12 July 2017

Why Australia and the world need free trade to thrive

By Martin Tricaud, Chief Executive Officer, Australia, HSBC

Agriculture producers are among the beneficiaries of free trade agreements.

Australia is luckier than many countries to have an arsenal of robust free trade agreements (FTAs) that, in theory, give it the firepower to prosper as a nation.

The 10 FTAs to which it is signatory – encompassing countries as diverse as Chile, Thailand, United States, Japan and China – allow it to tap into economic dynamics that could help prolong its own record-breaking run of close to 26 years without recession.

The Federal government should take every opportunity to explore new FTAs that will position Australia to deepen ties with other nations, enhance its competitiveness and capitalise on the quantifiable rewards that trade liberalisation delivers to the population-at-large.

New ties with Old Blighty

The potential to forge new trade ties with the UK following its impending exit from the European Union is a case in point, as is the recent announcement that Australia will commence FTA negotiations with the Pacific Alliance trade bloc.

A July 6 inquiry by the Trade Sub-Committee of the Australian Parliament's Joint Standing Committee on Foreign Affairs, Defence and Trade into our future trade relationship with the UK highlighted the obvious opportunities this particular alliance could bring.

The UK produces just 54 per cent of the food it consumes, for instance, with the EU supplying 27 per cent and Australasia around one per cent. The possibility of a level playing field for our suppliers, or even advantageous terms, could allow Australia to extend its leadership as the UK's top supplier of wine to other agricultural segments including beef and other meats, grains, dairy and high-end consumables.

Again, the potential gains from such agreements are significant. The OECD estimates that if G20 economies cut overall trade barriers by half, real wages paid to lower-skilled workers could rise by 1.8-8 per cent and by up to 8.1 per cent for higher-skilled workers. Jobs for lower-skilled workers could also rise by 0.3-3.3 per cent and by up to 3.9 per cent for the more highly-skilled.

Recent history shows that forecasts like this are "not pie in the sky". Roberto Azevedo, Director General of the World Trade Organisation, has stated that two-thirds of the one billion people brought out of extreme poverty from 1990-2015 can be attributed to economic growth generated by an increase in trade in developing countries.

Sharing the spoils

We now know that such high level gains do not always filter down to the man-on-the-street and the challenge for governments is clear: not just to negotiate the complexities of FTAs with foreign counterparts but also to form a pact with the public and business in which the end goal of free trade is to generate equitable results for all parties.

The community needs to be encouraged to overcome any deep-seated suspicions of free trade fuelled by anti-globalisation sentiment elsewhere in the world. And business itself requires greater assistance to put the terms of FTAs into practical effect so that Australia does not miss the full benefits of trade liberalisation for which successive governments have negotiated long and hard.

The latter point should not be underestimated. Research conducted by HSBC in 2014 showed that, on average, each FTA signed by Australia was used only by 19 per cent of Australian exporters who took part in the survey, compared to an average of 26 per cent among Asian exporters using their respective markets' FTAs. Complexity of trade terms and a lack of understanding of the benefits were among the factors behind the subdued uptake. Importantly, those who did utilise FTAs were well rewarded – 75 per cent had experienced export growth, access to a wider client base or created new business opportunities that allowed their ventures to flourish.

Dismantling barriers

The Australian government already showed its willingness to address impediments to the successful application of FTAs when it became one of the first signatories to the World Trade Organisation's (WTO) Trade Facilitation Agreement in February this year. This far-reaching customs accord – which aims to cut red tape and streamline border processes – could add up to 0.5 per cent per annum to global GDP growth by 2030 by cutting trade costs, according to the WTO.

Trade liberalisation has proven its worth since it was first articulated as a concept some 240 years ago. Australia's Federal government is right to continue to forge new FTAs and encourage stronger take-up of existing deals. Free trade can and must play a role in the country's continued economic prosperity.