Tag: free trade

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.

Seeing a Commonwealth minister beg on behalf of a special interest is embarrassing.

The Manufacturing Minister Kim Carr wrote in The Australian over the weekend that automobile manufacturing is “an industry at the core of the society we want to be”.

Less than half of one per cent of the labour force works for the car industry. Yet it is, according to the Minister, absolutely central to our national identity.

Perhaps he’s right; insofar as our national identity is tied up with handing taxpayer money over to a few politically well-connected and otherwise uncompetitive businesses.

It’s all well and good to believe that Australian industry should be encouraged to “make things”. But in practise it leads to the complete subordination of an entire industry to politics, backroom dealing, and electoral calculations.

Few other industries get such hands-on cabinet attention. Every investment, every new product announcement, every decision to open or close a factory is met with a media release and ministerial statement.

In the lead up to the 2007 election, Carr spoke about how he would “thump the tables in the boardrooms of Detroit, in Tokyo, in Beijing” if Labor won government.

The promise was apparently kept. The car industry appears to have their own Minister of the Crown deputised to help with business negotiations, and their own pool of taxpayers’ money on hand to sweeten deals.

This naked corporatism is surely no person’s idea of the “society we want to be”.

The first federal tariffs in 1907 covered vehicle components, as part of “protection all round”. Since then, state support for other industries has fallen away. The car manufacturers’ stubborn hold on their subsidy is only thanks to close political friendships.

Carr’s demotion in the reshuffle late last year was widely noted. But his new roles are important too. Carr is not only the Minister of Manufacturing; he is also the Minister for Defence Materiel – that is, minister in charge of the wasteful sink-hole of military equipment acquisition.

The two roles have a perverse synergy.

Carr has long argued that that a domestic manufacturing industry is needed for national defence. He told ABC radio back in 2008 that “You can’t make a jet fighter without having a strong car industry”.

This is obviously ridiculous. Holden needs $100 million just in case World War Three starts and the international arms market no longer sells Joint Strike Fighters? Australians will need to beat their ploughshares back into swords? If the Government truly believes this scenario is anything other than fantasy, well, aircraft production is the least of our problems.

Carr firmly believes that taxpayers’ money should artificially prop up domestic manufacturing. Now that he is also in charge of defence acquisitions, it is easy to see how Australian-made military equipment will be favoured even when there is better, cheaper, foreign equipment available.

On The Drum last week, Annabel Crabb pointed out almost every other country pours cash into their automobile industry.

But that doesn’t mean that we need to keep supporting ours. Right now, the rest of the world supports the car industry for the same reason we do – because during the second half of the 20th century, manufacturing unions built extremely close relationships with political parties. Those relationships have paid off handsomely in subsidy, protection, and parliamentary representation.

There’s nothing special about automobiles that demands government support. They’re not particularly challenging to make. They’re not particularly central to the economic structure. They’re not particularly hard to buy from overseas. Their manufacturing is not particularly high-tech, at least compared to any other industry. Yet they are particularly well connected. And that’s it. That’s why we support them.

Happily, this week has demonstrated how increasingly hard it is for the automobile industry to justify their claim on our money.

But what on earth is the Coalition thinking?

A big part of Joe Hockey’s plan to reduce government spending is a $500 million cut to car industry subsidies. That would be great.

Yet last week there were suggestions the cut may be abandoned.

Shadow ministers now talk about how critical the automotive industry is. How “savagely” the Government abandoned the Cash for Clunkers scheme. How cruelly the Green Car Innovation Fund was decimated.

The Coalition was rightly scathing about these boondoggles when they were announced.

Hockey and Andrew Robb – both described by their colleagues as “economic rationalists”, in a neat throwback to the 1990s – are apparently holding firm on the cuts.

That the Coalition is going wobbly on spending reductions is no surprise, given Tony Abbott’s deliberate attempt to take Labor’s industrial base, and his embrace of economic nationalism to do so.

Still – car subsidies? If the Coalition can’t even bring itself reduce this irrational, wasteful, pointless, politicised corporate welfare program, they’re going to struggle to cut anything at all.

On Wednesday Tony Abbott told The Age that he would make a free trade agreement with China less of a priority than one with Japan – because China, he pointed out, is not a market economy.

