1
THE UNIVERSITY OF SYDNEY
Department of Political Economy
School of Social & Political Sciences
NSW 2006
AUSTRALIA
Fax: +61 9351 8596Telephone: +61 2 9351 6617Email:
The ‘Crean’ Trade Policy Review
c/f Justin Brown, Secretariat
Trade Development Division
R G CaseyBuilding
John McEwen Cr
Barton ACT 0221
6 May 2008
Dear Review Secretariat
Please accept the following text as a submission to the two-headed review of strategies to enhance Australia’s trade performance, initiated by the Trade Minister Mr Simon Crean.
(Dr) Evan Jones
University of Sydney
______
Congratulations are due to the Rudd Government, and to the Minister for Trade, Mr Simon Crean, for instituting the proposed wide-ranging review of structures that underlie the current trade pattern embodied in the balance on current account and its constituent components.
The announcement of the single monthly trade deficit of $3.3 billion for February 2008 is a salutary reminder that something is amiss. On the occasion, almost 9 years ago, of the reporting of a then record monthly trade deficit of $1.5 billion, I wrote an article highlighting the contemporary intellectual and political impasse (AFR, 5 May 1999, attached). Another decade rolls on, the numbers escalate, and nothing has changed.
1.The parlous state of respectable economic opinion
The intellectual backdrop to current account movements in the last twenty-five years has contributed to the present parlous state of affairs. First we had the draconian macroeconomic restrictions in the time-worn British ‘stop-go’ mould, courtesy of the boffins in the federal Treasury and the Reserve Bank of Australia, that contributed to the recession that we didn’t have to have but did nothing for the current account deficit. Simultaneously we had the unilateral tariff reduction brigade that imagined that the rest of the world, especially our Asian neighbours, would be blinded by our purity of spirit and would readily do likewise.
Throughout there has been a handful of economic tautologists (intermingling with pro-globalisation purists) who imagine that the balance of payments is automatically self-equilibrating.
Then there is the faction that holds that the capital account is singly driving the show and that the current account is the flip side reflecting the consequences. Academic Tony Makin is representative of this ilk (c/f AFR, 8 April). There is substance to the position (save for the sub-argument from some of this faction that lack of domestic saving is the problem). Undoubtedly, there are autonomous capital flows (not least chasing differential interest rates), whose consequences are reflected in the current account, but it is not a one-way street. The current account is not purely a byproduct of capital flows but deserves examination in its own right.
With the current account at a complete impasse by the early 1990s comes academic John Pitchford to tell us that the current account deficit doesn’t matter. It’s merely a byproduct of transactions between consenting adults who live across arbitrary national borders. Probably not even Pitchford could have envisaged the heady opportunism with which the then Labor Government embraced his arm-chair theorising.
With Pitchford as implicit backdrop, never explicitly repudiated by any of the commentators, the atmosphere has been pervaded by variations on a theme of ill-defended optimism. We’re in a temporary bad patch on the trade deficit, but resources exports will right it soon. Resources exports would already have righted the deficit were it not for infrastructure blockages (especially transport and portfacilities). The trade deficit is a product of capital equipment imports whose usage will right the deficit down the track. Etc., etc. Every report of another trade and current account deficit brings this chorus but no deeper concern for origins or solutions.
For twenty years, net income payable to overseas residents has been roughly $20 billion or above; now it has blown out to double that figure. A country blessed with unparalleled natural resources and a formally skilled population is outlaying these sums annually as the cost of ‘doing business’. What’s going on?
2.The problem in a nutshell
The much-quoted and overpaid bank economists/analysts on whose pronouncements the media have conferred a monopoly wisdom have made insufficient use of the bible, DFAT’s Composition of Trade Australia, now readily available on the web ( thanks to recent foresight of persons unknown.
Tables 4, 7, 12 and 14 encapsulate the story for people short of time and short of brainpower. In net terms, Australian residents export unprocessed and semi-processed merchandise and import value-added merchandise. End of story. Dutch disease meets Colonial cringe.
The pattern was cemented when White Australia developed via the British imperial division of labour in the 19th Century, and reinforced under the 1930s Ottawa Agreement. The British imperial division of labour has disappeared with the British Empire but Australia’s trade pattern remains. Efforts were made during the Hawke-Keating years to reduce the net deficits in manufactured goods and services (indeed comparable strategic efforts occurred during the McEwen era 1960s, a period despised by the ignorant), but the game has fallen away during the Howard era.
In 2006-07, Elaborately Transformed Manufactured exports constituted a mere 17% of merchandise exports (Table 6, Composition of Trade). In the last five years, exports of ETMs have grown on average a mere 2.3% per annum, whereas ETM imports have grown on average 7.2% (Table 4). The deficit in ETMs in 2006-07 was a colossal $100 billion! Once a colony always a colony?
