Extracts of Fit for Service
Fit for Service is a short book (monograph) which considers whether Australia has what it takes to make the most of the growth of the Asian middle class. Extracts published in the Australian Financial Review, photos and endorsements follow.
Australian Financial Review
6 February 2017
Australia is a trading nation whose high living standards rely upon free trade which allows exports beyond our small domestic market. After a fortnight in which Donald Trump strained the US-Australia alliance, withdrew America from the Trans Pacific Partnership trade deal and recommitted to a border tax; a trading nation like Australia must have its own insurance against protectionism. The best insurance in the Asian region is having every possible free trade iron in the fire.
The opportunities surrounding Australia have never been greater. By 2030, the Asian middle class will be three billion strong. If ever there was a time to look outward, it is now.
Over seven years working for the Financial Services Council, I started giving serious thought as to why Australia has not become a greater services exporter. The result of that work is Fit for Service, a book which looks at the history of Australian free trade and features in-depth interviews with some of the main players in Australia's recent trade history: politicians, business leaders, exporters and analysts. There are four major lessons to be learned:
First, protection is not the answer. Almost one quarter of Australia's gross domestic product relies on exports. "We have been here before, we know protection doesn't work. The US erected trade barriers in the 1920s such as through the Smoot-Hawley Act and the era of protectionism led in great part to the Great Depression", Prime Minster Malcolm Turnbull said.
As the United States leaves the TPP, Australia must remain committed to open, free markets and an independent foreign and trade policy.
Australia's history holds the answers we need today. We have tried and failed with protectionist policies and we've won with openness. Many Australian industries bear scar tissue from protectionist ventures of the past.
Accordingly, our farmers, winemakers, financial services businesses and cane-growers all want the TPP.
Barriers do not work. In fact, in most cases, the lower the barrier, the stronger the economy. As Westpac and Telstra director Craig Dunn told me " ... perhaps we should allow others into our services sector on a unilateral basis to improve our competitiveness at home".
The benefits of unilateral liberalisation are often understated but virtually all the evidence, and Australia's own experience, suggests it improves competitiveness.
Riding a protectionist Trojan horse
Yet the allure of protectionism has not abated, and one of the protectionists' favourite red herrings is invoking the spectre of "Investor State Dispute Settlement" (ISDS).
ISDS is a mechanism where governments allow courts to consider whether investments and rights of companies have been impinged through lawmaking. ISDS is designed to provide confidence to investors that arbitrary or retrospective legal changes will not imperil investments made in good faith.
Studies from the World Bank show ISDS boosts foreign investment, strengthens the rule of law and protects Australia's interests where our companies invest offshore. ISDS has not resulted in social, health or environmental laws changing. Such laws are expressly preserved in agreements such as the TPP.
Yet the Greens said in the past fortnight that "allowing ISDS clauses into our trade deals is fundamentally undemocratic and will open a Pandora's Box that could have devastating effects on our nation". This hysteria is without any basis.
Dartmouth trade expert Douglas Irwin wrote in Foreign Affairs that "despite populist claims to the contrary, the TPP's provisions for settling disputes between investors and governments and dealing with intellectual property rights are reasonable. In the early 1990s, similar fears about such provisions in the WTO were just as exaggerated and ultimately proved baseless".
We must fight myths such as ISDS which are little more than Trojan horses for protection.
Second, Australia cannot afford to wait for great and powerful friends such as the US to show the way. We need to have plenty of irons in the fire. The TPP is a big iron, even if its future is no longer clear. It brings in Mexico and Canada where we have no free trade agreements.
The historical lesson of being flat footed and waiting for great and powerful friends is clear. One of our biggest trading partners in the 1970s, the UK, significantly increased tariffs on our agricultural products when joining the common market.
Don't be fooled by Trump
But Australia should not fall prey or be sucked in by Trump's showmanship on the TPP. Trump is not a white-bread protectionist. His policy explicitly says the Trump administration is in favour of free trade. It actually appears he wants the type of free trade deals Australia already has with China and Japan.
Australia should be prepared for a Nixonian move by Trump. Richard Nixon, the great anti-communist, shocked the world when he recognised Red China. Trump may well do the same through a trade deal with China in this presidential term.
What this means for Australia is we must be prepared for disruption, and strategically our government must be involved in every piece of regional trade architecture, and every going negotiation in Asia. Staying committed to the three major multilateral trade agreements in Asia under negotiation is the best protection against Trump's disruption.
Third, business must publicly support free markets and competitive policy settings. The farmers came out for Sir Robert Menzies with his pivot to Asia just 12 years after World War II to back his controversial commerce agreement with Japan.
