Australia WT/TPR/S/178/Rev.1 
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I. ECONOMIC ENVIRONMENT 
(1) OVERVIEW  
1. There is a high degree of transparency in th e formulation and evaluation of Australia's 
economic policies in relation to their rationale, nature, and economic eff ects, thereby enhancing 
government accountability and public debate over th e merits of these policies.  Consequently, 
transparency has contributed greatly to the conti nual process of reform, which began in the 1980s, and 
in which trade liberalization, much of it unilateral,  has played an integral part.  The extent of 
structural reform in Australia is exemplified by th e drop in the effective rate of assistance (ERA) for 
manufacturing during the past two decades1, from 25% to 4.5% in 2003/04.2  Structural reforms were 
accompanied by macroeconomic reforms, notably the fl oating of the exchange rate in the early 1980s, 
which facilitated subsequent ad justment to tariff reductions.3  Structural reforms have been aimed at 
reducing, if not removing, distortions to competiti on in order to improve the functioning and therefore 
flexibility of markets for goods, services, labour, a nd capital, thereby accomplishing a more efficient 
use of domestic resources.  The resulting rise in productivity and improved competitiveness of Australia's goods and services in world markets has en abled real GDP to grow at an average annual 
rate of about 3.5% during the past 15 years, which has raised per capita income to eighth place among 
OECD countries.  Reform has also made the economy more flexible and resili ent to external shocks, 
like the Asian financial crisis in the late 1990s and, more recently, the drought in 2006.
4 
2. Against the backdrop of continued wide-ranging structural reforms as well as sound 
macroeconomic policies since the previous Review of  Australia (in 2002), real GDP has grown by an 
average annual rate of around 3.2%.  One-quarter of the GDP growth is due to increases in total factor 
productivity (TFP), albeit not as strong as in the 1990s.5  Inflation has remained, by and large, within 
the Central Bank's targeted range.  Unemployment has reached its lowest level in 30 years, in great part due to reforms that have rendere d the labour market more flexible.   
3. Growth has been led by a global boom in dema nd for mineral products, of which Australia is 
a major exporter.  The increased demand for res ource-based products has revealed infrastructure 
constraints, which the Australian Government and the various state governments (responsible for most 
Australian ports) are trying to address.  Othe r unfinished business under the competition reforms 
include reform of land transportation, electricity, and water services, as well as continued efforts to 
maintain labour market flexibility.  
4. Rapid growth in the resource sector and the accompanying rise in private investment, 
including inward foreign direct investment (FDI), have in great part contributed to a widened current 
account deficit.  The strength of the Australian dolla r has put pressure on other sectors, particularly 
manufacturing, although, according to the authorities,  this has not resulted in any significant domestic 
pressure for further protection from imports.   
                                                     
 
1 ERAs are a measure of the net assistance to a sector  divided by the sector's unassisted value added.  
Sectors that have relatively high ERAs are more likely to  attract resources away from those with lower rates. 
2 Banks (2005), and Productivity Commission (2004). 
3 Australia commenced its unilateral tariff reduction programme in 1988. 
4 The drought in 2006 caused a 20% fall in farm output, which is predicted to reduce GDP growth by 
half a percentage point (Reserve Bank of Australia, Statement on Monetary Policy,  November 2006.  Viewed 
at:  http://www.rba.gov.au/PublicationsAndResearch/S tatementsOnMonetaryPolicy/statement_on_monetary_11
06.html [24 November 06]). 
5 Growth of total factor productivity averaged 2.1% annually between 1993/94 and 1998/99 (ABS 
document 5206.0, September 2005), but fell to 0.8% annually between 2001/02 and 2005/06. WT/TPR/S/178/Rev.1 Trade Policy Review 
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(2) RECENT ECONOMIC PERFORMANCE  
5. Australia's economic performance has continued to  be impressive during the review period;  
its annual GDP growth averaged 3.2%, unemployment declined to 4.8% in August 2006, its lowest 
level since the 1970s, and inflation h as, by and large, remained with in the Reserve Bank's targeted 
range (2-3% on average over the economic cycle) (Table I.1).6  Productivity growth continued, albeit 
more slowly than during the 1990s.  In particul ar, TFP growth averaged 0.8% between 2001/02 and 
2005/06 (turning negative in 2004/05), while capital productivity actually declined, suggesting the 
need for continuing the reform programme.7 
Table I.1 
Selected macroeconom ic indicators, 2001-06  
  2001/02 2002/03 2003/04 2004/05 2005/06 
National accounts  Percentage change  
Real GDP (2004/05 prices) 3.8 3.2 4.1 2.7 2.9 
Consumption 2.9 3.4 5.0 4.2 2.8 
Private consumption 3.0 3.4 5.3 4.3 2.6 
Government consumption 2.8 3.2 3.9 3.9 3.4 
Gross fixed capital formation 9.7 14.4 8.3 6.0 8.9 
Exports of goods and non-factor services -1.0 -0.4 2.1 3.1 2.2 
Imports of goods and non-factor services 1.5 13.1 13.0 12.1 7.3 
Unemployment rate (%) 6.7  6.2  5.8  5.3  5.1  
Productivity (2004/05=100)   Percentage change  
Labour productivity 3.6 1.8 3.2 -0.4 2.2 
Capital productivity 0.8 -0.1 0.0 -2.0 -2.9 
Total factor productivity 2.5 0.9 1.8 -1.1 0.0 
Prices and interest rates Per cent  
Inflation (CPI, percentage change) 2.9 3.1 2.4 2.4 3.2 
90-day bank bill (end-period) 5.11  4.67  5. 50 5.66  5.97 
90-day bank bill (period average)  4.58  4.83  5.27 5.54  5.68 
Government bond yield (10-years;  end-period) 5.99  5.01  5.87 5.11 5.79 
Government bond yield (10-years;  period average) 5.89  5.37  5.65 5.42 5.39 
Money credit (end period)  Percentage change  
M3 money supplya 6.1 13.6 10.2 8.9 10.2  
Broad money supplyb -0.4 7.9 9.1 11.4 10.0  
Credit to private sector  18.8 14.6 12.0 12.5  ..  
