Showing posts with label protection. Show all posts
Showing posts with label protection. Show all posts

Friday, May 3, 2024

Is a Future Made in Australia a good or bad idea? Maybe a bit of both

What exactly is a Future Made in Australia? You can read the long speech Anthony Albanese made about it and still not be sure. My guess is it’s a slogan designed by spin doctors to mean whatever you’d like it to mean.

As I wrote on Monday, what I hope it means is that the government intends to secure our economic future by ensuring all the income we’re going to lose from the world’s decision to stop buying our exports of fossil fuels is replaced by us using our new-found comparative advantage of being able to produce renewable energy more cheaply than most other countries.

We can produce masses of the stuff but, because it’s expensive to export, we can set up new industries which use the renewable energy to produce green iron, green aluminium and various other green minerals and then sell them to the world.

Because such industries don’t yet exist, the businesses that start them will inevitably make mistakes from which later businesses will learn. So it makes hard-headed economic sense for the government to cover much of the cost of this learning-by-doing “positive externality” – this spillover benefit to the wider economy for which the original businesses will go unrewarded.

If that’s what Albanese means by making our economic future, he deserves all the support and encouragement the rest of us can give him.

But I fear his slick slogan was designed to remind people of the old goal of trying to ensure that as many as possible of the goods we consume are Made in Australia.

This was our aim for about half a century until, in the 1980s, the Labor government of Bob Hawke and Paul Keating rolled back the import duties protecting our inefficient manufacturing industry and opened our economy to the world.

But why would Albo and his smart economists, Jim Chalmers and Chris Bowen, want to reverse the bipartisan policy of the past 40 years and take us back to the future?

Well, some polling produced this week by Essential Report offers some big clues. Asked to what extent they supported or opposed the Future Made in Australia policy, 30 per cent of respondents said neither. I take this to mean most hadn’t heard of it, or weren’t sure what it involved.

But 51 per cent supported the policy, leaving only 19 per cent opposing it. Unsurprisingly, Labor voters were more supportive than Liberal voters. But this is surprising: two-thirds of Greens voters supported it.

Why so much support for the government policy with a snappy name but so little detail? More clues followed. Fully 70 per cent of respondents agreed with the statement that “the pandemic showed we cannot be wholly reliant on global supply chains”.

And 63 per cent agreed that “it was a mistake to allow the Australian car industry to close,” with 43 per cent agreeing that “the days of globalisation, where we just imported cheap goods from overseas are over”.

Against that, however, only 37 per cent agreed that “it is not the government’s job to support Australian businesses that can’t compete overseas,” and only 34 per cent that “the market will make the best decisions and government should stay out of the way.”

Get it? There’s strong support for the goal of self-sufficiency and making as much as we can locally – keeping the jobs and the profits at home, not sending them abroad.

It’s noteworthy, too, that support for Made in Australia is much stronger among those aged 55 and above than among those aged 18 to 34. Believing that a country must make things, not just deliver services is, thankfully, more a hangup of the old.

So, if Albo and his spin doctors see benefit in playing to the Bring Back Manufacturing crowd, it wouldn’t be so surprising.

Just so long as you don’t forget this: keeping the jobs at home seems no more than common sense but, when you think it through, you see it’s a great way to be poorer, not richer.

One of the main ways humans have made themselves richer over the centuries is what economists call “the division of labour” and the rest of us call specialisation.

We can use the same amount of labour to produce more goods and services by having workers specialise in doing what they do best. By now, the process of specialisation – which no doubt has yet further to run – has reached the point of specialisation within specialties.

But obviously, specialisation can’t work without exchange: I sell my stuff to you; you sell your stuff to me. And what makes economic sense for individuals also makes sense for countries. We don’t maximise our material prosperity by stopping specialisation and exchange at the border.

Countries also need to specialise in what they do best, exchanging their surplus production with other countries specialising in what they do best. Economists call this pursuing our “comparative advantage”.

Autarky – the pursuit of national self-sufficiency – seems like a good idea, but one of the most useful things economists do for the community is to explain why, contrary to common sense, self-sufficiency is a great way to be poorer than we need to be.

It’s a dumb idea because it involves wilfully forgoing the benefits of specialisation and the “gains from trade”. When we insist on making items we aren’t good at, those things will cost more that importing the same goods from those countries better at it than we are.

So we end up forcing Australians to buy the inferior and more expensive locally made goods by imposing a special tax or “duty” on the imports. This leaves us less money to spend on other locally made goods and services. So jobs created in the inefficient part of the economy come at the expense of jobs in the efficient part, causing us to be less well-off than we could be. Well done.

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Monday, April 29, 2024

How Albanese can make Australia's future the smart way

Thank goodness we’ve finally got someone saying something sensible about Anthony Albanese’s Future Made in Australia. So far, it’s been a phoney war between the old fogeys from the Productivity Commission – all government subsidies are rent-seeking – and the Bring Back Manufacturing Brigade, pushing the notion that making goods is more economically virtuous than providing services and quoting bulldust measures of “economic complexity” to prove it.

