Tradetech and the problem of international coordination

With Darcy Allen, Sinclair Davidson, Mikayla Novak, and Jason Potts. Originally a Medium post.

International trade is an information problem.

As goods move between firms and across borders, information about the provenance, characteristics, and compliance liabilities (whether they are subject to taxes or tariffs) of those goods move alongside them.

Handling companies need to know which goods are going where.

Regulators and trade authorities need to know whether the goods crossing a national border are compliant with domestic regulations.

(Does a good need an import permit? Does it require any special documentation? In Australia the Minimum documentary and import declaration requirements policy is a 27 page document.)

And end-users increasingly demand information about where their goods came from and how they were produced.

(Consumers want to know where their food is grown, whether it was grown to organic standards, or was manufactured gluten-free or nut-free. Advanced manufacturing firms want assurances that components — such as aircraft or wind turbine parts — are of high quality. And everyone wants assurances that their goods have been looked after while in transit.)

The result is piles of documentation shipped alongside internationally traded goods.

And the demand for documentation is growing. Supply chains are getting more complex. Regulatory requirements are increasing. End-users want more information about what they’re buying.

Introducing TradeTech

FinTech is the application of new technology — particularly developments in computer science — to the financial services industry. RegTech does the same for regulatory compliance.

Now we have TradeTech — the application of information technology to reduce the information costs of international trade.

TradeTech can reduce transaction costs, increase transparency for firms, regulators, and consumers, facilitate trade finance, and significantly lower regulatory and tariff compliance burdens.

Tackling border costs

One TradeTech application, blockchains used to manage supply chains, have the potential to provide a new digital services infrastructure for international trade in goods.

Blockchains use a combination of cryptography and economic incentives to allow people to come to a consensus on a shared digital ledger without the need for a trusted third party. Blockchains are a technology for secure non-hierarchical information governance.

Blockchains can store information about the provenance and distribution of tradable goods through the entire supply chain in circumstances where firms (and regulators) through the supply chain do not necessarily trust each other.

The invention of the shipping container in the 1950s radically transformed international trade by tackling the high cost — and unreliability — of getting goods on and off ships intact.

But in the 2010s, it isn’t the cost of transport that is the biggest burden on international trade. According to IBM and Maerskthe costs of bringing goods across borders are higher than the costs of transport costs.

In 2018 and 2019 we expect blockchains used in supply chains and to facilitate global trade will be one of the breakthrough blockchain use cases.

The impact of this sort of TradeTech will provide an enormous boost to the potential for global trade.

Facilitating trade flows

The information flows that facilitiate international trade are still to a remarkable degree governed and organised on a one-to-one basis and using paper. Each firm in a global supply chain passes off information relating to a tradeable good to each other one step at a time, vouchsafing that information until it can be passed to the next firm on the chain.

Furthermore, despite two decades of the digitisation of global commerce, it is still the case that international trade is a significantly paper-based process — which is slow, error-prone and raises fraud risks.

The growth of the regulatory state over the last thirty years has significantly increased the compliance costs of trade. While regulatory harmonisation and tariff reductions have encouraged larger volumes of trade, these have been matched by greater demands for information those goods travelling across borders.

New regulatory concerns about labour, environmental, chemical, and biosecurity standards are being reflected in international trade agreements and are translating into more regulatory requirements at the border.

Longer and more complex supply chains as a result of globalisation has multiplied these compliance burdens.

Blockchains can provide a ‘rail’ on which all this information travels.

Blockchains are uniquely suited for an era of advanced globalisation, the regulatory state, and demand for information about product origins and quality.

But TradeTech needs multilateral coordination

Private industry is developing the technology for blockchain-enhanced supply chains.

But there is the need for an international coordination to ensure that industry is able to exploit the opportunities this technology presents.

For example: information rmanaged on blockchains needs to be accepted as valid and compliant by domestic regulators.

One risk is that industry-developed blockchains might not be not treated as compliant with existing regulations. Goods could then remain subject to existing paper-based processes, necessitating double-handling of compliance and reducing the benefits of blockchain-enhanced trade.

Another risk is that individual trading countries adopt their own standards, which would also necessitate double-handling.

A further risk is that standards are developed by early market leaders in the blockchain-facilitated trade space, are adopted by regulators and trade authorities on an ad-hoc basis, and through regulatory lock-in limit the contestability of this trade infrastructure.

The benefits of TradeTech will be realised in a world of open-standards, rather than closed ones.

Multilateral bodies like APEC (Asia-Pacific Economic Cooperation) should be considering these questions now.

We don’t think governments should try to regulate the development of blockchain technology, or compel its introduction. The blockchain is an experimental technology that needs space to evolve. But there is a clear role for multilateral bodies to set standards for information managed through blockchains.

