Kevin Rudd (Griffith, Australian Labor Party, Shadow Minister for Foreign Affairs and Trade and International Security) Share this | Hansard source

I rise to speak on the Export Market Development Grants Legislation Amendment Bill 2006. In the context of this debate, I want to place clearly on the parliamentary record Labor’s concerns in relation to Australia’s continuing trade deficit; how that impacts in turn on Australia’s current account deficit; the impact which that has further on Australia’s record foreign debt; why improving Australia’s current account deficit is critical, not marginal, to the future of our economy; the underlying constraints on Australia’s trade performance; the contribution that the Export Market Development Grants program potentially makes to our trading arrangements; and a number of specific areas where this bill could be improved.

The trade figures released by the ABS last week demonstrate the very difficult trading position in which Australia finds itself. Every month, the ABS releases another set of disappointing export figures, and regrettably last week was no exception. The data revealed that Australia recorded yet another trade deficit—this time, a monthly trade deficit of $1.5 billion for March, and this represented a massive $1 billion increase on February. This is Australia’s 48th consecutive monthly trade deficit, meaning that we now have had a continuous trade deficit for the past four years. It is not just the continuum of monthly trade deficits that is the problem; it is the quantum of these deficits as well.

Australia’s trade deficit is the single largest contributing factor to our current account deficit. In 2005, Australia’s current account deficit was a massive $55 billion, which represented six per cent of gross domestic product. Of this $55 billion, some $19 billion is derived from our trade deficit. This is yet another record for the government: the highest annual current account deficit ever. And, in Tuesday’s budget, the Treasurer forecast that Australia’s current account deficit will reach a new record of $62.5 billion in 2006-07. Given that the current account deficit is the deficit on our income to and from Australia, it contributes directly to our foreign debt. With Australia’s trade and current account deficits over the past two years at record levels, Australia’s foreign debt has consequently spiralled to unprecedented levels.

Australia now has a foreign debt of half a trillion dollars. On the day that, two weeks ago, the Treasurer was crowing about ‘debt-free day’, Australians owed the rest of the world half a trillion dollars. This is a number we are not used to hearing or using in the domestic economic debate in this country; it is a number we are going to hear a lot more about in the months and years ahead, up until the next election. That figure represents $24,276 for every single Australian. This half a trillion dollar foreign debt, along with four years of trade deficits and a record current account deficit, is being recorded at a time in the economic cycle when Australia’s external balance should be moving into positive territory.

The bottom line is that Australia has experienced a massive increase in both the demand for and the prices of our resource exports. The price of our largest commodity export, coal, has tripled over the last three years. The price of our next largest commodity export, iron ore, has doubled over the same period. Australia’s terms of trade—that is, the ratio of export prices to import prices—has increased by 34 per cent since December 2001 and is now at the highest level it has been in 30 years, since March 1974. At times in our history when Australia has had similar terms of trade to that which we enjoy today, our trade and current account balances have improved as a result. As Professor Ross Garnaut said last year to the Senate inquiry into Australia’s current account deficit:

There are a couple of features of that big number—or all those big numbers last year and the big number in the March quarter of this year—that make that big number even more unusual. One of those is that it has occurred at a time of historically extremely high current account deficits—prices for our exports relative to our imports. Other periods of peak current account deficits—they have never been quite this high before, but at other times they have got close to it—have usually been times when export prices have been relatively low. But at this time they are unusually high.

So why should we be concerned about Australia’s record current account deficit? The current account deficits that we have experienced in the last 12 months, with some quarterly deficits reaching well above seven per cent of GDP, are starting to get into dangerous territory. Such high external imbalances expose our economy to the vagaries of markets. And when international markets react to bad economic data and conclude that the current account deficit has reached unsustainable levels, interest rates almost inevitably rise. The real risk is that the boom that we have seen in commodity prices, which has kept our export earnings higher than they otherwise would be, will at some stage come to an end. In evidence again to the Senate Economics References Committee investigation into the CAD last year, Professor Ross Garnaut stated:

... I think the outstanding possibility is a retreat of the terms of trade towards more normal levels. This is the way that the boom of the late sixties and early seventies ended. This is the way that the resources boom of the Fraser era ended. This is part of the story of the boom of the late eighties which gave rise to recession. On each occasion, there was a large and fairly sharp fall in the terms of trade. I do not think there is any doubt that, if within a relatively short period we got an adjustment in export prices similar to that which has occurred a number of times in modern Australian history, we would have a very difficult adjustment ...

This is not to say that a rapid decline in the terms of trade is inevitable, but it is a risk—a big risk—that the economy faces. Just last month, in April, we saw what could be the first signs that world commodity prices have peaked. The ANZ Bank reported that coking coal producers accepted price cuts of around 12 per cent. The ANZ also stated:

Commodity prices cannot continue to rise at the stellar pace of recent years, and there are signs that non-rural prices could now be peaking as global growth eases back from unsustainably strong growth rates and as Asian purchasers play hardball in contract negotiations.