Of course, there’s nothing sacred about bilateral free trade agreements. They’re a poor cousin to multilateral agreements. They can be written well or poorly. A lot rides on their negotiation, and interest groups and rent seekers will want their say.

But the pros and cons of bilateral agreements plainly have little to do with the Opposition Leader’s scepticism about a trade deal with China.

Last week’s comments are not isolated. Abbott also wants tougher laws against anti-dumping, to penalise goods subsidised by foreign governments. With these policies, the Opposition Leader is close to endorsing retaliatory protectionism.

Abbott says he wants to ensure a “genuinely level playing field with a fair go for Australian companies”. In recent interviews, he has begun to talk not about “free trade” but “free and fair trade”.

Abbott is not alone. Barnaby Joyce also talks about his full-bodied support for free trade but only if it is “genuine” free trade. The AWU’s Paul Howes says, “If trade is going to be on, it’s got to be on a level playing field.”

Of course, the entire point of free trade is that the playing field isn’t level. The world isn’t flat. The world is very bumpy. Different products are made more efficiently at different places. Environmental, geographic and social conditions vary wildly. If anything, the process of globalisation has emphasised just how different parts of the world are.

Free trade is beneficial precisely because the world is heterogeneous, not homogenous.

This applies even when those differences are created by deliberate public policy choices, not “naturally”.

Yes, China is not a market economy. As John Lee pointed out in Crikey last week, it would be flattering to even call it a mixed economy. It is led and dominated by the state, rigged so state-owned enterprises are the main beneficiaries, and corrupted by industry plans and subsidies.

These are all bad things. But to retaliate – or, to use less-loaded language, compensate – by bumping up our trade barriers would be compounding one error upon another.

We should feel sorry for Chinese taxpayers when they are asked to stump up for ever more industry subsidies, not resentful of them. China is a developing country. Yet it is taxing its citizens in order to prop up businesses. Which then go sell their products below the market cost to rich countries. These subsidies are a direct wealth transfer from third-world taxpayers to first-world consumers.

As Professor of Economics Donald J Boudreaux describes this perverse strategy: “To make its country’s exports artificially more abundant and artificially less costly for foreigners to buy, a government taxes its citizens, effectively forcing people within that country to bestow benefits on people outside its boundaries.”

It’s tragic. But Australians are the beneficiaries of such misguided policies, not the losers.

There is no reason to believe the efforts of foreign governments to build industries using subsidies and industry plans will be any more effective for them than it has been for us – that is, it will be entirely fruitless and extremely expensive.

So foreign subsidies do nothing to undermine the case for free trade. Self-sufficiency is no virtue. Just as it is nonsensical for an individual to make everything they need themselves, it is nonsensical for countries as well. Free trade would be beneficial even if Australia was the only country in the world that believed in it.

The union movement offers one further objection to trade with China – the Chinese government artificially undervalues the yuan, deviously making their exports more competitive than if their currency had been floated.

Perhaps. Currency demagogues in the United States (where the strength of the yuan is a major political issue) have long pointed to the Economist’s Big Mac Index, which compares the price of the iconic hamburger around the world. It’s a rudimentary but evocative test of currency health. It measures a standardised product, allowing us some indicative comparisons. The Economist found the yuan could be undervalued as much as 44 per cent.

At least it did until the index was drastically revised this year. Big Macs should be cheaper in countries with low labour and land costs. The index was adjusted to take account of that obvious complication. Its revised data suggests the yuan is much less undervalued than everybody originally thought.

The Big Mac Index is certainly crude. But we know an artificially low yuan is bad for China itself. An undervalued currency is an effective subsidy to exporters at the expense of domestic consumers, raising the price of imports and increasing costs across the economy.

In the last 12 months domestic pressures have been getting more intense. The Chinese growth model is a ticking time bomb. What we’re seeing is not cunning manipulation of a currency to undermine international competitors. We’re seeing an economy teetering on the edge of the abyss – and Chinese policymakers know it.

It seems bizarre to claim economic self-harm in China justifies economic self-harm in Australia.

But that is exactly what Tony Abbott, Barnaby Joyce, Paul Howes and other free trade sceptics now recommend.