The man talking sense – adroitly picking his way through the blind ideology, partisanship and rent-seeking to find the sound economics – is Rod Sims, former chair of the Australian Competition and Consumer Commission and now chair of Professor Ross Garnaut’s brainchild, the Superpower Institute. Sims spoke to the Melbourne Economic Forum last week.

For reasons I’ll explain another day, the Productivity Commission old-timers are right to insist that the basic principles of economics haven’t changed. We must resist the false promise of self-sufficiency and stick to doing the things we’re particularly good at – our “comparative advantage” – which, throughout our history, has included exploiting our “natural endowment” of some of the most valuable deposits of minerals and fossil fuels in the world.

On the other hand, though the basic economic principles haven’t changed, the Back to Manufacturing Brigade is right – or half right – in saying that the circumstances in which the world economy now finds itself have changed radically.

This is not because, in its present period of craziness, the United States has turned protectionist, staging a trade war with China and subsidising various local industries. Others acting contrary to their own best interests – their comparative advantage – is not a sign that we should go crazy too.

No, the big change is the world’s grudging realisation that if we want to stop global warming, we must cease burning fossil fuels and switch to renewables. The move to net zero emissions of greenhouse gases by 2050 will surely be the biggest and fastest structural change the industrialised world has ever experienced.

The implications of this euphemistically named “transition” are huge for every economy, but for ours, they are monumental. Why? Because, as Sims points out, Australia is the world’s largest exporter of coal and gas, combined.

What everyone knows but doesn’t seem to get is that, within a decade or two, our economy will have been hit by a meteor. The world will have stopped buying our fossil fuels. It will have taken a huge chunk of our natural endowment and declared it worthless.

So, our greatest comparative advantage is in the process of ceasing to exist. This is what Albanese lacked the courage to say in his happy-clappy speech about a Future Made in Australia.

This is what the generals busy fighting the last war don’t get. This is why their implication that the government should sit back and see how the market reacts to this sudden drop in our standard of living is bad economics.

What we must do is something we’ve never needed to do before: hunt around in our natural endowment to find something else offering us a new comparative advantage. This is why we’re so heavily indebted to Garnaut for being the first to realise and trumpet the news that, in a decarbonised world, all our sun and wind have suddenly gone from being of little value to hugely valuable.

Australia has much more sunlight than most other countries and as much wind as the best of them. What makes this so valuable is that it’s so expensive to turn renewable energy into a form that can be exported.

Sims demonstrates the value of our new comparative advantage with the example of iron metal. At present, we export iron ore, the metallurgical coal used to reduce the iron ore to iron metal, and both the thermal coal and gas, which can provide the heat to make the iron metal.

We export the ingredients and let others bake the cake because that’s what makes economic sense. In the coming zero-carbon world, however, it will make economic sense to produce green iron in Australia.

Green iron is likely to need green hydrogen in place of the coking coal that turns the ore into metal. However, making green hydrogen requires a massive amount of renewable energy to power the electrolysers that split water into hydrogen and oxygen.

So green iron should be made in Australia because the economics has been turned on its head. If it costs, say, $100 to mine a tonne of metallurgical coal in Australia, you can send it to China for just an extra $5 or $10. But if hydrogen costs $100 to make here in Oz, it will cost at least another $100 to ship it to China.

With hydrogen, you need to turn it into ammonia, at great expense, to be able to ship it, and then you need to turn it back into hydrogen at the other end. This is complex and will involve much leakage.

So renewable energy should be used close to where it’s produced. Sims says all overseas studies he’s seen suggest that Australia is likely to be the cheapest place in the world to make green iron. Those trying to make green iron by importing hydrogen will be uncompetitive.

It should be the same story for green aluminium, green fertiliser, green silicon and green aviation fuel. We will be able to export our masses of surplus renewable energy embedded within those many products.

So, yes, we can have a lot more manufacturing in our future. And the best place for this further processing will be close to the regional sources of sun and wind-produced electricity.

But while green iron-making technology is proven, it’s not yet been done at scale, Sims says. Those who go first will inevitably make mistakes, from which others will learn. Those mistakes will be costly for the first mover but hugely beneficial to those who come after.

In other words, this learning by doing is a “positive externality” – a benefit to other businesses and the community generally for which the first business isn’t rewarded.

This is the hard-headed economic justification for temporary government grants to firms starting out in industries directly related to the exploitation of our new-found comparative advantage.

(The key “negative externality” relevant to the transition to renewable energy is the cost to the environment from the use of fossil fuels to make steel and many other things that the relevant businesses aren’t required to pay for, thus putting renewable energy producers at a price disadvantage – something the former Productivity Commission bosses keep forgetting to mention.)

But, Sims rightly warns, if all the Made in Australia talk means subsiding businesses making solar panels, wind farm components, batteries and electrolysers – in none of which we have a comparative advantage – then there’s no way we’ll become a superpower, and the extra manufacturing jobs will come at the expense of jobs in all other industries. Labor voters and the ACTU take note.