TradeTech doesn’t need government regulation or direction. But it does need government cooperation.

Poorest Members Of Trans-Pacific Partnership To Benefit Most

Why is Australia a party to the Trans-Pacific Partnership agreement? This regional free trade agreement between 12 Pacific Rim nations, including the United States, Canada, Japan, Vietnam, Malaysia, and Australia, has been almost universally panned, left, right and centre. Yet it is likely to be signed in New Zealand in February.

A report by the World Bank released last week claimed the benefit to Australia from signing the agreement would be a near imperceptible fraction of a per cent of growth a year – just an added 0.7 per cent of GDP by 2030. The government’s own economic advisory agency, the Productivity Commission, says the Trans-Pacific Partnership will distort trade rather than free trade. And GetUp calls it the “dirtiest deal you’ve never heard of”, driven by “big business, big pharmaceuticals and big tobacco”.

They’re all wrong. Yes, the Trans-Pacific Partnership is not perfect. It has bad parts. It might require the government to further crack down on copyright piracy, even as the piracy problem is ebbing away in our world of Netflix and Apple Music. The Investor-State Dispute Resolution mechanism – which allows firms to sue the Australian government in special tribunals – is, in the words of the American libertarian think tank the Cato Institute, “unnecessary, unreasonable, and unwise”.

And the deal’s importance for the global economy has been wildly overstated. The Abbott government tried to desperately pump up the significance of the free trade deals it was signing as it saw its other economic growth strategies slip away.

But trade deals are policy bundles. The question isn’t whether the Trans-Pacific Partnership has bad parts. It’s whether the good parts outweigh the bad parts. Nor is the question of whether Australia “wins” from the deal. It’s whether it enhances global welfare.

The poorest signatories are likely to be the deal’s biggest beneficiaries. The World Bank believes that the Vietnamese economy will be 10 per cent larger by 2030 thanks to the Trans-Pacific Partnership.

Malaysia will be 8 per cent richer. Brunei 5 per cent richer.

These figures represent real people in real countries getting better lives thanks to an agreement we will sign. The benefits dwarf the $90 million a year Australia gives in overseas development assistance – foreign aid – to Vietnam.

Free trade deals exist to solve a political puzzle. The puzzle is this: countries that allow foreign imports are richer, all else being equal, than countries which discourage foreign imports. Protectionism is bad for consumers and bad for the economy. This is counter-intuitively true even if every other country in the world is protectionist. On the question of free trade the economics profession is almost unanimous. Yet in recent decades few countries have been happy to unilaterally reduce trade barriers.

This is where free trade agreements come in. They allow governments to sell domestic tariff reductions to their voters by pointing to the fact that other countries are reducing tariffs as well. A lot of people think that international trade has to be done on a “level playing field” to be good. This is bad economics.

But it is a political reality. Many voters will accept a reduction in protection only if they see other countries doing the same.

There’s another reason why we might want to sign a trade deal: insurance. Trade deals reduce the likelihood of a future trade war – that is, the deals prevent countries raising their trade barriers in retaliation for perceived slights. Taking this insurance effect into account, the economists Richard Harris and Peter Robertson have found the economic benefits from the free trade deal the Howard government signed with the United States have been up to four times larger than previously believed.

This particularly important for Australia as we are highly trade exposed.

I’m not suggesting that the politicians who sign free trade agreements have these sorts of sophisticated reasons for doing so. Politicians pander to voters. They talk a lot of nonsense about exports and imports, about how they’re forcing opening foreign markets to exporters, extracting concessions from other countries and so forth.

But by pursuing free trade deals they are building a more prosperous world. The Trans-Pacific Partnership tangles the economic interests of an entire region together. Call it mutually assured construction. Being part of this process isn’t pointless or “dirty”. If you think international development and international relationships are important, then trade deals are some of the best foreign policy we can do.

ChAFTA: Union Campaign Misses The Point

The union campaign against the China-Australia Free Trade Agreement (ChAFTA) is a mixture of misinformation, confusion and xenophobia.

But it does hide an uncomfortable truth. Labour market protectionism encourages the exploitation of foreign workers. We’ll come to that shortly.

The ACTU argues that ChAFTA will “shut out locals from jobs”. They point to three controversial provisions.

The first is the elimination of labour market testing for Chinese workers in the 457 visa program. Labour market testing requires employers to advertise locally before they employ foreigners on in 457 visas. But the requirement has always been a tick-the-box waste of time. An independentreview last year found it was pointless and cumbersome. There’s no evidence that unemployed Australians in any way benefit from this regulatory hurdle.