It’s hard to top deposing a Prime Minister. But having the management of Rio Tinto replaced by monkeys (as Australian Worker’s Union boss Paul Howes suggested last week) would be pretty impressive too.

The AWU celebrated its 125th anniversary with bluster and assertiveness. It’s been swinging wildly at mining companies, foreign imports, and ministers in the Government it installed.

None of it shows the AWU in a particularly good light. Take for instance the union’s campaign to strengthen the Government’s anti-dumping laws.

“Dumping” occurs when a foreign firm exports into Australia products and sells them for a price lower than in their home market. The idea, in theory, is to put Australian firms out of business, and then jack up prices. Our anti-dumping laws impose selective tariffs on goods to compensate. Lots of countries have similar laws.

So it may seem the union’s “Don’t Dump on Australia” is of minor importance. But the campaign against dumping exposes a simple truth: the union movement is a special interest, acting on behalf of a few favoured sectors of the economy.

Because from the very beginning, anti-dumping laws had almost nothing to do with the theory of dumping.

The first anti-dumping law was enacted in Canada in 1904. New Zealand imposed one in 1905, and Australia in 1906. The US joined the anti-dumping club 1916; South Africa and Great Britain five years after that.

But it was only in 1923 the economic theory of dangers of dumping was formulated, by the economist Jacob Viner in his book Dumping: A Problem in International Trade.

So what inspired the earlier anti-dumping laws? Politics, not economics. The Canadian government first imposed anti-dumping laws to curry favour with domestic steelmakers feeling threatened by cheap US imports.

The rest of the world followed suit. For Australia, anti-dumping legislation was a simple component of “protection all round”.

In other words, anti-dumping is not a measure to defend the integrity of free trade (as Howes claimed last week, saying foreign competitors were “cheating”) but a measure to undermine it.

Anti-dumping laws are protectionism, pure and simple.

As the failures of state socialism have become clearly manifest in the last few decades, Viner’s theory of dumping has been abandoned, along with the arguments for infant industry protection, import quotas, general tariffs, and trade subsidies.

After all, the dumping thesis relies on the possibility of a foreign producer, having eliminated all its competitors, raising prices. But it’s hard to find in the literature an example of a firm ever doing so. It’s not a very good strategy: it’s expensive, and its reward is uncertain. Even if a firm managed to eliminate all its competitors, the moment it raised prices new competitors would flood back into the market.

And if imported goods are only cheap because they’re subsidised by foreign governments, that’s a straight transfer of wealth from overseas taxpayers to Australian consumers.

A Productivity Commission inquiry last year found while anti-dumping measures benefited a few companies, those benefits came at the expense of everybody else’s economic well-being.

It did, admittedly, find the overall cost to the economy was likely to be very small. So the commission recommended keeping the laws for a very specific reason – to placate the fears of some firms (and the union movement) about tariff reform.

That is, for politics, not for good policy.

You could dismiss the Productivity Commission as unforgivably neo-liberal.

But even the Nobel Prize winner Joseph Stiglitz – hardly a doctrinaire free-marketeer – describes much anti-dumping laws nothing more than “creative new measures to block imports” which make “little economic sense”. The first world, Stiglitz argues, uses anti-dumping legislation to shield itself from third world competition.

The AWU is welcome to stand up for what it perceives to be in the interests of its members. That’s its job – to seek special privileges for those who pay the annual fee.

But the union cannot claim the policies it pursues are in the general interest of the Australian economy. (And, as Stiglitz might add, in the interest of third world workers.) The union’s ferocious advocacy of anti-dumping laws is a small but indicative reminder of this.

If the AWU was concerned with all Australians they would campaign to eliminate anti-dumping laws. Lower prices and a more competitive economy benefit unionists and non-unionists alike.

Unfortunately the Federal Coalition has joined the AWU on its anti-dumping crusade: Tony Abbott has also called for an examination of the anti-dumping regime to protect jobs.

The review of 2010 federal election by Steve Bracks, John Faulkner and Bob Carr has reaffirmed the relationship between an antagonistic union movement and a deferential Labor Party.

Given the union movement’s willingness to forego the national interest while protecting its client industries, this should not be welcomed.

