Microeconomic Reform in Australia
1-0 INTRODUCTION.
The debate between free trade and restrictions on international trade is one of the oldest debates in history (Porter quoted in Lloyd, 1993: 35).
In recent years the world has experienced a shift from regional isolationism towards economic integration. The concept of free trade is a contemporary discussion and also a primary source of worldwide tension. The General Agreement on Tariffs and Trade (GATT), presently known as the World Trade Organization (WTO) provides a diplomatic framework and an open forum for trade discussion in purpose to ease tensions between nations. One may ask whether the contemporary trend towards liberation of worldwide trade will be to Australia's advantage and whether the nation will be able to improve its current balance of payment situation.
1-1 Outline of this Seminar Paper.
This seminar paper will discuss the concept of free trade and examine the main role of GATT. However, this paper will primarily focus on whether free trade would benefit Australia and if it would help improve the nation's balance of trade situation.
2-0 THE CONCEPT OF FREE TRADE.
"International trade policy can be regarded as the result of the opposing forces of free trade and protection" (Root, 1993: 162). Lloyd (1993: 35) argues that a clear worldwide trend exists towards increased management of trade by government. International trade activity now affects domestic policy more than in the past and governments, in their desire to structurize their domestic economic activity, will be forced to intervene more in the international markets.
2-1 Why do Nations Trade? -the Concept of Absolute and Comparative Advantage
Mutually beneficial trade between nations can yield two sources by which trade can improve welfare, known as the exchange gain and the production gain from trade (Woodbridge, 1993: 85). The exchange gain of trade simple refers to the difference between the value of the goods or services that a nation exports and imports. The production gain from trade is focusing on efficiency of production. This theory emphasizes that trading partners should benefit as long as nations which enjoy a comparative (David Ricardo) or absolute advantage over another focus on their proficient areas of production, thus rely upon imports in other areas. In other words, the nation which enjoys the lowest opportunity cost and greatest efficiency in producing one particular good or service should concentrate on producing that commodity (Woodbridge, 1993:86).
A nation can enjoy comparative advantages in many fields simultaneously. Such an advantage can be expressed in tangible means or in intangible advantages. Recently it has been proven that nations with few natural resources are able to remain competitive throughout intangible means such as knowledge, productivity and efficiencies (Woodbridge, 1993: 87). Japan is an excellent example of such a nation, with no or very few disposable resources. On the contrary, Australia, still primarily relies on its absolute advantage in natural resources.
Finally, it should be noted that the concept of Absolute advantage is less relevant today since technological and marketing forces have diffused the "Absolute" term and nations rather trade on the basis of a comparative advantage (i.e. nations compete against each other in the sales of similar goods and services).
2-2 Freedom to Market Forces.
According to the concept of free trade, both Australia and Japan would be better of in a trading relationship, since the two nations both complement each other's weaknesses. However, this is not the case. Japan gains more from this trading relationship, since the process of transforming goods and services is more profitable than the sale of natural resources.
Considering the example discussed, one may ask whether the comparative advantage theory is relevant to contemporary free trade theory. Furthermore, world trade is extremely dynamic since political and market forces play a potential role in free trade today (Root, 1993: 34). Perfect competition does not really exist today, since there are multiple variables impacting on global trade.
2-3 The Impact of Strategic Trade Policy (STP).
The impact on free trade caused by STP is detrimental. Government intervention in free trade often cause market instability and industrial concern (Moskowitz 1993: 73). Strategic Trade Theory (STT) states that government intervention to free trade can provide selected industry sectors opportunities to expand markets and thereby increase national income (i.e shifting rents). STT has been successfully used in highly successful nations such as Japan and South Korea (Bell, Wanna, 1992: 188). This should not imply that it would be to Australia's benefit to utilize such strategy. For instance, national tariff and non tariff barriers to trade such as subsides, laws and litigation, product standards and local content laws decrease relevance of both comparative and absolute advantages in trade theory. Frequently, domestic customers end-up paying for the support of domestic industry. Also, nations retaliate as a direct response to unilateral strategic trade intervention, causing International tension. Root (1992: 276) argues that the political consequences of applying STT are often more sever than the economic.
In addition, STP tend to oppose the fundamental purpose of GATT since it focuses to a large extent on unilateral actions. Multilateral and bilateral agreements on trade can increase international industry integration and thereby trigger a synergy effect that can increase economic well being for all nations involved (Moskowitz, 1993: 74).
3-0 THE MAIN ROLE OF GATT IN THE INTEGRATED COMMUNITY.
3-1 Primary Functions.
The ultimate objective of GATT is to reduce barriers hindering free trade. GATT is a multi-lateral agreement governing the conduct of international trade. Please refer to table #1 for the general framework on which the activities of GATT are structured.
3-2 A Forum for Discussion.