Another controversy relates to skills requirements. The unions say ChAFTA means foreign tradies could come to Australia who do not meet Australian standards. But the skills requirements under ChAFTA are exactly the same as for most other countries we accept skilled workers from. ChAFTA just removes a discriminatory higher bar for Chinese workers. (The higher bar still applies to a small number of other developing countries)

The final controversy concerns major projects. A side memorandum to ChAFTA establishes a new type of labour agreement – “investor facilitation agreements” – that allow major infrastructure projects to bring in foreign workers.

But we already have similar labour agreements. The essentials of the law haven’t changed, as the Migration Council’s Henry Sherrell notes. All agreements have to be approved by the immigration minister. And major projects have to pay foreign workers Australian market rates. Claims that ChAFTA changes existing major project wage requirements are simply wrong.

The unions can get away with these fudges because migration law is extraordinarily complicated – a byzantine regulatory environment of quotas and controls. The Immigration Department offers dozens of different types of visas for different types of people. Each have their own criteria and conditions. The Migration Act is a behemoth: currently 1048 pages, not including supporting regulations.

There are lots of reasons for this complexity. But one big one comes from the unions, who want migration to be heavily controlled to protect Australian jobs. If we were more open to migration – if there was wider acceptance of the evidence that immigrants do not steal jobs – then these rigid and regulated visa schemes would not have to exist.

This is the political economy behind union stories of foreign workers being exploited in Australia.

To the extent that there is exploitation in Australian immigration, it is because employers are able to use restrictive visa conditions – demanded by unions to protect Australian workers – as a stick to wield against foreign visa holders.

For instance, on the weekend Fairfax papers and Four Corners uncovered what they say is widespread exploitation of 7/11 workers. No doubt the story has a way to run before we learn all the facts. But notice how many allegedly exploited 7/11 employees are working on student visas.

The visa conditions on one student “gave the franchisees leverage to threaten to go to the authorities to have his visa cancelled if he complained about his salary or working conditions.”

At least student visa holders might be able to find other work. Workers on 457 visas have just a single sponsor, with correspondingly greater leverage.

It is possible to be opposed to foreign workers from China and not be xenophobic. But you’d have to be blind to miss the undercurrent of xenophobia in the anti-ChAFTA campaign. Just as the union campaign against poles and wires privatisation in March this year leant heavily on anti-Chinese sentiment, so too does this month’s spectre of Chinese workers.

Our highly regulated migration system is better than none at all. Immigration is the most powerful anti-poverty tool we have. People who migrate from poor countries to rich countries dramatically improve their wellbeing and those of their families.

We ought to be accepting more foreign workers. And we ought to be reducing the visa restrictions that make them vulnerable to exploitation.

Because when we talk about immigration policy we need to keep the focus on the immigrants themselves – and why they would want to come to Australian in the first place.

When unions campaign for Aussie jobs – when they campaign for crackdowns on visa categories, for more rules on who cannot work in Australia, for limiting foreign workers on projects – they are campaigning not against business or “capital” but against people who are less well-off than they and who were born in countries poor than ours.

International solidarity, it seems, only goes so far.

The TPP Isn’t The Bogey-Treaty That We Think It Is

The debate about the Trans-Pacific Partnership (TPP) has gotten far, far ahead of itself.

On Friday morning, the US House of Representatives voted down the Trade Promotion Authority (TPA), a legislative agreement between Congress and the president that would effectively delegate trade negotiation authority to the latter.

The idea was to help “fast track” the TPP negotiation. The president’s authority could quickly be yanked back if Congress decided he was exceeding his mandate. Either way, the whole agreement or each individual parts would have to be voted on by Congress after the diplomacy was over.

In trade policy, acronyms build up very quickly. The TPA isn’t the TPP. But everyone knows without the TPA an American president is unlikely to get any final TPP through Congress. So it’s been used by American opponents as a proxy for the broader agreement.

The US union movement thinks “fast track trade deals” lead to “fewer jobs, lower wages, and declining middle class”. In Australia, GetUp! describes the TPP as “the dirtiest deal you’ve never heard of”.

This sort of hyperbole is likely to derail the TPP (if it hasn’t already been derailed by the US Congress) with very real and damaging consequences for the global economy and anti-poverty efforts in the developing world.

Because the potential benefits from a regional free trade deal are enormous. Analysis by the US-based Peterson Institute for International Economics finds that there are potential economic gains from the TPP in the order of US$1.9 trillion. A further analysis argues that by far the biggest winner out of the TPP would be Vietnam – that is, a poor, developing economy.

Now, there’s a standard caveat when we talk about bilateral or multilateral trade agreements. The benefits of free trade accrue to countries that liberalise their own trade barriers. This means unilateral liberalisation is best. But as I argued in The Drum last November, there are strong political reasons to welcome multi-country agreements, insofar as they create the political conditions often necessary for domestic reform.

There’s another caveat specific to the TPP. Right now, the TPP is highly secretive. A lot of the detail that we know about the TPP we know through WikiLeaks. Legislators who want to take a look at the negotiating text have to sign a rather absurd confidentiality agreement.

