Look at our history: protectionism doesn’t work

With Vijay Mohan

We rarely think about supply chains – those immensely complex networks of production and logistics that structure the economy. 

That has changed. Early in the COVID-19 crisis, we learned that Australia imports much of its basic medical equipment like facemasks and other protective gear. As borders were being closed importing this high-demand equipment got suddenly very hard.  

Now there is an unsurprising clamour for the government to take more of an interest in how our supply chains actually work, and to use the traditional tools of protectionism to encourage domestic production of medical equipment and pharmaceuticals.  

Prime Minister Scott Morrison said in April that “we need to look very carefully at our domestic economic sovereignty”. 

But neo-protectionism to secure Australia’s supply chains would be a grave mistake – and it fundamentally gets the supply chain challenge wrong. 

First, the obvious but necessary point. We actually had a protectionist economy for most of the twentieth century. And we didn’t build facemasks. We built cars. We built cars because cars had a certain romance in the twentieth century and Labor and the union movement wanted to lock in prestigious manufacturing jobs for their supporters. 

This has always been one of the central planks of the case against protectionism. The choice of what industries to protect is not made by all-knowing and benevolent leaders, but by self-interested politicians. They get to the top of their profession not because they are skilled production managers or supply chain coordinators, but because they’re great at navigating political factions and going on television. 

Of course, our national leaders will come out of this crisis more focused on the risk of future pandemics, and more motivated to prepare our economy for this now-known risk. But as they say in the military, generals too often prepare for the last war, not the next one. We don’t need an economic system that is prepared for a crisis that looks exactly like COVID-19. We need an economic system that is prepared for an unexpected crisis – which, definitionally, could be anything. 

Indeed, it is the fact that the pandemic was unexpected to most in government that makes the strongest case for free trade. The crisis has caused a lot of market disruption. But global supply chains have adjusted remarkably well to new demands and routed around new constraints. For example, airlines have been doing temporary conversions of passenger planes to cargo planes – particularly important because medical equipment, which in normal times would be leisurely transported by ship, needs to get to new COVID-19 hot spots urgently. 

Protectionism invariably makes the industries it protects brittle and highly politicised, not agile and adaptable to sudden economic shocks. And it is a fantasy to suggest that a small, wealthy, highly-educated nation like Australia could or should ever be self-reliant in the production of all low-value goods that might be needed in unexpected crises. 

There are things the government can do to be prepared for the next crisis. Rather than making essential products, we can buy them and store them. This requires no more foresight than full-blown protectionism and is a lot cheaper. The idea of keeping extensive national stockpiles of equipment for emergencies is uncontroversial. By all accounts, the National Medical Stockpile has been an immensely valuable asset during COVID-19. 

With our RMIT colleague Marta Poblet, we have been looking at the problems consumers had getting reliable information on supply chain security in the first weeks of the crisis.  

Before the pandemic, Australian industry was interested in using new technologies (such as blockchain, 5G communication, and smart devices) to better combat food fraud in export markets or to how to prove to their customers that their products were organic or fair trade certified.  

But the pandemic revealed a more basic problem with about supply chain information. Consumers were not worried about quality or fraud. They were worried there were not enough goods available to meet demand at all – hence the panic buying of toilet paper, hand sanitizer, and dried pasta.  

This panic buying looked a lot like the sort of panic withdrawals you see in a bank run. If depositors aren’t convinced their bank is solvent, they rush to be the first to get their money out. And as we saw, Scott Morrison was no better able to convince shoppers that there were adequate domestic supplies of toilet paper in March 2020 than South Australian premier Don Dunstan was able to convince the customers of the Hindmarsh Building Society that there were adequate funds to cover deposits October 1974 — despite standing in the street outside its headquarters with a megaphone.  

In moments of high-stress consumers just don’t trust the political assurances they are given. Do we really blame them? 

Ultimately within a few weeks supply chains adjusted. Coles and Woolworths lifted their toilet paper sale limits. 

