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Centre for International Economics (CIE) Report on Australian Trade Liberalisation

Australian Trade Liberalisation: Analysis of the Economic Impacts

31 October 2017

Executive summary

Australia has a long history of undertaking economic reforms aimed at realising a more flexible and resilient economy. The floating of the dollar, the deregulation of financial markets, the broadening of the tax base and corporatisation of government businesses, to name just a few reforms, have produced an economy that is better placed to take advantage of emerging opportunities and to weather global economic storms.

An integral part of the reform agenda has been the sustained liberalisation of trade barriers and reduced industry protection. Throughout the 1970s, 80s, 90s and over the last decade, Australia has embarked upon unilateral, bilateral and multilateral trade liberalisation.

This report updates a 2009 study that quantified the economic impacts of Australian merchandise trade liberalisation over the 20 year period between 1988 and 2008.1 This report, as did the previous, uses economic modelling to simulate the economic impact of Australian merchandise trade liberalisation. This time, however, a 30 year trade liberalisation window (1986–2016) has been considered.

Importantly, the economic modelling has only taken Australian merchandise trade liberalisation into account — the modelling excludes Australian services and investment liberalisation, and any trade liberalisation undertaken by Australia's trading partners. As such, the economic modelling results can be seen as representing the minimum of what has resulted from Australia's overall process of trade and investment liberalisation over the past 30 years.

Trade is an important element of the Australian economy and accounts for 1 in 5 jobs

Trade liberalisation undertaken by Australia over the period 1986 to 2016 has seen Australia become more integrated into the global economy and more trade orientated, with trade growing faster than nominal GDP over the period. In 2016, merchandise trade was equivalent to nearly 31 per cent of nominal GDP, up from 26 per cent in 1986. Overall goods and service trade was even larger, at just under 40 per cent of nominal GDP in 2016.

Trade is also important to the Australian labour market. Using the latest input-output tables from the national accounts, it is estimated that around one in five Australian workers, or 2.2 million people, are employed in a trade-related activity. This includes workers in heavily export-focused industries like agriculture, minerals and energy, but also, importantly, incorporates the many tens of thousands of employees who each day work to bring imported goods into Australia and to distribute them to consumers and businesses who need them.

Trade liberalisation has increased overall GDP and average Australian household incomes

The economic modelling undertaken for this report suggests that the merchandise trade liberalisation over the 1986 to 2016 period has benefitted the Australian economy, with real GDP being 5.4 per cent higher in 2016 than it would otherwise have been (with no trade liberalisation).

For the average Australian family, this period of trade liberalisation is estimated to have seen real income being A$8448 higher in 2016 than otherwise.

Increased tariffs would be detrimental to the Australian economy and labour market outcomes

Over the last few years, there have been increasing calls to rollback decades of trade liberalisation and renegotiate, or even tear-up, previously agreed to trade agreements. These calls have been made on the basis of an argument that trade liberalisation has been undertaken at the expense of local jobs and a loss of sovereignty, to the net detriment of the liberalising country. In response, a number of modelling simulations were conducted for this report to investigate the economic impact should tariffs be increased globally.

The economic modelling suggests that if tariffs on manufacturing imports were raised such that there was a 10 per cent price increase in such products across the world, real GDP in Australia would be 1.8 per cent lower; while global real GDP would be 3.5 per cent lower. If tariffs on all merchandise imports were increased to raise all import prices by 10 per cent, real GDP in Australia would be 2.2 per cent lower, and global real GDP 4.1 per cent lower. The short-term impacts of tariff increases would see job losses in Australia, while over the longer-term, real wages for Australian workers would be lower, in turn cutting household consumption and Australian living standards overall.

In contrast to the impact of raising tariffs, further liberalising global merchandise trade would act to grow economic activity. The modelling suggests that lowering tariffs such that import prices fall by 10 per cent across the world would see real GDP in Australia being 0.6 per cent higher, and 1.1 per cent higher globally. Short-term employment would grow, and in the longer-term, Australian real wages and living standards would increase.

1. See CIE (2009), Benefits of trade and trade liberalisation, report prepared for the Department of Foreign Affairs and Trade, May 2009.

Last Updated: 6 November 2017

Category: Trade and investment

Topic: Trade agreements