Speech to The Spectator Conference: Anglo-Australian Relations in a post-Brexit World
28 June 2018
Australia House, London
HE the Hon George Brandis QC, Australian High Commissioner
When the first issue of The Spectator hit the streets of London on the 6th of July 1828 – 190 years ago next week – it was 40 years since Captain Arthur Philip had taken possession of the colony of New South Wales in the name of the King. Later in that year, when the first census was taken, it revealed that the population of New South Wales – not including indigenous people – had grown to 36,598. Australia was already shedding its character as a penal settlement: a majority were by this time either free settlers, native-born, or former convicts who had served their time and chosen to seek their fortune under the sunnier skies of a new land.
Trade between Australia and the United Kingdom was already prospering: wool, the first of the great Australian export commodities, was first shipped to Britain in commercial quantities before the end of the Napoleonic wars; by 1831, almost two and a half million pounds of wool was exported from the Australian colonies to the British market, although this burgeoning trade had suffered something of a setback in 1825, when the Government of Lord Liverpool imposed import duties which favoured the woolgrowers of Saxony and Prussia over those of New South Wales and Van Dieman’s land – perhaps a portent of things to come a century and a half later. The politics of trade would be a dominant issue in Britain for the next two decades, splitting the Tory Party, until 1846, when the dispute culminated in the victory of the advocates of free trade with the repeal of the Corn Laws. All the while, Australia’s trade with Britain grew, to the mutual benefit of both nations.
Today, as then, Australia is still an importer of people and capital, and an exporter of commodities – along with much else. But it is now the twelfth largest economy in the world; the second largest in the southern hemisphere; and, after China and Japan, the third largest in East Asia. Earlier this year, Australia recorded its 27th year of consecutive economic growth – almost half of which, by the way, was enjoyed during the Government of John Howard. In about 6 weeks’ time, the Australian population will reach 25 million, who enjoy one of the highest per capita incomes in the world.
There are many reasons for the prosperity of modern Australia. Not least among them is trade. While Australia adopted protectionist policies for much of its history, in the late part of the twentieth century, parties on both sides of politics undertook a fundamental rethinking of that earlier outlook. I should note that John Howard, as opposition leader at the time, was one of the principal thought leaders of that profound and beneficial shift in Australian public policy. And we opened our economy to the world. The decision was an undoubted success: it is no coincidence that our economy has continued to grow for the last 27 years. Today, Australia stands firm in its commitment to free trade and its opposition to protectionism – not for ideological reasons, but because our own experience of the last quarter of a century has taught us the benefits free trade brings. And, as we consider the opportunities for the relationship between Australia and the United Kingdom after Britain withdraws from the European Union and redefines its place in the world, first and foremost in our minds are the opportunities which the renewal and expansion of the trade between our two nations will bring to both.
The Case for Free Trade
It is passing strange that – 172 years after the repeal of the Corn Laws – the case for free trade still needs to be made. Yet the voices calling for protectionism are gaining strength and confidence, and the very foundation of the world’s economic system is being called into question.
It is timely, therefore, to consider once again why free trade works, and why protectionism is a fool’s errand. The benefits of trade have been known for centuries – David Ricardo first postulated the theory of comparative advantage in 1817. His thesis is as true today as it was two centuries ago.
A recent study by the OECD - ‘The Impact of Trade Liberalisation on Jobs and Growth’ - (Dee et al., 2011) conducted a comprehensive analysis of the benefits of free trade. The paper yet again demonstrates what economists have long known – that open markets in goods and services contribute to job creation and income growth.
What that paper found was that in the short term, reducing tariffs and non-tariff barriers reduces the costs of imported products for consumers and provides new market opportunities for exporters.
In the longer term, lasting gains can be found from reallocation of resources across sectors and from productivity growth. In particular, reducing barriers to foreign direct investment in services increases demand for highly skilled labour, while the offshoring of services is not found to shift jobs abroad.
The link between trade and productivity growth is crucial, because higher productivity is the only basis for sustainably higher incomes and thus economic growth.