This secrecy is excessive and is damaging the free trade cause.

But trade negotiations are usually held privately between the upper levels of foreign governments. Diplomacy is about compromise, and the process of compromise is easier when kept off newspaper front pages.

The TPP negotiations are not much more secret than any other legislative agenda prepared by a bureaucratic department “secretly” before being introduced into the legislature.

The second stickler with the TPP is intellectual property. I find it hard to get agitated about what might possibly be in the final version of the TPP regarding intellectual property, given what the Australian Government is proposing to do in the copyright space right now.

With or without a TPP, advocates of increased patent terms or copyright penalties need to demonstrate these measures would inspire new innovations or creative works.

Still, it would be lot better – and the negotiation process a lot smoother – if intellectual property was not in the TPP. Copyright harmonisation is not going to boost economic growth. Copyright harmonisation is not going to do anything for poor people in Vietnam.

The devil of these multilateral trade agreements is that they rest on dozens of quid pro quos.

So the questions we may have to face if the TPP is finally concluded are not easy ones to answer. For instance, would we accept longer copyright terms in Australia if it meant other countries lower tariffs, which, in turn, would boost the incomes of poor Vietnamese clothing manufacturers? Maybe. Maybe not.

Figuring out whether the trade-offs in a huge deal like the TPP are worth it is only possible once the negotiations are finished and the document as a whole is up for public scrutiny.

If the US Congress has already killed the TPP by voting down the TPA, that chance may never come. The TPP will remain a secret bogey-treaty, on which special interests can project their deepest, wildest fears.

But if agreement can be found, there’s a lesson there too. The Australian public should not accept the argument made after the Australia-United States free trade agreement was signed a decade ago – that the enabling domestic legislation had to be passed because its terms had already been agreed to at the international level.

Because, ultimately, it is Parliament that decides what is in the best interest of the people of Australia, not our trade negotiators.

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.

Abbott Deserves Only Praise For Embracing Free Trade

The economics of trade can be a little counter-intuitive.

This is no more so than for its central lesson, which is this: the benefits of tariff liberalisation primarily accrue to the countries that lower their own tariffs, not their trading partners.

Or, putting it another way, even if we lived in a world where every single country had high barriers to trade and refused to budge them, it would still be in our interest to lower our own.

So while the China-Australia free trade agreement (FTA) is a big deal, it’s not a big deal for the reasons most reports have suggested.

Take the provision in the FTA which phases out Chinese tariffs on Australian dairy for infant formula over a four-year period.

The Age is predicting that this formula market will be “enormously lucrative” for Australian businesses. The Australian Dairy Industry Council is chalking the agreement up as a win.

But the winners here are really Chinese consumers.

Access to quality infant formula is a serious problem in China. In 2008, there was aninternational scandal when it was discovered the largest budget infant formula firm had been adding industrial chemicals to fake protein content.

More than 50,000 children were reported to have become sick from the formula. Four died.

Now, understandably, Chinese parents don’t want to buy domestically produced formula. The demand for formula imports is so high that Hong Kong and Macau have placed limits on the amount of formula Chinese tourists can bring home with them.

So while it might be true that opening up the Chinese formula market will be lucrative for Australian firms, this seems to miss the point. The real winners are surely the Chinese people who have been genuinely suffering from their government’s dairy protectionism.

A lot of trade discussions are like this – focused on the benefits to firms and workers when it ought to look at how consumers fare.

Of course, most people are both workers and consumers, and are interested in both the supply and demand parts of the economic equation.

But as Adam Smith wrote, “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.”

Hopefully we all love our jobs, but no doubt what we most love about our jobs is the fact that we get paid to do them, and that money is available to spend on the things we want or need.

So a few happy Australian dairy firms is nothing compared to the millions of Chinese families who will benefit from the FTA.

It is this producers’ bias that has led us to a world where the cause of free trade is being driven by two-party trade agreements.

For while it might be easy to demonstrate that – on an academic level – a country will be better off if it lowered its own trade barriers unilaterally, few politicians have the sort of political nous and conceptual clarity to present such a case to the public.

Governments have worked out that the politics of trade liberalisation is easier if it is done on a piecemeal and bilateral level – emphasising what it has managed to get other countries.

This isn’t necessarily a bad thing. Anything that makes beneficial change more politically palatable should be welcomed.

But the fact that trade liberalisation benefits the liberaliser first and foremost suggests that the economics of FTAs are very different from the way they are presented.

Have a look at the official Australian announcement of the deal. It is completely dominated by reforms China will have to make to allow market access to Australian firms. There is very little mention of what we have to do.

