2019 Stan Kelly Lecture

Acknowledgements

Thank you Danielle [Wood, Economic Society of Australia National President] for that kind introduction.

Like his son Bert, who established this memorial lecture in 1977, Stan Kelly was an important, early Australian voice for free trade and economic openness, at a time when protectionism was the dominant national economic ideology.

As the Economic Society's website tells us, Stan Kelly was a member of the Tariff Board from 1929 to 1939, an adviser to the Commonwealth Prices Commissioner from 1942 to 1948, and a key player in industry and import policy circles through to the 1960s – truly "a lifelong champion of free trade".

Bert Kelly – a one-time minister for the navy – was as one with his father on the benefits to Australia of free trade.

As Trade, Tourism and Investment Minister Simon Birmingham said last month in his 2019 Alfred Deakin Institute Oration, marking the centenary of Deakin's death, "decades later [Bert] would lead arguments to dissuade Australia of continued protectionism".

This lecture holds a past speaker's list to make a present speaker's toes curl: Bob Hawke, Ross Garnaut, John Stone and Gary Banks, to name only a few.

Those are hard acts to follow, but I am grateful for the invitation to speak tonight about a broad subject – the benefits of free, or at least freer trade, the merits of which I have long been convinced.

I bring to my task the perspective of a study of Economics at the University of Adelaide in the late 1970s and early 1980s and a long career in a department committed, in the modern era at least, to negotiating the reduction of trade barriers of all descriptions to the benefit of Australian producers and consumers.

I should add that my direct contribution to this effort has been modest indeed, taking the form of a brief stint in the late 1990s as head of the Services Trade Section in the then Trade Negotiations Division.

Like Stan and Bert Kelly, I am also proudly a South Australian.

My main topic, unsurprisingly then, will be an element of our international trade that I believe doesn't get enough attention: services.

I'll speak about why services matter, and what the Government has been doing to reform and open up our international markets.

In doing so, I am of course not suggesting that goods trade – or investment for that matter – are not subjects of immense importance to jobs and national income in Australia.

If they weren't, the Government wouldn't have such an active FTA agenda, and Australia's expert trade negotiators wouldn't have so much work on their hands!

But we've reached a point in our national economic story when, I think, for all the obvious benefits our goods exports bring, we need to bring to the front of our minds the present and future potential of services exports, as Australia makes its way in an increasingly complex and contested world.

As we do so, it is worth pointing out that services markets are, in the main, even more competitive in terms of numbers of producers and potential producers than the commodities markets in which Australia excels.

And that even when we look at commodities, one particularly important aspect of our success has been having an intellectual property advantage.

The philosophy behind our approach

I know there are some who are sceptical about the approach that Australian governments of both sides have taken in recent years to trade liberalisation.

They might argue that, our approach – trying to pursue a multilateral agenda in Geneva, working on regional deals with a range of countries, at the same time as striking bilateral FTAs with key partners – is not the optimal way to achieve more economic openness around the world.

Some say it's a complex way to advance reform.

Others worry FTAs are not only trade expanding, but also trade distorting.

I want to tackle those ideas head on.

As much as we might wish it were otherwise, and as hard as we work to make things happen, unfortunately, the multilateral liberalisation approach that grew out of the GATT and is now embodied in the World Trade Organization is in a bad way, to say the least.

Amid the sharp complexities of great power rivalry, the functions of the WTO itself are facing immense strains – not least its dispute resolution mechanism.

We're still deeply committed to multilateral efforts – and our negotiators in Geneva and in key capitals are working as hard as ever to try to re-vivify the WTO, including in areas such as e-commerce, fisheries subsidies and domestic regulation of services.

But if we wait for the next grand bargain with the traditional "nothing is agreed until everything is agreed" approach – we may be waiting forever.

In the meantime, regional and bilateral agreements are delivering real progress on so many fronts – and I'll talk about that in the context of services tonight.

With respect to the argument that overlapping trade agreements bring business complexity, well, we're aware of that challenge.

That's why the Government works hard to help our businesses to take advantage of the deals we strike, for example through the FTA portal, the trade seminars and roadshows we run, as well as business contact points within DFAT.

Further, regional agreements like the Trans-Pacific Partnership and negotiations like the Regional Comprehensive Economic Partnership directly tackle that complexity, such as by harmonising rules of origin across the membership.