Last week’s Freedom Flotilla incident has highlighted an old truth. Trade – or, in this case, the forced closure of trade – is an ineffective foreign policy tool.

The blockade of Gaza by Egypt and Israel is actually a massive trade and travel embargo.

Humanitarian supplies can be legally brought into Gaza, but also much more than that: frozen salmon and low-fat yoghurt can come in too. Coriander, margarine and A4 paper cannot. Wood for doors or window frames, yes. Wood for construction, no. The list seems completely arbitrary. Hillary Clinton had to personally intervene to have dried pasta allowed in.

That’s because Egypt and Israel don’t just want to force the end of weapons smuggling. They want the trade embargo to undermine Hamas’ support in Gaza. One Egyptian politician said “Egypt will not accept the establishment of an Islamic emirate along [its] eastern border.”

Gaza under Hamas is a rogue state.

That’s a regional problem, not just an Israeli one.

Since coming to power, Hamas has led brutal attacks on opponents and civil society organisations. In the days after the Freedom Flotilla, Hamas security forces raided six NGOs in Gaza. Thuggish political violence and repression is an essential part of Hamas’ program.

And despite the blockade, with Hamas acting as an Iranian proxy, they seem to be having no problem getting weapons.

That shouldn’t come as a surprise. There have been few occasions when trade embargos have succeeded. Embargos rarely hurt those in power, who have the money and the political means to acquire things others do not.

Fifty years of economic sanctions have utterly failed to budge the Castro regime in Cuba.

And worse, they’ve given the Cuban dictatorship an easy excuse for its own failures. Directing domestic attention towards the American trade embargo is simpler than dealing with the deep economic problems caused by a half a century of socialism.

The same holds true for North Korea, where isolation from the world economy supports rather than challenges the regime. The state ideology of Juche – socialist autarky – is how the regime embraces this forced seclusion, and uses it to cement its control over the population. And, as in Cuba, the responsibility for North Korean poverty is levelled solely at the West.

Restrictions on trade with Iraq failed to topple Saddam Hussein. They were some of the toughest sanctions in history. Yet before 2003, the only major destabilisation of the Iraq government came from the bombing in 1998.

Trade embargoes have failed in Burma, Iran, Zimbabwe, and Syria.

A 2007 study of 204 separate economic sanctions over the last century found they were successful in achieving regime change in only 31 per cent of cases. Their success at disrupting military adventures was successful in just 19 per cent.

And they can have some terrible unintended consequences.

Certainly, humanitarian goods are getting into Gaza. But simply sustaining the population isn’t the main game.

The trade embargo stops Gazans from integrating themselves into the world economy. Their domestic economy is busted. It will remain busted as long as they are unable to trade. Imports to Gaza may be strictly limited, but exports from Gaza are effectively banned.

The Palestinian Trade Centre claims that, as a consequence, the number of private sector firms has shrunk at least 70%. In 2005, around 25,000 people were employed in Gaza’s clothing industry. That number is now around 230. Unemployment in Gaza is nearing 50 per cent. 80 per cent of the population relies on aid. Recent Iraqi history has taught us sudden mass unemployment is not a harbinger of peace.

There is little Israel and Egypt could do to divert hardline Hamas fighters from their path of violence. But the blockade could convince many Gazans there is no prospect for mutually beneficial cooperation with its neighbours – the sort of cooperation that open trade encourages.

The only peaceful future of the Middle East will be one with trade and economic cooperation.

History tells us the blockade is unlikely to budge their rule. Worse, it could legitimise it, in the minds of some Gazans.

That’s why what happened on the Freedom Flotilla has been such a massive win for Hamas. The blockade hides the extraordinary repressiveness of the ruling regime. Last week in Gaza there was a 2,000 person demonstration against new taxes being levied on smuggled commodities by Hamas. But the Freedom Flotilla turned the attention right back on Israel, inside and outside the Gaza strip.

And of course, Egypt’s role in the blockade has been popularly ignored.

Nations have an absolute right to defend themselves. Egypt and Israel are unquestionably justified in inspecting for weapons entering Gaza, and taking action against aggression. But rather than destabilising Hamas, the economic blockade might be only encouraging the violence.