The ‘Dutch disease’ concept has been pooh-poohed but it appears to have found a home in Australia. The grazier class succumbed to it, dressed in the sanctity of the wool clip; since the 1960s, the disease has emanated from Australia’s serendipitous wealth of mineral resources, centred on coal and iron ore. The federal Treasury caught the disease in the 1960s when catering to Japanese industrialisation seemed to relieve Australia from interminable balance of payments crises; Prime Minister Malcolm Fraser caught it, in desperation following the end of the long boom, with his ‘resources-led recovery’; Professor Ross Garnaut had it in spades in his influential 1989 Australia and the Northeast Asian Ascendancy; and the disease is widespread today. The Dutch disease in Australia has generated a cargo cult mentality: dig it up, ship it out; no worries.
There are stories of exceptional native strategic capability – Woodside Petroleumand the wine industry are representative. But in general the bottom line is this: the export of unprocessed and semi-processed merchandise will never again be sufficient to offset Australian resident’s addition to value-added imports.
(John Spooner, The Age, 9 March 2005)
The current account deficit is all downhill (see graph below). The recent most favourable terms of trade imaginable has not diminished that prospect. Of course, the other elephant in the room – net petroleum imports – has already and will further alter the equation adversely.
Lack of access to the convenient software producing this telling graph has prevented updating to the present. Figures for the last several years are shown in the accompanying table. Two of the last three positive ‘bumps’ in the merchandise goods balance (leading to positive ‘bumps’ in the overall current account balance) are a product of recession in Australia – hardly a sophisticated means of offsetting underlying deficits.
Australia – Balance on Current Account $A billion
Financial year / Merchandise trade / Services trade / Income payable / Transfers / Balance2003-04 / - 23.5 / + 0.5 / - 23.7 / - 0.3 / - 47.0
2004-05 / -23.3 / - 1.6 / - 32.3 / - 0.4 / - 57.6
2005-06 / - 15.8 / - 0.7 / - 37.5 / - 0.4 / - 54.4
2006-07 / - 14.0 / + 2.0 / - 46.6 / - 0.4 / - 59.0
In the last several years, the improvement in the merchandise trade balance has been offset by the further deterioration in the income payable balance, with the overall deficit hovering at $60 billion, or 5.7% of GDP. The figure for 2007-08 will almost certainly be higher.
3.The deeper myths
The rudimentary myths of trade are probably more pervasive amongst Australia’s opinion-forming classes than in any other country. Thirty years of adverse movements in the current account have not dislodged the conventional wisdoms.
Trade may be mutually beneficial for the participants, but ‘free trade’ is a qualitatively different animal. There is no robust theoretical defense of free trade. All the huffing and puffing of Mr Free Trade, Jagdish Bhagwati, and his acolytes can’t raise them from the thin ice on which their skating glides.
The conventional nostrum of ‘comparative advantage’ is a joke. The much-reproduced 18th Century illustration of mutual benefit from British – Portugese trade with the countries exchanging their respective ‘specialties’ failed to acknowledge the fact that Portugal was effectively a vassal state of Britain at the time. Later, the European imperial powers tried to dictate to the Japanese that their ‘comparative advantage’ was in silk, or textiles at the outside, but the post-Meiji Japanese were having none of it (c/f my article, AFR, 21 March 2002, attached).
Save for the constraints of material and climatic inheritance, ‘comparative advantage’ can be strategically constructed (an inkling not lost on Mr Rudd as he, at this very moment, tries to flog the ‘skills’ of Macquarie Bank to the Chinese). Once the advanced powers lost the monopoly of steel production, once Taiwan became a centre for hi-tech microchips, once India and now China are moving inexorably into automobile production, what price ‘comparative advantage’? Now even lowly Portugal has thrown off its slough and is becoming a net exporter of technology and a mover and shaker in renewable energy (country report, Financial Times, 8 April 2008). Ricardo would be having apoplexy.
Meanwhile, Australia sits on its fat lazy polluting bum enjoying its comparative advantage in coal, sending its best and brightest solar power experts elsewhere to generate beneficiaries and benefits on the other side of the current account. It is not inconsequential that the much-feted Australia and the Northeast Asian Ascendancy of the estimable Professor Garnaut heralded one of Australia’s comparative advantages to be a polluting industry tolerance capacity (with the subsidised electricity-guzzling aluminium industry especially in mind). We are now reaping the wind of that particular comparative advantage.
By comparable ‘reasoning’, the pundits should be crediting Thailand’s export of prostitution services and the Philippines’ export of female domestic servant workers as an innate ‘comparative advantage’ of those countries’ populations.
With ‘comparative advantage’ down the tubes as an entrenched template, who is to decide who should produce and trade what and with whom?
Then there is the so-called ‘free trade consensus’, now apparently under threat. There is not and never has been a free trade consensus. As I note in an attached article, ‘if free trade is so good, why is it so rarely practiced?’ (AFR, 10 January 1995). The only country that took free trade seriously was Great Britain after mid-19th Century, but that stance was rooted in the self-interest of the ascendant classes (the title of Bernard Semmel’s dissection of the age, The Rise of Free Trade Imperialism, captures the essence of its character).
