Rudd must act on trade reform

Prime Minister Kevin Rudd has avowed his government’s commitment to multilateral trade reform at the Group of 20 and Asia-Pacific Economic Co-operation forum summits. However, like everyone else he is struggling to find a way to not just rescue the Doha round of trade negotiations, but rebuild the momentum for reform that has contributed to world prosperity over the past 60 years.

The protectionist rhetoric of US president-elect Barack Obama and the anti-free trade leanings of the Democratic Party have not made the task appear any easier.

Yet the appointment of Lawrence Summers as the Obama administration’s chief economic adviser presents an opportunity for Australia to promote long-run multilateral trade reform, possibly in conjunction with the new government in New Zealand.

Summers argues that the collapse of the Doha round is a symptom of a deeper crisis. The problem, he says, is that even the citizens of the countries that have benefited most from decades of multilateral trade reform cannot see the benefits of further reductions in trade barriers.

They will be even less impressed as the focus of trade reform moves into the critical area of services. The barriers to trade in services are typically invisible “behind the border” regulations and institutional arrangements. Many of these policies were put in place for legitimate domestic reasons and designed with no thought of the possibility of the international trade in services.

As popular enthusiasm for trade reform drains away, so does the willingness of governments to make concessions at international trade negotiations. Trade barriers were erected by governments as a result of domestic political pressure to protect jobs and profits in trade-threatened industries. And they will come down only when there is domestic political support for change.

What is badly needed is a mechanism to show voters the benefits of further trade reform. And that, as it happens, is exactly what Tim Groser, New Zealand’s former trade representative and now a member of the National Party-led government in Wellington, championed at the Uruguay round of multilateral trade negotiations.

A similar initiative has been strongly advocated in Australia and New Zealand by the prominent economist and former diplomat, Ross Garnaut, by a former chairman of the Industries Assistance Commission, Bill Carmichael, by Australia and New Zealand Banking Group’s chief economist, Saul Eslake, and by Roger Kerr of the New Zealand Business Roundtable and “Rogernomics” fame.

The key is transparency. The former Industries Assistance Commission publicly exposed the real cost of protecting inefficient industries. Australia’s economic renewal of the 1980s and ’90s came about in part due to tariff cuts. But they were unilateral. It wasn’t deeper access to foreign markets that drove growth but cheaper, high-quality imports that changed asset allocation and enabled efficiencies through competition. The benefits for developing countries would be comparable – some suggest up to $US21 billion ($33 billion) from pulling down barriers, however intuitively appealing are the arguments for protecting their farmers and “infant” industries behind tariff walls.

Through history, the benefits of trade reform have gone disproportionately to the countries that reduced their trade barriers. But countries will support genuine multilateral trade reform only when their citizens are able to see that the economy-wide benefits of trade liberalisation far exceed the costs to protected industries. For that reason, Mr Carmichael and other advocates of reform are urging the Rudd government to sponsor a new “transparency initiative” at the World Trade Organization to encourage governments to expose the cost of protection to their own citizens.

Even the United States does not engage in that kind of transparency. And yet, a commitment to transparency as part of a breakthrough on multilateral trade reform could be an attractive option for Mr Obama if he wants to gradually loosen the shackles of his party’s protectionist rhetoric. At the very least, it should appeal to his chief economic adviser.

The Rudd government is close to announcing its response to the Mortimer review of export policies and programs.

But, perhaps because of its concentration on opening export markets for Australian industry and the immediate challenge of resuscitating the Doha round, the Mortimer review has given little weight to the broader issues raised by the collapse of the multilateral trade negotiations. In particular, it has brushed aside the idea of a transparency initiative at the WTO.

Mr Rudd must not make the same mistake. He should seize the opportunity created by the Summers appointment and embrace the most promising proposal yet for rebuilding popular support for trade reform over the longer term.