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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