Exchange rate      
US$/$A (financial year-annual average) 0.5239  0.5847  0.7137  0.7529  0.7474  
Real effective exchange rate (percentage  change) 2.1  7.1  16.3  2.5  1.9  
 Per cent of GDP, unless otherwise indicated  
Commonwealth fiscal balance      
Revenue 22.1 22.5 22.4 23.0 23.0 
Tax revenue 20.5 21.0 20.9 21.7 21.4 
Expenses  22.7 21.9 21.7 21.8 21.3 
Table I.1 (cont'd)  
                                                      
6 The Australian financial year starts on 1 July and ends on 30 June. 
7 According to the authorities, lower productivity grow th in recent years reflected partly the cyclical 
downturn;  however, the low measured productivity may also reflect the time lag between investment and output 
growth.  The authorities state that, mining investment and employment, for example, have grown significantly, with output expected to pick up in the coming years. Australia WT/TPR/S/178/Rev.1 
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  2001/02 2002/03 2003/04 2004/05 2005/06 
Net operating balance -0.5 0.6 0.7 1.2 1.6 
Commonwealth government debt 5.2  3.8  2.8  1.3  -0.6  
Saving and investment       
Gross national savings 20.4  20.1  20.7  20.1  21.0  
Gross domestic investment 22.9  24.8  25.4  25.8  26.5  
Savings-investment gap -2.5  -4.7  -4.7  -5.7  -5.5  
External sector      
Current account balance  -2.5  -4.9  -5.5  -6.2  -5.6  
Net merchandise trade  -0.1  -2.4  -2.8  -2.6  -1.6  
Value of exports 16.4  14.8  13.0  14.3  16.0 
Value of imports 16.6  17.2  15.8  16.8  17.6  
Services balance 0.3  0.3  0.2  0.0  0.1  
Capital account balance 0.1  0.1  0.1  0.1  0.1  
Financial account balance 2.6  4.8  5.3  6.0  5.4  
Direct investment 0.2  1.4  -1.9  5.0  -1.0  
Terms of trade, (2004/05=100) 83.5  85.3  91.0  100.0  110.9  
Merchandise exports (percentage change) 0.6  -4.2  -5.5  16.8  20.7  
Merchandise imports (percentage change) 1.2  10.1  -0.9  13.4  12.5  
Service exports (percentage change) -2.1  2.3  4.9  5.2  5.7  
Service imports (percentage change) -2.0  1.0  6.7  10.1  4.6  
Foreign exchange reservesc ($A billion) 32.8  36.0  46.1  52.7  60.6  
Net external debt ($A million; end-period) 324,14 7.0  356,995.0  390,565.0  431,941. 0  493,828.0  
Net external debt (US$ million; end-period) 169, 820.6  208,735.0  278,746. 2  325,208.4  369,087.0  
Debt service ratiod  (end-period) 8.8  7.9  8.7  9.4  ..  
.. Not available.  
a M3 is defined as currency plus bank current  deposits of the private non-bank sector.   
b Broad money is defined as M3 plus bo rrowings from the private sector by non-ba nk financial institutions (NBFIs), less the 
latter's holdings of cu rrency and bank deposits. 
c Excluding gold and SDRs (Special Drawi ng Rights) and reserve position in IMF. 
d Net interest payments to exports. 
Source:  Australian Bureau of Statistics documents 1301.0, 1350 .0, 5204.0, 5206.0, 5302.0;  Reserve Bank of Australia, 
Bulletin Statistical Tables,  November 2006;  and Australian Government, Final Budget Outcome,  various issues.  
6. In terms of value added by sector, the mining and quarrying sector slowed in 2005/06, after 
growing at 5% in 2004/05;  manufacturing also slowed (Table I.2).  On the other hand, construction and services have been growing during the review period.  The mining and quarrying sector has been one of the major driving forces behind Australia's  recent economic growth, accounting for 48.4% of 
total merchandise exports in 2005.  The global boom  in mineral commodities, of which Australia is a 
major exporter, boosted its terms of trade by 30% from 2002/03 to 2005/06.  This has raised tax 
revenue, as the surge in commodity prices increased  the profitability not onl y of mining companies, 
but also of other enterprises, such as construction and retail companies. 
