Trade and Assistance Review 2013-14

• Government assistance to firms, projects and industry is provided through an array of measures including tariffs, grants, concessional loans, tax concessions, regulatory restrictions on competition, and government purchasing preferences.
  • While tariff and budgetary assistance remains substantial and is readily quantified, other less transparent and difficult to quantify measures can confer substantial assistance.
  • The reaction of some firms to emerging competition, technologies and business models (for example digital disruption) has been to call for restrictions on competition.
• Australian Government tariff and budgetary gross assistance to industry amounted to over $17 billion in 2013-14.
  • After allowing for the cost to business of tariffs on imported inputs ($7.3 billion, largely incurred by service industries), net assistance across all sectors was $9.7 billion.
  • Tariffs alone costs every Australian around $150 each year.
• Net assistance matters. This is most perversely manifest in the net negative assistance to services - $4.3 billion of assistance is outweighed by a $4.9 billion tariff penalty on inputs.
• Budgetary industry assistance in 2013-14 was about 17 per cent (or $1.3 billion) higher than in 2012-13. The largest increase was from the Small Business Simplified Depreciation Rules.
• Notably in the year to May 2015, the Government announced additional industry assistance involving about $1.5 billion as well as reductions of around $1 billion. Significant increases were afforded though the Industry Innovation and Competitiveness Agenda.
• Where Government becomes a 'co-investor' through firm-specific grants, and despite some recent government resistance to such calls, resource misallocation is likely. Moreover, governance and due diligence fall short of contemporary, comparable best practice. The term 'co-investor' is a commercial misnomer.
  • Better government assessment processes are needed.
• The evolution and recent measurement of global value chains and value-added trade flows provides valuable insights for trade and assistance policy. The key policy take-outs reinforce several established policy imperatives, including:
  • multilateral trade reform is the most effective way to improve national and global welfare
  • non-discriminatory policies that seek to lower imported input costs and other business costs have the best chance of fostering firm and economic growth
  • policies that seek to support designated priority sectors unavoidably risk disadvantaging more competitive activities.
• Slow progress in multilateral trade reform has accelerated preferential agreement making.
• Preferential trade agreements add to the complexity and cost of international trade through substantially different sets of rules of origin, varying coverage of services and potentially costly intellectual property protections and investor-state dispute settlement provisions.
  • The emerging and growing potential for trade preferences to impose net costs on the community presents a compelling case for the final text of an agreement to be rigorously analysed before signing. Analysis undertaken for the Japan-Australia agreement reveals a wide and concerning gap compared to the Commission's view of rigorous assessment.

In 2013-14, Australian industry received over $17 billion in gross assistance from the Australian Government through budgetary outlays, tax concessions and tariffs according to the latest annual Trade and Assistance Review (The Review) by the Productivity Commission.

Notably, budgetary assistance to industry in 2013-14 was about 17% (or $1.3 billion) higher than in 2012-13.

The Review finds that while tariff assistance today is much lower than it was - from as high as 125% in 1985 to a maximum of 5% today - on average it 'taxes' every Australian about $150 each year. Businesses incurred an estimated $7.3 billion in additional input costs in 2013-14, from the same source.

The net effect of assistance varies significantly by sector. Manufacturing remains the biggest beneficiary, receiving around $7 billion in net assistance. Other sectors do far less well from the taxpayer. Services once again bear a greater imposed cost - with the tariff penalty on their inputs perversely outweighing the benefit from government assistance measures.

The Review highlights that services are more important than traditional trade statistics suggest. While trade statistics suggest that manufactures are about 36% of Australian exports, on a value added basis much of this is composed of services. Consequently, services are more like 42% of Australian trade; and manufactures fall to around 14%. Imposing a net burden on services through industry assistance measures in part designed to promote exports appears even less explicable.

The Trade and Assistance Review 2013-14 also outlines policy insights from the evolution and recent developments in the measurement of global value chains. The new data tracks global value chains as goods and services journey between countries, regions and industries before they end up in the hands of the consumer. This recently available data shows that more of our exports ultimately end up in Europe and the United States than suggested by traditional Australian trade data. 'Global trade statistics now unravel the DNA of value-added trade between countries and regions. Current policy settings not based on them, and many trade and industry policies are not, are at best ill-informed' said Commissioner Karen Chester.

The Review also comments on the weakness of Government assessment of both industry assistance and preferential trade agreements (otherwise known as 'free trade agreements'). Established benchmarks for assessment are not being applied. Even if the policies were advisable, the analysis to support that is not being developed as might be expected.

A 'gap analysis' of assessment work for the Japan Australia Economic Partnership Agreement compared with the Commission's previously published benchmarks for rigorous assessment has been undertaken and is included in the Review. 'Our 'gap analysis' of the Japan Australia Agreement shows today's assessment processes fall well short of what is needed before committing us to these agreements,' Commissioner Karen Chester said.