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Saturday, August 15, 2020

The last thing we need: neutering the free-trade referee

With the coronavirus putting the world economy into its worst dive in almost a century, it would help if the surviving trade in goods and services between countries was continuing in an orderly way. But, as if we didn’t have enough problems, the future of the international body responsible for ensuring free and fair trade, the World Trade Organisation, is in grave doubt.

The eternal temptation in international trade is protectionism: please buy all our exports, but we’ll be importing as few as possible of your exports. It’s tempting because, to the voters in every country, it seems just common sense to favour your own industries over their rivals in other countries.

Only when you’ve learnt a bit of economics – about the gains from specialisation and exchange, in particular – do your realise that first, it’s the consumers of the protected products and all the local industries you don’t protect who pick up the tab, and second, when you try to steal a march on other countries, they usually retaliate, which ends up meaning you’re both screwed.

That’s why the WTO was set up: to help its 164 member countries reduce their import duties (“tariffs” as economists call them) and other restrictions on imports, and then keep them down, so all the members are better off.

As explained in a report from the Lowy Institute, prepared by Dmitry Grozoubinski, a former trade negotiator with our Department of Foreign Affairs and Trade, the WTO has three main roles.

First, the negotiation of successive “rounds” of mutual reductions in tariffs and import bans or quotas by all the members. After the establishment of the Geneva-based General Agreement on Tariffs and Trade (GATT) after the end of World War II, eight multilateral rounds of reductions were negotiated.

In the early rounds, the members were mainly the developed countries and they concentrated on reducing the tariffs on manufactures that had built up in the 1930s as countries tried to use protection to end the Great Depression, but succeeded only in making it worse.

The result of the rounds was hugely increased trade between the rich countries, which many economists believe contributed greatly to the post-war period of rapid economic growth, rising living standards and full employment, but which ended with the coming of “stagflation” – high inflation and unemployment – in the mid-1970s.

By the “Uruguay round”, completed in 1994, the negotiations had broadened to cover textiles, agricultural subsidies, services and intellectual property. Many developing countries had joined the agreement and benefited from the liberalisation of trade in clothing and textiles, and rural products.

But the round’s most spectacular achievement was turning the GATT into the World Trade Organisation, still based in Geneva. Many more developing countries joined, as did China in 2001.

The WTO’s second role is to monitor member countries’ compliance with the rules agreed on during the rounds. One rule is that once a tariff reduction has been agreed on, it’s then “bound” and mustn’t be increased.

But the most important rule is “most favoured nation”: no other country should be given a special deal. So the lowest tariff you impose on some nation must be the one you impose on every other member. Another key rule is “national treatment”: imported and locally produced goods must be treated equally.

The point of these rules is to keep world trade both free and fair; to discourage countries from backsliding and help governments resist local pressure to revert to protection. In particular, to stop small countries being pushed around by big countries.

And so you see why a middle-size country like ours has much to gain from living in a world where every country sticks to the rules – and much to lose when the big boys on the block decide to start throwing their weight around.

The WTO’s third role is to formally adjudicate trade disputes between its member countries, thereby enforcing its rules. Serious disputes go to a court-like “dispute settlement body” and, if necessary, to an “appellate body”.

So, what’s the problem? Why is the WTO in deep trouble? Because, in Grozoubinski’s words, “all three pillars are wobbly, and had been long before the Trump administration started taking a sledgehammer to them. Unquestionably, however, the picture in 2020 is grim.”

The first role – negotiating further rounds of reduced barriers to trade – is, he says, “hopelessly stalled”. The “Doha round” was launched in 2001, but was unable to reach agreement, partly because it’s much harder for so many developed and developing countries to find common ground. The last attempt to make progress was in 2013.

Meanwhile, countries have shifted from seeking multilateral agreements to doing any number of bilateral (misnamed) “free-trade agreements,” which breach the spirit if not the letter of WTO rules such as “most favoured nation”.

The second role – monitoring members’ compliance with the rules – “relies on international peer pressure for the bulk of its enforcement,” but the world is in the grip of a trade war between the United States and China, meaning the US has gone from decades of getting everyone else to agree on sensible rules and stick by them to ignoring any rules it finds inconvenient in its quest to “make America great again”.

As for the third role – a binding dispute settlement mechanism – in December the US used a procedural blockade to render the WTO’s appellate body “impotent and unable to convene the required quorum of three panellists,” thus rendering the formerly legally binding system of arbitration optional.

If that wasn’t enough, the US is refusing to approve the organisation’s budget, and Congress has bills that would withdraw the US from the WTO (but which are unlikely to be passed). The outfit’s director-general has resigned, and any member could sabotage his replacement. The next conference of trade ministers has been delayed until at least 2021.

And all this is happening at a time of pandemic and escalating protectionism. Well done, chaps.
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Wednesday, February 5, 2020

Morrison's dream: climate fixed with no changes to jobs or tax

When I was new to journalism, there was a saying that the two words which, when used in a newsagents’ poster or a headline, would attract the most readers, were "free" and "tax". These days, the two words politicians use to suck in unwary voters are "jobs" and "tax".