But the toilet paper panic symbolises the choice we now face when it comes to supply chain resilience. To go protectionist would be to trust our supply chains to the same political class that we simultaneously accuse of being underprepared for COVID-19. Or we could lean into free trade and open markets. We should encourage entrepreneurs to adapt rapidly to new circumstances, to experiment with new technology, and let them figure out how to operate in a disrupted global economy. 

Australia has a long history of protectionism. Let’s try to remember what we learned. 

International policy coordination for blockchain supply chains

With Darcy Allen, Sinclair Davidson, Mikayla Novak and Jason Potts. Published in Asia & The Pacific Policy Studies, 30 May 2019

Abstract: From the adoption of the shipping container to coordinated trade liberalization, reductions in trade costs have propelled modern globalization. In this paper, we analyse the application of blockchain to reduce the trade costs of producing and coordinating trusted information along supply chains. Consumers, producers, and governments increasingly demand information about the quality, characteristics, and provenance of traded goods. Partially due to the risks of error and fraud, this information is costly to produce and to maintain between dispersed parties. Recent efforts have sought to overcome these costs—such as paperless trade agendas—through the application of new technologies. Our focus is on how blockchain technology can form a new decentralized economic infrastructure for supply chains by governing decentralized dynamic ledgers of information about goods as they move. We outline the potential economic consequences of blockchain supply chains before examining policy. Effective adoption faces a range of policy challenges including regulatory recognition and interoperability across jurisdictions. We propose a high‐level policy forum in the Asia‐Pacific region to coordinate issues such as open standards and regulatory compatibility.

Available at Wiley Online.

Supply Chains on Blockchains

With Sinclair Davidson and Jason Potts

Blockchain technology is shaping up as one of the most disruptive new technologies of the 21st century, facilitating an entirely new decentralised architecture of economic organization. While still experimental, it is disrupting industry after industry, beginning with money, banking and payments, and now moving through finance, logistics, health, and across the digital economy. These waves of innovation are being driven by both new entrepreneurial startups as well as by industry dominant firms reimagining and rebuilding their business models and services to use blockchain technology. Trade platforms and supply chains are shaping up as the major use case for blockchain technology, and we explain here how this may lead to a second phase of globalisation.

Breakthroughs in the technology of trade can have far-reaching consequences. Sailing ships and steam ships, refrigeration and aircraft were all watersheds in the making of the modern world, but two technologies of trade delivered us the modern era of globalization: these are (1) the shipping container, and (2) the WTO (formerly known as the GATT).

The invention of the shipping container in 1956 led to a revolution in international trade, birthing a new phase of globalisation. Blockchains, invented in 2009, promise a similar revolution. Blockchains offer a fundamental architectural change in the way firms and governments manage international trade, with enormous efficiency and productivity gains.

But, just as the shipping container required significant investment to bear fruit—and came up against the interests of the unions, regulators and ports—blockchain-enabled trade will require substantial upfront investment in new systems and will inevitably challenge existing interests. In the 1950s the shipping container was the solution to the problem of the high expense in money, time, and security to load cargo in and out of ships. Handling costs were high, operations were slow, and theft was rife.

Today the constraints on trade consist of the ever-increasing complexity of the data, records, payments and regulatory permissions that accompany goods as they travel across the world. Every good moving along a supply chain is accompanied by a data trail, often still as paperwork, to track bills of lading, invoices of receipt and payment, origin, ownership and provenance, as well as compliance with vast schedules of trade prohibitions and environmental regulation, taxes and duties.

The shipping container is a physical coordination technology, while the WTO is an institutional coordination technology. At the Blockchain Innovation Hub we believe that blockchain technology – as tradetech – is shaping up as the third great technology of trade.

The Cost of Information and Trust

Blockchain technology can solve a major and growing problem with the global trading order – namely the problem of information. Every time a good or service moves, information moves with it. The quantity of information associated with each product continues to grow, and the costs of dealing with this information, from compliance, auditing, verification – trust, in a word – is becoming a greater and greater share of the costs of the global trading system.

