“Regional economic integration as a foundation for prosperity – an Australian perspective”
Speech to the ANU conference on Asian Economic Integration
Parliament House, Canberra, 11 February 2010
Good Afternoon,
Professor Chubb, Professor Drysdale, Excellencies, Parliamentary colleagues, distinguished guests, ladies and gentlemen.
I thank both the ANU’s East and South Asia Bureaus of Economic Research for the invitation to address you.
It is a pleasure to be here today among so many friends, old and new.
To those who have not been here before, a special welcome to Parliament House, and to Canberra.
Through my comments and the question and answer session, I want to discuss three things with you today.
The first is the importance of a mutually reinforcing approach to multilateral, regional and bilateral trade policy. I refer to this as the cascade effect.
Such integration is beneficial to each country participant, their region and the global economy. It also offers greater prospects for peace and stability in this, the Asia-Pacific Century.
The second point is that trade policy has to build on two key pillars – trade liberalisation and structural adjustment throughout the economy. Reform has to be at the border, but supported with reforms behind the border. There is no point liberalising trade if economies are not competitive enough and lack the capacity to take advantage of open markets.
This leads me to my third point, which has particular relevance to developing countries.
This is simply that developing economies need to be supported in their efforts to build competitive economies. It is well and good to open markets and promote reforms, but developing countries must be helped in ensuring that they have the capacity to undertake those reforms, and to be able to engage in trade. This capacity building element is vital.
My perspective
I am conscious of the individual and collective expertise represented here.
Even setting aside the political and security issues that your region confronts, you know directly the economic challenges confronting South and East Asian development.
But while the scale of the challenges can be daunting, we cannot allow ourselves to be overwhelmed.
Trade is a vital stimulus to economic growth and development and must be deployed in our fight against poverty.
The cascade effect
There are many aspects to a modern trade policy. To help make the point, I often refer to the various strands of multilateral, regional and bilateral agreements running together as a self-reinforcing cascade effect.
At the multilateral level, it is genuinely in all our interests for the WTO Doha Round to be successfully concluded.
The Round should be concluded. The Round can be concluded. The buy in by G20 leaders shows a political will at leader level – which is prepared, at the appropriate time, to become engaged.
Trade is an economic stimulus. A stimulus without a hit on the budget. According to the Peterson Institute, the successful conclusion of the Doha Round will remove 125 billion US dollars worth of tariffs. And the conclusion of the Round will deliver up to a 700 billion US dollar shot in the arm to global GDP.
And connecting these sorts of aggregate figures to job opportunities is also key to making clear to all the benefits of concluding the Round.
But while seeking to conclude the Round, we also have to be moving on regional and bilateral economic integration as well. Such agreements have to be WTO plus.
For example, Australia’s very first, modern trade liberalisation agreement, CER, was concluded with New Zealand in 1983. Looking at it from 2010, you would not believe how difficult a process that was for both countries – including because both economies had large agricultural sectors.
Remarkably, when it was signed, it was contemplated that we would move to duty free trade in ten years. We reached that goal ahead of schedule, in 1990, and have built on the original agreement to conclude a world-leading services liberalisation package and are now finalising an investment protocol.
While Australia has always looked to export what we produce given the size of the domestic market, the agreement with New Zealand has been critical in helping build an export culture amongst Australian companies of all sizes. More Australian companies export to New Zealand than any other export market. In 2007-2008, almost 18,000 companies exported to New Zealand, which was approximately double the number exporting to the next largest destination for exporters, the United States. This is remarkable when you consider that New Zealand is a country of approximately 4.3 million people.
In recent years, Australia has successfully concluded the ASEAN Australia NZ FTA or AANZFTA. This is a historic agreement, which brings together the ten economies of ASEAN, at very different points along the economic development spectrum, with the economies of Australia and New Zealand. It is also a very modern agreement, in covering goods, services and investment liberalisation. ASEAN as a group is just as big for Australia’s trade as our trade with China.
Australia also strongly supports the proposal for a Comprehensive Economic Partnership in East Asia (CEPEA) - including consideration of a possible East Asia Summit-wide FTA. This would create a market of over 3 billion people with a nominal GDP of 14 trillion US dollars.
According to simulations done in an initial CEPEA study, which took into account trade liberalisation and economic cooperation, GDP in East Asian countries would increase by a significant 2.11 percent under CEPEA. Under CEPEA, ASEAN’s overall GDP is estimated to increase by the largest amount, that is, 5.89 percent.
Australia is also one of eight countries participating in negotiations for an ambitious FTA that would span the Pacific – the Trans-Pacific Partnership Agreement.
Negotiations will commence in Melbourne in March with the United States, New Zealand, Chile, Singapore, Brunei, Peru and Vietnam.
The TPP represents a strategic opportunity to shape our regional agenda including in emerging sectors such as green technology and the digital economy. The TPP could also ultimately serve as a pathway to the APEC goal of a Free Trade Area of the Asia Pacific.
Despite not being based on a binding legal agreement, APEC itself has gone from strength to strength.
APEC has been championing economic integration, regional and global, since its inception more than 20 years ago and was a key grouping in helping move the then Uruguay Round negotiations forward, and then build on its outcomes. Its 21 members account for over half of global GDP and nearly half of world trade. Average tariffs in the APEC region have fallen from 17 per cent in 1989 to around 5 per cent today.
