PC News - October 2015

The Commission has proposed steps that Australian governments should take to reduce barriers to service exports.

The opportunities for Australian service providers to participate in international trade are greater than ever before. Global demand for services is increasing due to rising household incomes, particularly in some countries in Asia. Services are also becoming increasingly important to global value chains.

Reflecting the growing opportunities to export services, the Australian Government asked the Commission to conduct a study into barriers to growth in Australian service exports focusing on six services sectors (the tourism, education, financial, professional, information technology and health sectors. The draft report was released in August 2015.

The study focuses on identifying policy relevant barriers that affect Australian service exports. A barrier is anything that unnecessarily impedes the ability of businesses to export services. This definition recognises that there may be a legitimate rationale for government involvement in markets to address a market failure or to meet an equity objective.

The Commission identified a number of policy and regulatory barriers to service exports - both in Australia and overseas - that are preventing Australian service providers from realising the full opportunities from international trade.

On the domestic front, the priority for the Australian Government should be policy reform that promotes competition and provides incentives for domestic firms, including in services sectors, to innovate and lift their productivity.

A flexible and productive economy can enable all sectors of the economy, including service providers, to respond to market opportunities in Australia and in international markets.

The Commission also identified domestic reforms to reduce barriers to service exports.

• The Australian Government is reforming short-term visitor and education visa processing arrangements. The reforms will address shortcomings of the current arrangements while maintaining immigration integrity and could help to facilitate the entry into Australia of short-term visitors and international students.
• Further liberalising air services arrangements would promote competition and encourage airlines to reduce their costs, innovate and expand services. Liberalising air services arrangements would be expected to promote greater service exports in service sectors where providers rely on face-to-face delivery of their service.
• Australia's system of withholding taxes is complex, with various exemptions and special rates applying to different types of investment. Simplifying the system would reduce investment distortions, which affect the demand for financial service exports.

International students in Australia

• • International education services contributed $17 billion to the Australian economy in 2014.
  • Around half of this was from fees paid to educational institutions, with the remainder from expenditure on goods and services by international students living in Australia.
  • The sector represented about 27 per cent of services exports and close to 5 per cent of total Australian exports.
  • In 2014, there were over 450 000 international students onshore, representing around 20 per cent of higher education students and 5 per cent of students enrolled in vocational education and training.
  • Around three quarters of all international students enrolled in Australia in 2014 were from Asia, with China and India accounting for 37 per cent of all international students (26 and 11 per cent respectively).
  • Of the 160 000 enrolments in courses delivered offshore, more than two thirds were in the higher education sector. Withholding taxes should not be lowered simply to match the rates in other jurisdictions - domestic policy settings should be based on broader community welfare considerations.
  • Reforming policy arrangements underpinning infrastructure investment could help to address concerns about the adequacy of education and tourism infrastructure. Proposed reforms include implementing best practice project selection processes for public infrastructure projects and the ongoing review and reform of development approval processes that apply to private and public infrastructure.

Australian exports by services sector

On the international front, there are a range of mechanisms for addressing barriers to service exports, including mutual recognition agreements (MRAs) and international trade agreements.

Some study participants considered that trade agreements are a necessary precursor to facilitating service exports, but highlighted that some barriers have persisted even where Australia has signed an agreement.

A clear lesson that emerges is that no one mechanism will be sufficient to address international barriers to services trade.

The Commission identified key areas for international negotiations where barriers are imposing costs on Australian service providers. Service providers that rely on setting up operations overseas to export their services - such as the financial service providers - are heavily influenced by international barriers.

• The increased use of digital technologies to trade services has seen governments impose restrictions on the flow of data across their borders. Data restrictions can force businesses to invest in data centres that cost tens of millions of dollars, or develop costly workarounds. Removing unnecessary data restrictions would benefit a range of service providers, with the greatest benefits likely to accrue to financial service providers. Some countries with data restrictions have large and growing demand for financial services, including China, Malaysia and Singapore.
• Some countries have overly burdensome licensing and standards regulations that go beyond what is required to address legitimate policy objectives. In India foreign lawyers may be admitted as a local lawyer only if they are an Indian citizen, and in some countries in Asia accountants need to be living in the country to provide services.
• Investment barriers can prevent Australian service providers from entering particular export markets or impose costs through constraining how service providers operate. For example, foreign equity limits are considered the primary barrier to accessing Asian banking markets, and the provision of accounting services using a foreign affiliate is not permitted in India. Mandatory joint ventures in China can impose substantial costs where they impose a non-preferred business model.

While reducing barriers to service exports could deliver significant benefits to the Australian community, increasing service exports is not a goal in itself.

For example, while the financial sector faces burdensome barriers to service exports, Australian governments should not introduce reforms simply to increase the international competitiveness of financial service providers. Increasing service exports should only be pursued where it is expected to deliver net benefits to the community.

Service Exports: summary of the Commission's draft recommendations*

• Some priorities for domestic reform

  Governments should pursue sound policy settings that promote competition and a flexible and productive economy. Government actions should address concerns about infrastructure acting as a constraint to service exports.

  The Australian Government should make screening thresholds for examination of investment proposals by the Foreign Investment Review Board consistent across investors from different countries.

  The Australian Government should remove the priority afforded to specific industries under the Industry Skills Fund.

• Opportunities to grow financial services exports

  The Australian Government should continue to progress the Asia Region Funds Passport and encourage other jurisdictions to participate in the Passport.

  The Australian Government should simplify Australia's regime of withholding taxes.

• Enhancing export capacity in education and health

  The Department of Education and Training should review the effectiveness of the Quality Indicators for Learning and Teaching online platform in meeting its proposed objective.

  The Australian Government should examine the relationship between the use of online education by international students studying in Australia and student visa non-compliance to inform options for enabling more innovative and flexible approaches to delivering education services.

• Removing impediments to tourism exports

  The Australian Government should liberalise air services arrangements in Australia's major gateway cities.

• Reducing international barriers to service exports

  The Australian Government should put in place a framework for developing and implementing mutual recognition arrangements as part of, or following, the inclusion of mutual recognition provisions in trade (or other) agreements.

  The Australian Government should seek to ensure that measures restricting cross-border data flows are the least restrictive necessary to address privacy or security objectives, and are only applied where other remedies could not achieve the same objective at a lower net cost.

* A complete list of draft recommendations are available in the report overview.

Service Exports

• Read the Draft Report released August 2015

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