A Welcome Mutiny Against Protectionism

It’s sometimes thought that the economic disputes that characterised the 1970s and ’80s are finished. The debate over protectionism, for instance, has been displaced by more modern debates over inequality and the environment.

Two issues raised by the Government in the last week show how untrue that is.

On Wednesday, Warren Truss outlined the Government’s plan to deregulate Australia’s coastal shipping industry, and yesterday the Australian Financial Review reported the Government was considering opening up domestic air routes in the north to foreign airlines.

I was critical of the Government last week for being reform-shy, but these proposals are very, very good.

Both coastal shipping and airlines are governed by cabotage rights – a peculiar 19th century term that refers to the right to transport passengers and goods between two points within a single country.

The issue here is whether foreign-registered or owned or crewed ships and planes have cabotage rights. For instance, can British Airways fly domestic routes in Australia? Under Australian law, only in emergencies. Are Chinese registered vessels allowed to ship goods between Brisbane and Sydney? Under highly regulated conditions designed to dissuade them from doing so.

Australia’s cabotage restrictions are protectionism by another name. They are restrictions on what economic activity foreign firms can conduct in Australia. And, as with any protectionist policy that limits competitive pressure, they raise costs to consumers and hinder economic growth.

Let’s start with coastal shipping.

Over the last few decades, the number of Australian registered ships used in coastal shipping has been in a dramatic decline. In 1996 there were 75 Australian registered ships in the coastal trade. Truss told a conference last week that number was now just 15. This is mostly due to the heavy burden of Australian industrial relations laws that apply to maritime workers on Australian vessels.

In 2008 a parliamentary committee declared the industry was in “crisis” and “many in the Australian maritime industry (believe) Australia would benefit from a revived and expanded coastal shipping sector”. One of those voices, of course, was the Maritime Union of Australia, whose members were losing out from the decline of Australian coastal ships.

So in 2012 the Gillard government passed a large package of reforms to the shipping industry that dramatically increased restrictions on what foreign vessels and foreign-crewed vessels could do in Australian waters.

Anthony Albanese, then infrastructure minister, made plain the protectionist purpose of the reforms: “Australian vessels paying Australian wages and providing jobs to Australians will be given preference to carry Australian goods on the Australian coast.”

As the former Productivity Commission head, Gary Banks, pointed out at the time, the government admitted these reforms were “strictly inconsistent” with the principles of competition policy that have driven economic liberalisation for the last few decades.

It’s worth recalling that those competition policies were originally established by Paul Keating’s Labor government. Labor now is, of course, opposed to any deregulation. For once that old commentary canard about the modern Labor Party having “betrayed the Hawke-Keating legacy” actually holds true.

Like shipping, aviation has avoided the comprehensive liberalisations of the last few decades. Not many travellers pause to question why domestic air consists almost entirely of Qantas and Virgin. Australia is a rich country. Surely some foreign airlines might want a piece of the busy Melbourne-Sydney corridor?

The Government’s proposal to allow foreign airlines to fly domestic routes is limited to northern Australia. It’s being sold as a “develop the north” strategy. But these sort of region-specific liberalisations are usually meant to be experimental tests for nation-wide reform. If airline deregulation works in the north – if it provides better, cheaper services – then there will be little reason not to roll it out across the country.

Liberalisation is always accompanied by the bleatings of those whose privileges are being taken away. “Qantas and Virgin are fighting a rearguard action behind the scenes” against the proposal, one report said yesterday. More publicly, Albanese complains deregulation would be “unilateral economic disarmament”.

It’s true that granting cabotage rights to foreign airlines is very rare around the world. But so what? Australia used to be a leader in market-oriented reform. A northern experiment would be good to prove these fears are nonsense.

In a sense these proposed Abbott Government reforms feel like the calm before the storm. This is cabotage liberalisation by choice before cabotage liberalisation becomes a necessity.

We are on the brink of an unpredictable yet certain revolutionary change in transport technology. Just as autonomous cars will challenge regulatory frameworks that assume every car has a driver, autonomous ships and autonomous planes will completely change the regulatory – and political – dynamic of these industries.

It sounds all a bit cringingly futurist but the pilotless ships are already seen by Australian unions as a threat to cabotage protectionism. No labour costs means pilotless ships can travel slower, thereby using less fuel. This is good for cheap shipping and the environment.

Likewise, when pilotless commercial aircraft become accepted, the old alliance between air services unions and airlines that underpins Labor’s opposition to deregulation is going to break down.

When this technological revolution occurs, limits on foreign firms operating in Australia are going to look like the 20th century anachronisms that they are.