Australia is at risk of a 2% hit to economic activity, a loss of more than a quarter of a million jobs and a fall in real wages should the rest of the world continue to shift towards greater trade protectionism, according to a key economic modeling report commissioned by the federal government.
Revealing that Australian families had benefited by an increase of $8,500 a year in household incomes due to 30 years of trade liberalization, the report also warns, however, of a 3.5% contraction in global economic growth from any worldwide rollback of free-trade policy, AAP reported.
For Australia this will lead to the loss of 270,000 jobs, and an economic loss of between 1.8% and 2.2% of GDP.
Commissioned by the Department of Foreign Affairs and Trade and released ahead of this week’s APEC world leaders meeting in Vietnam, the report underpins the case against emerging protectionist sentiment.
Tensions over trade will expose a central point of difference between Prime Minister Malcolm Turnbull and US President Donald Trump during their planned bilateral meeting, with the PM pushing for an 11-nation Trans-Pacific Partnership deal to be finalized at APEC, without the US, which withdrew from the pact.
Trump will respond with calls for “fair trade”, asking China, Japan and South Korea to do more to rein in their surpluses with the US.
The push for the revamped TPP is being led by Japan’s Prime Minister Shinzo Abe and Turnbull. New Zealand’s new leader, Jacinda Ardern, Sunday confirmed her continuing support for the deal.
China remains excluded from the TPP, but President Xi Jinping is expected to use the APEC summit and the East Asia Summit in Philippines the following week to claim the mantle of the strongest voice for trade liberalization in the region.
The Center for International Economics report warns that the Asia-Pacific region will be worst affected by any shift towards increased trade barriers, with ASEAN nations likely to experience up to a 10% decline in economic activity.
Turnbull warned at the weekend that trade liberalization was under stress due to the rise of populism. The ability of world leaders to “advance trade liberalization, contain protectionism and enforce international rules faces greater challenges than any time since the creation of the multilateral trading system in the 1940s”, Turnbull said in a speech in Perth.
Trade Tensions
“Moreover, there is a real risk that rising major power trade tensions—tensions between assertive state capitalism in China and populism in the US—could undermine the stability of the WTO’s rules-based trading system and its all-important mechanisms for settling disputes.
“You don’t need a degree in economics to know that a world in which the rules-based economic system is weakened will be poorer for us. The resurgence of populism throughout the world makes it even more important that we make the case for well-regulated open markets.”
He said he would be taking a strong message to the summit for countries to resist a protectionist path, which the DFAT report cautioned would be economically disastrous for the region.
“Over the last few years, there have been increasing calls to roll back decades of trade liberalization and renegotiate, or even tear up, previously agreed to trade agreements,” the report says.
“These calls have been made on the basis of an argument that trade liberalization has been undertaken at the expense of local jobs and a loss of sovereignty, to the net detriment of the liberalizing country.
Impact of Tariff Increases
“The economic modeling suggests that if tariffs on manufacturing imports were raised such that there was a 10% price increase in such products across the world, real GDP in Australia would be 1.8% lower; while global real GDP would be 3.5% lower.
“If tariffs on all merchandise imports were increased to raise all import prices by 10%, real GDP in Australia would be 2.2% lower, and global real GDP 4.1% 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.”
The report is the first modeling since 2009 to evaluate Australia’s trade contribution to GDP and living standards. It found average household income in Australia was $8,448 higher last year than it would have been without trade liberalization, with real GDP 5.4% higher.
The modeling also showed that investment was 11.7% higher, real wages 7.4% higher and prices 3.4% lower due to trade liberalization that began in the 1980s.
Increasing Protection
“Increasing protection sees distortions being introduced into the Australian economy, culminating in capital earning a lower return and therefore making Australia a less attractive destination for investment,” the report says.
“In the short run, increased protection could lead to a decline in employment of up to 2.2%, or up to 270,000 jobs. Over time, however, real wages are expected to decline and employment increase back to the level before the change in protection.”
Trade Minister Steve Ciobo said there were still lingering misconceptions about free trade and warned of the economic dangers of protectionism. “Free trade has taken an unfair beating in recent years due to misunderstandings over its effects,” Ciobo said.
“Lowering the barriers to free trade has made Australians richer and our economy more competitive. This independent study is a timely reminder of trade’s benefits and shows why the Turnbull coalition government is committed to further liberalization and more trade agreements.”
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