And against accusations that they can be trade distorting, that's why we've been pushing for FTAs that are as comprehensive as possible, to boost the welfare or economic impacts.

Virtually all trade globally moves under WTO rules – and FTAs are built on those rules.

If we don't take that pragmatic approach to building free trade from the bottom up, we face a real risk of shrinking back into some outdated mercantilist mindset – and in a world dancing on the edge of trade wars, that would be a big mistake.

With that, admittedly very serious caveat, I'd like to turn to my focus on services.

Introduction: the historic shape of Australia's exports

A century ago, the year of Deakin's death, Australians – like people from nations everywhere – were recovering from the disaster of the First World War and Stan Kelly was in Cambridge.

Having enlisted in the 48th Battalion of the Australian Imperial Force in 1917, Kelly was wounded in France, and, after recuperating, began a very different type of task for our war effort.

He had been a farmer in Australia before the war, but in 1918 and 1919, Stan was lecturing and writing for a unit known as the AIF Education Service.

Even before the war had finished, attention had turned at senior levels to the big manpower challenge of the times: what to do with thousands upon thousands of returned soldiers once the war was won?

Accordingly, in 1919, Stan Kelly was the author of the second of what the AIF Education Service called its "land books" – short, practical, how-to guides to help returning soldiers transition back to civilian life.

Many, it was hoped, would find work on the land.

"Beef, Mutton and Wool – A Practical Handbook on Meat and Wool Production for the Australian Farmer" – that was the title of Stan's book, and it speaks volumes about Australia circa 1919.

As Stan noted in his chapter on "Sheep on the Farm", the first 32 merino had been brought here from the Cape of Good Hope in 1796, but by 1916, we had 78 million of them, on his figures.

What stands out over the first century and a half of Australia's history since European settlement is the extent to which our economic success largely rested on a handful of bulk commodities – exportable goods like sheep and sheepmeat, live cattle and beef, wool and minerals.

Australia was – and still is – famous for our bulk commodity exports – and all the way through to 2019, exports of bulk commodities like coal and iron ore make a powerful contribution to our exports.

Our two-way trade with China, for example, reached new heights in 2018, hitting nearly $215 billion on the back of strong demand for Australian iron ore as China continues to grow and change.

Agriculture, too, is a striking strength.

But Australia has never been just a quarry, or just a farm, even if, through that lens of our exports, that was how we were seen by others – and indeed often how we thought about ourselves.

Services contribute 73 per cent of Australia's GDP and nearly 80 per cent of employment.

Those statistics might surprise many people, accustomed as we are to thinking about the big exports that drive so much of our national story: minerals, energy sources like coal and LNG, and so on.

A lawyer in Collins Street who picks up a brief for an Asian firm looking at making an investment here isn't herself crossing a border, as an exportable good would.

Yet her work – the advice that she writes – does flow across a border, and has a life and a value as an Australian export.

It's true that not all services have been exportable.

Driven by technology, though, that's changing in many cases.

Health services, for example, are an increasingly important domestic supply as our population ages and more and more people move into supported accommodation or stages of life.

This is also an area of immense export potential, including through telemedicine.

Typically, there are four modes of cross-border services trade.

The most obvious, perhaps, is like the Collins St example I've just given, where the supplier is in one country and the consumer is in another.

The most visible and easily quantifiable mode of services export, in many ways, is consumption of a service abroad – such as when a foreign student travels to Australia to undertake a course of study, or a tourist comes here to visit the Great Barrier Reef.

The third mode of services export is the establishment of a commercial presence overseas – lawyers, accountants, banks, financial services suppliers and increasingly Australian educators, as many different institutions establish campuses offshore.

And the fourth is where an Australian service supplier travels overseas to deliver a service, like an architect designing and supervising a building's construction.

In all of these modes of services exports, Australia has great strengths – and in some areas, we are world-leading, or have unique advantages.

Reshaping our economy: opening up from the 1980s onwards

The truth is, Australia has long been a more diversified economy than epithets like "the sheep's back" give us credit for.

This is a point that maybe not all analysts appreciate – as we saw again with the release a few weeks ago of the Harvard "Economic Complexity" rankings, which put Australia in the same breath as Uganda and Senegal.

From the middle of the 20th Century onwards, albeit perhaps slowly and sometimes without too many people noticing, we began to evolve into a much more complex exporting nation.

