Australia punches above its weight economically because it is a successful trading nation. Trade is why we are all able to enjoy one of the highest living standards in the world.
The gains from trade for a relatively small country such as Australia are huge.
Just think where we would be if we couldn’t sell our iron ore, coal and gas, our beef, our education services abroad in return for imports of computer equipment, oil, cars, pharmaceuticals and overseas travel? Indeed, it is unthinkable. We would certainly be a lot poorer.
There are many risks and uncertainties in the current global trading environment including the ramping up of anti-trade rhetoric overseas and at home.
People often fear trade because it can place pressure on jobs in some industries. This pressure is undeniable, but certain jobs are also replaced (as new ones emerge) as the result of new technologies, domestic competition and changing consumer preferences. Such forces shouldn’t and, indeed, cannot be stopped.
Turning inward and insulating ourselves against global forces may seem tempting. But any benefits would be short-lived and quickly overwhelmed by global developments, leaving us ill-prepared and falling behind.
Instead, the best defence is to ensure we have businesses that are well placed to adjust to and embrace new opportunities and to create new, higher paying jobs. We also need to provide adequate support and retraining for people who have been displaced, whatever the driver.
It is not yet clear whether the USA will fully match its anti-trade rhetoric with action. With less reliance on trade than Australia, the USA may have greater capacity to look inwards, at least for a time, although economic realities will bite eventually. For example, American businesses that depend on global supply chains for their inputs will lose competitiveness if import barriers are raised.
While we can hope that sense prevails we shouldn’t be too sanguine. There are still many risks and challenges for Australia.
How do we maintain our competitiveness in the face of significant tax reductions in the US and other countries? How do we ensure we are not left behind as the Chinese economy (our single largest trading partner) develops and extends its links to the region? How do we counter domestic isolationist pressures?
Australia must continue to be at the forefront of efforts to defend the world trading system, forming coalitions with like-minded countries and driving regional liberalisation.
We also must ensure that domestic policy settings support and are consistent with an open and trade-oriented economy. We must match our rhetoric with action.
Realising the gains from trade first and foremost requires competitive, innovative and responsive businesses. It requires internationally competitive businesses that seek out markets and that have the scale and capacity to service them.
On ABS figures, larger firms account for more than 90 per cent of Australia’s export income. Much of our comparative advantage is in activities that require large capital investments – in resources, agriculture and increasingly in services such as tourism and higher education.
It is large mining companies that invest billions of dollars in mining projects that create regional jobs and drive billions of dollars in export income and government revenues.
The potential for greater value adding in agrifood and health related products that leverage our clean green image in emerging Asian middle-class markets is huge. Realising it will require large investments, including from abroad.
Yet right now, Australia has a serious investment problem. Private business investment has fallen substantially over the past three years. The last time it was falling as fast was during the early 1990s recession.
Resurgent business investment will be essential for future export growth, higher-paying jobs growth and higher living standards across the country, particularly in regional areas.
Attracting new investment demands a competitive business environment.
A globally-competitive company tax rate is one of the most direct and effective economy-wide policy levers we have for driving higher investment. Other countries know this and have been reducing their company tax rates while we have stood still.
We also need regulatory and workplace relations settings that encourage flexibility and innovation. And welcoming engagement with people from abroad to encourage learning and innovation.
We have some extraordinary advantages but we must do more to ensure that we get the most from them in an increasingly competitive and uncertain world.
This blog draws on content discussed in Grant's panel at State of the Nation 2017, titled Trade in the Trump era. Watch the panel discussion below.