Importantly, the 2006-07 budget papers are forecasting a plateauing in Australia’s terms of trade.

What do we do about the rapid deterioration in our current account deficit? Why has Australia’s trade imbalance demonstrably deteriorated under the Howard government? The answer to this is complex, but the key is Australia’s export performance. In the week of the federal budget, let us look at Australia’s recent export performance. Let us also examine the Treasurer’s predictions for exports over the past few years. Since 2001-02, the government has overforecast growth in exports by an average of 5.5 percentage points each year. Each of these predictions has turned out to be a complete and utter joke in terms of the real export performance delivered in each of the years in question.

Let me demonstrate by going to the record. In 2001 the government forecast five per cent export growth when in fact exports fell by 0.8 per cent. In 2002 the government forecast six per cent export growth, then exports in fact fell again by 0.8 per cent. In 2003 the government again forecast export growth of six per cent, while exports grew by barely more than one per cent. In 2004 the government provided a truly heroic forecast of eight per cent export growth, whereas in fact exports grew by 2.5 per cent. In 2005 the government forecast seven per cent export growth, which was followed by an expected two per cent actual growth over the period. In the budget on Tuesday the government forecast again that exports will grow by seven per cent in the year ahead. We are deeply concerned as to whether in fact that figure will be realised in practice. It is important to note that over the past four years exports have averaged growth of just 0.6 per cent per year. This compares to yearly export growth of around eight per cent per year in the 1990s.

Of equal concern over the 10 years that the government has been in office has been the narrowing of our export base. Exports of ETMs—elaborately transformed manufactures—and services have declined as a proportion of GDP for the past five years. Let us take ETMs as an example. The Australian Industry Group succinctly summarised Australia’s manufactured export performance over the last five years in its 2006 Manufacturing futures: achieving global fitness publication when it reported:

... the total value of manufactured exports in money terms remains around $2 billion below the peak of November 2001, when manufactured exports totalled over $70 billion.

Indeed, Australia has lost a fifth of its global market share of manufactured exports since 2001. Tuesday’s budget once again reveals that Australia will be placing all its export eggs into one basket—that is, a resources boom driven by Chinese demand. The budget papers effectively haul up the flag of defeat and retreat when it comes to our overall performance on manufacturing exports.

Despite the clamour of warnings and advice to the government on exports, the government, regrettably, is still not listening. Core Australian export sectors are being neglected by the government while it focuses all of its attention, it seems, on the minerals boom. The budget papers state of Australia’s manufacturing sector:

Exports of elaborately transformed manufactures are forecast to grow moderately over the next two years, but are expected to continue to be hindered by a relatively high exchange rate and the increasing competitiveness of the manufacturing sectors in developing countries, such as China.

The story is no better when it comes to services exports. Again, the budget papers state:

Service exports are forecast to improve modestly in 2006-07, after two years of little growth. Competition appears to have intensified in the global tourism industry, with factors such as increasing price competition in the short-haul airline market out of major Asian hubs reported to have adversely affected Australia’s travel service exports. This may continue to constrain travel export growth in the near term.

These are references from the government’s own budget papers. These are not statements simply by the Australian Labor Party seeking to advance a partisan argument. The Reserve Bank has also provided commentary on this question.

A division having been called in the House of Representatives—

The Reserve Bank has also entered this debate. Referring to the commodity price boom, the bank said in its latest statement on monetary policy:

Australia’s export performance over recent years has been disappointing, considering the favourable international conditions.

…       …            …

Australian incomes have been substantially boosted by these developments, but almost all of the gain has come from higher export prices rather than from increased volumes. The volume of coal exports has been broadly unchanged over the past three years. Growth has been limited by capacity constraints in the mining sector, some infrastructure bottlenecks, and the long lead times required for large mining projects to come on line.

In addition, Felicity Emmett and Kieran Davies of ABN AMRO said of the billion-dollar blow-out in March’s trade balance:

Excluding price effects, we calculate that real net exports have remained a drag on growth in the first quarter, subtracting around 0.3 of a percentage point from GDP. This will be the 18th consecutive quarter of subtraction. With export prices up a sharp five per cent, real exports look to have posted a small fall in the quarter such that they have continued to zigzag around a broadly flat trend. This continues to be a source of disappointment for the economy as export volumes have failed to make any meaningful headway, despite strong synchronised world growth.