7. Australia's prudent macroeconomic policies have helped to strengthen the economy's 
resilience to shocks, and thereby to sustain economic growth.  The inflation target enables the Reserve 
Bank to keep inflation moderate in a flexible ma nner, and the floating exchange rate helps to ease 
inflation pressure.  On the fiscal side, both the Au stralian Commonwealth and state governments have 
achieved fiscal surpluses, and the net government de bt has been eliminated.  However, with the 
economy at almost full capacity, the predicted fall in  fiscal surplus as the result of tax reform, in 
combination with the rising interest rates due to in flationary pressure, raises the question of whether 
the present mix of monetary and fiscal policies is a ppropriate.  According to the authorities, changes WT/TPR/S/178/Rev.1 Trade Policy Review 
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in the fiscal position of less than 1% of GDP should not cause problems for monetary policy;  thus, 
the Australian Government’s fiscal change in th e current Budget, reducing the fiscal surplus by 
around 0.5% of GDP between 2005/06 and 2006/07, is within the limit. 
Table I.2 
Basic economic indicators, 2001-06  
  2001/02 2002/03 2003/04 2004/05 2005/06 
Real GDP ($A million, 2004/05 prices) 813,542.0  839,187.0  873,197.0  896,568.0  922,385.0  
Real GDP (US$ million, 2004/05 prices) 426,214. 7  490,672.6  623,200.7  675,026.0  689,390.5  
Current GDP at market price ($A million) 735,714.0  781,675.0  840,285.0  896,568.0  966,036.0  
Current GDP at market price (US$ million) 385,44 0.6  457,045.4  599,711.4  675,026. 0  722,015.3  
Current GDP at factor cost ($A million) 651,51 2.0  688,913.0  740,980.0  794,590. 0  858,559.0  
Current GDP at factor cost price (US$ million) 341,327.1  402,807.4  528,837.4  598,24 6.8  641,687.0  
GDP per capita at current market price ($A) 37,677.0  39,574.0  42,057.0  44,376.0  47,185.0  
GDP per capita at current market price (US$) 19,739.0  23,138.9  30,016.1  33,410.7  35,266.1  
 Annual percentage change  
GDP by economic activity at 2004/05 real pricesa      
Agriculture, forestry and fishing 3.2  -23.5  31.4  -0.7  3.6 
Mining and quarrying 0.1  -0.3  -3.6  5.0  -2.4  
Manufacturing 2.1  3.6  0.9  -1.1  -0.4  
Electricity, gas and water -0.8  0.9  0.7  0.7  1.6  
Construction 11.9  16.4  6.6  4.8  9.4  
Services 3.8  3.6  3.8  3.2  3.5  
Wholesale and retail trade 4.0  4.7  5.0  3.9  2.0  
Accommodation, cafés and restaurant s -0.0  3.4  5.6  4.7  3.0  
Transport, storage and communication 3.4  7.5  4.6  4.0  4.3  
Finance and insurance 3.3  2.1  4.7  2.0  4.8  
Real estate and business 5.1  3.4  3.6  1.3  3.5  
Government administration and defen ce 4.3  -1.2  1.6  3.5  2.4  
Education 1.8  1.6  1.3  1.4  1.8  
Health and community  5.4  4.3  3.5  4.8  4.2  
Cultural and recreational 0.5  3.7  5.8  5.8  3.7  
Personal and other services 4.0  2.1  1.3  1.3  5.4  
Ownership of dwellings 3.8  4.0  3.9  4.3  3.9  
 Per cent  
Share of sectors in GDP at current pricesb      
Agriculture, forestry and fishing 4.4  3.3  3.5  3.3  3.1  
Mining and quarrying 5.3  5.0  4.3  5.6  7.5  
Manufacturing 12.1  12.5  12.4  11.7  11.0  
Electricity, gas and water 2.5  2.6  2.5  2.5  2.5  
Construction 5.9  6.3  6.8  6.9  7.0  
Services 69.8  70.4  70.4  69.9  68.9  
Wholesale and retail trade 11.7  12.1  12.1  11.7  11.3  
Accommodation, cafés and restaurant s 2.4  2.3  2.3  2.4  2.2  
Transport, storage and communication 7.9  7.9  7.9  7.9  7.5  
Finance and insurance 7.5  7.4  7.6  7.6  7.8  
Real estate and business 12.6  12.9  12.9  12.8  12.4  
Government administration and defe nce 4.2  4.2  4.2  4.2  4.2  
Education 4.7  4.7  4.7  4.6  4.7  
Health and community  6.2  6.3  6.4  6.5  6.7  
Table I.2 (cont'd) Australia WT/TPR/S/178/Rev.1 
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  2001/02 2002/03 2003/04 2004/05 2005/06 
Cultural and recreational 1.5  1.6  1.6  1.6  1.6  
Personal and other services 2.1  2.0  2.0  2.0  2.0  
Ownership of dwellings 9.0  8.9  8.7  8.6  8.5  
Share of sectors in total employment      
Agriculture, forestry and fishery 4.9  4.0  3.9  3.7  3.5  
Mining and quarrying 0.9  0.9  1.0  1.1  1.3  
Manufacturing 11.8  11.9  11.2  11.1  10.6  
Electricity, gas and water 0.7  0.8  0.8  0.8  0.9  
Construction 7.6  7.7  8.2  8.5  8.7  
Services 74.1  74.7  74.9  74.8  75.0  
Wholesale and retail trade 19.8  20.1  19.8  19.7  19.3  
Accommodation, cafés and restaurant s 5.0  4.8  4.9  5.1  4.8  
Transport, storage and communication 6.3  6.2  6.4  6.5  6.4  
Finance and insurance 3.8  3.7  3.6  3.7  3.7  
Property and business 11.3  11.6  11.8  11.5  11.9  
Government administration and defe nce 4.3  4.6  4.7  4.6  4.6  
Education 7.1  7.1  7.3  6.9  7.2  
Health and community services 9.9  10.0  10.0  10.2  10.4  
Cultural and recreational services 2.5  2.6  2.5  2.7  2.7  
Personal and other services 4.0  4.1  3.9  4.0  4.0  
a Based on chain volume measures.  
