Address to the Lowy institute for International Policy

07 March 2017

Thank you to the Lowy Institute and Michael Fullilove for the invitation to speak today about the uncertain global economy.

Its a pleasure to accept the invitation, just as its a pleasure to participate in any Lowy event.

Not just because the Lowy Institute has become such an important part of our national intellectual infrastructure, and not just because Michael Fullilove has been a friend for twenty- five years, but because these are important topics which must be addressed.

Im delighted to be joined today by our Shadow Minister for Trade and Resources, Jason Clare. Ive also known Jason for longer than we might care to dwell on. In our case, we grew up together in Western Sydney.

Perhaps because of that, we have a very similar world view. In Jason and I youll have a Treasurer and a Trade Minister working closely together on important matters in our global and domestic economies.

We are also Canberra flatmates which will ensure smooth and efficient communications between the Treasurer and Trade Minister over a night-cap at the end of parliamentary sitting days.

Of course, well be working closely under Bills leadership with colleagues like Penny Wong and Jim Chalmers and the entire Cabinet on the big issues confronting our economy and our region.

Its easy to be pessimistic about international events if you care about the global economy, believe that trade can lift living standards and support the development of rules-based liberal international engagement which has been the norm since the end of World War II.

Looking around the world, these beliefs are under constant attack from a nativist populism which has seemingly convinced many with legitimate grievances and concerns that lifting the drawbridge and engaging in greater isolation is the answer to their problems and a way to restore their country to its former glory.

And the general uncertainty created by a febrile environment in which the prospects of a trade war and indeed something even more serious between the worlds two biggest economies are soberly assessed in serious company is another cause for pessimism.

But Im more optimistic than that.
Yes, many developments recently have not been for the better.
I want to cover a few issues today.
First, how we can win the argument about the benefits of openness.

Second, the current state of regional trade liberalisation following the demise of the TPP.

Third, certainly ambitiously and perhaps courageously, I will argue its time to prepare for another attempt at genuine multilateral trade liberalisation through the WTO.

And finally, I want to make some observations about the need for deeper economic engagement with our region.

Firstly, let me provide some brief views on how we can win the openness argument. To win this war, we have to win several battles.
We have to win
1) The evidence battle.

2) The passion battle.
3) The fairness and inclusivity battle.

While the world focuses understandably on Trump, Brexit and LePen, there are other examples that provide an alternative template.

In France, Emmanuel Macron is combining a passion for progressive politics with a belief in openness and trade. And he is showing that such an approach can gain traction.

And of course in Canada, Justin Trudeaus progressive Liberal Party showed, in its massive 2015 electoral win, what an optimistic and progressive case put with passion can achieve.

Let me deal with the evidence battle first.

Prior to the global financial crisis, advanced economies around the world including Australia had experienced one of the greatest lifts in living standards in world history.

GDP per capita in purchasing power parity terms grew by two thirds for advanced economies [67%] between 1995 and 2007.

And its not just advanced nations. The proportion of the global population classified as living in poverty fell from around 30% in the mid-1990s to around 10% in recent years.

Its incontrovertible that trade played a central role in these advances.

As the OECD has pointed out, in East Asia and the Pacific, where virtually all countries have embraced outward-looking development strategies, trade intensity and GDP have grown hand-in- hand.

In the 1990s, per capita real income grew more than three times faster for developing countries that lowered trade barriers (5.0% per year) than for other developing countries (1.4% per year). [1]

And according to the World Bank, extreme poverty has declined faster in East Asia and the Pacific than in any other region, falling from 80% in 1981 to 4% in 2015.[2]

But not only has trade been important for our economic success over the last quarter century, the global slowdown in trade has been in part responsible for the anaemic recovery from the GFC.

In fact even in the United States where unemployment has fallen to around 5%, it has experienced the slowest recovery from an economic downturn since WWII.

And its not just the US.

Unemployment remains stubbornly high in many advanced economies mired with anaemic growth.

The lessons of history are important.

During and after the Global Financial Crisis and subsequent global recession, we liked to congratulate ourselves that we avoided the protectionist response that accompanied the Great Depression.

