They never talk about trade

The trade and investment policies of the two main political parties in Australia have flip-flopped in chorus over the years so they hardly ever figure in election debates. As if they didn’t matter enough to fight about.

Yet there’s little that matters more to the future prosperity of a small, open, still-somewhat-remote economy than building its long-distance links to growth and technology through trade and foreign investment. Unfortunately neither of the major parties has the courage or imagination[*] to offer a serious program of trade policy reforms. So, at the end of this little historical review, I offer some politically adventurous but, I believe, entirely practical suggestions for the future… Just in case.

Backstory (you could skip it)

Until the 1980s, contrary to theory, the rural-rump of the conservative coalition (owners of abundant factors; land, resources) conspired with capital (a scarce factor) to socialise their market risks behind high tariff barriers and pegged exchange rates. Happily for them, the the party of the other scarce factor (labor) supported a social contract with capital based on the ponzi-welfare plan of ‘protection all round’. Trade policy questions were ‘settled’.

Then, in the mid–1980s, without taking the matter to the electorate, the Labor party turned the social contract on its head and became the party of unilateral liberalisation of both trade and the exchange rate. The Conservatives’ supporters valued the social contract above all and, for the next thirty years, planned reductions in protection under flexible exchange rates was the new orthodoxy.

Trade openness remade the Australian economy. From the mid 1970s to 2010 the trade-intensity of output in Australia almost doubled from 25% to 45%. In the latter half of that period, our prosperity soared on the wave of international trade. The ‘China effect’ alone boosted our command over imports by 30%; our export prices rose 20% and our import prices fell by 10%.

Astonishingly, there was no lasting political vision behind the trade liberalisation plans, much less political backbone. The first decade or so of the twenty-first century was marked by trade-policy ad-hoc-ism from both parties and a bizarre hostility toward foreign investors. The conservatives who governed in the first half had no interest in carrying the opening of markets to its logical and desirable conclusion in a duty-free border; on the contrary they removed some duty concessions, extended some of the most egregious quarantine protection for horticulture and clumsily shook a ‘national interest’ stick at resource investments.

The left, when it recovered power, took leave of its rational heritage, penalising energy industries in which Australia enjoys comparative advantage and spasmodically banning cattle exports on unexamined evidence of abuse. It blessed with massive subsidies declining industries such as automobiles and shipbuilding that welded themselves to deals with unionised labor. It built new cathedrals in which the priesthood of anti-dumpers could conduct their mumbo-jumbo rituals; sacrificing consumer interests to those of persistently overpriced producers of coated and structural steel, PVC and canned fruit.

Both conservatives and labor have hidden their lack of trade policy behind a banner-waving support for trade agreements. They seem to hope that cheerleading will look the same as kicking goals. A handful of bilateral and regional trade agreements over the past twenty years have, in reality, procured little or no advantage we could not have won for ourselves with a duty-free border and a more welcoming attitude to foreign investment. But they have saddled us with laws offering onerous benefits for useless copyrights. Nothing we know about the sagging Trans Pacific Partnership agreement suggests it will be any different.

A globally coordinated (WTO) deal to cut red-tape and spillovers from domestic policy failures that hamper international trade would be valuable. But neither China nor the United States shows any interest or capacity at present to lead a consensus in that direction, much less to do so jointly. So it’s not going to happen any time soon.

But the lazy showmanship of both parties in the past decade leaves us with plenty we could do to help ourselves[#]

Why not be bold?

Recommendation: Cut all customs duties to zero within three years

Why: Zero is a feasible option and a strong signal. It completes the logic of the liberalization that made us prosperous and make it clear here and abroad that we don’t put barrier in the way of doing business across our border

Risks: Negligible or none to revenue or to national welfare. Our average tax on imports from all sources is 2.8% despite half of our goods imports are duty free from all sources because a small number of products get taxed at much higher rates. If you count our ‘free trade’ commitments, our average duty is still lower.