b Percentage of gross value added at basic prices. 
Source:  Australian Bureau of Statistics documents, 1350.0, 5204.0, and 5206.0. 
8. In 2005/06, the current account deficit reach ed 5.6% of GDP (compared with 2.6% in 
2001/02), and external debt was 51.1% of GDP (up from 44.1% in 2001/02).  This reflected the widened gap between gross domestic investment and national savings, mainly owing to strong growth 
in the former, driven initially by  the real estate sector, but more  recently by the commodity price 
boom and the consequent increase in business investme nt.  With savings insufficient to finance higher 
investment, FDI flows into Australia increased to a record high in 2004
8, resulting in an appreciation 
of the Australian dollar.  By contrast, national sav ings' share of GDP remained broadly stable during 
the period under review, at around 20% (Table I.1).9   
9. The current account deficit reflected private sector's savings and investment decisions, as 
general government net debt was eliminated and the general government budget was in modest 
surplus.  Around 99% of all net external debt was owned by the private sector in 2005.10  Australia's 
foreign reserves increased from $A 32.8 billion in 2001/02 to $A 60.6 billion in 2005/06.  Import coverage also changed from two and a half to three and a half months (for goods and non-factor 
services).   
                                                     
 
8 FDI inflows reached a record  US$43 billion in 2004, up fr om US$15.6 billion in 2002 and 
US$7 billion in 2003 (UNCTAD, 2005).   
9 The conventional way to measure savings is by subtracting consumption and depreciation from 
household disposable income.  However, in Australia, the composition of household savings has shifted from bank deposits and fixed income to equity holdings.  Thus, the authorities consider it more appropriate to 
measure savings as the change in household net financia l wealth, defined as household financial assets (bank 
deposits, bonds, equities, and unit trusts) less non-housing debt.  The authorities indicate that in countries with 
low household savings (using conventional measures), households usually hold a greater proportion of their 
savings in equities (Reserve Bank of Australia, Statement on Monetary Policy, May 2006).  The authorities state 
that, taking into account financial wealth, the share of savings to GDP is much higher.  
10 IMF (2006). WT/TPR/S/178/Rev.1 Trade Policy Review 
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(3) MACROECONOMIC POLICIES  
(i) Monetary and exchange rate policies 
10. The Reserve Bank of Australia (RBA) is r esponsible for formula ting and implementing 
monetary policy;  the principal aim is to achieve  an inflation rate of 2-3% on average over the 
economic cycle.  As the inflation target is define d as a medium-term averag e, the RBA considers it 
allows flexibility in forecasting, and allows for uncer tainties and lags in the effects of monetary policy 
on the economy.11   
11. Since its previous Review, the RBA has, by and large, kept inflation within this targeted 
range;  in September 2006, core CPI inflation, wh ich excludes volatile items such as fresh food and 
petrol, was 2.6%.12  However, headline inflation (including all items) was 3.9%.  As a result of 
increased inflationary pressure (owing to rises in energy and commodity prices), the RBA has been 
tightening monetary policy.  The cash rate was increased from 4.25% at the beginning of May 2002, 
to 5.25% by the end of 2003.  The rate was incr eased by a further 25 basis points in March 2005, 
May 2006, August 2006, and again in November 2 006, following which it has been maintained at 
6.25%.13   
12. Australia maintains a floating exchange rate system (introduced in 1983), with the RBA 
intervening in the foreign exchange  market from time to time in order to prevent misalignment of the 
exchange rate.14  The real effective exchange rate of th e Australian dollar has been rising during the 
period under review although it has been relatively stable since 2004, mainly due to narrowing 
interests rate differentials and an expected slowdown in the commodity boom (Table I.1).15   
(ii) Fiscal policy 
13. The primary objective of the Government’s fiscal policy is to maintain the budget in balance, 
on average, over the economic cycle.16  Since its previous Review, fiscal policy has in general been 
effective in this regard, with the general governme nt (Commonwealth and state) fiscal balance being 
in modest surplus;  as a result, net government debt was eliminated.17  The improvement in the fiscal 
balance is mainly attributed to the increase in tax re venues;  at the same time, the share of expenditure 
in GDP has been kept relatively stable.  An impor tant source of the increase in tax revenue has been 
corporate taxes, attributed to, inter alia,  the surge in commodity prices and the resulting boost in 
corporate profitability and the sustained economic ex pansion, which has reduced the stock of losses 
carried-forward.   