These words have magical powers because we attach our own meaning to them and assume the polly is using them to imply what we think they imply. They evoke in us an emotional reaction – welcoming in the case of "jobs", disapproving in the case of "tax" – and so we ask no further questions.

Those two words have the magical ability to cut through our distrust and disarm our powers of critical thought. Scott Morrison has been using both in his belated response to this appalling summer of bushfires, heatwaves, smoke haze and dust.

Many of us have realised how terrible climate change actually is, that it’s already happening and will keep getting worse – much worse – unless all the world’s big countries get serious about largely eliminating their carbon emissions, and doing so pretty quickly.

Although Australia is a big emitter relative to our small population, in absolute volume we’re not in the same league as America, China or Europe. But the rest of the world’s horrified reaction to our fire season has helped us see we’re in the vanguard, that the Wide Brown Land is going to cop it a lot harder than the green and pleasant lands.

So our self interest lies not just in doing our fair share, but in doing more than our share, so we’re well placed to press the big boys to try harder.

Initially, Morrison seemed to want us to believe he agreed with those saying we must do more to reduce greenhouse gas emissions. "We want to reduce emissions and do the best job we possibly can and get better and better at it. In the years ahead, we are going to continue to evolve our policy in this area to reduce emissions even further," he said.

But then he wanted to reassure his party’s climate-change deniers, and those of us who want to fight climate change without paying any personal price, that nothing had changed. "But what I won’t do is this: I am not going to sell out Australians – I am not going to sell out Australians based on the calls from some to put higher taxes on them or push up their electricity prices or to abandon their jobs and their industries."

On the question of jobs, don’t assume it’s your job he’s promising to save. What we know is that jobs in the coal industry are sacred, but what happens to other jobs isn’t the focus of his concern. Don’t forget, this is the same government which, as one of its first acts, decided we no longer needed a motor vehicle industry. Favoured existing jobs take priority over future jobs – which can look after themselves.

But even this doesn’t fully expose the trickiness of the things politicians say about jobs. What governments usually end up protecting in an industry isn’t its jobs, but its profits. For instance, when not in the hearing of North Queensland voters, Adani boasts about how highly automated its mine will be. Apart from the few years it takes to construct a mine, mining involves a lot of expensive imported machines and precious few jobs.

Looking back, it’s arguable that most of the jobs lost from manufacturing were lost to automation, not the removal of tariff protection.

As for taxes, the latest turn in Morrison’s spin cycle is that his "climate action agenda" is "driven by technology not taxation". This, apparently, is a reference to technologies such as hydrogen, carbon capture and storage, lithium production, biofuels and waste-to-energy.

Like many of politicians’ efforts to mislead us, this contains a large dollop of truth. It’s likely that our move to zero net emissions will involve the adoption of most if not all of those new technologies, in the process creating many job opportunities in new industries and – inevitably – doing so at the expense of jobs in existing fossil-fuel industries.

So this seems to have a lot of similarity with Professor Ross Garnaut’s vision of us becoming a renewable-energy superpower. But get this: Garnaut’s grand plan has been designed to require no return to any form of carbon tax.

Economists advocate "putting a price on carbon" because they believe it’s the best way to minimise the ultimate cost to the economy (and the punters who make it up) of moving to a low-carbon economy.

But if Australian voters are stupid enough to allow some on-the-make politicians to persuade them to reject the economists’ advice, then so be it. You prefer to do it the expensive way? Okay, have it your way. There’s no shortage of more costly alternatives.

So Morrison is busy demolishing a straw man. Why? Because he wants to distract your attention from the likelihood that his preferred way of skinning the cat will require a big increase in government spending to facilitate all those new technologies and industries.

You don’t think this increased spending will eventually have to be covered by higher taxes? Dream on.
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Saturday, April 28, 2018

Both sides of politics play along with costly con trick

Since there’s probably more madness to come, it’s too soon to tell how much Donald Trump’s uncomprehending machinations on trade will do to make America’s economy less great, let alone the rest of us. But it’s safe to predict damage to our economy – much of it self-inflicted.

Yes, self-inflicted. It won’t just be what Trump and others do to us, but also the damage we do to ourselves by hitting back in ways that hurt us more than they hurt the other guys.

By reacting emotionally rather than intelligently. By playing to the peanut gallery.

It’s true that our economy loses when other countries try to reduce their spending on our exports by imposing a tariff (import duty) on their citizens’ purchases of those exports.

But for us to retaliate by whacking a tariff on our imports from them – as is the instinctive reaction of almost everyone – just makes matters worse by requiring our citizens (and businesses) to pay more for those imports.

This gut reaction is prompted by people’s unthinking assumption that exports are good, but imports are bad. When you think it through, however, you realise imports are just as good as exports – why would we be so keen to buy them if they weren’t?

And exports are good mainly because we can use the money we make from them to buy imports.

International trade is an exercise in mutual and reciprocal benefits. They gain from buying our exports; we gain from buying their exports.