By avoiding tariffs like those imposed under the infamous Smoot-Hawley Act in 1930, we avoided the downward spiral of growth and deepening depression.

But the modern reality is more complex.

A decade before the GFC, international trade grew at roughly twice the rate of economic growth. Since then it has barely kept pace.

The WTO recently predicted that for the first time in 15 years, international trade would grow more slowly than global output in 2016.[3]

While global growth and investment are weak, rising protectionism is increasingly cited as one of the reasons for the slowdown.

As a recent Lowy G20 paper pointed out, as of last year, less than a quarter of the 1583 trade- restrictive measures introduced by G20 countries since 2009 has been eliminated and indeed such measures have continued to accumulate.[4]

Looked at another way, the WTO points out that in 2010 there were 464 trade-restricting measures in place but by the middle of last year the number had grown to 2,127 of them.[5]

This comes at a cost.

As OECD analysis shows, each dollar of increased border protection leads to a drop of GDP of 66 cents.[6]

Increasingly of course, the production of goods now occurs across multiple borders making the need to resist increased protectionism even more compelling.

Recent OECD data suggests around 75% of global trade is now comprised of intermediate inputs and capital goods and services.[7]

As the OECD has explicitly stated, imposing protectionist measures on imports is the trade policy equivalent of shooting yourself in the foot, causing costs of production to rise and damaging the competitiveness of exporting firms.[8]

The case is clear: open trade has been a source of increasing prosperity. We need to present the evidence clearly.

But these raw facts dont mean the argument has been won.

For example, a 2015 Pew Research Centre survey found that about two-thirds (68%) of Americans say that growing trade and business ties between the U.S. and other nations is good for the country.

Yet only one in five Americans think trade with other countries creates jobs.[9]

I suspect views in Australia would be fairly similar, particularly in some regions.

And, as I will deal with in a few moments, trade and economic dislocation generally does have losers and no lecture about the greater good will or should cut the mustard with these people.

Governments have to listen to concerns that this dislocation is having, particularly in parts of our economy that are not doing as well as the big cities.

But the onus is on leaders to do better in communicating the benefits of trade and what trade delivers.

It is not just about dry facts.

Secondly, to the passion battle.

Facts are essential, but they are not enough.

Proponents of nativist populism, whether they are British, American or Australian, have access to and use effectively powerful emotions of returning to the nostalgic past.

Where all was good and patriotism ruled together with traditional values. We need to passionately expound the cause of openness as a virtue.

The opening of the Chinese economy to more market and international forces has driven the biggest lift of people out of poverty in human history.

Liberalisation of trade through the General Agreement on Tariffs and Trade and then the World Trade Organization saw trade increase four-fold between 1970 and 2008, lifting hundreds of millions of people lifted out of poverty in China, India and many other countries.

This should be celebrated.

For Australia, the opening of our economy has turned aspirations into reality, raising living standards for many who previously would have been consigned to jobs with a limited future.

The facts are not just on the side of openness, but virtue is as well. We should tell the story loudly and proudly.

Again, I see opportunities and cause for optimism in the current debate.

Around the world, people are saying they want to debate our values. They dont want election campaigns to be dry debates between political insiders as to who is the more competent technocrat.

They want a contest of values and ideas. Well, as far as were concerned, were more than happy to oblige.

And thirdly, the fairness battle.

I think have I made it clear in my speech today that I am a supporter of an open economy and an outward looking nation.

But lets not kid ourselves that the current arrangements are working well for everyone.

In the Australian context, not only facing the global forces of rapid technological disruption and a subdued world economy, there is a separate and more unique transition well under way as mining investment continues to fall dramatically.

This transition is hurting a lot of people.
This is particularly pronounced in the regions.

You only have to look at the annual average employment data for New South Wales and Queensland over the last twelve months to get a glimpse of the city region divide.

In Sydneys Eastern suburbs unemployment is very low at 3.1 per cent.

But in places like New England and northwest NSW, unemployment is more than double at 7.7 per cent.