                                                      
11 RBA, "Third Statement on the Conduct of Monetary Policy".  Viewed at:  http://www.rba.gov.au/ 
MonetaryPolicy/third_statement_on_the_conduct_of _monetary_policy_2006.html [23 November 2006] 
12 RBA Table H1.  Viewed at:  http://www.r ba.gov.au/Statistics/Bulletin/G01hist.xls  
[23 November 2006]. 
13 The RBA targets a publicly announced overnight cash (interest) rate determined by the Reserve Bank 
Board to act pre-emptivel y against inflationary pressures (WTO, 2003).   
14 RBA online information.  Viewed at:  http:// www.rba.gov.au/MarketOperations/International/ 
ex_rate_rba_role_fxm.html [6 October2006]. 
15 According to the IMF, in July 2006 the dollar wa s 11% above its 20-year av erage in real effective 
terms, although relatively stable in spite of the commodity boom (IMF, 2006). 
16 There are also a number of secondary objectiv es, including maintaining budget surpluses over the 
immediate two-year projection period, given sound growth prospects;  and not increasing the overall tax burden from 1996/97 levels (Budget, 2006).  Also, in Australia, there is "no attempt to precisely date the economic 
cycle" (OECD, 2006b). 
17 Federal government net debt was eliminated in ear ly 2006, and aggregate state governments' net debt 
was eliminated a few years earlier . Australia WT/TPR/S/178/Rev.1 
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14. In 2005 and the first half of 2006, a number of measures were adopted to further the reform of 
Australia's tax system.  Measures considered by the authorities to have a significant impact on 
revenue included, increases in the thresholds of pe rsonal income tax and reduced rates, the abolition 
of the surcharge on superannuation contributions, a nd changes to depreciation arrangements.  In 
addition, tariffs on certain imports were reduced and the tariff applying to imported business inputs 
under the tariff concession system was removed.18  Partly due to these reforms, the Government has 
predicted a fall in the fiscal surplus from 1.3% of  GDP in 2005/06 to 0.5% in 2006/07 (for all levels 
of government), which, with interest rates ri sing, raises the question as to whether fiscal policy 
remains sufficiently prudent and the mix of monetary  and fiscal policies appropriate for the future.  
The rise in interest rates could counteract the effects of tax cuts and could pose a potential threat to the 
sustainability of an economy, esp ecially as the economy is operating at almost full capacity (in 
August 2006, when the unemployment rate was 4.8% at the national level, it fell below 3% in the 
resource-rich state of Western Australia). 
(4) MAIN STRUCTURAL REFORM ISSUES  
15. Australia's strong economic performance has been  the result of two decades of structural 
reforms, of which trade liberalization has been an in tegral part.  Since its previous Review, Australia 
has continued its pursuit of these reforms, which, by promoting competition, increasing labour market 
flexibility and supply, and boosting productivity, s hould help Australia to rise to a number of 
challenges.  These include, in particular, the possi ble end to the commodity price boom and an aging 
population. 
(i) Tariff and tax reforms 
16. In 2005, Australia unilaterally reduced tariffs  on passenger motor vehicles (PMV), as well as 
on textiles, clothing and footwear (TCF) products (Chapter III(2)(ii)(a)).  Consequently, the overall 
simple average applied MFN tariff rate fell from 4.5%  in 2002 to 3.8% in 2006.  In addition, on 
11 May 2005, the 3% tariff on business inputs under the tariff concession system was removed.  As a 
result, all goods covered by a tariff con cession order (TCO) can be imported duty free 
(Chapter III(2)(ii)(b)).19   
17. Tax reforms have continued since the introduc tion of the New Tax System (including the 
introduction of the goods and services tax) in 2000.   Reforms for business taxes have been conducted 
to reduce their complexity and thus compliance costs, encourage investment, and support small 
business development (Chapter III(4)(i)).  In addition, the corporate income tax rate was reduced from 
34% to 30% as a result of tax reform in 2001, and has been maintained at this  rate;  while the present 
rate is higher than in some country in the region, it is not out of line with rates in OECD countries.  
By contrast, personal income tax rates were reduced  and thresholds increased, with the result that in 
2006 more than 80% of taxpayers face a marginal income tax rate of 30% or less, and the top income tax rate has been reduced to 45% (from 47%).  As income tax rates may affect people's decisions on 
how much and where to work, the reduction in the top tax rates and the hi gher thresholds tend to 
enhance Australia's international competitiveness, as well as to redu ce the tax disincentive for people 
to save.   
                                                     
 
18 Although tariffs are a source of government revenu e, they are not formally  considered part of 
taxation policy in Australia. 
