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Fostering an export or fostering an export culture: the role of Government



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Fostering an Export

or

Fostering an Export Culture;

The Role of Government

by

Alexander Downer, M.P.

Shadow Minister for Trade & Trade Negotiations

MTIA National Business Strategy Group

Conference

Hyatt Hotel, Canberra

COMMONWEALTH 1

PAR! iAMENTA.RY UBRAkY i MiCAl·!

3 March 1992

FAILURE OF PROTECTIONISM

Last year Singapore's former prime minister and now Senior Minister, Lee Kuan Yew, told The Australian in the course of an interview on a wide range of subjects that Australia risked being reduced to the status of "a Tahiti" if it continued to hide

behind protective barriers to trade. Mr Lee made it clear that he considered it an illusion to think you can build competitive industries by hiding behind barriers to trade.

Mr Lee knew what he was talking about. He built one of the most competitive economies in the world precisely by reducing barriers to trade. Today, Singapore stands alongside Hong Kong as a

monument to free trade. Singapore is a modern, tough,

competitive economy. It has experienced high rates of economic growth for sometime, it has a growing manufacturing sector although services remains the major contributor to GDP, and its exports - including re-exports - stand at about 1.5 times its GDP.

By contrast, Australian manufacturing industry, quivering behind tariffs and quotas, putting out its hand for government

assistance, has kidded itself since the 1930s that it was modern, tough and competitive. In actual fact it has been weak and

ineffective seeking to keep out the goods of real competitors.

Put simply, protectionism has been discredited.

Contrary to popular belief, there is not an industry any where in the world which has grown strong because of protectionism. Not in the United States, not in the U.K., not in Germany, and not in Japan. Where they have grown strong, it has been due to

factors other than restrictions on imports, such as the existence of a flexible and competitive labour supply, willingness to develop and implement modern technology and production methods, and a vigorous level of competition that has had an outward, export-oriented focus.

Indeed, where these factors which give real comparative advantage have been absent and an economy has depended solely on import barriers to build a particular industry, it has overwhelmingly failed to do so. Sadly, we don't have to look too far from home

for an example: Without intending the pun, protectionism has turned the textile, clothing and footwear industries in Australia into a basket case. For too long firms in this sector have made their money by riding on the consumer's back. But in all its 50 years of protection the industry has failed to become

internationally competitive.

It is simply wrong to say manufacturing has declined in recent years because of reductions in the levels of tariff protection. As Des Moore of the Institute of Public Affairs has demonstrated, the combined net effect of the fall in the average rate of

assistance to manufacturing (from 21 per cent to 16 per cent) coupled with an exchange rate depreciation of about 14 per cent in real terms between 1983-84 and 1989-90 "was to increase the

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capacity of manufacturing to compete against imports over this period as a whole".

Put quite simply: an exchange rate depreciation of this

magnitude during the 1980s provided manufacturing with more protection against imports and enabled it to be more competitive on the world market against foreign competition. Australian manufactures should have become cheaper than their competition

on both the domestic market r and abroad. The fact that Australian manufacturing failed to become competitive cannot thus be put down to reductions in protection and the reasons for its failure must be found elsewhere.

And ultimately protectionism not only fails the industries it seeks to forster; it also penalises the sectors of an economy which are efficient. This is because the operating costs of these sectors increases in line with the higher costs of imported machinery which they need. Unfortunately they are not in a

position to pass those costs on to buyers overseas and remain internationally competitive.

In Australia, our competitive mining and agricultural sectors, which had given Australians the highest standard of living in the world at the beginning of this century, were hurt by protection for manufacturing. As their costs rose - despite their

considerable successes in raising their own productivity - these industries gradually diminished because, at the margin, higher cost producers among them went to the wall.

This of course had an effect on economic growth. That effect was to slow it considerably. And our standards of living slowed with the lower rates of economic growth. Everyone, including those employed in the manufacturing sector, was less well off than they would have been had protection for manufacturing not been

introduced.

Perhaps the greatest irony of protectionism in Australia is that it has not done anything to lift Australia's ratio of exports-to- GDP since 1958 nor, in that time frame, has it changed our trade mix to reflect the greater emphasis on manufacturing. Moreover,

the fact that the most highly protected sectors - the automotive industry and the textiles, clothing and footwear industries - have been among those to show the greatest relative declines in their contribution to GDP than the manufacturing industry as a whole is an indictment of protectionism.

STRATEGIC TRADE THEORY: THE NEW PROTECTIONISM

While few still argue for a return to the protectionism of old, a growing number of business leaders, politicians and academics are calling on the Australian Government to adopt as policy the new area of trade theory known as strategic trade theory. This theory argues that under certain conditions government

intervention in favour of particular industries can improve the general well being of an economy.

