Australia must pursue further trade liberalisation after recession, report says

Australia needs to avoid adopting “fortress Australia” policies and continue to pursue trade liberalisation and competitive markets as the bedrocks of economic recovery from the current downturn, according to the Productivity Commission.

But while asserting the importance of openness for Australia’s prosperity, the commission has also signalled that maintaining productivity improvements in a services economy like Australia will be a complex exercise, requiring new policy approaches and new economic research mapping out the most effective means of achieving that outcome.

In a new report to be released on Thursday, the commission notes that other developed and emerging economies managed to achieve significant gains in productivity and living standards on the back of their growing, highly efficient manufacturing sectors during the 20th century.

But Australia has never been a global leader in manufacturing, and services, once considered a residual sector in the Australian economy, now constitutes 90% of local employment.

The commission says being a high productivity economy in the 21st century will require having a highly productive services sector, “but the path to productivity growth in services may look different to that taken in goods sectors like manufacturing, mining, and agriculture”.

As well as exploring new policy approaches to boosting productivity in a services economy, which might involve piecemeal changes rather than “big bang” reform, the chairman of the commission, Michael Brennan, says Australia needs to learn the lessons of past recessions.

Brennan notes that recessions can induce fundamental change to policy settings. “The aftermath of the 1890s recession saw the establishment of the fortress Australia’ approach – with trade protection, wage arbitration and government monopolies in key industries,” the chairman says.

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“The 1930s saw the worldwide rise of trade barriers. By contrast, the early 1980s and early 1990s saw a fundamental rethink of Australian policy, focused on openness to trade, competition and greater flexibility”.

Brennan says the microeconomic policy reforms of the 1980s and 1990s coincided with – “and likely contributed to a productivity boom in the 1990s, in which Australia’s productivity grew at its fastest rate in the two decades before or after, with Australia’s per capita income growth surpassing that of all G7 economies”.

“Looking to our history provides some lessons for the future – including the importance of openness to trade and investment, competition and flexible regulation of product and labour markets,” Brennan said.

The new research comes amid a renewed national debate about sovereign capability – a discussion prompted by disruptions to global supply chains during the pandemic.

But the treasurer, Josh Frydenberg, on Wednesday warned against Australia retreating into protectionism or pursuing an economic “decoupling” from China on the other side of the Covid-19 crisis.

Frydenberg used a speech to say any attempts to decouple from highly integrated global supply chains “would carry huge economic costs”.

He said the crisis had sharpened the focus of all countries on the need to build national resilience in a highly interconnected world – leading to a push for nations to become more self-sufficient and produce more critical goods in their home markets.

“This is a legitimate response and course of action, where it is necessary to protect our citizens and our national interests,” he said.

“Australia felt these pressures first-hand during the early stages of Covid-19, with our domestic manufacturing sector pivoting to assist with the production of masks and other medical equipment.

“However, it is important that calls for greater self-sufficiency do not go too far, resulting in a more fractured global economic system or become a back door to increased protectionism.”

Frydenberg made the point that an “economic decoupling” – the subject of increasing discussion globally – would be against Australia’s interests, given it was a strong trading nation. Australia’s total annual imports and exports were worth about $900bn in 2019-20 or 45% of gross domestic product.

“The answer to building economic resilience is not to shut ourselves off from the benefits of economic openness,” he said.

“Instead there are opportunities to build resilience by developing new international partnerships and establishing new markets. And each country needs to play to its own strengths.”

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