And theres a similar pattern in Queensland.
The unemployment rate in inner city Brisbane sits at 3
12 per cent.

But in Cairns the unemployment rate is closer to 8 per cent while in outback Queensland unemployment sits at 11.6 per cent up from around 4 per cent just 18 months ago.

While the recent bounce back in GDP was anticipated and welcome it continues to mask ongoing weakness.

Wages growth in Australia continues to deteriorate and is now running at an annual rate of just 1.8% in the private sector, the lowest rate in a generation.

Our unemployment rate is higher than it was during the GFC and there are now 56,000 fewer full-time jobs in Australia than there were a year ago, together with elevated underemployment.

This is not to mention the fact that households around Australia have been forced to take on record amounts of debt to live out their dream of buying a home the same dream their parents were able to achieve with far greater ease just a few decades ago.

We cant expect people to be upset about the attacks on a globalised economy when they dont feel they are benefitting from it personally, here at home quite the contrary.

As the OECD has noted, differences in the pace of income growth across household groups have been particularly pronounced in some English-speaking countries.

In the UK, those who voted to leave Europe were overwhelmingly those for whom the economy is no longer working.

From the mid-1980s to the late 2000s, household incomes in the top decile in the UK grew at 212 times the rate of the bottom decile.[10]

The Economist magazine recently asked the question as to what proponents of openness should do in the face of this inequality.

The Economist is no journal of the radical left, and quickly answered its own question: The most important thing to do is devise policies that spread the benefits of globalisation more widely, it said.

Or as another of my favourite magazines, the New Statesman recently put it: The truth is that, for a while now, growth has failed to deliver its moral dividend alongside its economic one because the increased prosperity has not been shared fairly.

Thats part of the reason why Labors agenda is so important for Australia.
Protecting Australias low and middle income families from harsh cuts to family payments.

Ensuring that our temporary skilled immigration system does what it is intended to do: simply fill genuine gaps in employment.

Focussing on skills and vocational education improvements, so Australians know their government will assist them in lifting their ability to contribute and compete.

And, at a time when profit growth is at a record highs and wages growth is at record lows, protecting people who work on weekends from an unprecedented absolute pay cut.

As a pro-growth progressive, I think there are lot of good reasons to care about income inequality, social mobility and inclusiveness.

But even if I didnt care about these things from a moral or progressive point of view, I would care about them from the vantage point of making it easier to defend globalisation and an open economy.

The more people feel they benefit from our economy, the more they will embrace openness and the system which has allowed a small open economy like Australia to prosper.

Let me now turn to some specific observations about the state of free trade

One would think by reading the headlines that freer trade in our region is now a bit of a pipedream.

The TPP is dead.

No-one in Australia killed it. A rather high profile American did.

But there is no point pretending its alive or that it is merely pining for the fjords.

The benefits of the TPP would not have been as great for Australia as some people like to make out.

We already have free trade agreements with most TPP members so the progress to be made through the TPP was marginal.[11] Material, but marginal.

But with the TPP effectively dead, it is likely that in the short term the Regional Comprehensive Economic Partnership (RCEP) initiated by the ASEAN countries will take centre stage.

RCEP is a regional agreement with ASEAN member states and those countries which have existing FTAs with ASEAN Australia, China, India, Japan, Republic of Korea and New Zealand.

The 16 RCEP participating countries account for more than 312 billion people more than 4 times the population covered in the TPP[12] around 30 per cent of global GDP and over a quarter of world exports.

Importantly for Australia, RCEP includes 9 out of Australias top 13 trading partners and 70% of Australias trade in goods and services so concluding a deal here could deliver large benefits.

Given some RCEP countries that were not in the TPP have relatively higher barriers to trade its likely any incremental gains here has the potential to deliver larger gains than the TPP.

Of course, RCEP shouldnt be seen as the end goal.
RCEP provides a pathway to broader liberalisation in APEC.

APEC is often forgotten body when it comes to trade, but it has been quietly achieving real results on the trading front.

APEC is a proud achievement of my side of politics and APEC cannot be overlooked while other groupings such as the G20 attract all the attention.

