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Aug 30, 2011

The return of protectionism: the gang's all here

Protectionism is alive and well and has strong allies in the public policy arena.

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The successful economic reform project of the last 30 years stands at an important juncture. A key component, free trade, is under increasing pressure from organized labour, the balance of power party and conservatives, and all that stands in the way is a minority government.

I suggested a fortnight ago that in their obsession with securing power, the Coalition had “defected” from the consensus of the last 30 years, abandoning the rules by which the political game had been played in Australia, give or take the occasional breach by both sides, since 1983. Events since then have only reinforced that perception.

First there was the Coalition’s bid to overturn the government’s decision on New Zealand apples, initially via a measure that would have clearly breached WTO rules until a measure of sanity prevailed.

Now there’s a clear push for manufacturing protectionism from Sophie Mirabella, who while – like everyone else – is unwilling to cop to the protectionist label, is talking the crudest kind of protectionist rhetoric about “playing fields not being level” and “subsidized goods distorting our markets” (“our” being the key emotive word).

Like every other protectionist, Mirabella labours under the delusion that protectionism helps an economy, rather than damages it, and the most intelligent response to another country inflicting damage on their economy is to damage your own. You punch yourself in the face, well, cop this — I’ll give myself a black eye.

Meanwhile, Barnaby Joyce has been ramping up his xenophobic campaign against foreign investment, claiming an OECD report showing we had fewer restrictions on foreign investment in agriculture and mining than other countries was a problem, rather than a positive. Although, oddly, Joyce’s economic nationalism seems to disappear when it comes to the sale of Cubbie Station, the interests of which Joyce has enthusiastically devoted himself to ever since he arrived in Federal politics.

The array of foreign–owned agricultural companies bidding up the price of Cubbie has elicited no comment from the locally-based senator thus far. Possibly Joyce thinks it OK for Cubbie to get a top sale price from competition engendered by foreign investment, but not farmers elsewhere.

Yesterday Tony Abbott spoke at a CEDA conference and sought, as is typical of him, to hold all positions at once:

“The Coalition is strongly opposed to industry policy that props up over-manning and feather-bedding or that does not count the cost of intervening and honestly face up to it. On the other hand, if there’s a respectable case that can be made for maintaining a heavy manufacturing base on the grounds of national security, the inherent value of a diversified economy or the transitional costs of shutting down capital intensive industries only to start them up again when market conditions change, there needs to be a forum where it can be addressed.”

So in essence, Abbott, yet another proclaimed non-protectionist, supports protection in the right circumstances, but favours the Right’s traditional justification for protectionism — “national security” (normally the phrase is “strategic industries”) — rather than the Left’s traditional justification, supporting well-paid local jobs. Both are just excuses for propping up uncompetitive industries for political reasons.

In the Coalition’s case, its commitment to protecting industry is particularly amusing given its role in stopping the one policy measure that would have mitigated the impacts of the resources boom on the manufacturing sector, the RSPT. And Paul Howes, Dave Oliver and even Heather Ridout all have the excuse that in demanding industry assistance they are merely doing their job of representing the interests of those who pay them. What’s the Coalition’s excuse?

In some parts of the Liberal Party, sense still prevails. This week Josh Frydenberg called for a sovereign wealth fund to offset the mining boom, following the lead of Malcolm Turnbull on the issue. The Greens — who favour a heavily interventionist national industry policy — also back a sovereign wealth fund.

But protectionism, once considered dead, buried and cremated, now has a strong array of allies in Australian public policy: left and right-wing unions, major employer groups, the Greens and the Federal Opposition. Free trade has in its corner Treasury and a minority Labor government that, mostly, has so far resisted pressure – a particularly commendable feat from Kim Carr, long the doyen of Labor industry policy, who has stuck fast to the mantra of innovation rather than protectionism. But even Labor has thrown money at the steel industry to prop it up in the face of a high dollar and Bluescope’s dud management.

And for how long will Labor resist the pressure if the dollar remains strong and job losses keep mounting?

Several Coalition MPs are eager to turn the adverse conditions facing manufacturing into an excuse for more industrial relations reform. They’re drawing on the growing commentariat consensus that Something Needs To Be Done about Australia’s productivity.

It’s a measure of how poor our economic debate can be that discussions about productivity still, in even otherwise well-informed minds, default to thinking about ways to make Australians work longer hours for less pay and poorer conditions.

As I pointed out back in June, labour productivity data shows that productivity in Australia fell off a cliff under that all-you-can-eat IR reform buffet of WorkChoices. Reform advocates might argue that WorkChoices didn’t have long enough to have an effect – but that hasn’t stopped them from arguing, only two years into the Fair Work framework, that that has failed and needs an overhaul.

A decline in productivity under WorkChoices was actually predicted by Treasury in advice to then-Treasurer Peter Costello, who curiously decided not to release it, until FOI guru Michael McKinnon obtained a copy.  As Treasury pointed out, IR reform must necessarily decrease productivity by bringing into the workforce lower-skilled workers who currently aren’t competitive with the rest of the workforce.

The productivity = IR deregulation crowd don’t even know their history. As a Parliamentary Library paper showed a decade ago, labor productivity growth was higher in the 1990s in Australia than in the 1980s, but lower than in the 1970s — the archetypal period of stroppy trade union leaders, rampant industrial warfare and heavily regulated industrial relations.