We should also look at the work of the Senate Economics References Committee, which last year investigated this current account deficit question, in particular the demand for imported goods and household debt. I draw the attention of the House to the committee’s report entitled ‘Consenting adults deficits and household debt’. The committee recommended that the government develop new strategies to promote the exports of ETMs and services to underpin a long-term improvement in Australia’s balance of trade. The committee recommended that the government introduce policies designed to bring about an improvement in the medium- to long-term average of the current account deficit, including improving domestic savings and increasing the diversity and international competitiveness of the export sector.

Unfortunately the government simply does not provide us with any evidence that it has developed a comprehensive, cohesive, consistent export strategy. Let us look at what trade policy this government has adopted to broaden our export horizon. This will be particularly important in upcoming debates around the Doha Round, which currently is under some duress. What the government has established instead is a tangled web of ad hoc bilateral free trade agreements.

However, so far these FTAs have worsened rather than improved Australia’s overall export performance. For example, in the first 12 months of the US FTA, Australia’s trade deficit with the US increased by 52 per cent to $1.5 billion. Over the same period, Australia’s trade balance with Thailand went from a surplus of around $100 million to a deficit of close to $150 million under the FTA with that country. And since Australia’s FTA with Singapore came into effect in mid-2003 our exports to Singapore have been static while imports have doubled, with the trade deficit bilaterally blowing out to half a billion dollars. In negotiating these deals, the Minister for Trade has demonstrated that he is quite happy to sell out the very constituents the National Party is meant to represent. Our trade minister is failing the interests of Australia’s exporters.

The 2006-07 budget contains no new export initiatives—simply a continuation of current programs such as the EMDGs, which we are debating in the legislation before the House, and trade smart. Existing export promotion initiatives have failed dismally to lift the number of Australian exporting firms. Four years ago—and this is a very important point—the trade minister set a target to double the number of Australian exporters, from 25,000 to 50,000, by the year 2006. By contrast, the number of exporters in Australia has actually decreased over the past two years.

Australia desperately needs a new export strategy that rebuilds the skills of our nation—the skills demanded by our export industry—lifts research and development, plans properly for our national infrastructure needs rather than standing passively by while infrastructure bottlenecks impede any increase in export volumes, lifts export promotion and better coordinates federal and state government resources in this area, and rebuilds Australia’s export culture so that exporting becomes a logical extension to simply doing business in Australia. It is clear that Australia needs to be planning for its future prosperity. Addressing its continued trade balance problems with a new export strategy for the country should be front and centre to that planning. Regrettably, it is not.

My fear is that this government in many respects has become a one-trick pony when it comes to trade policy. There is no doubt that the government has focused much, and occasionally all, of its energies on establishing bilateral FTAs while not establishing a broad, comprehensive and multilateral trade policy for Australia’s exporting future. It is for this reason that it is critical that we enhance the schemes that have some capacity for success in promoting Australia’s export interests. That is why we speak today in support of the continuation of the EMDGs under the Export Market Development Grants Amendment Bill 2006.

Since it began operation in 1974, the EMDGs have provided substantial assistance to Australian exporters. From 1997 to 2002 funding for the EMDG scheme was capped at $150 million. In the 2004-05 budget the Australian government announced an additional $30 million for the scheme to be provided for 2005-06 and 2006-07. The latest available information demonstrates that in the 2004-05 financial year, $123.9 million and 3,277 grants were paid to Australian small and medium businesses to assist them with the costs of export marketing and promotion.

According to Austrade, for grants relating to the 2003-04 grant year, the average grant was $37,145, the median grant was $22,643 and 77 per cent of businesses receiving EMDG assistance reported annual income of $5 million or less. Over the past several years there have been a number of reviews conducted to improve the EMDG scheme. As per the requirements of the act, Austrade is required to review the EMDG scheme and make recommendations to the trade minister on whether the scheme should continue beyond the 2005-06 grant year. Austrade for this purpose used the Centre for International Economics, CIE, for the review, and concluded:

... the scheme is effective in increasing the number of SMEs that develop into new exporters, in increasing the number of SMEs that achieve sustainability in export markets, in generating additional exports, and in further developing an export culture in Australia.

…     …         …

Extending the scheme indefinitely would offer greatest certainty to industry. However, a five-year extension, with a review before the end of that period, would ensure accountability and give business, industry, governments and the broader community an opportunity to again review the program’s performance. A five-year extension would balance the need for certainty with the need for accountability and transparency.