In 2012 APEC agreed to slash tariffs on 54 environmental goods to no more than 5 per cent, boosting trade and improving access to the tools needed to fight climate change.

This was the first multilateral tariff-cutting arrangement in 20 years, which will help lower the cost of environmental goods like solar panels, wind turbines and air pollution control equipment. [13]

This comes on the back of APEC reducing average tariffs in our region from 17% to less than 6% since 1989[14].

Liberalisation through RCEP has the potential to crowd in other Asia-Pacific economies over time, which would reinvigorate trade discussions towards a Free Trade Area of the Asia Pacific, or FTAAP as its commonly known.

Further liberalising trade and investment in the APEC areas is particularly important given Australias place in the region, and also given APEC brings together the US and China.

The one thing we shouldnt be doing is spending all our energy trying to resuscitate and advocate for deals like the TPP which are currently not going anywhere.

Instead, Australia should be actively participating in the regional discussion about Whats next when it comes to regional freer trade.

Multilateral trade better

Now let me turn to another matter for some optimism, or at least for some hope.

Maybe, just maybe, the decline in popularity of bilateral free trade agreements will lead to an international reconsideration of the benefits of genuine global trade reform through the WTO.

This is hard. But the pay-off is big.
There has been a false debate in recent years, both in Australia and internationally. Apparently, you are pro-trade if you are pro-free-trade-agreement.

But bilateral free trade agreements are a third-best outcome, after genuine multilateral reform through the WTO as the first-best outcome and regional or plurilateral trade agreements as the second best.

Bilateral free trade agreements have only become fashionable as the world appeared to have given up any meaningful multilateral reform, frustrated by repeated failed attempts.

But free trade agreements have eaten up the resources of trade negotiators and consumed the political bandwidth.

These deals take up considerable energy of the body politic and in the process take the focus off genuine multilateral reform.

As the Productivity Commission has consistently argued The benefits of trade liberalisation are greatest if the liberalisation is undertaken on a multilateral basis.[15]

Its no coincidence that the prosperity achieved since the Second World War has coincided with great progress on multilateral trade liberalisation.

Going back as far as the General Agreement on Tariffs and Trade (GATT), an international code of tariff and trade rules that was signed by 23 countries in 1947.

By the end of the 1970s, more than 100 countries had joined.[16]

GATT sponsored several rounds of multilateral trade negotiations, culminating in the Uruguay Round in the 1990s.

As the WTO notes, the Uruguay Round involved 123 countries and covered almost all trade, from toothbrushes to pleasure boats, from banking to telecommunications and was simply the largest trade negotiation ever, and most probably the largest negotiation of any kind in history. [17]

By lowering tariffs and liberalising capital markets, increased competition drove unparalleled increases in living standards around the world.

Many factors may have contributed to this remarkable expansion of trade but the fact that it coincided with a significant reduction in trade barriers through genuine multilateral reform is inescapable.

Conversely bilateral agreements can increase the complexity of and business costs of international trade, while diverting trade from some countries to others.

As head of the Productivity Commission Peter Harris has said, Its red tape, and growing at a very healthy rate.[18]

This is not to say the perfect should be the enemy of the good. The recent more incremental approach is a case in point.

This breakthrough reform involves countries coming together to harvest areas of the long- running Doha Round of multilateral trade negotiations on which there is a real chance of agreement.

This more practical, incremental approach began taking shape a few years ago and is really starting to bear fruit, particularly in relation to Trade Facilitation, Agriculture and Services.

In fact, the 22nd of February, just two weeks ago, was an important occasion - the entry into force of the Trade Facilitation Agreement with the 110th country ratification now received.

This Agreement will radically cut administrative burdens and inefficient customs procedures involved with trade.

Fully implemented, the Trade Facilitation Agreement has the potential to reduce trade costs by more than 14% and increase global exports by up to $1 trillion.

It will also add more than half a per cent per year to world GDP growth just what the global economy needs.[19]

And from Labors point of view, were proud that Labors Trade Minister, Craig Emerson, played an important role in the negotiations which brought this about.