The gains are greater the more each side concentrates on exporting the things they’re good at and importing the things they aren’t much good at. That is, from specialising in their strengths, then exchanging with others with different specialisations.

Trying to maximise your exports while minimising your imports is like not wanting to take your turn in a playground game. The others will object and exclude you from the game if you won’t play fair.

But there’s more to it than just fairness to others. By trying to reduce your imports you’re seeking to divert your own resources – land, labour and capital - from producing stuff you’re good at to producing stuff you aren’t good at.

A great way to make yourself poorer rather than richer.

But to get back to where we started, how can I be so sure our politicians would be stupid enough to respond to the folly of others by doing something that would merely increase the cost to us?

Because of the knee-jerk reaction of both the Coalition and Labor when Trump first announced his intention to impose a tariff of 25 per cent on America’s imports of steel.

As Peter Harris, boss of the Productivity Commission, reminded us in a speech this week, “politicians on both sides, along with steel company executives, competed to sound alarms and promote the concept of even bigger price imposts on steel users in this country, all in the name of supposedly saving jobs”.

Apart from asking our best mate Don to exempt our steel from the new tariff (which is what eventually happened), the government trumpeted its willingness to ramp up our “anti-dumping assistance”.

It didn’t mention that this would have been the third ramp-up in decade. A ramp-up of a ramped-up ramp-up.

Not to be outdone, the opposition not only pledged support for tougher anti-dumping measures, it also said it was willing to shift responsibility for reviewing applications for “safeguards” tariff increases from the hard-headed Productivity Commission to some other, soft-headed outfit.

Both the anti-dumping and the safeguards provisions are backdoor ways of using excuses to sneak back-up tariffs you’d earlier reduced.

They’re ways of giving special treatment to our tiny and inefficient steel industry. And, as always, at the expense not just of all Australian consumers of steel products, but all the other Australian industries that use steel as an input to whatever it is they’re producing, possibly for export.

The popular delusion is that higher protection against imports hurts only the countries whose exports we’re trying to keep out. The truth we’re never told about is that the cost of protecting our industry is actually picked up by all our other industries.

Protection doesn’t save jobs, it just attempts to save jobs in the favoured industry by reducing jobs in all other industries. It’s a form of income redistribution from the efficient to the inefficient which, in the process, makes our economy less efficient overall.

Great idea. So why do politicians do it? In Trump’s case, because he’s a fool, and takes no advice from people who are smarter. In the case of our politicians, because they’re knaves: they know (if only because our econocrats keep telling them) that protection is a costly con trick, but prefer to humour popular incomprehension.

In its Trade and Assistance Review for 2016-17, published this week, the Productivity Commission models several “scenarios” that could emerge from Trump’s trouble-making, depending on how we and others respond to his provocation.

It finds that, should no country respond to Trump significantly increasing tariffs on imports from Mexico and China, Australia would be little affected.

On the other hand, should an all-out trade war leave all countries (including us) with tariffs 15 percentage points higher than at present, real gross world product would fall by 2.9 per cent. The fall in our GDP would be less than half that.

Should we hold out from the general increase in tariffs, our gross domestic product would actually be a bit higher than otherwise, though our real national income would be a little worse.

Now get this: should we join with the other members of the Regional Comprehensive Economic Partnership – China, Japan, South Korea, India, New Zealand and the ASEAN countries – in refusing to increase tariffs while everyone else was, the effects of a not-so-global trade war on us would be tiny.
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Saturday, March 17, 2018

Why protection from imports isn't smart

With The Donald now busy playing poker with Little Rocket Man, the threat of a trade war has receded. Good. Gives us time to get our thinking straight before the threat returns.

Everyone knows a trade war would be a terrible thing, but most people's reason for thinking so is wrong. This misunderstanding means such a war could happen, even though everyone knows it would be bad.

It seems common sense for a country to want to protect its industry by imposing a tax – known as a tariff or import duty – on imports competing with locally-produced goods. After all, we win and foreigners lose.

The problem arises only if the foreigners retaliate and slap a tariff on our exporters. That's bad for us because it may lead to job losses among those of our workers who earn their living making goods for export.

Is that the way you figure it? Sorry, it may be common sense, but it's wrong. You need to have learnt a bit of economics to see why, because the case against protection is "counterintuitive" – it doesn't seem right, but it is.

The reason people can't see what's wrong with protection is that every baby is born with a disease called mercantilism.

Mercantilism is the belief that exports are good, but imports are bad. Why? Because we – Australia – make money selling exports to foreigners, whereas it costs us money to buy imports, the foreigners' exports.

So mercantilists see Australia as like a company, and our balance of trade as like a company's profit and loss statement. The more you can export and the less you can import – the higher your trade surplus - the richer you become.

What's wrong with that way of thinking? Plenty. For a start, it's the mentality of a miser – someone who loves money for its own sake, not for what it will buy.

Money is just a means to an end, not an end in itself. The economic game is about producing goods and services so we can consume them. Production is the means; consumption is the end. Focus on one at the expense of the other and you've actually done badly in the game.

Similarly, jobs are just a means to an end. Why do people want jobs? So they can earn money and then spend it.