The review made 14 recommendations on how the scheme should be improved. These recommendations have now been examined by the Senate Foreign Affairs, Defence and Trade Legislation Committee. The bill before us will therefore change the existing legislation to incorporate these 14 amendments, which would have the effect of (1) continuing the EMDG scheme to the end of the 2010-11 grant year and providing for a review of the scheme with a report to the Minister for Trade by 30 June 2010; (2) increasing the overseas visit allowance from $200 to $300 a day; (3) allowing Austrade to deem certain applicants eligible where they do not technically meet the act’s current principal status requirements; (4) modifying the scheme’s Australian origin rules so that goods coming into their final form in Australia must be made in Australia to be eligible—for other goods to be eligible, Austrade must be satisfied that Australia will derive a significant net benefit from the sale of those goods outside Australia; (5) making applicants’ expenses eligible when they are incurred to increase the return on the disposal of intellectual property and know-how related to a company; (6) separating the claimable expense categories for overseas representatives and marketing consultants and capping expense claims for overseas representatives at $200,000 per claim and for marketing consultants at $50,000 per claim; (7) revising the rule covering changes in business ownership to make it clearer for applicants and easier to administer; (8) allowing Austrade to grant special approval status, including approved body status, for five years rather than three; (9) providing that the eligibility of cash payments made by applicants is limited to $10,000 per claim; (10) ensuring that the scheme’s rules clearly set out Austrade’s power to disregard any unsubstantiated, unreasonable, uncommercial or non bona fides expense claims; (11) removing the export performance test from the EMDG scheme; and (12) ensuring that, as intended, commission payments remain ineligible for the scheme. There are of course a number of other minor amendments to the scheme as well, bringing the total number of amendments to 14.

A division having been called in the House of Representatives—

As I have stated, the opposition will support this bill. The EMDGs potentially play an important role in assisting Australian exporters, and we want to see that this scheme is continually improved and provides real assistance to exporters on the ground to assist them in the task. The Senate Foreign Affairs, Defence and Trade Legislation Committee examined this bill and did, however, make a key recommendation. The committee noted:

... the Government’s intention to conduct a review of the scheme with a report to the Minister for Trade by 30 June 2010. While the Committee supports not just this review; it is concerned that the operation of the scheme, which involves substantial sums of money, is not subject to scrutiny by independent and experienced analysts.

As a consequence, the committee recommended:

... that the Australian Government request the Auditor General to conduct a performance audit of the scheme two years after the proposed legislation comes into effect.

We believe this is a sensible addition to the bill and ask the minister to consider its addition before this bill passes the House and the Senate.

We also note the bill’s attempt to modify the EMDG Scheme’s Australian origin rules to change the test of whether or not products under the scheme are made in Australia, giving the minister discretion, through ministerial guidelines, for determining the definition of ‘Australian origin’; and, further, the bill’s attempt to remove the export performance test for ongoing applicants, thereby removing the performance criteria which applicants must meet to be eligible for multiple grants under the scheme.

The opposition would like to see more detail with regard to the changes to the Australian origin rules, because we do not yet have any information from the government as to what those rules will be changed to. The bill states that responsibility for defining ‘Australian origin’ will now be placed in the hands of the minister, through ministerial guidelines; however, we do not yet know what definition the minister will apply.

We also note that this bill will remove the export performance test for ongoing applicants to the scheme. Labor opposes this move. The export market development grants should be about practically assisting Australian exporters in an attempt to improve our trade balance. The grants should not be turned into a form of unaccountable business welfare. It is critical that the EMDGs are well funded, but they should not be a bottomless bucket of money. Applicants should be subject to appropriate performance criteria after their export market has been established. The EMDG should reward those exporters who are genuinely trying to promote their businesses, not provide an ongoing source of funding for exporters unwilling to put in the hard yards and unwilling to subject themselves to proper testing on the question of whether, after an appropriate number of grants, they have in fact begun to export.

Rectifying our trade problems, our continuing problems with the current account deficit and our continuing problems with a half a trillion dollar foreign debt is critical if we are concerned about securing this country’s long-term economic future. That is the core deficiency in the budget which has just been passed. All three of these deficits are of deep structural concern to the long-term health of the Australian economy. In response to this challenge which faces us for the long term, we can either be passive, as the government has demonstrated itself to be with the response in the budget, or take an active approach. Part of an active approach lies in implementing the new export strategy for Australia, which the opposition outlined last year. Part of an active approach lies also, when it comes to specific programs like the EMDG, in ensuring that proper performance tests are applied to those businesses which successfully obtain grants for export promotion under the scheme. For these reasons, I move:

That all words after “That” be omitted with a view to substituting the following words: “whilst not declining to give the bill a second reading, the House:

(1)

notes the Government’s attempt to modify the Scheme’s Australian origin rules will change the test of whether products under the scheme are made in Australia and give the Minister discretion to determine the definition of “Australian origin”; and

(2)

calls on the Government:

(a)

not to proceed with the provision to remove the export performance test for ongoing applicants as this will remove the performance criteria which applicants must meet to be eligible for multiple grants under the Scheme; and

(b)

to implement the Senate Foreign Affairs, Defence and Trade Legislation Committee recommendation that the government request the Auditor General to conduct a performance audit of the scheme two years after the proposed legislation comes into effect.”

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