One of the primary functions of GATT today, is to provide an international open forum for discussions regarding free trade and other trade related issues. Historically, trade rounds in GATT have been fairly successful in eliminating trade tariffs and quotas and many nations have refrained from implementing unilateral and bilateral resolutions that could impact on free trade (Root, 1992).
In recent years, solutions to trade disputes have been more difficult to resolve. The trade rounds are longer and more complex. In the Uruguay round (1986-1994), government subsidies, trade in services and intellectual copyright protection were on top of the agenda. However, very slow progress was made and future discussions will become even more complex in nature, since the world is presently being divided into integrated common trade markets and economic unions (Root, 1992: 207).
One of the most striking, but least talked about GATT function is the settlement of trade disputes between members. Complain procedures in GATT make it possible for any member to complain at global GATT meetings (Weissman, 1994: 9). Its trade policy review function frequently examines whether its members live up to multilateral agreements. Valuable statistical data and national trade policies are collected and published in yearbooks.
3-3 A "Gentlemen's Agreement"
The main weakness of GATT is that it is the "Gentlemen's Agreement on Tariffs and Trade". The role of GATT is therefore limited since it has very little power to implement policies. In addition, unilateral trade treaties between economic integrated blocs may limit its role in future trade negotiations. Furthermore, GATT is not an international organization and its members are bound to the treaty by a contractual relationship (Root, 1992: 182). Also, not all nations are members in GATT. For instance, the recent copyright dispute between China and the USA could not be discussed in the institution since China is not a member, so bilateral conditional agreements between the two nations were formulated. Moreover, governments tend to prefer bilateral agreements to the multinational agreements under the nondiscrimination policy of GATT. Unilateral and bilateral trade agreements are often less complex in nature and can be resolved more quickly (Weissman, 1994:9)
In addition, the formation of new integrated trade areas such as the EU, ASEAN, NAFTA and APEC represents yet another obstacle to GATT. The existence of trade blocs poses special management problems, since special common interests within blocs will be able to exert an undue amount of influence on trade contract policy (Lloyd, 1993: 42).
3-4 WTO - More "Power" to GATT.
In December 1994, the Uruguay Rounds of the GATT negotiations concluded with a call for the creation of a World Trade Organization (WTO) to govern global trade. WTO will enhance trade relations among its members by imposing a more disciplined approach to trade disputes in primarily two ways: (1) WTO is expected to act as a watch dog monitoring trade practice and (2) provide for effective arbitration procedures to resolve disputes. Also, the WTO gives all 117 signatories an equal vote (Buckely, William, 1994: 94). "Each member shall ensure the conformity of its laws, regulations and administrative procedures with its obligations stautated by the treaty." (Barnard, 1994: 23)
For instance, a country whose domestic law is ruled to be unlawful under trade rules has to change its law to conform with WTO rules. By signing on to the WTO, countries take on the international obligation to change A country might be forced, for example, to withhold federal funding, sue a state government, or to pass laws that preempt local initiatives their laws to comply with it. If a nation fails to change its laws, the winning country can request permission of the WTO members to impose trade sanctions on the loser (Weissman, 1994: 9). These are automatically granted unless all WTO members agree to reject the request.
However, if nations are not prepared to utilize the new powers invested by the WTO, the over all effect on world trade relations will be equal to zero. For instance, in the current trade dispute between the USA and Japan, the WTO has not been effectively involved. Instead, unilateral trade restrictions are imposed on both sides. American trade officials did file a complaint to WTO, however, it was immediately backed up by a unilateral trade resolution (Special "Super" 301 clause) against Tokyo (Stutchbury, 1995: 1). This conflict is the first test of the effectiveness of the new powers invested in WTO.
4-0 WOULD FREE TRADE BENEFIT AUSTRALIA?
According to Australia's treasurer, Mr. Willis, the trade deficit is the biggest obstacle to growth and represents one of the main problems that the government yet has to deal with. Australia's trade deficit is expected to reach a record high of $27 billion in the 1994-95 fiscal period (Ellis, 1995: 3). This section will discuss whether free trade alone would decrease, or perhaps, turn the trade deficit into a healthy surplus.
4-1 History of Protectionism.
Australian has historically practiced a high degree of protectionism. Trade Tariffs, subsidies, quotas and other protective measures have been used to protect domestic industry from international competition. Scholars argue that over-protection is partly responsible for the balance of trade deficit that the nation is presently facing (Hubbard, 1992: 21).
4-2 Lack of Competitiveness in International Markets.
