Further Productivity Commission research casts light on our trade performance

A version of this article was first published by The DCN in September 2022.

Andrew Hudson, Partner in our Customs and Trade practice, looks at recent reports from the Productivity Commission (PC) on Australia’s trade performance.

The PC, the successor to the Industry Assistance Commission, has a long history of ‘providing independent research and advice to government on economic, social and environmental issues affecting the welfare of Australians’.

That research is conducted both in response to referrals from government and initiated on its own account and has included several topics directly relevant to industry, including:

• an inquiry into our Anti-Dumping and Countervailing System (2009) followed by a research paper into developments in Anti-Dumping Arrangements;
• reviews of the benefits of our free-trade agreements (which the PC prefers to call preferential trade agreements);
• regular reviews of the level of government assistance to trade and industry;
• a review into Australia’s supply chain stability; and
• an inquiry into ‘Collection Models for GST on Low-Value Imported Goods’.

The PC’s work is based heavily on gathering relevant economic data supplemented by submissions by interested parties and public hearings. Importantly, the work of the PC does not address political considerations and governments are not obliged to adopt the outcomes and recommendations. In particular, the PC has previously found that our Anti-Dumping and Countervailing System is being used increasingly, even though the outcomes are negative in pure economic terms.

On Friday 5 August 2022, the PC released its results of two major studies which assessed the level of government assistance to trade and industry for 2020-21 (Trade Assistance Review) and a separate, although related research paper into the ‘Nuisance Costs of Tariffs’ (Nuisance Costs Research).

Nuisance Costs Research

Of these two studies, the Nuisance Costs Research is probably of more immediate interest to industry, as it reveals the estimated costs of recovering ‘nuisance tariffs’ both to government and to the private sector. It is important to note that the costs to the private sector include the payment of the tariffs by the importers, the compliance costs to industry from complying with related regulation and the costs passed on to consumers. This includes the costs to secure preference under Australia’s Free-Trade Agreements (FTA), both now in place and likely to come into effect soon.

The headline summary from an article on the Nuisance Costs Research in the Sydney Morning Herald from 5 August 2022 is that:

• A review of the system has found that businesses and consumers are bearing the brunt of ‘obsolete’ tariffs that will cost more to collect than they raise as Australia strikes new free trade deals.
• PC research that puts pressure on the federal government to consider axing all remaining tariffs found the broad economic cost of collecting $1 in tariffs is likely to climb from between 57¢ and $1.59 today to almost $5.
• The Nuisance Costs Research goes into significantly more detail. It describes the associated costs of the nuisance tariffs, including the costs of seeking Tariff Concession Orders (to eliminate the payment of the tariffs) and the legal costs in the Administrative Appeals Tribunal (AAT) and Federal and High Courts (including the Pharm-A-Care decision of the High Court). However, the Nuisance Costs Research does not refer to the costs of recent Full Federal Court decisions in Alstom and Hurley and the likely review of those decisions in the AAT and High Court, respectively. The Nuisance Costs Research also provides detail on the numbers of Australian Border Force employees involved in the administration of the system and the amounts paid to those employees.

Trade Assistance Review

The wider Trade Assistance Review is another in a succession of such reviews, which conclude that primary production and manufacturing industries received the most assistance (industry assistance) relative to their contribution (value added) to the economy.

Excluding the $90 billion of assistance related to the COVID-19 pandemic, the review found the $16 billion received as industry assistance in 2020-21 was an increase of $4 billion on industry assistance provided in 2019-20.

Chapter three of the review addresses ‘Trade Policy Developments’ and summarises them as:

• Australia’s trade in goods and services began to recover in 2020-21 relative to 2019-20, though exports of services remained suppressed due to ongoing restrictions on international travel.
• Calls to reform the World Trade Organisation dispute settlement process continue as the Appellate Body remains incapacitated. An interim appeals body is operational but has yet to hear any appeals.
• With the impending implementation of the Australia-UK FTA and with negotiations progressing with the European Union and India, preferential trade agreements (PTAs) could soon cover a large majority of Australia’s imports. This raises questions about the role of tariffs, given the costs involved with utilising PTAs.
• Internationally, carbon border tariffs (CBTs) have gained renewed attention and are being considered by some of Australia’s trading partners.

The chapter provides further details, including an objective review of the future of Australia’s trade agreements and tariffs. Paragraph 3.4 states that the argument for unilateral tariff removal has strengthened as coverage of PTAs has grown, and it is ‘increasingly clear’ there would be considerable gains for unilaterally adopting a reform schedule to reduce import tariffs to zero, even though that would not reduce compliance costs to zero. For example, in Australia, errors, omissions and misstatements in reports to the Australian Border Force can attract penalties and infringement notices even if there is no underpayment of duty or no overpayment of refunds of customs duty or duty drawbacks.

The PC observes that compliance costs could also be reduced by removing Rules of Origin from Australia’s PTAs (which is unlikely to happen) and by streamlining the interface between businesses and the tariff system (perhaps through the proposed Simplified Trade System). The PC also suggests that the reported leverage in FTA negotiations from reductions in our tariffs (often cited as grounds to keep those tariffs) is likely to be outweighed by the leverage to be gained by liberalising our barriers to the provision of services into Australia and reducing barriers to foreign investment. Again, this supports significant tariff reform.

The review (paragraph 3.5) assessed anti-dumping and countervailing activity and found that the number of products subject to measures has increased since 2010. In 2021, there were 67 sets of measures in place, and six new investigations initiated, contrasting to the world median of measures (20 in 2021) which mostly declined in the past decade. The review did not address related issues such as exemption inquiries and inquiries to determine final duty paid by some importers, which take significant additional time. The PC also observed that reductions in activity, employment and investment in industries affected by measures can outweigh any benefits accrued to recipient industries. This does not consider the significant compliance costs of dealing with the measures.

It will be interesting to see how the (new) federal government responds to the research and conclusions of the PC, which are in no way binding on the government. Earlier research by the PC finding that FTAs and the anti-dumping and countervailing regimes did not add real economic value compared to their associated costs and did not lead to the government making fundamental changes to those areas. The political rhetoric of the new federal government has been to increase the number of goods manufactured in Australia – which may provide political coverage for retention of the current policy settings.

More to come in the next print edition of the Daily Cargo News, by which time the PC may have issued its first draft report as part of its review of the Australian Maritime Logistics System.

For advice on all aspects of Australian and international trade and customs obligations, please contact our Customs & Trade team.