Craig Emerson and Australia realised that the Doha Rounds goal of a single undertaking that nothing is agreed until everything is agreed was beyond reach.

So Craig and Australia advocated for and led a "new pathways" approach to finding consensus in different areas of trade, instead of focusing on the entire Doha Round.

This is in keeping with Australias well-deserved reputation as an honest broker in multilateral trade negotiations.

Labor believes that Australia can play an important role again in progressing the case for multilateral reform.

We dont overstate that role. We are a middle-sized economy and the task is tough. But the task seemed daunting when Australia formed the Cairns Group thirty years ago.

The Cairns Group brought together 19 agricultural exporting developed and developing countries which account for over 25 per cent of the worlds agricultural exports and lobbied for a sensible outcome on agriculture in the Uruguay Round[20].

Without the Cairns Group, the Uruguay round may not have happened and if it did, the outcome would not have been as advantageous to Australia and similar countries as it turned out to be.

The incremental approach advocated by Australia and like-minded countries also led to a WTO agreement reached in Nairobi in December 2015 to eliminate agricultural export subsidies that had so grievously damaged farmers in Australia and other Cairns Group countries during the 1980s.

And the Trade in Services Agreement jointly led by the US and EU with Australia playing a key role is making good progress.

This is an agreement which would cover 70% of total global services trade, including areas like financial services, telecommunications and e-commerce and professional services.[21]

The services sector employs 4 out of every 5 people in Australia so the potential jobs benefits with an agreement like this are pretty clear.

While negotiations for the trade in Services Agreement are outside the auspices of the WTO, there is potential for the agreement to be multilateralised within the WTO at some time in the future.

We should be continuing to work with like- minded countries to prepare the ground for when international political circumstances allow for multilateral negotiations to take off again.

This might not be for a few years, but we can lay the ground work now with other countries that see the benefits of genuine multilateral reform.

A genuine multilateral approach maximises the gains from trade and avoids the damage of trade being diverted from low-cost to higher-cost countries.

Multilateral trade based on the most-favoured nation clause where what is offered to one country has to be offered to all is the most comprehensive and rewarding approach to trade liberalisation.

But while this might have been a bit easier to achieve last century, its not now.

Variance among a growing number of WTO members in terms of interests and priorities have made negotiations harder to manage and slower to complete.

In 1956 there were just 26 countries in the General Agreement on Tariffs and Trade (which preceded the WTO).

In 1994 this had grown to 128.

There are now 164 member countries in the WTO.[22]

This means 164 countries effectively have veto power in the Doha Round.

Each of these 164 countries, regardless of their size, can hold the negotiating table to ransom.

One country disagrees and progress stalls.

Multilateral reform will continue to be the first-best option.

This is why thought should be put into whether genuine multilateral agreements like Doha should be held to ransom to the positions of one or two member countries blocking them.

This may sound radical.

But a more pragmatic approach might be desirable, such that when WTO agreements achieve a critical mass or a coalition of the willing, they can still move forward.

Such plurilateral agreements are already provided for under the WTO rules.

This is ultimately a matter for the WTO and for further deliberation, but worth exploring by member countries including Australia.

Fostering greater cooperation locally
Opening the doors to new trade pathways through agreements is important, but not enough.

This brings me to my final set of observations, about economic engagement with our region.

Global uncertainty makes deeper economic engagement with our region, particularly South East Asia, more important and urgent than ever.

Frankly, as a nation we often pay the Asian Century more lip service than serious effort and reform.

If Australia manages to access just 1% of the emerging middle class market in Asia, it will be the equivalent of accessing 6 cities the size of Sydney.

Take Indonesia for example.

The growing Indonesian middle class and the fact that Indonesia is likely to be in the worlds five-largest economies by 2050 means that our economy will benefit from much closer economic engagement with this growing economic power which is such a near neighbour.

It would be negligent if we as nation didnt forge closer economic engagement with such a large, rapidly growing economy so close to us.

Just as Australias and Indonesias leaders have had a formalised Annual Leaders meeting since 2010 and our Foreign and Defence Ministers have had a Two-Plus-Two dialogue since 2012, Ive proposed that Australia and Indonesia formalise annual meetings between our finance and trade ministers in an economic and investment 2 + 2.