The deal involves Australia reducing tariffs on clothes, cars, components and electronics from China. We also will be relaxing our foreign investment guidelines. Tony Abbott said on Monday that some aspects of the deal would require legislation to be passed.

Politics being what it is, using self-interested producers eager to open up foreign markets to agitate for the reduction of protectionism at home isn’t a bad way to build a political coalition for change.

Earlier this year in The Drum, I argued that the bilateral trade negotiation process holds back the cause of domestic reform. It can perversely encourage countries to hold back unilateral changes as a bargaining chip.

But here’s the thing. The Abbott Government has been criticised for being too eager to sign these agreements. Bill Shorten says that Labor is pro-free trade but thinks the government is “more focused on booking a venue for the signing ceremony than examining the fine print or getting a better deal”.

Yet if we view FTAs as primarily a tool for shifting domestic policy, then what sort of deal are we holding out to get? Playing the tough negotiator would be counter-productive – harming ourselves by delaying our own reform program. It is in the interest of the Australian economy to conclude these agreements as quickly as practicable.

And that’s why it is in the realm of free trade agreements that the Coalition has been most clearly successful.

For all the Gillard government talked about the ‘Asian century’, it has been the Abbott Government that has given us free trade agreements with Korea, Japan, and China.

Bilateral Trade Deals Simply A Political Plaything

Bilateral free trade agreements are political confidence tricks.

Far from encouraging trade liberalisation, the trade negotiation process holds it back.

Bilateral agreements make international trade seem like a game that countries win or lose. They encourage countries to hold back on domestic reform, seeing tariffs as bargaining chips for future negotiations. And worst of all, they bury the interests of consumers in the morass of international diplomacy.

The Abbott Government is currently signing bilateral trade agreements across Asia. They’ve finalised one with Japan, another one with South Korea, and they’re trying to get one with the really big fish – China.

These are described as free trade deals but they’re really more like mutual long-term tariff reduction pacts. When the Japanese agreement is in full force in 2029, Japanese consumers will still be paying a 19.5 per cent tariff on imported Australian frozen beef, and 23.5 per cent on fresh beef.

Twenty-three per cent is nobody’s definition of “free”. Beef tariffs are bad for Japan and Australia alike.

In 1817 David Ricardo demonstrated conclusively that free trade is mutually beneficial to all involved. Two centuries later Ricardo’s law of comparative advantage is still what both left and right-leaning economics professors teach their students.

The textbook Principles of Economics, written by the Harvard professor and former Bush advisor, Greg Mankiw, tells students that “the best policy, from the standpoint of economic efficiency, would be to allow trade without a tariff”.

Economics, by the Nobel-winning Paul Krugman, agrees: “The vast majority of economists would say that international trade is a good thing from the point of view of the nation as a whole.”

But here’s the thing. The biggest benefit we get from free trade deals isn’t that other countries lower their tariff barriers. It’s that we lower our own.

Lower tariffs in Australia means cheaper consumer goods and a higher standard of living. Protectionism only favours a few well-connected industries, and does so at the expense of everyone else.

In other words, the chief benefit of trade deals is that they provide an excuse to liberalise domestic trade barriers at home, while placating Australian producers with promises of new markets abroad.

This makes the incredibly complex bilateral trade agreements a much less appealing proposition.

Why not lower tariff barriers unilaterally? In a 2010 report into trade agreements, the Productivity Commission recommended that we do exactly that.

Indeed, the greatest trade liberalisation in Australian history was unilateral – the surprise 1973 decision by the Whitlam government to cut tariffs by 25 per cent across the board.

But the diplomatic focus on trade agreements makes it unlikely we would do this sort of autonomous liberalisation again.

Modern trade agreements are still, to a very large extent, shaped by memory of the Great Depression.

One of the first and most damaging responses of policymakers to that economic calamity was to immediately raise trade barriers. But protectionism only made the slump worse.

As a consequence, when policymakers were rebuilding the international economic system after World War II, they wanted to set up formal institutions that would bring about long-term tariff reductions around the world, and try to guarantee such mistakes were never made again.

One of the big issues at the 1944 Bretton Woods conference (which set up the International Monetary Fund and the World Bank) and the 1947 Geneva conference (which set up the General Agreement of Tariff and Trade, the precursor of the World Trade Organisation) was the preferential trade deals the United Kingdom had set up with the rest of the Commonwealth in the middle of the depression – a policy called imperial preference.

The solution was multilateral trade agreements through the GATT. These rounds ended imperial preference and ate away at the barriers that had built up around the world.

But in the 21st century multilateral trade deals have become bogged down. The Doha round, which is trying to get a trade deal between 159 countries at once, has been going since 2001 and looks unlikely to conclude anytime soon (despite modest progress in Bali last December).

As multilateralism has become dysfunctional, individual countries have filled in the gap by forging individual agreements with each other. Regional trade deals are also being developed.