Exports are production, imports are consumption (although much of our imports are of machines we use in the production process). Production without consumption makes sense only to a miser.

Get this: 80 per cent of the way Australia makes its living is by all the workers and businesses and governments producing goods and services and selling them to other Australian workers, businesses and governments, so they can be consumed.

In principle, we could raise the 80 per cent to 100 per cent by only selling to and buying from ourselves. So why do we sell about 20 per cent of the things we produce to foreigners?

Not because it makes us richer, nor because it creates more jobs. It's solely so we can afford to buy some of the goods and services produced by businesses and workers in other countries, when we judge them to be better or cheaper than the stuff made locally.

Exports are good solely because we can use the proceeds to pay for imports – and imports are also good because they raise our material standard of living by giving all of us (workers, would-be workers and dependents) access to goods and services that are better or cheaper than those made in Australia.

If we weren't willing to use the proceeds from our exports to pay for imports from other countries, those countries would refuse to buy our exports.

Refusing to buy our exports would leave those countries worse off (because they'd lose their ability to buy the things we can produce better or cheaper than they can), as well as leaving us worse off because we lost our ability to use our export income to buy their exports.

This, BTW, is why trade wars are mutually self-harming. A group exercise in cutting off your nose to spite your face.

Why wouldn't it be better to be 100 per cent self-sufficient? Because this would limit the benefits to us from "specialisation and exchange". Our domestic economy is organised on the basis that we're all better off if each of us specialises in producing what we're good at, then uses money to exchange what we've produced with what other specialists have produced.

Opening our economy to trade with other countries merely extends this principle, on which we've always run our domestic economy, beyond our borders.

This is why the mercantilists' assumption that trade is a zero-sum game – if you win, I lose – is wrong. Both sides win because both benefit from the "mutual gains from trade".

It follows that the mercantilist notion that foreigners are the only people who lose when we decide to protect some of our industries is wrong. The biggest losers are every other industry and every Australian who loses their access to cheaper or better imported goods and has to pay more for the local version.

That is, tariffs are a tax, not on foreigners, but on Australian producers and consumers. A way of favouring some Australian industries at the expense of all the others. A redistribution of income to favoured industries from those that aren't favoured, and from Australian consumers generally. A form of rent-seeking.

And thus, an attempt to protect some jobs at the expense of all other jobs. Great idea.

Trade wars are destructive not primarily because it's crazy for other countries to retaliate – which it is – but because the country that provokes the retaliation by protecting some favoured industries is damaging itself.

Better to let it stew in its own juice than punish it by harming yourself.
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Monday, March 12, 2018

How we could gang up against a Trump trade war

A possible trade war looms and, as always, an adverse overseas development has caught poor little Oz utterly unprepared. Well, actually, not this time.

Just as Treasury had been war-gaming the next big world recession well before the global financial crisis of late 2008, so the Productivity Commission began thinking about our best response to a trade war soon after the election of Donald Trump.

In July last year it published a research paper, Rising protectionism: challenges, threats and opportunities for Australia, to which Dr Shiro Armstrong, co-director of the Australia-Japan Research Centre, at the Australian National University, made a major contribution. (During a visit to ANU last week I also benefited from discussion with Professor Jenny Corbett.)

Trump's tariffs (import duties) on steel and aluminium were never a great threat to our economy. It'll be only when he decides to take a crack at the Chinese that there'll be a lot to worry about.

But the chest-thumping by our pollies (on both sides) over steel is a demonstration of the way populism can crowd out clear-headed self-interest where protectionism is involved.

Trade wars happen by accident. They start out in a small way, the perceived victims feel their manhood demands they stand up to a bully by retaliating, the bully hits back and pretty soon everyone in the bar is throwing chairs and punches.

As the research paper puts it, "significant worldwide increases in protection would cause a global recession."

Economic modelling by Armstrong estimates that, for every extra dollar by which our revenue from import duties rose, economic activity in Australia would fall by 64¢.

In total, the level of real gross domestic product would be 1 per cent lower each year. This would equate to a loss of about 100,000 jobs. (As with all modelling, take these figures as, at best, roughly indicative.)

A full-blown global trade war would take many months, even years to build up, so how should we respond to the provocative actions of others? What could we do to minimise the damage we'd suffer?

The research paper proposes what economists call a "first-best" response (here I'd call it the What-would-Jesus-do? cheek-turning response): not only should we resist the temptation to retaliate in any way, we should also cut what few remaining protective barriers we have.

If you think that would be plum crazy, you don't know as much about protection as you should. But you've demonstrated why any politician would find such advice almost impossible.

That's why I'm attracted by the paper's second-best suggestion: "working with a coalition of countries to keep their markets open is a strategy that would make it easier for Australia to resist protectionist pressures".

Good thinking. Our leaders want to be seen to be acting to defend our economy, and this response – "let's form our own gang and fight back" - is active rather than passive, and harder to portray as appeasing the bullies.

Oh yeah, what gang? What coalition of countries? That's obvious. We're already a member of a gang that, depending on how you measure it, is bigger than Trump's, or the Europeans'. And our gang's by far the fastest growing.