Recommendation: Set ‘unacceptable risk to national security’ as the only basis for review of foreign investment proposals. Require a Ministerial report to Parliament in the case of reviews requiring modifications of proposals. Abolish the Foreign Investment Review Board.

Why: Border reviews are the wrong ‘safeguard’ against commercial risk; we have many effective regulatory controls on the behaviour of firms whether they are domiciled here or abroad. A secret committee of ‘gatekeepers’ has no hope (and apparently a poor record) of knowing what conditions to set for commercial behavior or of enforcing them later. We rely on investment and must be much more welcoming to investors.

Risks: No costs. The risk is that Australia will develop a global reputation as a uniquely welcoming environment for new capital and technology.

Recommendation: Repeal the expensive, inefficient statutory preferences for Australian shipping, especially in coastal trade and remove barriers, including State government barriers, to foreign airlines on domestic routes

Why: Our transport market is strongly rigged in favour of maritime unions, domestic carriers (and airport-owners?). Users’ interests and economic efficiency are a long-way down the list. The costs to our international trade are huge and the Rudd labor government made them a lot bigger with the Coastal Trading Bill of 2012

Risks: Geography imposes big costs on our trade; it’s madness to heap more on ourselves. Our high shipping costs leak into every import and export (including services) sapping competitiveness.

Recommendation: Adopt an economy-wide impact test before all final anti-dumping decisions

Why: Anti-dumping calls imports from abroad ‘unfair’ that we would call ‘competitive’ if they were imports from e.g. another state. It offers high levels of tailor-made protection for a small range of frequent-user firms. We need to be sure that the costs imposed on consumers deliver a net win for the economy as a whole, not just the beneficiaries.

Risks: None. Fully compatible with international obligations. Likely to save us from costly mistakes.

Recommendation: Require an economy-wide impact test for any quarantine measure that acts to prohibit imports

Why: Quarantine barriers are potentially very costly for firms and households but confer protection on some producers from more or less (un)likely risks. WTO has overturned Australian quarantine risk assessments after finding them ‘exaggerated’. A balance is needed to ensure costly prohibitions on imports deliver a net benefit to the whole economy

Risks: None. Cost-benefit analysis that takes account of economy-wide interests in quarantine protection is fully compatible with our international obligations and could save us from madness such as bananas at $12/kg or the loss of livestock industries (pork) due to crippling feed-grain costs.

Recommendation: Reduce copyright protection from the current “life of author plus 70 years” to “date of production plus 50 years” and seek an amendment to the WTO TRIPS agreement to eliminate any reference to a specific term of protection

Why: Copyright is a monopoly benefit created by the state to encourage creativity that has (unspecified) ‘spillover’ public benefits. Whatever the public benefits from a given creation may be, their present value converges on a sum that ceases to grow after about 25 years at any reasonable social discount rate (Productivity Commission research suggests 8 percent). The benefit conferred on the creator should align with this public benefit.

Risks: The excessive current term is embedded in latest versions of the international copyright convention. The WTO’s TRIPS agreement requires a copyright term of at least 50 years. Rent-seeking copyright owners will condemn any reduction in their unjustified profits. But there will also be substantial international support for a more balanced and reasonable term that will ensure good consumer value and, consequently, less piracy. A qualified majority of 2/3 of WTO Members must approve any amendment to the TRIPS Agreement. There is no evidence that a shorter copyright term will discourage creativity; many leading authors, musicians etc make no attempt now to secure any particular copyright protection. Distributors who seek secure protection over longer terms already use technological means to deny access to non-licensed users.

[*] I was going to say ‘balls’… but thought better of it.  –> go back

[#] By the way… if some of this seems ‘scary’ or ‘reckless’ to you ask yourself why open markets weren’t a problem when the UK and USA grew to greatness. If we’re frightened of open markets today, is it us or the market that has changed?   –> go back

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