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Adherents of this theory, among them the new Treasurer John Dawkins, argue that the economic success of Japan and the so- called "tigers of Asia" - South Korea, Taiwan, Hong Kong and Singapore - is due to their implementation of this theory. They

say we should learn from the "lessons" of Asia and also adopt this theory as part of our package of economic policies.

However, the "lessons" of Asia are not as clear cut as the

proponents of strategic trade theory would have us believe. A study by the Industry Commission - Strategic Trade Theory: The East Asian Experience - which was released at the end of last year said it was "naive to argue that the success of Japan and the other DAEs (Dynamic Asian Economies) can be explained

principally by governments providing industry-specific assistance." The Industry Commission went on to conclude that strategic interventions by governments were not the key to rapid

economic growth in these economies. Instead, the Commission said several other common factors were more important including among them strong social consensus in favour of growth; a willingness to introduce modern technology and production methods; and a

flexible and competitive labour force.

The message of the Industry Commission study was that "strategic trade policies were neither a necessary nor a sufficient

condition for success." As the paper pointed out, the extent of assistance varied considerably across the economies which were examined by the Commission - Japan plus the four tigers. Yet they all achieved exceptional economic growth. When trade

liberalisation occurred, these economies were still successful. Moreover, there was also clear evidence of failure when

government intervention moved from being fairly uniform to being more closely focussed - that is to "picking winners".

South Korea in particular provided an interesting case study because its Government has been at times the most interventionist in the region. Economic growth was phenomenal in Korea between 1982 and 1988 because it achieved impressive productivity growth as a result of significant trade policy reforms, not government

intervention. However, economic growth has slowed significantly in recent years because of a fall in productivity with rapid rises in wages and an escalation of strikes.

On the empirical evidence, then, strategic trade theory does not have what it takes to make an economy competitive. Intervention itself has a very mixed record in Asia and the conditions

prevailing in Japan and the DAEs that made rapid economic growth possible do not exist in Australia.

There are also several flaws in the theory itself which should lead many of its disciples here to question whether it should really be adopted as policy in Australia.

For one thing, the founding father of strategic trade theory, Dr Paul Krugman of MIT, has concluded that it is of little practical use and that free trade remains the best policy option for

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governments.

Another leading proponent, Professor Bruce Scott of Harvard University's School of Business Administration, who visited Australia very recently, has said that its success in Asia has depended on the types of political structures existent there and

has concluded that the transition in economic strategy should precede the transition to democracy. In other words, strategic trade policy is dependent on undemocratic coercive powers and is

not compatible with a pluralist system of government. I think most Australians would share my concerns about the implications of this argument.

Another concern with the theory is that the strategic industries which would be selected by national governments for assistance would be the same industries from one country to the next. If all governments target the automobile or aviation industry as

strategic it hardly suggests that industry is going to be very profitable in the future. We cannot all specialise in the

manufacture of cars and aeroplanes and then benefit from

international trade.

This raises the question of who decides which industries are of strategic importance. Choosing industries which are going to be of strategic importance means picking winners. Do we really want bureaucrats doing that? Indeed, as Peter Swan argued in the recent report of the Australian Manufacturing Council, Going

International: Export Myths and Strategic Realities, if it was clear who the winners will be the private sector would already be backing them because by definition they will return handsome profits.

If the private sector has difficulty identifying winners, do we really believe bureaucrats in the Department of Industry, Technology and Commerce or the Australian Trade Commission or Treasury will be any better at picking winners? The history of bureaucrats picking winners, not only in Australia but all over

the world, including Japan where much is claimed for the Ministry of International Trade and Industry (MITI), suggests otherwise. Some of M I T I 's attempts to guide industry have succeeded -

although they may have succeeded without M I T I . Some have n o t . Amongst the failures are MITI's opposition to Honda entering car manufacturing, its attempts to stop Sony producing transistor technology and its attempt to get Japanese industry to produce

one single "people's car " . And while cars and electronics have surged ahead, industries that MITI tried to foster, like steel and shipbuilding, have failed.

And like the protectionism of old, strategic trade theory is dependent on diverting scarce national savings from competitive sectors to uncompetitive sectors of an economy. I am not fond on quoting the new Prime Minister, but Mr Keating had it right when he said in an interview on Channel Nine's Sunday a few weeks

ago that "you're only cheating yourself if you run policies which have scarce national savings going to the wrong places."

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But the most important consideration for governments toying with the idea of adopting strategic trade policies has to be that it is fundamentally unsustainable because it is based on protection in the home market and the pursuit of aggressive exporting

strategies to capture external markets. Such policies would further corrupt an already imperfect world trading system where the rise of non-tariff barriers and subsidies has already

substantially undermined the GATT framework. The pursuit of strategic trade theory can only lead to the collapse of the world trading system into hostile trading blocs and no one would

benefit from the trade wars which would ensue.