Part of that process was internal, particularly from the 1980s onwards, as voices like those of Stan and Bert Kelly were listened to more and more, and Australia moved away from the protectionist, anti-competitive stance it had adopted since Federation.

Part of it was a response to external stimuli.

The emergence of the European Economic Community, for example, drew Britain away from the traditional hub-and-spokes trading pattern that had been such a strong feature of Australia's trade in the late 19th and early 20th Centuries.

Likewise, the emergence of tigers, giants and dragons to Australia's north brought its own imperatives for reform, as opportunities began to expand in East Asia.

If you like, our domestic economic reforms of the past three or four decades – introducing a floating exchange rate, modernising our labour markets, reducing trade barriers, deregulating our financial markets and so on – set the scene for a major expansion in services exports to meet changing global demand.

Together, they enabled Australia to attract vital foreign investment which we used to build productive capacity and deeper trade relationships.

This, in turn, allowed us to capture a large share of the growth in regional and global import demand for both natural resources like minerals, energy and agriculture, and for services like education and tourism.

In the late 40s and early 50s, services exports only accounted for between five and nine per cent of our overall exports.

From the late 50s, when one in ten Australian export dollars was earned in services, things began to change, albeit slowly at first.

In the 1970s, our economy was still characterised by a manufacturing sector focused on the domestic market, low rates of innovation and skill development and high cost infrastructure like power, transport and communications.

But the process of diversification really began to accelerate in the 1980s, an era of economic reform led from the top as policymakers liberalised our economy.

It wasn't an easy period, as we all know, but Australian public and political commitment to reform was maintained throughout the 1980s.

Partly, perhaps, that was because – as Martin Parkinson pointed out in his 2015 Princeton paper questioning whether the lucky country had run out of luck^[1] – we had just been through a decade of stagflation, bookended by two recessions, and Lee Kuan Yew's "poor, white trash of Asia" epithet continued to ring in our ears.

Removing tariffs, floating the dollar and deregulating labour laws led to protests, job losses and a sense of trepidation in some industries.

But community support more broadly was strong and there was no halt to the tariff adjustment process, notwithstanding the recession of the early 1990s.

Australia's strong social safety nets and industry transition programs helped people adjust – a strategy we still employ today.

While difficult, these reforms turned Australia's economy around.

They reversed our sliding GDP, increased productivity and grew trade, including in expanding sectors like services, and delivered significant increases in living standards.

By the early 90s, services were accounting for around 20 per cent of Australia's exports by value, and by the end of the decade through to 2004, that share actually exceeded one in four of our export dollars.

Services dropped down to 17 per cent of our exports at the peak of the mining boom, before rebounding to more than 20 per cent in more normal times since.

When you boil it down, our booming services exports growth has been just as impressive as our booming export performance in goods.

Put it like this: we have a total of $93 billion in services exports.

That is out of total exports of $438 billion.

But our service exports to China alone – $18 billion – are higher than our goods exports to most other trading partners – in 2018, there were only three countries to which we exported more than $18 billion worth of goods.

In the last year, our goods exports to China grew by an impressive 18 per cent.

But our services exports to China also grew strongly, at over 13 per cent.

It's also important to recognise that there are embodied and embedded services within our resources exports, in terms of the technology services involved in extracting and delivering to market.

In 2015, we estimate services embodied in mining exports accounted for just under 25 per cent of the total value.

As Prime Minister Morrison said in Chicago recently, Australia is now in its 29th consecutive year of economic expansion, much of which rests on our transformation into a modern, open, competitive economy.

Why services matter

While our traditional exports will remain essential for Australia for the foreseeable future – the boom in mining production and export being an obvious example – we can't afford to stand still in the dynamic and rapidly changing 21st Century.

These ideas were very much picked up in the Government's 2017 Foreign Policy White Paper, which identified as one of our key priorities the importance of supporting businesses to expand into new areas overseas.

Likewise, the White Paper made a point of saying how important it is that we maintain and update the global trading system within which we work – a point Mr Morrison has made again in recent weeks in talking about reform of the multilateral system.

Domestically, it will also be important we take measures to ensure Australia's international competitiveness remains strong.

Amongst other things, we need to be serious about addressing regulatory burdens that impede the ability of our goods and services exports to win markets.