By contrast, the Americans use ‘free trade’ as a rhetorical battering ram. They have always used trade restrictions and their selective reduction/elimination assertively out of self-interest. The results have most recently been manifest in a series of one-sided free trade agreements (c/f my article, Canberra Times, 11 August 2004, attached), of which the one with Australia is Exhibit A. Post-agreement, the bilateral trade balance, always in substantial deficit, has climbed to over $15 billion (Composition of Trade Australia, p.292). No outcome could have been more predictable than this one.
An integral part of the free trade rhetorical machine is the perennial attack on the skeptics as no-nothings, ignorant – the unwashed masses with their ‘populist’ mentality. The stark reality is that the unwashed masses at the pointy end of trade liberalisation may have a better handle on freer trade outcomes than do the ‘experts’, secure in their own employment and sense of self-importance. (The unwashed masses also got it right with the 1997 scuttling of the first world OECD’s Multilateral Agreement on Investment.) Tell it to South Carolina textile workers (Tony Walker, AFR, 28 February). Tell it to Mexican farmers (Le Monde Diplomatique, April 2008, (subscriber only); copy available at As Walker notes, there is a disconnect between Wall Street and Main Street.
The Australian Financial Review’s resident scorched earth free trade mullah, Alan Mitchell, has belatedly come to believe that bringing the unwashed masses around to the truth is the key to unblocking the impasse that currently prevails in global trade restrictions (c/f AFR, 25 February, 9 April). This is an important step for the purists – the masses can no longer be ignored and denigrated from lofty places; they must now be educated as to their best interests (because, damn it, they vote). The Warwick Commission’s December 2007 report, The Multilateral Trade Regime: Which Way Forward?, pushes the same line in perhaps more sympathetic language.
But what if the masses are right, even if partially? What if the experts’ conventional rules for estimating the benefits are imperfect, narrow? The re-education job may prove to be trickier than hoped for. And who is to be re-educated?
It is with a better grasp of reality and its associated politics that the Warwick Commission authors concern themselves with the adverse distributional consequences of trade liberalisation. The Report notes (p.40):
But we do believe that the ability of nations to take advantage of open trade is influenced significantly by the degree to which they are able and willing to manage the distributional consequences of changes brought about by liberalisation and to make investments to overcome supply side bottlenecks and related weaknesses. … too little attention is paid to the distributional impact of trade-opening domestically, including at the sectoral level. Ignoring this reality courts political trouble as it risks alienating a regime’s constituent members. We need to find ways to allow liberalising states effectively to help liberalisation’s losers to take advantage of the commercial opportunities created by trade reform.
The report recommends ‘Aid for Trade’ to integrate the reluctant countries into the multilateral fold, as ‘ethically appropriate and makes good economic and political sense’ (p.42). But if the proposed integration is on superpower terms, seed funding may not compensate for potential loss of integrity of domestic economies. Compare the current food famine in tragically impoverished Haiti – an exemplary case study of the human disaster attending ‘free trade’ relations between the powerful and the powerless.
4.The elephant in the room, or the emperor has no clothes
Oceans of ink have been spilt on the impasse of the Doha Round while generating little insight – much hand-wringing and supplications to the God of Free Trade to no avail. Confront the possibility, not improbable, that the Doha Round is dead. More, that the prospect of agricultural trade liberalisation is dead. Beyond, that multilateralism per se is dead. The Howard Government, for all its faults, smelt that something was up. Ross Gittins (SMH, 3-4 May), typifies the conventional wisdom that there is light at the end of the tunnel. Gittins has proved himself a lateral thinker on some issues, but on this issue he has put his laterality to bed. The danger is that this Gittins article and its ilk might be used to reinforce the ongoing illusion that something big is achievable in the not too distant future.
In particular, our best minds ought to have confronted by now that something is resolutely sticky in the arena of agricultural trade and associated domestic support mechanisms. Support structures under the beast that is the Common Agricultural Policy umbrella, for example, might be reduced in the future; but the likelihood is that any such action will result from internecine European politics rather than via the apparatus of the WTO.
This is the way of the world; the lectures on the supposed benefits of reform fall on deaf ears. The current attempt to leverage open agricultural trade barriers via a free trade agreement with Japan highlights that the lights are not on upstairs. Ditto with Australian attempts at the 20th anniversary meeting of the Cairns Group in September 2006 to pressure developing country members to liberalise their own agricultural markets. With friends like this, who needs enemies?
The World Trade Organisation inflated the carcass that was the Uruguay Round into an edifice even more grandiose and ambitious. The WTO has moved beyond merchandise trade into investment, intellectual property and services. The contemporaneous privatisation of infrastructure, including essential services, and even of social services delivery, has enlarged the significance of the WTO’s broader coverage. The stakes are now higher. Although the WTO’s more formal dispute resolution procedure has facilitated gains of the also-rans (Peru can now not only sell sardines into Europe but also label them sardines!), the also-ran countries could be excused for thinking that the WTO is ran by and for the superpowers. National sovereignty itself (and beneath that, popular sovereignty) is at stake.