The costs of trade assistance

A version of this article was first published by The DCN in September 2023.

On 20 July 2023, the Productivity Commission (Commission) issued its Trade and Assistance Review 2021-22.

In the foreword for the 49th annual review, Alex Robson, Deputy Chair of the Commission, acknowledged the significance of the timing of this year’s publication:

“This Trade and Assistance Review (TAR) is released at an important time for the world economy. After more than 60 years of falling trade barriers and increasing global economic integration, industry policy and trade protectionism are back on the rise. The shift is being driven by a resurgence in strategic competition between the major economies, public memory of Covid-19-related supply chain disruptions, and national positioning to benefit from the global clean energy transition.”

The TAR refers to a variety of developments in major economies which reflect this change of approach, including the United States’ Inflation Reduction Act, Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act, Science Act and the draft EU Net-Zero Industry Act.

To that, Australian movements are similar with the Critical Minerals Strategy, Hydrogen Headstart program, National Reconstruction Fund and the National Battery Strategy. Ultimately, when adding all these developments together, industry assistance has shifted from relying on tariffs and quotas to less transparent, behind-the-border measures, such as subsidies, tax concessions, local content rules and concessional finance.

The Commission has calculated that such ‘behind-the-border’ industry assistance in Australia totalled $13.8 billion in 2021-22, with that figure likely to escalate through increased provision of concessional finance and exemptions from climate change policy, which could be seen as assistance to the exempted local industry.

The Commission points out the economic risk that such measures threaten recent gains in living standards by pushing natural resources towards sectors that may not be the most efficient for those countries. The Commission then springs something of a surprise by stating that it will only continue to monitor the ‘nuisance costs’ of Australia’s tariff system, as opposed to estimating the small amount of remaining assistance from tariffs.

Key findings from the TAR

In its key-points summary of assistance and costs estimates in the TAR, the Commission has concluded that:

• industry assistance increased by 3.4% to $13.8 billion (nominal) in 2021-22 from $13.3 billion in 2020-21;
• the services sector received the most assistance in absolute terms;
• ‘behind-the-border’ budgetary assistance, including budgetary outlays and concessions, accounted for most of the industry assistance in 2021-22, demonstrating the reduced role of tariffs in industry assistance; and
• the remaining portion of the Australian tariff regime is estimated to have imposed compliance costs between $1.2 and $3.6 billion on Australian businesses in 2021-22 while collecting $1.8 billion in revenue.

The last outcome triggered the change in approach of the Commission when reviewing these tariffs.

Other significant findings

The TAR is an extensive and meticulously researched report and it is impossible to do justice to its contents in this article. However, it does warrant close review by those in industry, especially those who are involved in predicting trends in trade and the changes which may be needed to accommodate trends in trade. However, there are some other important findings to be considered.

For instance, Australia’s trade environment has continued to recover from the effects of the COVID-19 pandemic mainly due to increases in commodity prices and improvements in the tourism sector.

Also, China’s trade restrictions on Australia’s exports, including coal, wine and lobsters, did not have the significant adverse effect on export earnings as had originally been estimated. The Commission estimated that the restrictions had reduced GDP by just 0.009%, effectively $225 million.

The Commission summarised that this outcome reflected very well on the resilience and resourcefulness of Australian exporters, as well as the government agencies providing support.

Another consideration is that stories predicting the demise of globalisation are incorrect. International trade has continued, albeit in a different and more restricted form.

The world has come too far as an international community to comprehensively dismantle the international supply chains for all manner of goods, ranging from resources and agricultural produce, down to e-commerce.

Finally, the new international economy and supply chain will be very different to that which had been previously developing based on pure economic theory. Cheaper goods from overseas markets does not guarantee their prompt delivery, or give assurance that the goods are not the product of forced labour or other dubious practices.

More precedence will be given to national interests, sovereign capacity, and the need to avoid questionable production processes. There will also be the increased effects of trade disputes and political interference. There will also be more ‘behind-the-border’ or non-tariff barriers to be considered.

The new world order will be more difficult to navigate and require an appreciation of wider interests. Advance notice of changes will be invaluable, as will flexibility and resilience of supply chains.

The Commission and the trade modernisation agenda

There is significant work being undertaken domestically and internationally on measures to facilitate and modernise the international supply chain without compromising border security and revenue considerations. Even so, the TAR does raise some important questions, both in relation to the work of the Commission and the interaction with the trade facilitation and modernisation agenda.

It remains an area of concern that the comprehensive work and recommendations of the Commission are seemingly being disregarded. It has undertaken work on the anti-dumping and subsidy regime, our free trade agreement regime and ‘nuisance tariffs’ where the recommendations have not led to significant changes.

Over the years, the TAR does not appear to have elicited responses or action by governments. Similarly, the federal government has yet to respond to the recommendations by the Commission in its report on the maritime supply chain from December 2022. Some sort of response and reasons for action are now vital.

Also, the Commission has provided some excellent and considered recommendations regarding the merits of maintaining ‘nuisance tariffs’ which have also been raised by the International Forwarders & Customs Brokers Association of Australia (IFCBAA) and other associations in their submissions to the Simplified Trade System (STS) Taskforce. However, there appears to be little government interest in that fundamental proposal even though it would simplify the system.

The STS Taskforce is currently undertaking some excellent work on enhancing trade facilitation and modernisation agenda. It is obvious government will still have to consider those recommendations before actioning any of them.

Surely, some contemporaneous work by the Commission on actual financial outcomes would assist and encourage government forwarding the results of the STS Taskforce to the Commission to review the economic outcomes.

The Commission should be provided with an immediate reference to consider the ongoing use of Self-assessed Clearance (SAC) declarations and the possible leakage to revenue from customs duty and GST, as well as the ongoing threats from the continued use of SAC declarations for illicit trade.

This would be a valuable support to any reform of the use of SAC declarations, including their possible removal from the supply chain. After all, the Commission is well-acquainted with the SAC system when it undertook the inquiry into the proposed imposition of GST on low-value imports.

The work of the Commission is extremely valuable, and one would hope that such work is put to more use by government and its agencies. At the very least, a federal government response to the Commission’s recommendations in its report into the maritime supply chain is urgently needed.

Contact us

If you would like to discuss any aspects of the Commission’s measures issued in the TAR, or assistance in addressing any current trade or supply chain issues your business is facing, please contact our Customs & Trade team.