But the irony here is that those individual and regional agreements are the same sort of preferential trade deals that multilateral trade liberalisation was designed to wipe away.

And they’re being instituted for largely the same reason.

Imperial preference was less an economic policy than a political one. It was seen by politicians in London as symbolising the strength of the British empire in adversity.

Likewise, today’s trade agreements are more about forging diplomatic relationships than benefiting consumers.

This may be why politicians and the press gallery get excited by trade deals but economists and consumers less so.

Perversely, the rise of bilateral trade agreements creates an incentive to keep trade barriers high. The Abbott Government has provided a classic illustration of this dynamic.

The Coalition went into the 2013 federal election promising to tighten controls on foreign investment, for instance lowering the threshold for Foreign Investment Review Board scrutiny of agricultural land deals to deals worth $15 million.

Now that promise is apparently being used as a bargaining chip in the negotiations over the Australia-China trade agreement deal, to be dealt away in return for liberalisations in China.

In part this is because Australia is a relatively open economy already. There are not that many tariffs to bargain with.

But mostly it’s because free trade agreements have little to do with the virtues of free trade. They’re about politics and diplomacy, not economics.

Insane Obsession: Australia’s Auto Industry Waste

In his foreword to the 2008 A New Car Plan for a Greener Future, Kevin Rudd observed that half a century had lapsed between the first demonstration of a horseless carriage in South Australia and the debut of the Holden FX in 1948 – the first truly Australian car.

Rudd was trying to say that the car industry is worth saving.

But anybody familiar with Australian protectionism in the 20th century would have recognised in Rudd’s observation less a story of triumph and more a long story of failure.

Ford is leaving Australian shores in 2016. It’s time to write the car industry’s obituary.

When we first started protecting the automotive industry against foreign competition, cars were a luxury item.

In August 1917, prime minister Billy Hughes announced an absolute prohibition on selected luxury imports. Car bodies were on the list, beside fur apparel, jewellery and (strangely enough) biscuits.

In part the government said this prohibition would keep currency from being sent overseas during the war, and would free up space on cargo ships that was being wasted on bulky and unnecessary imports.

But most of all Hughes wanted to encourage Australia’s existing horse-drawn carriage manufacturers (and their 7,000 or so employees) to make car bodies instead.

Cars were a luxury, but they were a high-tech sort of luxury. Founding a car industry in Australia was to politicians of the early 20th century as founding a “Silicon Valley” is to politicians of the 21st.

The Hughes prohibition on car body imports was immediately controversial. Now Australians wanting a car would have to order a chassis from overseas, and then, once it arrived, wait a few months for the body to be built domestically.

Industrial delegations filed into the office of the Minister for Trade and Customs. The importers and traders protested that cars would be more expensive. Furthermore, there was no way the domestic industry could fill orders already on the way. Their delegation was closely followed by an alliance of leatherworkers, sheet metal workers, glass bevellers, and parts makers who urged the government to stick to the embargo.

The importers and traders lost. After the war, the ban on car body imports was converted into a very high tariff.

For the next century, the car industry would be governed by ministers rather than markets. Even deep in the era of protection-all-round, cars were a special case. Both Labor and non-Labor parties fell over each other to support the car industry.

Protectionism distorted our automotive sector in all sorts of perverse ways.

The modern American car industry was really born in the 1930s. It abandoned its cottage manufacturing roots and became the large-scale, industrial enterprise that it is today.

But as the United States was taking advantage of economies of scale brought about by industry consolidations, the tariff kept Australian car companies sheltered and small. In the late 1930s, the average automotive parts company employed just 11 people.

And the tariff slowed the introduction of new technology. Closed-body and all-steel body cars were only available in Australia a decade after they were available in the United States.

In 1938 the Tariff Board – hardly a bastion of free market thought – concluded it was “unwise” to encourage Australian manufacturers to produce an all-Australian car.

This advice didn’t bother Ben Chifley. Chifley wanted a native Australian car to be the lynchpin of Australian manufacturing after World War II.

That car ended up being the Holden FX, launched in 1948. Henry Holden was one of those horse-drawn carriage makers who’d taken advantage of Billy Hughes’ ban on car body imports.

Australians tend to be pretty nostalgic about the early Holdens. But they couldn’t have been built without government assistance. They were never competitive in their own right. Holden still receives government subsidies. It wants even more.

We’ve been trying to spark a self-sustaining car industry for a century now. Every side of politics has tried their little hearts out. Low tariffs with high subsidies. High tariffs with low subsidies. Every side has failed. Every side tries again.

On Sunday the Coalition’s industry spokesperson, Sophie Mirabella, was talking up “strategic investments” on the Bolt Report, and calling for the Productivity Commission to provide a “clear path for a viable industry going forward”.