Now, APEC economies have recognised that barriers “at the border” are no longer the primary impediments to further integration in the Asia Pacific and are focusing on “behind the border” barriers and regulatory issues. And it is also seeking to facilitate trade “across borders” - we are working on identifying and addressing chokepoints in regional supply chains.
APEC remains extremely focused on practical initiatives. In Singapore last November, we agreed to collectively improve the ease of doing business by 25% by 2015 (against World bank indicators), with an interim target of 5% by 2010.
Within these global and regional economic integration efforts, it is clear that while we need to continue to look at agriculture and manufactured exports, we also have to understand the significance of the services sector in economic integration, and investment.
A measure of development is the size of the services sector within an economy. It follows that a key enabler of more rapid development is the expansion and increase in sophistication of the services sector in developing countries, including through investment flows. India and the IT sector is, of course, a classic example of this.
My purpose in outlining this range of economic integration models in which Australia is involved is to demonstrate that it is possible to back multiple processes in support of free trade in our region, while also pursuing the biggest outcomes through multilateral liberalisation.
But we know that regional economic integration does not happen by accident. It requires political will, and it requires a vibrant private sector. And it needs intellectual input from experts like you on how to make it work best for your region.
It is also important to get the institutional support right. That is why the evolution of regional architecture is currently a subject of ongoing high-level discussions - the Prime Minister’s Asia Pacific community proposal is a case in point.
Twin Pillars
This cascade effect I have described, of mutually reinforcing trade policy, needs to be built on firm domestic foundations.
When I was in Davos, there was a common theme of questions put to me when people were curious about how Australia was the only advanced economy that dodged a recession. Almost all questions started from the assumption that Australia’s economy had been saved by China’s growth and desire for our resources. But this assumption is incomplete.
The Australian economy was able to navigate the worst economic conditions for a decade because we acted with speed and with force to stimulate the economy; we had good safety nets in place, and most importantly, we have had decades of structural adjustment to build a more productive and competitive economy that has increasingly and successfully been able to integrate with Japan, Korea, China and ASEAN.
The fundamental importance of domestic reform has been a key lesson from Australia’s experience of the last twenty five years.
When the Hawke Labor government came to power in 1983, it inherited a rigid, inflexible economy but it embarked upon a decade long program of structural reform; floating the Australian dollar, deregulating the banking industry, reducing tariffs, moving away from centralised wage-fixing and making the central bank independent.
These market reforms were not easy to implement. We were opposed by special interest groups, sometimes vehemently. But the Government maintained its commitment and the initial reforms made the Australia economy more productive, more efficient, more open and more flexible. Inflation and the unemployment rate fell, while real disposable income increased. And we know that we have to keep working at ensuring that we remain competitive, and make the most of our opportunities.
Capacity Building
The importance of capacity building in trade work to support governments and communities taking up opportunities is often underestimated.
There is little point to opening markets if economic actors can not take advantage of such opportunities. This is the same point I made about what Australia had to do to make itself competitive, but applied in this instance to our trading partners.
Multilateral institutions such as the WTO and regional institutions such as APEC can, for instance, support policy dialogue and training which develops the capabilities and understanding of our policy makers.
Individual governments also need to accord priority to aid activities which support trade, when developing their own programs and identifying requirements for assistance. For example, capacity building is a key element of the ASEAN-Australian-New Zealand Free Trade Agreement. This will include training and the transfer of skills to local communities.
I am convinced that this critical component has to feature prominently in any developed – developing country agreement. It is a key to turning the promise of trade liberalisation into a positive benefit for developing countries.
That is why it is fundamental to our approach in Asia, in the Pacific, and in Africa.
Conclusion: regional integration and national prosperity
Based on Australia’s experience of increasing integration with the economies of North Asia, South East Asia, and the economies in APEC, which include some of the largest in the world, such as the United States, these are my conclusions.
Trade and economic integration requires strong political will. It needs to be driven at the very top – there are tough decisions to be made, and they cannot be made without strong political leadership.
There is not necessarily one model of regional integration that will suit every economy, at any particular moment in time. But where there is the will, even entirely voluntary models are capable of producing extraordinary results.
As experts in the field, you know that there is tremendous potential in Asia through economic integration – notwithstanding that there are political challenges to be overcome. I have outlined some of the efforts in East Asia. But I also applaud initiatives such as the South Asia Association for Regional Cooperation (SAARC) and I am pleased that Australia will be an observer. Similarly, the South Asia Free Trade Area (SAFTA) is a significant achievement for the SAARC countries.
The key is to get started and to get the biggest outcomes at the largest level that you can, and to keep pushing the momentum in a positive, liberalising direction.
The fourth message is that an economy’s efforts at the border need to be supported by its efforts behind the border – an internally competitive economy is an externally competitive trader.
My fifth point is to acknowledge that none of this is easy. We have been through the agonies of restructuring ourselves. We recognise that developing countries need assistance and we are committed to helping you marshal the resources, many of which are already out there, to make this happen.
So my final message is this. Trade liberalisation is a powerful tool in the battle to reduce poverty. Australia wants to work with the countries in North Asia, South Asia, and South East Asia – multilaterally, regionally and bilaterally – to unleash the potential of your countrymen and women.
A peaceful and prosperous region is in all our interests.
Australia stands ready to do what it can to achieve this vital goal.