19 Before 11 May 2005, under the tariff concessi on scheme, a tariff concession order (TCO) had 
allowed duty-free entry for consumption goods, and a minimum 3% duty had been charged for goods identified 
as business inputs. WT/TPR/S/178/Rev.1 Trade Policy Review 
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(ii) Labour-market reforms 
18. Although the unemployment rate has fallen to its  lowest level since the 1970s, further labour 
market reforms are required, particularly to d eal with the aging population and the high reliance on 
income support.  Therefore, "Welfare to Work" re forms were commenced in July 2006, to increase 
workforce participation.  These involved changes to  income support, such as the tightening of the 
eligibility criteria for new claimants of disability support pensions (DSP).  As of 1 July 2006, 
applicants who are able to work 15 hours or more per week are no longer eligible for DSP;  instead, 
they receive a "new start" allowance. 
19. Other reforms intended to increase labour market  flexibility include the implementation of the 
Work Choices Act in March 2006.  The Fair Pay Commission, a new independent body, was 
established under the Act to, inter alia,  set and adjust minimum wages according to criteria that 
include considering the impact of any decision on the employment prospects of the unemployed and the low paid.  The new system also streamlines  the process of making workplace agreements, and 
promotes bargaining at the workplace level.  
20. The Government believes that a healthy, skille d, and motivated population is critical to 
workforce participation and productivity.  Thus, und er the New National Refo rm Agenda launched by 
the Council of Australian Governments (COAG) in Fe bruary 2006, reform in human capital includes 
health promotion, education and training, as well as labour-market reforms to encourage workforce 
participation.   
(iii) The National Competition Policy, govern ment trading enterprises (GTEs), and 
deregulation 
21. Since the formulation of the National Competition Policy (NCP) in 1995, competition 
legislation has been extended to all business ac tivities, including government businesses.  Public 
monopolies have undergone reforms, such as separa tion of their regulatory function from commercial 
operations, ensuring third-party access to certain in frastructure services, and preventing overcharging 
by monopoly service providers.  The corporatizati on and/or privatization of government trading 
enterprises (GTEs) have also continued.  For exampl e, Sydney Airport was privatized in June 2002;  
the Australian Dairy Corporation was privatized into Dairy Australia in July 2003;  and in 
August 2005, the Government announced the divest ment of its majority stake in Telstra.  
22. One innovation of the NCP was the annual competition payments provided by the 
Commonwealth Government to state and territory governments for their implementation of the NCP 
reform.  The final round of payments under the NCP was made in December 2005;  before then, 
where there was lack of progress on NCP-related reform, the Government could reduce payments, upon recommendations from the Nati onal Competition Council (NCC).
20  Furthermore, the NCP 
includes a legislative review process under wh ich governments are committed to reviewing and 
changing legislation that may restrict competition.  Accordingly, several pieces of competition related 
legislation have been revised (Chapter III(4)(iii)).  
23. The National Reform Agenda endorsed by th e COAG on 10 February 2006 includes measures 
to facilitate investment in energy, transport, an d other export-oriented infrastructure, aimed at 
achieving efficient use of infrastructure by improving pricing and investment signals and establishing 
competitive markets.  Reform to reduce regulatory burden is also being pursued.  These measures 
                                                      
20 Total funding of $A 5.7 billion was allocated for  competition payments over the period 1997/98 to 
2005/06.  This funding level, estimated by the Industry Commission in 1995, represents the benefits of 
implementing the reform programme.  (Productivity Commission, 2005c)  Australia WT/TPR/S/178/Rev.1 
 Page 9 
 
 
would help to address issues such as infrastructur e bottlenecks, the reduction of which could increase 
exports (particularly of mineral resources).21  The COAG also agreed to establish a COAG Reform 
Council (CRC) to replace the National Competition Council (NCC).  The CRC is to report to the COAG on reform progress, and when the COAG considers reform proposals, to undertake 
independent cost-benefit analysis.  
(5) D
EVELOPMENTS IN TRADE AND FOREIGN DIRECT INVESTMENT  
(i) Merchandise trade  
24. The share of mining in total merchandise exports increased from 40% in 2002, to 48.4% in 
2005 (Chart I.1).  The shares of manufacturing and agriculture fell (Table AI.1).  Unlike the export 
structure, manufacturing accounted for around 80% of total merchandise imports;  the share of 
imported automotive products increased from 12.3%  in 2002 to 12.8% in 2005, perhaps reflecting 
tariff reductions in PMVs (Table AI.2).  Nonetheless,  the share of textiles and clothing fell from 4.8% 
in 2002 to 4.1% in 2005, notwithstanding the tariff reductions on 1 January 2005.  Imports by the 
mining sector increased, from 8.4% in 2002 to 12.1% in 2005;  the authorities state that import levels 
reflect strong business investment in capital goods , as well as increased demand for imported inputs, 
or intermediate goods. 
25. Australia's trade with Asia continues to incr ease (Chart I.2).  The Asia-Pacific Economic 
Cooperation (APEC) forum also plays a key role;  73.6% of Australia's merchandise exports and 
70.1% of its imports are with APEC countries (Table AI.3 and AI.4).   