In short, freer trade means higher income, higher growth, higher productivity, lower costs for consumers and more opportunities for businesses. There are also important consequences in terms of social equity: overwhelmingly, the principal beneficiaries of less expensive consumer goods are those with lower disposable incomes. As Australia’s former Prime Minister Paul Keating used to say, tariffs are a tax on the working class.
The international experience of free trade following the GATT agreement, and the formation of the WTO in particular, have borne out these predictions. Your International Trade Secretary Liam Fox, put it well, when he observed that, “the 3 decades between 1981 and 2010 witnessed the single greatest decrease in material deprivation in human history. A billion people were taken out of abject poverty in one generation.”
Of course, the truth and wisdom of that argument will be well known to the readers of The Spectator, which has been on the side of the angels on this issue for most of its long life. Yet it is alarming how often the case has to be made.
Australia’s experience
Let me turn to the Australian experience, which has proved the economic propositions that I have expressed correct. We have learned that protectionism was a path to economic failure, and liberalisation the engine of our economic growth.
Prior to the United Kingdom first applying to join the European Economic Community, Britain was Australia’s most significant trading partner, accounting for fully 23.5% of Australian exports in 1963-4 and 27.8% of its imports. Australia was a significant destination for British trade – in 1960, 7% of the United Kingdom’s exports went to Australia. We found ourselves shut off from your market when Britain joined the European Economic Community in 1973. British exports were also diverted into the EEC – rising from 21.7% in 1970 to 54% in 2006.
At first, Australia’s response was to keep high tariff walls around ourselves, seeking protection from international competition. It was a manifest failure. We made poorer products at a higher cost than we otherwise would have done. By 1980, Australia’s GDP per capita had fallen to a rank of 19th in the world from 3rd in the world much earlier in our history – from 7th in 1950.
By the mid-1980s, our policy makers – on both sides of politics as I have said - realized their mistake. We began to gear our industrial policy and trade policy towards an economy that responded to international competition, and not industry protection.
Far from killing our national economy, as some doomsayers have warned, the removal of protectionism renovated it: new industries emerged, old, inefficient and uncompetitive industries fell away.
There were transaction costs resulting from economic reform: some people lost their jobs or struggled to adjust to work in the new services industries that emerged. However, in tandem with policy reform, Australia implemented strong social security safety nets, industry transition programs, and a commitment to education and training to help people find new careers; new careers and better careers.
Agricultural support shrank, and what support the government gave to the agricultural sector was focused on encouraging research and development, rather than supporting inefficient farming and structural support programs. Dairy and tobacco farms did close, but they were replaced by vineyards: the removal of protectionism was the genesis of our world-class wine industry.
Australia found new markets, new opportunities, and our businesses became resilient enough to compete with the rest of the world.
As Australia’s current minister for trade, Steven Ciobo described the Australian experience, we moved from shielding the nation from competition to equipping Australia for competition.
The result by 2015, even after the waning of the mining boom, we were no longer 19 on the list of comparative income, rather, we had risen to be the 10th richest people in the world, as measured by GDP per capita. As I said before, we have just marked our 27th consecutive year of annual economic growth.
A bilateral free trade agreement
With the recent slowing of progress in the WTO, bilateral trade agreements have become the key policy instrument to achieve trade liberalisation. Modern free trade agreements remove tariff and non-tariff barriers that clog the wheels of business – everything from data, temporary movement of skilled labour, investment restrictions and the burden of bureaucratic red tape.
As keen proselytisers of free trade, Australians believe that Australia and the United Kingdom should prepare with a sense of urgency to negotiate a high quality and ambitious trade agreement once the United Kingdom leaves the EU.
The economic benefits of a bilateral FTA are very real. Australia and the Britain have extremely similar economies, and share likeminded philosophies in business, regulation, and culture. We are governed by similar laws and similar principles of corporate governance. And although our trade has fallen very significantly since the United Kingdom joined the European Union, our trade links remain significant.
The UK is a net exporter in services to Australia, with exports worth £4.7 billion in 2016-7, as against £3.1 billion in imports. The investment relationship is healthy, with Australia investing $331.1 billion in the UK at the end of 2017 (our second largest destination for investment) and receiving $481.3 billion of investment from the UK – our second largest source of investment. Our current trading and investment relationship forms an excellent basis from which to achieve free trade, raise productivity and to create more jobs in both our countries.