We do almost three-quarters of our two-way trade (exports plus imports) with Asia – in descending order, China, ASEAN, Japan, South Korea, New Zealand, India, Hong Kong and Taiwan. Europe accounts for only about 15 per cent and Trumpland​ for little more than 10 per cent.

Although it's true Asia needs to trade with North America and Europe, it's also true there's huge trade within our region. Just imagine the damage we'd suffer if we Asians started jacking up tariffs against each other. Or all of us against the rest of the world.

Australia and New Zealand are already members of various Asian trading clubs. And what greater incentive for Asians to pack down more closely than a threat from Trumpland, or from a Europe trying to repel boarders?

Nor is it presumptuous for Oz to take a (quiet) leadership role. Despite all their trade, there's a lot of mistrust between China, Korea, Japan and other countries. China and Japan, for instance, find it easier to work with us than with each other.

After all, we played significant roles in the formation of the Asia-Pacific Economic Co-operation group and in improving the governance arrangements for China's new Asian Infrastructure Investment Bank. We worked behind the scenes with Japan to keep the Trans-Pacific Partnership alive despite Trump's dummy-spit.

And guess what? Malcolm Turnbull will host a summit of the 10 leaders of the Association of Southeast Asian Nations in Sydney next weekend.
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Saturday, March 3, 2018

Free-trade agreements aren't about freer trade

You may think spin-doctoring and economics are worlds apart, but they combine in that relatively modern invention the "free-trade agreement" – the granddaddy of which, the Trans-Pacific Partnership, is presently receiving CPR from the lips of our own heroic lifesaver, Malcolm Turnbull.

It's not surprising many punters assume something called a "free-trade agreement" must be a Good Thing. Economists have been preaching the virtues of free trade ever since David Ricardo discovered the magic of "comparative advantage" in 1815.

Nor is it surprising the governments that put much work into negotiating free-trade agreements – and the business lobbyists who use them to win concessions for their industry clients – want us to believe they'll do wonders for "jobs and growth".

What is surprising is that so many economists – even the otherwise-smart The Economist magazine - assume something called a free-trade agreement is a cause they should be supporting.

Why's that surprising? Because you can't make something virtuous just by giving it a holy name. When you look behind the spin doctors' label you find "free trade" is covering up a lot of special deals that may or may not be good for the economy.

This is the conclusion I draw from the paper, What Do Trade Agreements Really Do? by a leading US expert on trade and globalisation, Professor Dani Rodrik, of Harvard, written for America's National Bureau of Economic Research.

Rodrik quotes a survey of 37 leading American economists, in which almost all agreed that freer trade was better than protection against imports, and were in equal agreement that the North American Free-Trade Agreement (NAFTA) to eliminate tariff (import duty) barriers between the United States, Canada and Mexico, begun in 1994, had left US citizens better off on average.

Their strong support for freer trade is no surprise. One of the economics profession's greatest contributions to human wellbeing is its demonstration that protection leaves us worse off, even though common sense tells us the reverse.

And that, just as we all benefit from specialising in a particular occupation we're good at, then exchanging goods and services with people in other specialties, so further "gains from trade" can be reaped by extending specialisation and exchange beyond our borders to producers in other countries.

What surprised and appalled Rodrik was the economists' equal certainty that NAFTA – a 2000-page document with numerous exceptions and qualifications negotiated between three countries and their business lobby groups – had been a great success.

He says recent research suggests the deal "produced minute net efficiency gains for the US economy while severely depressing wages of those groups and communities most directly affected by Mexican competition".

So there's a huge gap between what economic theory tells us about the benefits of free trade and the consequences of highly flawed, politically compromised deals between a few countries.

Rodrik says trade agreements, like free trade itself, create winners and losers. How can economists be so certain the gains to the winners far exceed the losses to the losers - and that the winners have compensated the losers?

He thinks economists automatically support trade agreements because they assume such deals are about reducing protection and making trade freer, which must be a good thing overall.

What many economists don't realise is that the international battle to eliminate tariffs and import quotas has largely been won (though less so for the agricultural products of interest to our farmers).

This means so-called free-trade agreements are much more about issues that aren't the focus of economists' simple trade theory: "regulatory standards, health and safety rules, investment, banking and finance, intellectual property, labour, the environment and many other subjects besides".

International agreements in such new areas produce economic consequences that are far more ambiguous than is the case of lowering traditional border barriers, Rodrik says, naming four components of agreements that are worrying.

First, intellectual property. Since the early 1990s, the US has been pushing for its laws protecting patents, copyrights and trademarks to be copied and policed by other governments (including ours). The US just happens to be a huge exporter of intellectual property – in the form of pharmaceuticals, software, hardware, music, movies and much else.

Tighter policing of US IP monopoly restrictions pits rich countries against poor countries. And though free trade is supposed to benefit both sides, with IP the rich countries' gains are largely the poor countries' losses. (Rich Australia, however, is a huge net importer of IP).