26. Japan remains Australia's larg est export market (20.4% in 2005), and the EC25 continues to 
account for the largest share of Australia's total imports (23.2%).  The proportion of trade with both 
Singapore and Thailand has increased, possibly owing to  the trade creating effects of RTAs.  Another 
notable trade partner is China, whose share in to tal exports increased from 7. 0% in 2002 to 11.6% in 
2005, and in total imports from 10.1% to 13.7%.  However, the proportion of trade with the United 
States fell.22 
(ii) Trade in services 
27. Trade in services is an important component of  Australia's total trade (Chapter IV(5)(i)).  
Exports of services rose by 5.7% and imports by 4. 6% in 2005/06, the servi ces trade surplus reached 
$A 828 million, up from $A 380 million in 2004/05. 
                                                      
21 Allegedly, queuing of ships at some coal ports re flected infrastructure bottlenecks for exports of raw 
materials.  An Exports and Infrastructure Taskforce was established in 2005 to identify infrastructure 
bottlenecks.  The taskforce found evidence of capac ity constraints, with the greatest impediment to 
infrastructure development being the regulatory framework.  Responding to the taskforce's conclusions, the 
COAG agreed to a "simple and consistent national system of regulation for ports and export-related 
infrastructure", and to include the issu e in its new National Reform Agenda. 
22 Analysis by DFAT indicates that the decline in e xports to the United States in 2005 was unrelated to 
the AUSFTA;  reasons for the decline included the diversif ication of beef and oil exports to other markets, and a 
higher average exchange  rate (DFAT, 2006c). WT/TPR/S/178/Rev.1 Trade Policy Review 
Page 10 
 
 
Chart I.1
Product composition of merchandise trade, 2002 and 2005
2002 2005
(a)    Exports (f.o.b.)
Other consumer goods   
4.1
Manufactures
23.9
Total:   US$65.0 billion Total:  US$105.8 billion  
(b)    Imports (f.o.b.)
Automotive 
products
12.3Chemicals
11.6Other transport 
equip.  6.5
Manufactures
82.9
Office machines &
 telecommunication 
equipment   12.5Other electrical
machines  
4.2Non-electrical 
machinery
10.4Textiles &
 clothing
4.8Other mining
1.1Fuels
7.3
Non-electrical
machinery
11.1Other
2.4
Other electrical 
machines
4.0Non-ferrous 
metals
6.1
Other
 semi-manuf.   
9.4Other transport 
equipment  4.5
Chemicals
11.4
Manufactures
79.9
Office machines &
telecommunication
equipment   11.8
Total:   US$69.2 billion Total:   US$118.9 billion Per cent
Manufactures
20.5
Mining
48.4Machinery
5.1Other agriculture
3.9
Machinery   
 5.9
Other consumer
 goods  
   10.7Other
2.8Food
16.1
Ores & other 
minerals
12.1
Fuels
20.7Other
6.8
Other semi-
manuf.  2.9 Ores & other
minerals
16.7Agriculture
20.1
Non-ferrous 
metals
7.2
Source :  UNSD, Comtrade database (SITC Rev.3).Other consumer 
goods 
11.5
Mining
12.1Other consumer 
goods   3.5
Transport equip.  4.4
Other semi-
manuf.  3.6
Other semi-
manuf.
9.2Other agriculture
5.8Food
20.8
Agriculture
5.5Agriculture
5.9
Mining
  8.4
Automotive
products
12.8Transport equip.
6.0
Fuels
25.6Chemicals  
4.3Chemicals  
4.6Other 
7.2
Textiles  & clothing
4.1 Other mining
1.0Fuels
11.1Gold
4.2Gold
4.4
Mining
40.0Agriculture
26.6
Note:   Subtotals for 2002 export data do not add up to 100%.
 Australia WT/TPR/S/178/Rev.1 
 Page 11 
 
 
Chart I.2
Direction of merchandise trade, 2002 and 2005
2002 2005
(a)    Exports (f.o.b.)
Other Asia  
13.2Asia
64.9
Total:   US$65.0 billion Total:  US$105.8 billion
(b)    Imports (f.o.b.)
Other
2.5Other Asia  
11.3EC25
23.4
United States
18.4EC25
23.2China
13.7
 Thailand   3.1
Singapore  5.6United States
13.9
Total:   US$69.2 billion Total:   US$118.9 billionPer cent
Asia
71.2
Other Asia  
12.8Middle East
3.6Japan
18.6
Middle East
2.0
Korea, Rep. of
3.3Korea, Rep. of   3.7United States
9.7Singapore
4.2
Other Asia  
11.4United States
6.7
Source :  UNSD, Comtrade database (SITC Rev.3).Japan
11.0EC25
10.8Middle East
5.3
Asia
55.5Asia
51.1Japan
12.4
New Zealand
3.8EC25
12.6
Hong Kong, China
3.0Japan
20.4
Other America
2.9
Malaysia  3.9Chinese Taipei
4.0Chinese Taipei
4.0
Singapore   3.4China
7.0
Korea, Rep. of
7.9Korea, Rep. of   
8.4
Other
2.9Middle East
  2.1
New Zealand
3.5Indonesia  3.3Thailand  3.0Other America
2.8Africa  2.6China
11.6
Africa  2.5
Other America
2.5
Other America
2.6China
10.1
Malaysia   3.1New Zealand
3.6India
5.0Other   
2.3Other 
2.1New Zealand
6.5
 WT/TPR/S/178/Rev.1 Trade Policy Review 
Page 12 
 
 
(iii) Foreign direct investment 
28. Australia's stock of inward foreign direct investment (FDI) peaked in 2004 (Table I.3).23  The 
United States continues to be the largest source of  FDI in Australia, accounting for 24.6% of total FDI 
in 2005.  Other major sources were the Un ited Kingdom (18.3%), and Japan (8.5%).24  It seems that 
Australia's recent regional trade agreements (with Singapore, Thailand, and the United States), which 
include investment-specific provisions, have not incr eased investment from its partner countries.  The 
authorities consider it is too early to assess the impa ct of these RTAs on foreign investment flows as 
they are relatively new. 