And quite aside from the economic benefits, a free trade agreement will announce the arrival of the United Kingdom as a modern, major, global trading nation in its own right, surely one of the principal outcomes which Brexit should achieve for this country.
And there is also, and John Howard touched on this, a geopolitical dimension to a bilateral FTA.
We are seeing rising tensions between the major powers – rigid state capitalism in China, rising protectionism in the United States – which could test the capacity of the WTO to settle disputes based on law and precedent.
The WTO is one of the foundations of the liberal rules-based order that has enabled us all to pursue security and prosperity without compromising autonomy. Now, more than ever, open liberal economies need to make the case for free trade and help to shape the global rules of the road. A truly ambitious free trade agreement between our two countries will help to show the way.
Can we do it?
As your Prime Minister Theresa May has described, a bilateral FTA “a priority for the United Kingdom”. I am confident we can sign an ambitious, high quality FTA quite soon after Brexit. As Prime Minister Turnbull said, “Australians are fleet of foot. We don’t muck around. … We will move as quickly as the UK will move and we’ll move as soon as Britain is lawfully able to enter into a free trade agreement.” Lest anyone among you think that that ambition is too bold, might I point out that the time between Australia commencing negotiations with the United States, and the conclusion of the Australia-US FTA, one of the jewels of the crown of the John Howard era, was only 15 months.
Our two governments are making good progress to this end. Our senior trade officials have met three times since the bilateral Trade Working Group was established in November 2016, and they will meet again shortly. And while we cannot commence formal negotiations until the United Kingdom until after March next year, we’re tracking well with the preparatory work needed to ensure negotiations run smoothly once they do commence.
We’re also moving forward to see what can be done without a formal FTA. For example, on 22 March, Australia and the United Kingdom signed a FinTech Bridge, that is designed to deepen collaboration between governments, regulators, and industry bodies; while also supporting improved access for Australian FinTech firms to the UK market.
Protectionism
Just as the United Kingdom outsourced its trade negotiation function to Brussels in 1973, it also outsourced the politics of trade. This country’s decision was to leave the European Union; the United Kingdom has the opportunity to take back its trade policy – and so the politics of trade is front-page news again.
In this context, it has been interesting to witness, as if preserved in aspic since 1973 voices calling for the United Kingdom to take a protectionist path once it leaves the EU.
When confronted by change, it can be comforting to seek to shield oneself from the outside world. This sentiment, which Australia fell victim to in the 1970s, it is not an option for modern Britain in the 21st century. To fall-back upon the arguments – which were defeated intellectually and practically in the first half of the 19th Century when you decided to repeal the Corn Laws – would be a catastrophic policy choice.
Our two governments believe in free trade. Your UK Prime Minister, Ms May, stated at the Commonwealth Joint Plenary Forum this year that, “Free and fair trade, which for decades has helped to lift hundreds of millions out of poverty, is under threat from a new wave of protectionism.” The Australian Prime Minister, Mr Turnbull, warned: “We do not accept the lure of protectionism. We believe that protectionism is not a ladder to get you out of the low growth trap but in fact a great big shovel to dig it a lot deeper.”
Yet I too have read the breathless newspaper articles warning of a tsunami of Australian lamb and beef headed to England and Britain, bent on bankrupting every farmer.
Nothing could be further from the truth. In fact, Australia can’t even supply the hungry middle classes of Asia quickly enough with our agricultural products. Our FTAs with China, Japan and South Korea already prove us a ready market for exports. Australia’s total food production would only support a population of 90 million people, equivalent to the Indonesian island of Java - and I note that we are hoping to conclude a FTA with Indonesia very shortly. So stare down, in this regard, the warning of catastrophists and doomsayers. Take comfort from the intellectual arguments that were won as long ago as the 19th century, and from the recent experience of Australia, in which the adoption of free and open markets has been a pathway to our modern prosperity.
We have learned that the outside world is not a threat but an opportunity – with ready markets willing to buy good product and pay handsomely for the privilege. This is an opportunity that awaits Britain too, Britain beyond the EU, if it is bold enough to seize the opportunities which Brexit bring will bring.