Australian industry finds it difficult to compete at the international marketplace. This problem can be linked to lack of global exposure due to protective strategies by government. In addition, lack of diversification, internal inefficiencies, expensive labor, lack of productivity and poor management have all contributed to Australia's mediocre performance in International trade. The Business Council of Australia reecognizes rgar rge mahor barrier to the competitiveness of large Australian firms is the centrailized, inflexible system of Industrial relations (Frenkel, Peetz, 1990). Furthermore, small domestic markets have made it difficult for producers to practice economies of scale and scope in production. Also, the emphasis on exporting unprocessed goods has lowered the technology base and has discouraged technological innovation (Hamilton, 1989: 27).
4-3 Unfavorable Industrial Focus: Unprocessed Primary Goods.
In addition to Australia's crucial problem of not being competitive enough in international markets, international trade has moved against Australia, since it has shifted in favor of transformed goods (Parkin, Summers, Ward, 1994: 357). Only 15 percent of the Australia's GDP comes from transformed manufacturers (Bell, Wanna, 1992: 178). Since much of Australia's main exporting industry emphasizes on primary produce, such as wool, metals, logs and agricultural products. Australia has a comparative advantage in many of these primary products, however, according to Drake and Nieuwenhuysen (1988: 17) this comparative advantage is a disadvantage for the nation, since specialization in such products is less profitable than secondary production, or transformed manufacturers (please refer to Appendix: graph #1 and table #1).
Furthermore, worldwide prices on primary commodities have decreased radically over the past six years, thereby decreasing the value of exports and increasing the costs of imports (Parkin, Summers, Ward, 1994: 357). Likewise, primary goods are price takers (low-value added) at the international market place, while transformed manufacturers are price bidders (high-value added). Hubbard (1992: 23) believes that emphasizing on transformed manufacturers would increase the value added of Australian exports and thereby ease balance of payments constraints. In addition, primary product are more volatile to external uncontrollable disasters, such as climatic changes.
4-4 Protection vs. Internationalization- A Political Debate.
Restructuring of industries can greatly increase productivity, competitiveness and can provide the opportunity for resource allocation to newly emerging sectors of the economy. Thus, governments should provide an open-market orientation subject to needs of domestic policy. However, an open market orientation is maintainable only if governments can provide assurances to domestic firms and citizens that this openness applies not only to their own markets but to foreign markets as well (Ronkainen, 1993: 825).
On may then ask whether STT in Australia can turn the trade deficit into a surplus. According to Quiggin (1995: 14), "Trade intervention has so far failed to produce the dramatic gains in total factor productivity and thereby not improved Australia's competitiveness in the International trading arena." In addition, policies regarding subsidies (Australia paid ~A$1 billion in 1990) and import substitution usually backfires, since customers end-up paying for the support of domestic industry. Regressive changes in income distribution may be the implication of such policy. In addition, STT is all about picking the right winners (in terms of industry), but also the losers. Critics argue that governments, nor any other institution is capable of making such strategic selections and may cause a 'political economy' problem (Bell, Wanna, 1992: 185).
Also, the nature of the Australian industry (i.e. small exporters, small domestic market and few technological leaders), does not provide for economies of scale nor scope in production and would make it fairly difficult to enter worldwide markets. In addition, a majority of Australian firm are 'Opportunistic' exporters, thus only consider exports when domestic markets are weak (Bell, Wanna, 1992: 187). Therefore, it is possible to assume that achieving a 'level playing field' (i.e. laissez faire -freedom to market forces) may not at all benefit Australia, especially when other nations maintain their tariff walls. Lloyd (1993: 48) proposes that there is no need to change Australia's unilateral trading policies. On the contrary, a well balanced combination of STT and free trade may very well improve balance of payments problems. Perhaps, the Australian micro-economic reform represent such a combination. Also, APEC will open new up new markets that could favorably utilize Australia's competitve advantage in natural resources.
As a final thought, will Australia always be one step behind in the International trading arena? Naturally, the chronic problem of catching up with competing nations will become more difficult as the newely developing "Tigers" in the East penetrate world markets.
5-0 CONCLUSION.
Free trade versus STT and STP is a contemporary discussion. The concept of free trade is based on Absolute and Comparative advantages. On the contrary, STT is based on an artificially created competitive advantage, by active interference by government trade policy, such as subsidies, barriers to trade and Learning by Doing measures (LBD). GATT in its new form of WTO does wield broader powers, but its powers are generally infused in good faith of members. Therefore, it is highly questionable whether it will be able to achieve its goal of achieving free-trade between its members. Recent economic integration into trade blocs and unilateral agreements on trade will even in the future pose special management problems for GATT. As for Australia, it can be concluded that neither free trade, nor a STP will cure its chronic balance of trade deficit. The nature of the Australian market, small international traders, 'opportunistic' exporters, reactive industry and an emphasis on primary produce points out that STP will not do much good. On the other hand, free trade alone could certainly make things even worse, as Australian industry is not competitive enough at the International market place. A combination between the two strategies named, as seen in the micro-economic reform, could hopefully turn the deficit into a healthy surplus.