Table I.3 
Foreign direct investment by co untry and economic activity, 2001-05  
($A million and per cent) 
 2001 2002 2003 2004 2005 
FDI inflow 16,058 31,296 12,301 48,885 -44,654 
FDI stock 218,839 249,269 264,560 332,664 281,121 
 FDI by origin (% of total FDI) 
United States  31.5 28.3 31.4 42.5 24.6 
United Kingdom 22.0 22.2 17.2 13.0 18.3 
Japan 7.4 6.7 6.9 5.6 8.5 
Netherlands 4.8 4.8 4.5 4.9 6.8 
Switzerland incl. Liechtenstein 2.4 3.9 4.1 3.6 5.1 
 FDI from RTA partner countries ($A million) 
United States  68,840 70,646 82,955 141,411 69,065 
New Zealand 5,444 4,158 5,512 6,382 5,889 
Singapore 14,873 3,683 4,253 5,137 4,200 
Thailand -10 ..a ..a ..a 52 
 FDI by economic activity (% of total FDI) 
Mining 16.8 16.2 17.1 13.7 21.1 
Manufacturing 30.2 26.5 27.9 38.9 19.3 
Wholesale and retail trade 11.7 16.3 15.6 13.8 17.2 
Finance and insurance 13.7 13.5 12.9 10.9 14.4 
Transport and communication 10.2 9.4 9.9 7.8 9.4 
Property and business services 7.7 8.4 7.7 5.8 6.9 
Unallocated 1.1 1.0 0.6 3.4 4.7 
Electricity, gas, and water 4.3 4.3 3.4 2.4 3.1 
Construction 1.6 1.7 2.0 1.7 2.4 
Other services 0.8 0.8 1.0 0.8 0.8 
.. Not available. 
a Included in totals where applicable but not av ailable for publication, unless otherwise indicated. 
Source : Australian Bureau of Statistics document 5352.0, 9 August 2006.   
29. At the sectoral level, mining accounted for the largest proportion of FDI in 2005, as a 
consequence of increased demand for mineral resources. The shares of FDI received in some other 
sectors of the economy fell;  the share of manufactu ring declined from 38.9% in 2004 to 19.3% in 
2005.   
                                                      
23 The fall of FDI in 2005 is la rgely because the News Corporatio n moved its primary listing to the 
New York Stock Exchange (UNCTAD, 2006, p. 85). 
24 Australian Bureau of Statistics document 5352.0, 9 August 2006. Australia WT/TPR/S/178/Rev.1 
 Page 13 
 
 
30. Australia's outward investment has also been increasing:  over the past 15 years, outward FDI 
stocks have grown faster than inward FDI stocks.25  The Government considers that the benefits of 
outward FDI include improving efficiency and comp etitiveness of domestic firms by expanding their 
business beyond the potential constraints imposed by the limited size of the domestic market;  
providing growth opportunities to domestic share holders by extending their market presence and 
permitting access to resources, expertise, and technology  in other markets;  and stimulating demand 
for goods and services provided by input suppliers.  
(6) PROSPECTS  
31. Australia's economic growth is expected to remain  strong.  The authorities are of the view that 
as a result of the ongoing and deepening structural reforms, the economy is now very resilient to 
external shocks.  The major challenge in the short term is to maintain macroeconomic stability in the 
face of the high commodity prices.  However, the authorities believe that the economy's vulnerability 
to an eventual end of the commodity price boom h as been reduced owing to earlier reforms, such as 
the introduction of a floating exchange rate in th e early 1980s and more flexible markets for goods, 
services, capital, and particularly labour.  Nonethel ess, in the face of the slowdown in total factor 
productivity in recent years, there also appears to be a need for continued reform, especially to key 
infrastructure-related services such as electricity, water, and transport.  Despite certain evidence 
showing that increased investment in infrastru cture has resulted in the mining sector overcoming 
some obstacles, such as infrastructure bottlen ecks as well as labour and equipment shortages26, there 
is a need to press ahead with refo rms as outlined in the National Refo rm Agenda to raise productivity 
further.  Increased productivity would also enable Au stralia to address the longer term challenge of an 
ageing population and the associated rise in health a nd social welfare costs and implications for the 
labour market. 
                                                      
25 FIRB (2005), p. 42. 
26 Financial Times , "Australia on course to returning to trade surplus", 4 October 2006.