This is something Jason and I would formerly propose to our Indonesian friends early in a Shorten Government.

One of the things that annoy me about policies which promote Asian engagement is the tendency for incoming governments to throw out the work of previous governments, just because it wasnt initiated by the incumbents.

Policies in this space take time to mature and pay off, and we cant afford short termism and opportunism.

Labors Australia in the Asian Century White Paper was a very important blueprint, but it remains archived and largely unimplemented.

This was a report which clearly laid out pathways to reform, to grow people-to-people links in our region, and to ensure that we grasp the many opportunities that lie ahead.

Boardrooms around Australia still remain drastically underrepresented when it comes to having an understanding about Asia.

An objective of the White Paper was that one-third of board members of Australias top 200 publicly listed companies and Commonwealth bodies (including companies, authorities, agencies and commissions) will have deep experience in and knowledge of Asia.

But years later the so-called bamboo ceiling in Australia remains in place.

A recent report showed that 17 per cent of working Australians identify themselves as having an Asian cultural background.

Yet out of Australias top 200 companies, just 1.9 per cent of executive managers and 4.15 per cent of directors have Asian cultural origins.[23]

But its not just the boardroom, its also the classroom.

I believe more young people learning Asian languages and developing an interest in our closest neighbours is an important national imperative for Australia.

As Ive said previously, politicians shouldnt lecture young people about doing something we are not prepared to do ourselves.

In our Shadow Ministry, our Shadow Foreign Affairs Minister Penny Wong speaks some Bahasa Malay.

Three years ago I decided it was hypocritical to wax lyrical about the need for us to be more Asian literate unless I was prepared to make a significant attempt to do so myself, and so enrolled in Diploma of Modern Languages in Bahasa Indonesia.

My modest contribution to improving Asian language literacy in Australia.

All going to plan, Ill finish this year and I suppose Ill then be an official Indonesian speaker, although with a highly questionable heavy Australian accent.

My Shadow Ministerial colleagues Stephen Jones and Matt Thistlethwaite are enrolled in the same diploma, Stephen in Indonesian and Matt in Mandarin.

We join our colleague the Member for Solomon, Luke Gosling, who is already fluent in Bahasa Indonesian and Jenny Macklin who speaks Japanese.

Asian language literacy in our Federal Caucus is probably at an all-time high. But as a nation, we have much more to do.
Let me end where I began.

Its a confusing, confronting time in the global economic environment.

While the real global economy is so much better than that confronted in 2008 and 2009, we are still dealing very much with the dislocation caused by the great recession and the anaemic recovery which has followed.

But this is a time for cool heads. For a values based approach which looks to the long-game.

Its a time which calls for governments to listen to peoples concerns about those left behind and to provide concrete and real solutions, which avoid simplistic and unrealistic false solutions.

Which calls for governments to be honest about the challenges and opportunities in the global environment.

Not to over-sell the potential of any one bilateral or regional trade deal, but to point out that genuine progress for better trade is in the interest of our country.

This is the approach that a Shorten Labor Government will take.

Jason and I, and our entire Labor team are looking forward to making the most of these challenges and opportunities on behalf of Australia.

[4] Lowy Institute, G20 Studies Centre, Towards Hangzou and Hamburg
[5] World Trade Organization (2016), Report to the TPRB from the director-general on trade- related developments, Geneva, 4 July, p. 4.
[7] the-oecd-wbg-inclusive-global-value-chains-report.htm
[8] the-oecd-wbg-inclusive-global-value-chains-report.htm
[9] the-country-but-not-great-for-jobs/
[10] the-causes-of-growing-inequalities-in-oecd-countries_9789264119536-en#.WLyiYU27rvU#page25 [11] See January-2016-Implications-Trans-Pacific-Partnership-Agreement.pdf, p. 227.
[12] partnership.aspx
[15] report.pdf
[21] services-agreement.aspx
[23] experiences-and-talents-into-australian-leadership/