The next time you hear that it is markets which are irrational, recall the definition of insanity: doing the same thing over and over again and expecting a different result.

Not even Ford – the world’s most historically prestigious car company – closing down its Australian operation can apparently break this insane obsession.

But then again, Ford had to be enticed to come to Australia in the first place. Only after government negotiators promised the company assistance did Ford set up shop in Geelong in 1925. Since then it has been protected by a tariff that has gone as high as 57.5 per cent. Australian consumers have paid for that tariff in higher car prices. And the company has received around $1 billion in direct taxpayer subsidies over the last decade.

Yet after all that, the supposed party of free markets still can’t recognise automotive protectionism for the waste of money that it is.

Protectionism, Symbolism And Gillard’s Jobs Plan

Timing is everything. On Sunday, Prime Minister Julia Gillard announced her “plan for Australian jobs” at the Boeing factory in Melbourne: $1 billion “to make sure that we are a manufacturing nation”.

The next day, the nation’s largest manufacturing union assembled for its national conference on the Gold Coast. Australian Workers’ Union (AWU) chief Paul Howes announced he backed her leadership “110 per cent”.

This is as good a way to measure public policy success as any.

Gillard’s jobs plan (formally titled the Industry and Innovation Statement) is an obvious sop to the protectionist wing of the union movement.

You can read the plan yourself here. But it’s actually pretty uninspiring; a grab-bag of miscellaneous policies trying to form a cohesive whole.

Some of the policies are new. The 10 “Industry Innovation Precincts” are an attempt to cluster industries à la Silicon Valley. We’re throwing $238 million at this little idea.

Industry Innovation Precincts are no more likely to be successful than a similar Howard and Kennett joint venture: the Commonwealth Technology Port, sited in the Melbourne Docklands.
ComTechPort failed to attract digital entrepreneurs and was instead colonised by government departments. Now it’s been rebranded as an “inner urban community”. Let’s see what the Gillard precincts look like in a decade’s time.

Others policies in the jobs plan have already been announced. Legislation for the Anti-Dumping Authority is already squirrelling through parliament.

All up, the jobs plan is not really a new “$1 billion” package. It’s a $791 million one.

But the plan’s big ticket items are the worst of both worlds: they’re both administratively complex and completely unable to achieve their purported goals.

In other words, Julia Gillard’s jobs plan is protectionism as symbolism. It’s a “victory” that the old industrial unions can bring back to their members.

All large projects with a capital expenditure cost above $500 million will be required to submit Australian Industry Participation plans that detail how they intend to involve local firms in their project. Australian Industry Participation plans started back in the early 2000s but only applied to government-funded projects. The Gillard Government is extending them to independent private projects.

In practice, Australian Industry Participation plans end up being pointless red tape. Only the most reckless project manager would deliberately exclude cheaper local suppliers. The plans are mainly there to make local firms feel like they’re in with a chance.

Really large projects ($2 billion and above) that are receiving concessions to import goods tariff-free will have to “embed Australian Industry Opportunity officers within their procurement teams”. It’s not clear exactly what that means. It sounds like embedded public servants.

Now, embedding public servants in private enterprise sounds a bit creepy.

But plus a few increases to existing programs (the Government’s venture capital fund gets an extra $350 million) that’s all there is to the Government’s “jobs plan”. It’s a couple of tokenistic, bureaucratic measures presented as a great win for Aussie jobs and Labor values and the Asian Century.

The fact that union bosses have taken this thin gruel back to their members with such enthusiasm is revealing. They are as much in on the game as the politicians.

No doubt there are many in the AWU’s rank-and-file who want the Government to protect manufacturing and blue-collar jobs by major government intervention – protectionism and planning and government investment. If so, then they’ve been completely sold down the river by their union representatives.

Gillard’s Labor Party faces the same dilemma as many other labour parties around the world. The ALP has become entirely technocratic, as Tim Soutphommasane lamented in the Age recently. Managerialism has replaced ideology. Quite rightly, they’ve learned that open markets and free trade deliver higher living standards for the whole country. But this is hard on their old base. The winds of international competition have been tough on manufacturing unions.

So the protectionism we do get is tokenistic – little regulatory rules and futile programs. Nobody seriously believes these policies will have a substantial effect on the viability of manufacturing in Australia. If the Government really believed that the secret to national economic success was clustering firms geographically or forcing big projects to buy local, these policies would be 10 times as large.

In the case of anti-dumping law (which prohibits foreign manufacturers from selling products in Australia below their “normal” price) the Productivity Commission has explicitly said it exists for psychological reasons rather than economic ones.

We can see the same dynamic in the United States. The political scientist Dan Drezner noted the mercantilist theme running through Barack Obama’s recent State of the Union speech. Obama needs to signal to blue-collar manufacturing workers that he wants to protect them but at the same time the administration can’t abandon the free trade necessary for its long-term economic growth.