Still, constantly pointing out such inconvenient facts appears useless. The refrain that all would be well if Australians were stripped of conditions and unions were curbed a bit more is being heard again and again. It’s an article of faith among many, and not amenable to rational argument.

Bernard Keane — Politics Editor

Bernard Keane

Politics Editor

Bernard Keane is Crikey’s political editor. Before that he was Crikey’s Canberra press gallery correspondent, covering politics, national security and economics.

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50 thoughts on “The return of protectionism: the gang’s all here

  1. michael r james

    [TOM MULLIN Posted Wednesday, 31 August 2011 at 5:14 am |

    Look at the massive subsidies for German manufacturing, both direct and indirect. Which is why we buy German goods. As a German businessman once said to me .. how many tons of iron ore do you have to dig up to buy one Mercedes?]

    There is something to what you say but actually people around the world buy Mercedes because it is perceived as highly desirable and extremely well engineered. Of course the biggest car manufacturer in Germany and Europe is VW group.

    You’re right that German industry is subsidized but it is by the Euro. Because the totality of the EU countries keeps the Euro much lower than if Germany still had its Mark and this means intra-EU trade is very much in favour of Germany and ditto makes their exports much more price competitive. The politicians know this which is why they are trying to save the Euro but the voters do not really understand how disastrous it would be, particularly for Germany, if there was a breakup (eg. into a core rich countries of EU etc).

    As I (and BruceMcF) said, the world’s monetary and financial systems are broke. China has a case for staying out of it and might be the reason why the rest of the world might eventually try to address it. You may be aware that Keynes had suggested a more sensible system not based on the USD, way back at the time of Bretton Woods. The US simply dismissed it and they are likely to be just as intransigent today even though it could be to their benefit too.

  2. Peter Ormonde

    Bruce and Jeeb….

    Bruce you are right of course … historically – protectionist policies did nurture manufacturing cultures… but not here. Here they nurtured a rentier culture where the private sector refused to invest, refused to innovate or conduct R&D, refused to train their workers, refused to look outwards and simply attached themselves to the public teat. They penalised the entire country and poisoned the soil in which any productive enterprise could grow by saddling them with their own inefficiencies and high costs.
    Unconditional protection produced a weak undercapitalised, uncompetitive, inefficient and essentially parasitic manufacturing sector. We picked winners and penalised – excluded – new sectors and industries.
    Jeebus… here’s an illustration: imagine for a moment how much software development would have been happening had we engendered a local hardware industry thriving behind a wall of protection… in which any and all computers used in Australia were either locally made or attracted massive tariffs… so that say we had a PC costing $10,000 a throw. That’s how protectionism works. The costs are huge, the profits are squandered and the real penalty is paid not just by consumers but by the future and our kids.
    We only have a software industry at all because we were not suckered into nurturing a protected hardware (technology input) sector. The software industry exists only because it emerged in the midst of tariff reductions.

    None of the above should suggest I disagree in the slightest with your perceptive view on currencies and the financial sector. That’s where I would be looking to construct a more conducive climate for manufacturing and investment… but not unconditionally. And we cannot do that on our own.

  3. michael r james

    [It’s a measure of how poor our economic debate can be that discussions about productivity still, in even otherwise well-informed minds, default to thinking about ways to make Australians work longer hours for less pay and poorer conditions.]

    Exactly as our million dollar man, Glen Stevens, was implying just yesterday. When these people at the top of the heap think of productivity they apparently are so clueless that this is all they can imagine. And there is no point, other than raising my blood pressure, in mentioning that Kim Carr sticks “fast to the mantra of innovation” when no Australian government ever, ever supports it. His only Green car initiative was an overt subsidy for Toyota to assemble its hybrid vehicles here! Vastly less than a single Silicon Valley entrepreneur (Elon Musk) is doing. (I suppose I should grant some brownie points for the NBN, we’ll see.)

    And incidentally France manages to have a productivity higher than the US despite the things that economic rationalists sneer at: 6-7 weeks annual vacation, 34 hour week, generous welfare system. France is famous for its dirigiste tendencies (championing big industry like high-speed trains, nuclear power, Airbus, Telcoms etc) which the textbooks say should be disastrous, yet it has more companies in the Fortune 100 or 500 (World) than any other European country (yes including UK and Germany).

    But Bernard has not done anything here other than give a rant not so different to every neo-con or economic-rationalist like the ones he criticizes (Craig Emerson; purlease, let’s not get confused about Costa who was just a ratbag with a Napoleon complex). Perhaps tomorrow BK could tell us in broad outline what exactly such a naked free-trade open economy will create in the next 5-10 years? As economists in the US have pointed out, Apple can be the most valuable company in their country but it will never employ more than a few percent of what GM or Ford, or even their remnant steel industry still does (about 100,000 versus 500,000 in the 90s). Of course not that we could ever create something remotely like Apple; nor can we even grow apples to compete even with NZ.

    BK has more or less acknowledged that the steel industry’s lack of competitiveness has nothing to do with productivity. They could bring in coolie labour and work them 24/7 until they died on the job and it would make no difference to the fundamental problem: China’s (and much of Asia’s) currency is about 40% undervalued and AUD is about 40% overvalued. The international monetary system and the international financial system are both dysfunctional. Given that these have changed at approximately 30 year intervals in the last century we are well overdue (since the Nixon Shock withdrawal from the Gold-Dollar link in 1971) for a serious rethink/remodelling of how exchange rates are determined.

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