THE ROLE OF GOVERNMENT IN BUILDING EXPORTS

Australian business' failure to compete on international markets is due to the failure of the Federal Government, despite eight years of rhetoric, to achieve fundamental structural reform.

Achieving structural reform is about removing conditions imposed by governments which, over the years, have distorted the pattern of national production. It is about tariff reform; it is about taxation reform; it is about micro-economic reform; it is about privatisation. Structural reform is about restructuring the Australian economy to remove distortions and discrimination which

reduce the competitiveness of Australian business, particularly where they harm the international performance of our most

efficient industries.

If I could put it another way: structural reform is about

getting the government and structural impediments out of the way of business so business can do what it does b est.

Removing the distortions in our economy is essential to

increasing our exports across the board. And we all have a

vested interest in seeing the export sector grow, diversify and develop.

The key to export growth is structural reform.

The problem at the heart of manufacturing lies on the other side of the structural reform agenda to tariff reform, in such factors as Australia's taxation system, the centralised wage fixing system, and productivity and efficiency.

It means very little to compare Australia's manufacturing performance with the successes of other manufacturing countries and then to talk about tariff levels and industry subsidies as the reason for success or failure. To do so misses the central point of our low level of productivity in the manufacturing

sector by comparison with successful manufacturing countries and the dynamic Asian economies. The 1990 World Competitiveness Report by the World Economic Forum and IMD shows that Australian productivity grew by only 1.1 per cent from 1982 to 1988 compared

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with 1.6 per cent for the US, 1.7 per cent for West Germany, and 3.3 per cent for Japan, our main competitors among industrialised economies. Over the same period employee productivity trends for the industrialising economies of our own region were phenomenal:

in South Korea, productivity grew by 7.7 per cent, in Taiwan by 5.5 per cent, in Hong Kong by 5.7 per cent, and in Singapore by 4.5 per cent.

The Bureau of Industry Economics has provided a new dimension to the productivity debate by comparing productivity in similar manufacturing plants in different countries but owned by the one multilateral company. The study, International Comparisons of

Plant Productivity: Research Report No. 38, found that productivity in Australia was appalling - in one case 571 per cent behind the United States - and that the real cause of low productivity was hours worked and labour productivity. And the BIE saw our industrial relations system as a factor in our poor productivity. Another factor was our attitudes to work.

These are problems that we need to address. While Government cannot force changes in attitudes to work, it can bring about changes in the industrial relations system which will influence those attitudes. For example the adoption of enterprise

bargaining which is widely used in the United States could do much to lift productivity by linking wage increases to real productivity increases at the plant level. This is where the

Government can and should be more active in bringing about the structural reform in Australia.

THE COALITION STRATEGY

It is very unfortunate that government's commitment to the exporting sector is very often measured in terms of what

financial assistance it is prepared to give to exporters. Those who believe the depth of a government's coffers demonstrate its attitude to exporters are out of touch with reality.

The reality is that government financial assistance, assistance in terms of strategic trade theory, of picking winners, has had its day. It is no longer appropriate in the evolving system of international trade (no matter how far we are from free world trade), and is particularly out of touch with the realities of the economic debate in this country as I have demonstrated.

When I addressed this conference last year I said to y o u :

"We are moving to a more mature politics both

domestically and internationally in which the

interests of the tax-payer and consumer are paramount. If you cannot compete and export in that type of world then you are in the wrong business."

My message for business has not changed since then.

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Nor has the Coalition policies on trade and industry.

We remain committed to achieving negligible tariffs by the year 2000. We continue to see the Export Markets Development Grants Scheme (EMDG) and the International Trade Enhancement Scheme (ITES) as very much second-best answers to the enormous problems which confront our exporters and therefore have made it plain

that they will not be continued after they expire in 1995. And in the meantime they will not receive any more funding under a Coalition Government precisely because these schemes do not address those problems.

The Managing Director of Bunge Australia, Mr John Russell, recently identified the scope of the problems facing Australian exporters to the Sunday Age. Those problems included low

productivity performance of Australian workers in relation to their counterparts in Asia and the high cost structures faced by Australian business relative to Asia. He said:

"The exporter in Australia has to pay payroll tax, Workcare, for sophisticated environmental protection, including a new impost on packaging. All of these

things go into the export component. You cannot add all these costs and compete with countries in Asia where they've never heard of them and their optimum pay rates are way below where ours start."

We will assist the exporting sector not by throwing more money at it in terms of subsidies. We will help the exporting sector by carrying out the reforms we have specified in our micro­ economic agenda, and other reforms detailed in the Fightback package.

Under a Hewson Government business will benefit directly from the abolition of, or reforms to, taxes which impose a significant relative cost disadvantage on Australian business generally, but most significantly on exporters and on those businesses whose

products compete with imports.