There was a great worry at the start of the global financial crisis that the world might take a turn towards protectionism. Politicians often respond to economic downturns by attacking trade.

But rather than demonstrating a lack of faith in free trade, symbolic protectionism does the opposite. Protectionism and state economic planning hasn’t just lost the intellectual debate. It’s completely lost the political one as well.

Remittances Dominate Aid Yet Remain Unspoken

The underappreciated thread that ties the global economy together is remittances – the money sent by migrants back to their home countries.

Remittances are the silent player in the immigration debate. They’re almost never referred to in our domestic politics or press.

The news monitoring site Factiva records just two mentions of remittances in Australian newspapers over the past two years.

Compare that to the reams of copy filed about foreign aid – 706 newspaper articles in the same period. Then add all the vox pops, chat shows, and talkback calls. Recall the hand-wringing which greeted Wayne Swan’s announcement that foreign aid growth would be modest in this budget. Yes, both left and right positively obsess about the cash the government gives to the third world.
But, even though we’re also constantly yabbering about immigrants, the vast sums of money foreign workers privately send home themselves goes entirely unnoticed.

So a new World Bank report, Migration and Remittances during the Global Financial Crisis and Beyond, released last week is all but guaranteed to be ignored. This is a shame.

The report underlines that the amount of money migrants send home far, far exceeds the amount of money the West spends on foreign aid. Remittances are a big deal.

And they’re an increasingly big deal. Total remittances used to be double the total amount of aid, which was impressive enough. But now, after the financial crisis, they are more than triple.
This is not because foreign aid has declined – official development assistance has continued to grow during the economic downturn. It’s because remittances have shot up further. While the developed world spends roughly $US100 billion on aid every year, migrants now send more than $300 billion home. And as remittances are extremely hard to measure (not all of it is sent through formal channels) it is likely to be much more.

This is a good thing. The financial crisis demonstrated that remittance income is stable income. Foreign direct investment in the developing world has wildly fluctuated since 2008 and has not yet returned to pre-crisis levels. By contrast, remittance flows have remained relatively steady. They dipped slightly in 2009 but quickly popped up again; in two years, the World Bank believes global remittances will be close to $600 billion a year.

We’re all familiar with the long-running “trade versus aid” debate. Which is the most effective development policy? There’s an increasing consensus that the actual winner is remittances.
So the significance of the global remittance economy ought to dominate the immigration debate.

But it doesn’t. Understandably, Australians look at immigration through Australian eyes. The emphasis is on us: how will migration programs affect domestic employment? How will migrants culturally integrate?

Barely do the fortunes of the migrants themselves figure. Working in the rich world, whether temporarily or permanently, is extraordinarily beneficial for people born in poor countries. The opportunities are much greater, and the prevailing salary for equivalent work much higher.

This simple and obvious fact is virtually absent from discussions about immigration. Perhaps it is an unstated assumption shared by all participants. But as the development economist Michael Clemens has pointed out, the benefits which are conferred on the migrants and their countries of origin are almost uniformly neglected by all sides of the debate.

No more so than with remittances. The flow of money from migrants helps fund investment and grow capital in the world’s poorest countries. It keeps families above the poverty line. It goes directly to households.

And as a form of third world development, remittances put no pressure on taxpayers in the first world. They are not planned by clever development economists or policymakers. They have not been coordinated by an international bureaucracy. Indeed, remittances are nothing but the result of the hard work of migrants.

That might sound hard-hearted but it helps keep the flow of money stable and targeted – certainly more stable and targeted than foreign aid, which is highly influenced by political decisions, and subject to the budget planning of treasurers for whom third world development is not an urgent priority.

But there’s also a political reason that remittances don’t get talked about. It’s in nobody’s interest to do so.

They don’t fit the left’s vision of economic development. Foreign aid is grand and interventionist and state-driven. Remittances are earned by individuals and spent in ways the migrants and their families choose. One small, pathetic, but indicative criticism of remittances from the left says they encourage “conspicuous consumption” in the developing world. It’s a common complaint and a bizarre one. Is the third world’s problem really not poverty but consumerism?

And it’s clear that many calls for foreign aid are driven by a belief in distributive justice – that foreign aid should be a penance for first world wealth. Certainly this is the message broadcast by the fashionable anti-poverty causes marketed to young people.

Nor do remittances appeal to conservative populists. Remittances offer one of the most compelling utilitarian arguments for importing foreign workers from the developing world – not only is immigration good for our economy and the migrants themselves, it’s also good for the countries the migrants come from. This is not a story that those sceptical of immigration want to tell.

But it is one we’ll have to start recognising if we want to understand our place in the global age of migration.