This information includes provenance and inputs – the information on a label. It includes trade-finance, bills of lading, shipping and handling information, security clearance – the commercial and administrative information. It includes the documentation of where it’s been and where it’s going, and who has handled it and who hasn’t. And it includes all the information that each country requires in relation to customs and duties, biosecurity, labour and environmental regulations, compliance with various treaties – a vast rigmarole of auditing and compliance, each of which is necessary, desirable and costly. With each day, the information burden increases, not decreases.

As the information cost of trade increases, it is not simply enough to digitize everything, because the real problem is that we need to be able to trust the information that is there.


Globalisation 2.0 will be built on tradetech, and the crucial infrastructural component of tradetech is blockchain. Blockchain technology, which is a distributed, append-only, peer-to-peer, trustless secure ledger, is almost custom-made for trade-tech. It provides an infrastructural platform upon which to build a new information architecture for globally tradable goods – and to do so in a way that is fully digital, tamper-proof, low-cost, end-to-end secure, verifiable, transparent, scalable and computable. What cryptocurrencies did for money tradetech will do for globalization.

Tradetech will integrate the benefits of fintech into trade networks. Crypto-based models of payments, trade finance, insurance and other risk management tools will be automated. Tradetech will integrate the benefits of regtech into trade networks. Verification and compliance with local regulations will be automated. Tradetech will power-up logistics technologies with blockchain affordances such as smart contracts, decentralized autonomous organisations (DAOs), and the full technology stack that includes AI integration.

So we think of blockchain as a next-generation infrastructural technology for the global movement of goods and services. Service exports have the same constraints with respect to compliance with certification, credential verification, and quality standards assurance. These same problems apply generally to the movement of people too. We are still yet to weave together a seamless global system of identity documents, education and trade certification and permissions, and taxation and other public liabilities.

Example: Benefits for Australia

Tradetech facilitated supply chains could to bring significant advantages to Australia, and her trading partners. This is win-win because there are both consumers and producers on each side.

For Australian exporters, there are at least two obvious advances. Tradetech facilitated Australian Agriculture will significantly boost the quality of provenance claims as to origin and quality of product. When this transparent verifiable information passes at much lower cost to final consumers, more of that assurance value passes back to suppliers, boosting primary producer income.

We are starting to see this already with start-ups in the primary export industry, for instance with Beef-ledger, Agridigital and Grainchain. We will also likely see the benefits of similar assurance in advanced manufacturing, such as in aerospace, medical devices, pharma and other high value bespoke manufacturing where quality is paramount and certification is costly. Or in other areas that rely heavily on intellectual property, such as creative industries.

Blockchain based tradetech will benefit producers and consumers by lowering the cost of providing and processing high value information that rewards legitimate quality production and minimizes
rent-extraction along the way.

Crypto Free Trade Zones

Blockchain-based next-generation trade infrastructure opens the prospect of a next generation of crypto free trade zones. These may overlay existing trade zones – within bilateral or multi-lateral zones – with a standard protocol for information handling. This would lower the transactions costs of trade, which economic theory predicts would increase the quantity of trade, and therefore value creation.

But blockchain trade areas could also build on private supply chains and infrastructure, as with consortia such as the IBM-Maersk-Walmart alliance, or with the recently announced adoption by FedEx of blockchain technology. This is the difference between say email (an open standard) and Facebook (a proprietary model). The strength of the closed network model is that it incentivizes investment. But it creates power, and invariably requires regulation to constrain that power. And regulation in turn stifles innovation.

We need to start thinking about how we want free trade to evolve in the blockchain era. Global open standards should be our ambition, because this brings the maximum prospect for growth and innovation. But open standard protocols are challenging to get started, because it can stumble on a coordination problem at the outset. This is why in order to build the next generation of globalization on blockchain infrastructure we will need to solve the open standards coordination problem.

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.