The National Farmers Federation backed Bob Hawke in the 1980s when he tore down the tariff walls. John Howard said of the leadership of the 1980s NFF: "They accepted the need to phase out subsidies to primary industry. Otherwise you were arguing inconsistently. They recognised the costs of tariffs are borne by our export industries, as they always had been ... the NFF argued strongly for an open economy and the removal of protection."
The mining industry has a fine history of civic engagement in ensuring the industry isn't saddled with uncompetitive burdens, such as the tax presently proposed by the WA Nationals.
Business needs to muscle up and widely advocate free and open markets. Either we reprise the 1980s NFF or look to other markets where groups such as the New Zealand Initiative have developed, researched and strongly backed difficult but essential reforms on taxation and budget repair.
Services aren't frozen meat
Fourth, services exports are different. We must work harder to achieve services exports and a new framework for services trade policy. I am proposing a new policy framework for services exports.
Services make up 70 per cent of Australia's economy but are just 19 per cent of exports. Barriers to trade in services are not tariffs but legal architecture; regulations, different consumer protection standards for banking, architecture and accounting for instance. Abolishing tariffs is politically hard but technically easy; but abolishing these non-tariff barriers requires the creation or disruption of legal frameworks.
Australia rode on the sheep's back for much of the 20th century thanks to trade policies developed through the close relationship between a succession of ministers with a close interest in primary production, and coordinated industry bodies.
It is unlikely history will repeat itself in the 21st century without the creation of NFF-like bodies to drive trade policy across the sprawling, vast array of disconnected services and technology sectors. Recognising this institutional gap is another important step in boosting services exports.
The traditional approach to trade policy cannot be relied upon when the economy is likely to be unrecognisable in 20 years. According to leading US-based management consultancy AT Kearney, the major ASX-listed companies in two decades' time probably do not even exist today.
Growing sectors such as Financial Technology (FinTech) and Agricultural Technology (AgTech), which are developing new ideas daily, will never read lengthy texts which will rapidly become redundant unless new trade agreements are built for these industries.
Selling a managed fund, an accounting service or a new "AgTech" idea to a resident of Beijing or a Japanese business bears few parallels with the trade of iron ore or frozen red meat.
Getting the sprawling, poorly organised services economy closer to trade policy is essential. We only need to repeat the methods used for farming by famed Trade Minister John "Black Jack" McEwen in 1964:
"What I did as minister in charge of negotiations was not merely to consult this body and every other organised body in Australia but actually to take to Brussels and to London with me representatives of the organised growers or producers. If they couldn't sit at the table, they were in the room outside where I or my officials could nick out and have a word with them. This is a pretty good relationship between government and primary industry."
The end of the beginning
AgTech start-up Full Profile is just one example of the type of company that should be factored into trade policy development. Full Profile's product uses a "blockchain" distributed ledger technology to overhaul payment, providence and competition arrangements in grain production.
It would allow farmers to get paid immediately, remove credit risk, a bigger market emerges and removes the need to fund collective bureaucracies to sell wheat.
"[Our idea] creates a bigger market at the farm gate by linking trusted buyers to sellers by using technology to eliminate the market problems of the past. The distributed ledger technology would remove the middle layer of industry collectives and bureaucracy," Full Profile's Bob McKay said.
Getting the services economy closer to trade negotiations is not the end of the new services export framework. Australia must get better at following through on services export deals by approaching the deal as the "end of the beginning" rather than the "beginning of the end".
Too many hard-fought concessions fall by the wayside because we haven’t been tenacious in implementing trade deals. Once a Ministerial press release heralding new possibilities of services exports is out, the work often stops, this is when the hard slog should start.
To succeed we must learn from our mistakes such as the failed mutual recognition scheme for managed funds with Hong Kong and the professional services implementation committees which meet once every second year only to fix a date for the next meeting.
The framework in Fit for Service throws out the indecipherable trade boffin language and excludes Australian specific terms, ends open-ended services commitments which farmers would never accept for chilled meat or dairy products, building mutual recognition capacity and bringing the implementation process to light through public reporting at Senate Estimates-like hearings.
Finally, we can no longer take 10 years to negotiate a paper based trade agreement like we did with Japan and China which could be disrupted or superseded by technology five times a week.
Australia should push for dynamic, digital trade agreements which establish general principles for market access whilst containing exclusions for sensitive activities. In business, it would be called it continuous improvement.
Trade policy must make it possible for individuals to trade Australian ideas. The ideas of one individual can boost national prosperity if properly harnessed. The next Hancock or Atlassian will be a person with an idea which technology can transform into a service within a month. The test of our trade capacity will be whether they can turn that service into an export.
Andrew Bragg is director of research and policy at the Menzies Research Centre. His book Fit for Service will be launched by Prime Minister Malcolm Turnbull on 8 February. It can be purchased on Amazon and Barnes & Noble. Twitter: @ajamesbragg