Wholesales sales taxes, payroll taxes, petroleum excise, customs duties and other taxes add around $15 billion to business costs directly and perhaps an additional 20 to 30 per cent indirectly through the cascading effect of these taxes.

Business costs will be reduced significantly by our proposed abolition of the wholesale sales tax, payroll taxes, refined petroleum excises and customs duties. By contrast with many of these taxes, the Goods and Services Tax will be fully rebateable

for most business inputs including fuel. The GST is a tax on

consumption; it is not a tax on business.

The abolition of these taxes - along with the reduction of

tariffs to negligible levels and reforms to transport and the waterfront, telecommunications, and industrial relations - will prove of far more beneficial than any export enhancement subsidy

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which might be given to industry. Studies by the Industry

Commission and the Business Council of Australia indicate that the policies advocated by the Coalition could boost GDP by at least 15 per cent. In other words, GDP could permanently be

increased by at least $60 billion. .

Paul Keating has said the Australian electorate will be

confronted with a stark choice between Labor and the Coalition at the next election. He is right. And Australian exporters will also have a stark choice before them. On the one side of

the equation is Labor which has just announced in its Economic Statement that it will boost funding for exporters by $41

million. On the other side of that equation stands the Coalition which has developed an economic package which will give you a $1.7 billion boost by removing impediments which directly impinge on your costs.

I know there is some interest in industry about what will happen to the Australian Trade Commission under a Hewson Government. Let me reassure you, our policy on Austrade will deliver a more efficient, more competitive way of promoting Australian exports abroad. -

We will implement a policy which will fundamentally change the way Austrade works. The corner stone to that policy is our

intention to contract-out to the private sector and industry representative organisations, such as the MTIA, services presently performed by Austrade which would be performed better outside a bureaucratic framework. And we will allow the

organisations and firms contracting for these functions of Austrade to charge market rates for the services they provide.

These policies will provide exporters with an export promotion services sector which is market driven, market responsive, and directly responsible to the exporters themselves.

Similarly I know there is a great deal of interest in what a

Hewson Government will do about dumping. The Coalition has never doubted that many countries play international trade unfairly. For that reason we are committed to implementing effective anti­ dumping and countervailing procedures. In particular, we will

significantly reduce the inquiry period for anti-dumping and countervailing cases.

The changes proposed will not allow anti-dumping and

countervailing procedures to be used as an alternate avenue for unlimited assistance. This would patently work against our objective of negligible protection, at most, for all Australian industries by the year 2000. They will, however, ensure that

unfair trade practices and claims of such practices, are dealt with quickly and effectively, thus giving greater certainty to both domestic and foreign producers.

In respect of anti-dumping procedures, domestic producers must currently wait 255 days to conclude an anti-dumping action and anti-subsidy restrictions are not getting the priority they

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deserve. A Hewson Government will put arrangements in place so that preliminary findings can be placed in 60 days, with up to 30 days extra in exceptional circumstances. Final hearings would have to be concluded in a maximum of 155 days (185 in exceptional cases), a considerable reduction compared with the existing 255 day s .

A Coalition Government will separate responsibility for

investigating material injury and extent of dumping and

subsidisation, with the former the province of the Anti-Dumping Authority and the latter remaining with the Australian Customs Service. Inquiries would run concurrently, within the proposed time limits. This change will facilitate better quality,

independent assessments, with each organisation concentrating on their area of expertise.

We will also extend the sunset provisions for duties from three to five years, with review to be held before expiry.

Arrangements will be made to allow exchange of confidential information between the representatives of the parties involved in a dumping case. This adopts the US practice and should help speed up inquiries. At the same time, we will impose heavy

penalties if confidential information is passed on to clients.

Finally, a Hewson Government will allocate more resources for the Anti-Dumping Authority and the Australian Customs Service dumping/countervailing branch by reorganising existing allocations of resources within the bodies.

CONCLUSION: TOWARDS AN EXPORT CULTURE

What Australia sadly lacks is real export culture. Protection against imports has not made Australian industry strong and competitive; rather, it has made it weak and ineffective.

Subsidies and attempts to pick winners have fostered a mendicant business culture and delivered losers in terms of international trade.

It is time we stopped cheating ourselves that industry protection means jobs and wealth for Australians when it has meant we cannot sell what we produce onto world markets. It is a nonsense to say that we should have subsidies because other countries subsidise

their industries because in the end they are only cheating

themselves by pursuing illogical and unsustainable policies.

Clearly Australia needs an alternative set of policies to the tried and failed. We do not need to foster exports so much as

we need to foster an export culture.

The Coalition's policies outlined above will deliver an export culture because they will deliver an Australian industry which is more outward looking and more sensitive to the international market and its competitors.

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