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Support for protectionist trade policies flares up periodically, usually during periods of slow economic and income growth. Now is one of those periods.
The trend towards use of tariffs and other protectionist measures has lifted in G20 countries since the Global Financial Crisis and there are clear signs that the protectionist trend could accelerate. US President Donald Trump was elected on the back of a protectionist trade policy stance and proponents of protectionism have been empowered in parts of Europe.
So far it is unclear how different countries’ trade policies will change. However, developments to date suggest that maintenance of the status quo is unlikely. Some think change will be at the margin, others fear major backsliding on protection and a renunciation of the rules‑based multilateral trading system.
How would Australia be affected by a new swing towards protectionism? Are there strategies for avoiding the risk of backsliding on protection? How can the costs of adjustment be minimised and the benefits of liberalisation made more inclusive?
The Commission was motivated to undertake this study by a desire to assist policy makers and the community with these broad questions. The analysis draws on stylised scenarios that the Commission has modelled to illustrate the possible effects on Australia of significant international increases in protection, and of different Australian policy responses.
From the analysis, we could comfort ourselves with a sense of isolation: the ultimate (longer term) effects on economic activity and living standards in Australia would be small if the rise in protectionism stopped at the United States imposing tariffs on China and Mexico, or adopting border adjustments. Yet in the interim, tariff increases would cause a significant disruption to, and reorganisation of, global trade in ways not captured by trade models. Uncertainty has a cost.
More seriously, if a scenario akin to the experience of the 1930s were to be repeated — with trade barriers significantly higher around the world — the economic dislocation unleashed would have the capacity to cause a global recession and put the rules-based global trading system under much strain.
Rising protectionist sentiment and actions in some countries may lead some to suggest that a rethink of Australia’s commitment to free trade is needed. They would be wrong. Protectionist policies would harm the Australian economy and risk reversing the community‑wide gains that the lowering of barriers to trade globally have helped to deliver to us and would not deal with the insecurity concerns about jobs and incomes that globalisation has come to encapsulate.
Yet it would also be a mistake to dismiss the signs of discontent that are testing the social compact that underpins open market policies.
Along with stronger social adjustment commitments, the best response to maintain and increase the wellbeing of Australians in the face of any widespread rise in protection would be to continue to work towards freer markets. Australia could proceed in this sense unilaterally, as most of the benefits, especially from lower non‑tariff measures, do not depend on our trading partners taking similar actions.
One option we consider is to extend tariff and other concessions made in preferential trade agreements to other trading partners — that is, make them non-discriminatory or most favoured nation. This would remove costs associated with complex rules of origin. Another option would be to address Australia’s non‑tariff barriers that add to the cost of doing business across borders. The economic benefits from being a first mover would be predominantly and widely distributed across Australian households and businesses.
A further policy option is to help to form a coalition of countries that conspicuously and explicitly choose to act together to persist with using transparent processes to maintain liberalising processes in the flow of international trade and investment.
Trade policy alone cannot ensure that the potential benefits of liberalisation are fully realised or widely distributed. This report outlines a three pronged strategy that would help achieve better outcomes for all Australians and foster public confidence in open markets.