Second, restrictions on a country's ability to manage cross-border capital flows. The US, which has world-dominating financial markets, always pushes for unrestricted inflows and outflows of financial capital, even though a string of financial crises has convinced economists it's a good thing for less-developed economies to retain some controls.

Third, "investor-state dispute settlement procedures". These were first developed to protect US multinationals from having their businesses expropriated by tin-pot governments.

Now, however, they allow foreign investors – but not local investors – to sue host governments in special arbitration tribunals and seek damages for regulatory, tax and other policy changes merely because those changes reduced their profits.

How, exactly, is this good for economic efficiency, jobs and growth?

Finally, harmonisation of regulations. Here the notion is that ensuring countries have the same regulations governing protection of the environment, working conditions, food, health and safety, and so forth makes it easier for foreign investment and trade to grow.

Trouble is, there's no natural benchmark that allows us to judge whether the regulatory standard you're harmonising with – probably America's - is inadequate, excessive or protectionist.

Rodrik concludes that "trade agreements are the result of rent-seeking, self-interested behaviour on the part of politically well-connected firms – international banks, pharmaceutical companies, multinational firms" (not to mention our farm lobby).

They may result in greater mutually beneficial trade, but they're just as likely to redistribute income from the poor to the rich under the guise of "free trade".
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Monday, November 14, 2016

Little right, much wrong with Trumponomics

For years I've wondered how America's business elite could grab almost all the proceeds of the country's growth, leaving real wages permanently stagnant, without having ordinary workers rioting in the streets.

Now I know. The anger kept building until a political huckster called Trump found the way to exploit it for personal advancement.

The bitter joke is that the populist promises he made to keep out Muslims, Mexicans and Chinese imports would do little to make the mug punters better off, whereas many of his more conventional economic policies will do much to further fatten the pockets of the 1 per cent the punters so resent.

While we wait to see which promises he acts on, the best guess is he'll implement those of his policies that fit with Republican orthodoxy.

After all, he'll be relying on the usual Republican suspects to make up his cabinet and relying on Republican majorities in Congress to put his policies into law.

This suggests he'll be quick to start phasing corporation tax down from 35 per cent to 15 per cent, and lowering all rates of personal income tax (though not necessarily in a way that favours low and middle earners).

He's likely to increase defence spending and maybe even keep his promise to fund a much-needed urban infrastructure renewal program.

But surely this would cause a huge expansion of the still-excessive federal budget deficit, wouldn't it?

Yes, but that's unlikely to stop it happening. It is, after all, similar to what Ronald Reagan did on coming to office in 1981.

We're about to see confirmation of an eternal truth of American politics: the Republicans care hugely about the evils of debt and deficit – it keeps them awake worrying about what we're leaving for our children and grandchildren – but only when there's a Democrat in the White House.

For the most part it will be a giant exercise in trickle-down economics – even though many of the people who fell for Trump's crude charms now rightly see it for the voodoo economics it mainly is.

Protectionism may be the new saviour – in Nick Xenophon's Oz as well as Trump's Rust Belt states – but it's still the delusion it always was. It seems "only common sense", but that doesn't mean it works.

In any case, were Trump to impose a huge tariff on Chinese imports, do you imagine that would re-open the ghostly steel mills in Gary, Indiana, or the rusting automobile plants down the road from Michael Moore's place in Flint, Michigan?

Turning back globalisation is no easier than turning back time. The main thing you'd do is rob working people (and the rest of us) of access to the one aspect of globalisation they've clearly benefited from: imported goods much cheaper than the locally made goods they replaced.

Don't kid yourself: some lost their jobs in factories, but all workers – most of whom never worked in manufacturing – benefited from lower prices.

That's why there's no free lunch in protection: it's a scheme where the fortunate few are subsidised by the less-favoured multitude. It's not foreigners who lose out, it's other locals.

And don't kid yourself on this: far from all the jobs lost from manufacturing were lost through import competition.

Far more than many oldies realise were lost through computerisation. That's a big part of the reason reimposing high tariffs would do surprisingly little to restore manufacturing employment.

It's a convenient delusion that globalisation is solely the product of "neo-liberal" deregulation. Its other, bigger driver is technological advance and the digital revolution. Think any pollie can stop that?

This isn't to say scuttling the Trans-Pacific Partnership free-trade agreement would be any loss. It offered trivial benefits to us, in return for giving foreign multinationals power to push our government around.

Just because preferential trade deals are called "free-trade agreements" doesn't make them a good thing. The US's primary goal in its many agreements is to advance the interests of its exporters of intellectual property, while continuing to protect its farmers.

Its trans-Pacific deal was intended as cover for the bilateral deal with Japan hidden within it, as well as strengthening America's trading links with all the main Asian economies that weren't China.

The Yanks may be paranoid about the rise of China, but the joke is there never were two big economies – the two biggest – more interdependent. The US is China's largest trading partner, while China is the US's second-biggest – and its biggest creditor.

The Yanks are really stoopid​ enough to take a crack at Chinese imports? Trump is a cunning con man, not an idiot.
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