The Prime Minister has asked Assistant Minister Ben Morton to take forward work on this front.

We need to ensure the Commonwealth works effectively with States and Territories to address such impediments and to maximise opportunities for Australian exporters.

Particularly at a time when the global economy, and also our economy, is growing more slowly, Australia needs to find new sources of growth.

Australia has been a key partner in fuelling Asia's post-war economic transition through large-scale exports of coal, iron ore, and more recently LNG.

But as Australia, and others, develop climate resilience and move towards low-emissions economies, we are well-placed to lead innovation in new areas.

It is easy to imagine a black swan that presents risks for the Australian economy – a new electricity-producing paradigm, for example, driven by concerns about global warming, could reshape coal or LNG markets in the decades ahead.

Minister Birmingham, I know, is very enthusiastic about the prospects for hydrogen as an energy source.

Other sectors will remain assets and there will be inevitable growth in productivity, particularly as AI and advanced robotics come on stream, but there also are inevitable limits.

So we need to focus more, I think, on the sectors where there is more potential for growth in jobs and income – and services loom large.

The IMF's latest World Economic Outlook earlier this month pointed to services as holding up global employment and income levels, while trade volumes (and manufacturing in particular) are hit by higher tariffs and policy uncertainty.

There is huge untapped potential in a highly developed, well-educated nation that generates 73 per cent of its GDP through services to develop more exportable services.

Australia is increasingly selling expertise – and services – with its goods exports, for example through the adoption of digital technology, and so-called "after-sales" technical support in the advanced manufacturing sector.

But services and technology are increasingly embedded across all of Australia's export sectors and underpin their future growth prospects.

And of course some export sectors are simply services, without any particular connection to goods exports – like financial services, in which we have a strong track record of innovation and success.

Capital markets have been an area of considerable expertise for early Australian fintechs for over 30 years now.

And our strong and stable banking system – now like our extraordinary retirement savings and fund management sectors – is consistently ranked high on global scales.

We are now seeing unprecedented use of and dependence on space technologies and services.

To catch this wave, the Government's Australian Civil Space Strategy aims to grow the Australian space industry from $3.9 billion to $12 billion by 2030.

Digital trade, as another example, is a massive facilitator of goods and services exports, and the artificial intelligence and digital revolutions are likely to revolutionise the ability of all countries to trade in services.

Richard Baldwin, a professor of international economics at the Graduate Institute of International and Development Studies in Geneva has said that the coming artificial intelligence and robotics revolution will benefit services to a far greater extent than goods trade.

Why we need to reform and liberalise services

The importance of services in the 21st Century is not, of course, a recent realisation to policymakers, but it is a challenge for Australian public thinking, accustomed as we are to drawing so much of our national income and standing from our deep commodity pockets.

Over at least the past three decades, in the trade portfolio, services has been a growing part of the Australian trade policy agenda, as we've seen in many of the free trade agreements we've negotiated in recent years, and the role we've taken on services in Geneva.

Until the 1990s, trade negotiations – then of course, more often multilateral negotiations under the GATT and WTO than the bilateral or plurilateral FTAs that predominate these days – were largely to do with goods.

So significant were the impediments to goods trade in many sectors globally in the 1960s, 70s and 80s that that area was, for good reason, the prime focus for global liberalisation efforts.

Australia's central role in the Cairns Group of agricultural exporters is a good example of the battles that were being fought in that time.

But from the late 1980s, Australia helped midwife the global services trade regime side by side with the GATT, under one of our leading trade negotiators David Hawes.

Then, as the phase of intense bilateral FTAs began in the 1990s, and as hopes for the Doha Round began to fade in the late noughties, the need to work on services liberalisation became increasingly apparent.

Hence, in the Japan-Australia Economic Partnership Agreement, signed in July 2014 – we agreed with Japan on expedited registration procedures for Australian lawyers in Japan.

In the same agreement, Japan guaranteed market access for Australian education providers in the Japanese higher education services market.

Likewise, in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership – the agreement that came after Japan and Australia spearheaded a resurrection of the TPP after the US withdrawal – member countries agreed to allow the supply of electronic payment services for payment card transactions in their countries on a cross-border basis.

In 2019, having worked with the services industry under Minister Birmingham on the Services Export Action Plan, it is clear within government that there are still a number of things holding back our services exports.

