at more rapid rates.
• China's economic infrastructure demands are huge and India has made infrastructure growth a top national priority
• In its World Economic Outlook, released overnight, the IMF notes that China and India's growth is set to moderate to 9.3 per cent and 7.9 per cent in 2008 respectively (down from 11.4 per cent and 9.2 per cent in 2007). These are still highly impressive figures.

India: Capitalising on Growth

It is fair to say that Australia's relationship with India has been underdone in recent years.

The Government is therefore committed to building a stronger bilateral relationship with India across all facets - including at the political, government, business, cultural and social levels.

As part of this process one of my first overseas trips was to India in January where I took the opportunity to engage with the Indian Government and business sectors on a range of political and commercial matters.

It was apparent from my visit that now is the time to take our trade and economic relationship to a higher level.

India is seizing the opportunities brought by globalisation and today is one of the world's fastest growing economies.

India's reforms have generated huge improvements in productive efficiency, and its economic boom owes much to a successful program of domestic reform, begun in earnest in the early 1990s.

This offers new opportunities for the commercial relationship and we are seeing rapid growth in bilateral trade in goods and services.

• India is now Australia's 10th largest merchandise trading partner and Australia, in turn, is India's 10th largest trading partner. Two-way trade in goods totalled over $10.7 billion in 2007.
• And importantly, India is our fastest growing major export market over the last five years it has become our sixth largest export market, with commodities such as coal, gold, copper ores and wool representing key exports.

Our trade relationship with India is now moving beyond the resources boom.

Manufacturing companies are also moving to take advantage of the opportunities presented in India: some examples of successful Australian companies providing manufactured goods to India include Leighton's, Woolworths, and BlueScope Steel.

As India continues to grow, demand for other goods exports - including unprocessed food as well as specialised manufactures - is likely to expand significantly.

There are natural synergies between the service industries in both the Australian and Indian economies

• Two-way trade in services is thriving, particularly in education, tourism, financial services, engineering, accountancy, telecommunications and legal services;
• India is our single biggest source of overseas fee-paying students;
• New prospects are emerging in sectors such as IT, biotechnology, health, film and insurance.

And Australia's competition watchdog is exploring an exchange program with New Delhi to boost competition law and enforcement; a good example of our cooperation to find ways to promote economic reform behind the border.

Infrastructure development in India is another area of considerable potential for Australian business.

Earlier today, I launched a report on Opportunities in Infrastructure and Resources in India, jointly prepared by Austrade and KPMG.

The report covers mining, oil and gas; roads, ports and airports; building and construction and related material and equipment, special economic zones and even real estate development.

It presents its information in a very logical way, describing each of these categories in terms of their current scenario, their future outlook and the opportunities they present for Australian enterprises in India's burgeoning infrastructure sector.

Australia has real expertise to offer in this sphere.

According to reports, India plans to spend $US500 billion on roads, airports and other infrastructure in coming years and this is an area where Australian companies can pursue opportunities.

I would urge you to get a copy of the report.

In the effort to capitalise on the potential for expanded trade between our two countries and to raise the relationship to a higher level we have been working towards a feasibility study on a possible Australia-India FTA.

Tonight, I am pleased to announce that the Indian Prime Minister has now agreed to the terms of reference for the study and officials will hold their first meeting in New Dehli next week.

Given the complementarities we have in so many areas this is an exciting prospect.

The study is anticipated to be completed by early next year and I look forward to its results.

I also look forward to discussing these issues with Indian Commerce Minister Kamal Nath when he visits Australia in May - together with a business delegation - for our next Joint Ministerial Commission meetings.

Minister Nath and I are working closely together to develop a framework for closer trade and economic relations between Australia and India.

China: Opportunities and Challenges

China is a classic illustration of how rapid economic growth through global engagement can contribute to economic prosperity

• China is now the single largest contributor to global growth, contributing over one-quarter of global growth last year according to IMF calculations.
• In 2007 China became our largest merchandise trading partner, with two-way trade in goods reaching $52.7 billion
• China is Australia's second largest export market for merchandise trade
• In the past five years China has also risen from our 8th largest export market for elaborately transformed manufactures (ETMs) to the third largest, and
  • further growth is possible: our ETM exports to China are roughly half that to the United States and a third of that to New Zealand
• China's expanding middle class also holds opportunities for services exports
  • China is already Australia's third largest export market for services
  • We have a sophisticated, internationally competitive services sector, particularly in education and training; telecommunications, financial services; and professional services
  • And we are well placed to supply the skills, technical expertise and management systems China needs to continue its growth
  • From this position the Australian services sector has a strong foundation to advocate its interests and the Government is prepared and ready to help.
• Two way investment is small compared to the trade relationship but is growing rapidly
  • Australian companies had invested $3 billion in China by the end of 2006, while Chinese investment in Australia reached $3.4 billion
  • This only represents 4% of Australia's outbound investment, meaning there remains huge potential for growth
  • We expect expanding investment flows between Australia and China will continue in a mutually beneficial way.

These are positive developments, but we can still do more.

As you would be aware the Prime Minister is visiting China this week. Today he met with the Chinese Premier Wen Jiabao and a key focus of discussion was reviving the Australia-China FTA talks.

Prime Minister Rudd and Premier Wen Jiabao have agreed to accelerate the FTA negotiations. They have instructed Trade Ministers at our next meeting to begin developing a roadmap to identify remaining obstacles and find solutions. Trade Ministers will report back regularly to heads of government, including on issues where high-level political involvement will be needed to find a way forward. The Premier and the Prime Minister agreed to aim for a high-quality, comprehensive result, that will be balanced and mutually beneficial. They agreed that the final result would have to cover goods, services, investment and other trade-related areas.

So, effectively they’ve unfrozen the stalled talks. This is good news – and provides a solid basis for the work program next week.

I am looking forward to meeting with my newly appointed Chinese counterpart Chen Deming in Beijing next week to build on this agreement.

• Australia will not sign an FTA that does not deliver commercially meaningful outcomes across all sectors of the economy.
• Such an agreement will need to include a strong services element.
• And given recent developments, an Australia-China FTA will need to address investment flows between our two countries.

In this regard, the recently concluded China-New Zealand FTA appears to be a good agreement for those two countries.

In some areas, such as trade in goods, the outcome will clearly be useful for us in our own negotiations with China.

However, comparisons are difficult given that Australia's economy is significantly broader than New Zealand's creating a difference in scale and scope of Australia's economic interests in China, including in some areas of agriculture and in the services sector.

Conclusion

Tonight I've outlined the commitment of the Rudd Government to engage with China and India at all levels - multilaterally, regionally and bilaterally - and in a much more strategic way.

The world is looking to China and India to exercise leadership in multilateral efforts to bring the Doha Round to a successful conclusion, helping strengthen the system of world trade rules from which they both benefit so much.

And Australia is also playing its part on many fronts in those efforts.

We are committed to engage in comprehensive manner with China and India in the emerging regional architecture and through bilateral free trade agreements.

As China and India continue to embrace the world economy at a rapid pace, the opportunities for Australia grow accordingly.

Business has to engage and seize these opportunities.

The links we are building through Australian business, academia, and in our broader societies, will establish the enduring partnerships with China and India.

This has rightly been the focus of your deliberations in this conference today.

I applaud you for coming together to think strategically about how you strengthen these links, these partnerships.

I encourage you also to work more actively with government as you do so - to identify the opportunities and to pursue them with us strategically.

I look forward to working with you to that end.