Australia and regional trade Mark Thirlwell Program Director, International Economy January 2005

Presentation themes Australia’s trade profile Why East Asian trade matters for Australia Basic features of East Asian trade Recent trends in regional trade Policy debates

1. Australia’s trade profile

Key developments in Australian trade policy YearEvent 1932Ottawa Agreement establishing Imperial preference trading system 1938Embargo on export of iron ore to Japan 1948Australia becomes one of 23 founding members of the GATT 1956Ottawa Agreement renegotiated 1957Commercial Treaty with Japan 1960Embargo on export of iron ore to Japan lifted 1961UK announces will seek membership in EC 1963Australia-Japan Treaty 1967Japan overtakes UK as largest export market

Continued... YearEvent 1973First round of across-the-board tariff cuts UK joins EC 1974Passenger Motor Vehicles Plan 1983Australia-New Zealand Closer Economic Relations Agreement Floating of the A$ 1986Cairns Group of agricultural exporters established 1987Amalgamation of depts of trade and foreign affairs into DFAT 1988Second round of across-the board tariff cuts 1989APEC established 1991Third round of tariff cuts

Continued (2)... YearEvent 1992Establishment of AFTA by ASEAN 1995APEC announces Bogor Goals: free trade by 2010 / White Paper on Foreign and Trade Policy: place for bilateralism 2003SAFTA signed Feasibility study for Australia-China (CAFTA?) deal announced 2004AUSFTA signed TAFTA signed Scoping study for Australia-Malaysia (MAFTA?) deal announced ASEAN-CER economic ministers call for regional negotiations

Australia’s move to a more liberal trading regime Source: Productivity Commission and WTO Effective rates of assistance, %

Australian tariff barriers in perspective Source: WTO web site. Data are for latest available year (generally ) MFN applied tariff rates, simple average, %

Tracking Australian international integration Source: RBA and ABS Australian exports of goods and services, % of GDP

The changing composition of Australian trade Source: RBA for 1953/4: DFAT for 1983 and 2003 Composition of Australian merchandise exports, %

The changing direction of Australian trade Source: DFAT, One hundred years of Australian trade Destination of Australian merchandise exports, %

Australian exports in 2003 Source: DFAT Trade 2004 Direction of exportsComposition of exports

2. Why East Asia matters for Australia

Major export markets for Australia Source: DFAT web site. Top ten merchandise exports markets in 2003, A$b 18% of total exports 9% 7.5%

A key growth market & a dynamic one Source: IMF Direction of Trade Statistics CD ROM Change in market share, % pointsCompound growth rate, % pa

3. Basic features of East Asian trade

Regional exports dominated by manufacturing Source: World Bank Development Indicators. Date for 2002 where available, otherwise Share of total goods exports, %

Significant role for ‘hi tech’ exports Source: World Bank Development Indicators. Data for 2002 where available, otherwise ‘Hi tech’ as share of total manufacturing exports, %

Imports slightly more balanced Source: World Bank Development Indicators. Data for 2002 where available, otherwise Share of total merchandise imports, %

3. Recent trends in regional trade

East Asia is growing its share of world trade Source: IMF Direction of Trade Statistics CD ROM Share of world goods exports, %Share of world goods trade, %

Aggregate numbers don’t tell the full story Source: IMF Direction of Trade Statistics CD ROM Share of world goods exports, % Change in share, % points

Growing role for intra-regional trade Source: IMF Direction of Trade Statistics CD ROM and Lowy Institute calculations Intra-regional exports as share of total, %

China an increasingly important market... Source: IMF Direction of Trade Statistics CD ROM and Lowy Institute calculations Change in share of goods exports to China, % points

... for most of region Source: IMF Direction of Trade Statistics CD ROM. Data are for Share of China in total goods exports, %

But extra-regional demand is still dominant East Asia ex Japan exports 100% East Asia ex Japan 36% Domestic demand 7% Rest of World 64% Production 29% 15% 14% Source: Monetary Authority of Singapore: data are for 2001.

5. Policy debates

China: comrade or competitor? Source: DFAT Economic Analytical Unit (2003). Share of net exports, %

The export boomerang: the case of Japan Source: Tim Harcourt (2004) "Global Challenges for the Australian Economy".

Surfing Asia’s development wave? Source: Tim Harcourt (2004) "Global Challenges for the Australian Economy".

Terms of trade turnaround Source: RBA Terms of trade, index 2002/03=100

Living in a world of preferential trade agreements Source: WTO web site. Cumulative number of PTAs, by date entered into force

Asia been slow to join the PTA bandwagon... Source: WTO World Trade Report Share of preferential trade in merchandise imports, %

But is now well on the way ASEAN / AFTA ASEAN – China ASEAN – India ASEAN – Japan ASEAN - Korea China - Australia China – HK China – Macao China – New Zealand Japan – Indonesia Japan – Mexico Japan – Philippines Japan – Korea Japan-Singapore Korea – Chile Korea – Mexico Malaysia-Australia? Singapore – Australia Singapore – Canada Singapore – Chile Singapore – EFTA Singapore – Mexico Singapore – US Thailand – Australia Thailand – US Selected regional PTAs, actual and proposed

The case for joining a PTA... 1.Trade creation outweighs trade diversion 2.A response to the log-jam in the multilateral system... and a spur to it (‘competitive liberalization’) 3.Prospect of going faster and deeper than multilateral negotiations 4.Insurance against policy shifts in key trading partners 5.Insurance against being frozen out by other PTAs (‘domino regionalism’) 6.Lock in domestic liberalization at home (Mexico and NAFTA) 7.Political / strategic objectives (the EU, AUSFTA?)

... and the case against 1.Trade diversion exceeds trade creation 2.Diverts scarce negotiation resources from multilateral negotiations 3.Distortions and transactions costs created by rules of origin required to make PTAs work, leading to the creation of a ‘spaghetti bowl’ of complex arrangements that stifle, rather than support, trade 5.Risk of creating protectionist forces (to retain preferential access created by PTAs) 6.Serious issues (e.g. agriculture) only dealt with in WTO 7.Trade may complicate political / strategic alliance