Domestically, often as a result of our federal structure, the regulation and membership of many professional organisations are still very complex.

And internationally, it is clear that services liberalisation lags a long way behind goods.

We know industry is very committed to changing this and finding ways to improve our services exports.

But there is a lot of work to be done.

What we've been doing and the agenda for services exports

As a result, services liberalisation is a key priority in both our FTA negotiations and our work in the WTO.

Australia was a co-leader of the Trade in Services Agreement in the WTO and stands ready to resume this role when the time is right.

Australia's WTO Ambassador, Frances Lisson, is also chairing the plurilateral discussions on e-commerce that seek to develop rules to facilitate digital trade.

Through these negotiations we seek to enhance certainty for services exporters and create opportunities in sectors of key commercial interest.

We also seek to reduce barriers to digital trade.

Although it is yet to enter into force, the Australia-Hong Kong FTA, for example, has improved on the leading edge trade rules on data in the CPTPP – guaranteeing data can flow across borders and without the requirement to hold data on shore – by extending those rules to financial services.

Likewise, in the Indonesia-Australia Comprehensive Economic Partnership Agreement, also yet to enter into force, Australian technical and vocational education providers will benefit from more transparent and predictable operating conditions in Indonesia, a major market for us.

IA-CEPA, as it is known, will bring greater clarity regarding the qualifications our suppliers can teach in Indonesia, as well as on the qualifications of the teachers delivering the services, and will enable technical and vocational education services to be provided anywhere in Indonesia.

One example of the exciting work we are doing is the proposed Australia-Singapore Digital Economy Agreement, announced earlier this month by Simon Birmingham and his Singaporean counterpart.

This ground-breaking idea is aiming to harness the digital transformation of our economies to expand our trade and economic ties.

It will deepen the bilateral economic relationship, promote greater connectivity and provide ambitious standards for the region's digital economy.

The Agreement will cover a broad range of new areas for bilateral cooperation, including digital trade facilitation, e-invoicing, e-payments, FinTech, digital identity and artificial intelligence.

Another area where we have been working hard in recent years is in Mutual Recognition Agreements.

These agreements allow for greater Australian professional recognition in key markets, and their number has been accelerating as we work to break into new markets for Australian service professionals.

Certified Practising Accountants, for example, now have the benefit of five new MRAs struck last year, making it easier for them to work in Canada, Sri Lanka and the United States.

Likewise, Australian architects gained invaluable recognition in 2017 in an agreement with 30 states of the United States.

Engineers gained greater access to South Africa (2018) and France (2019).

And last year Australian quantity surveyors benefited from four new MRAs making it easier for them to work in Hong Kong, Malaysia, the Philippines and Singapore.

Looking ahead, we know we've got a lot more work to do, as industry has been at pains to tell us through our consultation around the Services Export Action Plan process.

In November last year, Minister Birmingham hosted a roundtable with services exporters to initiate a partnership with government to boost Australia's services competitiveness.


DFAT and Austrade have continued this productive partnership throughout 2019 in establishing a series of working groups, involving the financial, professional, ICT, health and creative services sectors, to develop a Services Export Action Plan.

This should produce a range of policy suggestions that government and the services sector can work on together to address domestic impediments to competitiveness and increase exports.

Industry has also suggested that we work together to produce a comprehensive list of international barriers to services exports, so that we can prioritise them for action.

I know that advancing reform efforts is not easy, especially at a time when governments have to ask whether they have the necessary political capital.

But somehow, we have to find a way through, if we are to continue to build on the strengths of our economy.

Conclusion

The world of 2019 is more complex and contested than it has been for decades.

Industrial landscapes are never static, but for Australia, a country that has done so well on the back of its traditional industries, one of our big challenges is to stretch ourselves beyond our traditional successes.

If we are to succeed in the decades ahead, we need to continue to be open and embracing of change – after all, change has served us well since people like Stan and Bert Kelly began the great task of turning us away from domestic protection all those decades ago.

In the modern world, our largely services-driven economy needs to look outwards, not just on our traditional strengths, but in a host of new fields and areas where we can use our big advantages to win jobs and national income for Australia.

But to do it, we will need to be as smart, agile and open-minded on services reform as we have been innovative in the past on agricultural and broader goods liberalisation.

"Beef, Mutton and Wool" on their own just won't cut it.

Thank you.