The Productivity Commission has cast doubt on the effectiveness of greater ‘sovereign capability’ in boosting productivity and has advocated for increased liberalisation of trade to boost innovation diffusion.
A call to “pursue economic resilience and the benefits of open trade and foreign investment” to boost innovation diffusion is one of the 29 reform directives included in the Productivity Commission’s (PC) five-yearly productivity inquiry, published on Friday.
“While supply-chain issues need to be dealt with, businesses generally have the incentives and capacity to do so efficiently. The need for resilience must not veil revitalised protectionism or selective industry policy, given the inefficiency and rent-seeking they bring,” volume three of the report reads.
It later adds that “while businesses and governments are reconsidering how to manage the risks associated with supply chain disruptions, there is a danger that calls for ‘sovereign capability’ can encourage rent seeking, which would entail significant economic costs”.
Volume five of the PC’s review includes a focus on boosting Australian productivity through innovation diffusion – incremental adoption of both widely available innovations, like accounting software, as well as cutting ‘edge-technologies’, like artificial intelligence.
It also highlights that Australia’s relative size means “it is not optimal for us to invent everything domestically” and that “many ideas and technologies will come to Australia from overseas”.
As Australia is a small open economy it “has a comparative advantage as an importer and adapter of advanced technologies and other productivity enhancing innovations”, according to the PC. It argues that “increased global linkages are likely to be the best way for Australia to build resilience to deal with global uncertainties”.
“Trade enables Australian firms to access information and ideas about innovation from the global frontier, via their suppliers and customers. Imports are an important source of diffusion of intangible technology, with the value of Australia’s imports of foreign intellectual property far exceeding intellectual property sales,” the report reads.
“And for exporters, selling to overseas customers and competing with overseas firms provides exposure to new ideas and incentivises the adoption of product and process improvements.”
As such, the PC recommends that Australia should unilaterally eliminate statutory import tariffs which are already “responsible for a negligible amount of revenue and would offer relatively little protection to domestic producers”.
Associated compliance costs from Australia’s system of tariffs, concessions, and trade preferences in 2019-20 is estimated to result in $0.60 to $1.55 in lost economic activity per $1 raised in tariff revenue.
The report notes that Australia should also progressively remove “anti-dumping and countervailing measures and subject any new measures to an economy-wide cost benefit test”.
Accepting more product standards adopted in “other leading economies as ‘deemed to comply’”, particularly for pharmaceuticals and MedTech, should also be pursued to support innovation diffusion so long as the option for transparent reviews where significant safety risks are identified remains.