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Dec 19, 2016

Protectionism provided few jobs and made life tougher for working families

Despite the nostalgic longings of protectionists, closing off the Australian economy just meant everything was more expensive without any benefit for employment.

Bernard Keane — Politics Editor

Bernard Keane

Politics Editor

Before Australia rushes back to protectionism, it would be wise to recall some of the basic reasons why we abandoned it in the first place — and the costs of returning.

Protectionism — whether in its traditional form of tariff or quota barriers that either increase the price of imports or simply keep them out, or in its more modern form of government assistance for industries — costs all of us. Tariffs and quotas are like a GST on every import or import-competing product — you’re paying more every time you buy something. When Australia had high textile, clothing and footwear tariffs in the 1970s and 1980s, for example, the price impact was substantial. For low-income families who sent their kids to schools where uniforms were worn, a Midford school shirt or a pair of Bata Scouts (with the compass in the heel) were a substantial chunk of the week’s family income. You ripped your school shirt or uniform at your peril — it would have to be sewn back up again, not thrown out, and last til you grew out of it.

Now, cheap textiles sourced from countries like China or Bangladesh mean school uniforms are an almost negligible cost for parents. It’s just one small example of how protectionism means higher costs for consumers, and not just trivially higher costs. Business also pay higher costs — in fact, more so than consumers, because a lot of business inputs are sourced from overseas. At the moment, for example, the construction sector spends an extra $2 billion on steel because we’re determined to keep cheap foreign-made steel out of Australia. That means the costs of protectionism cascades through the economy — the business must charge higher prices to cover its higher costs.

[Want to cut construction costs? Try dumping.]

It also means that other, unprotected industries must compete for investment and workers with the industries we’re propping up, increasing their costs and making it harder for companies to flexibly respond to changing preferences or needs. Take health, for example. In 1984, health and caring services employed one in 12 of the Australian workforce. Now it’s more than one in eight. We’ve needed a massive increase in our health and caring workforce — where would those workers have come from if we’d had a less flexible economy that sought to freeze our 1980s economy in amber?

More modern forms of protectionism cost us via a different means: you don’t pay at the checkout, you pay through your tax return. Government support for industry costs money — lots of it. The new Royal Australian Navy submarine program will costs tens of billions more than necessary to be completed locally — with a price premium of perhaps 30% to employ just 2800 workers. So either we pay more taxes, we borrow more (which will have to be paid for with more taxes later) or the government cuts other goods and services. Which hospitals and school do you want to see closed so that we can build the submarines locally? Who should have their welfare cut (although cutting welfare isn’t going to be enough to pay for the subs)? There’s no free lunch.

[Trump-ish protectionism the lazy option for Turnbull, Shorten]

And protectionism is always aimed at particular industries, as a result of political and cultural pressures. We don’t set out to support industries that, say, are nearly viable, but not quite, or industries that are cost-competitive if the Aussie dollar is below a certain level. There was no policy rhyme or reason for what we used to support. Manufacturing has always attracted protectionism because it has powerful unions and well-connected companies that can form an alliance of interests to secure government support no matter who is in power. Agriculture secures assistance because rural political parties make it the price of their political support. Exactly which industry is protected is a political, not a rational, decision — and can be influenced by donations, bribes and other forms of corruption.

It’s also a cultural decision. In Europe and Australia, small-scale “family farming” is protected for “cultural” and “heritage” reasons. In fact, the National Party supports agricultural protectionism in Australia because it is opposed to Australia having a more efficient, productive agricultural sector — which would mean larger economies of scale and less employment. And manufacturing is protected because the idea that manual labour is somehow superior to all other forms of labour is deeply embedded in our culture — only making something is a real job, unlike a mere “McJob” of providing a service to someone else. Male manual jobs were sanctified as authentic work, compared to more sedentary, or knowledge-based, jobs that could be done by anyone with skill.

But protectionism worked, didn’t it? Things might have cost a lot more, and we might have had to pay more via our taxes to support randomly selected industries, but it kept people in work, didn’t it? Well, not really. Let’s pick a benchmark year when there was still a high level of protectionism in our manufacturing sector — say, 1985. At the end of 1985, when manufacturing enjoyed an effective overall rate of assistance of 22% and much higher levels for cars and textiles, manufacturing employed just under 16% of the entire workforce, according to ABS workforce data. Problem is, the jobless rate at that point was just under 8% in trend terms — significantly higher than now.

[Thanks to the unions, old-timey protectionism is back in fashion]

That was the nadir of unemployment after the recession of the early 1980s — in 1986 unemployment began rising again to over 8%. And this was a very different workforce: the employment to population ratio was 56.5% in trend terms compared to around 61% now, and the participation rate was a full three percentage points below its current level. The Australian workforce was a smaller proportion of its population back then, but unemployment was still worse than now.

(If you go back to when ABS record first begin, in 1978, the trend unemployment rate was 6.4%, still higher than now, with even lower participation than in 1985).

So there was no golden era of pre-liberalisation employment in a cosseted economy, unless you want to go back to the 1950s and 1960s, when there was full employment but women were explicitly banned or discouraged from employment in many sectors.

What about if we start breaking down the numbers? Let’s look at the two states that benefited most from protectionism — South Australia and Victoria. In Victoria at the end of 1985 unemployment was 6.5%, the employment to population ratio was four and half points below its current level, and the participation rate over four points below its current level. In South Australia, unemployment was 8.5%, nearly two points higher than now, from a participation rate 1.8 points lower and an employment to population ratio nearly three points lower. Even back in the Fraser years, when automotive protectionism meant an effective rate of assistance of about 80% for that industry and there was an average rate of manufacturing assistance of 26%, unemployment was 6.7% in South Australia compared to 6.6% now. In Queensland, the home of One Nation, unemployment is currently 6% in trend terms. In 1985 it was 8.9% (and 7.2% in 1978), again with lower participation rate and employment:population ratio.

The rise in participation rate since then has been because significantly more women are in the workforce. Female participation nationally is now around five percentage points higher than in the mid-80s. In both Victoria and South Australia, female participation has increased a whopping 11 points. The abandonment of protectionism and the shift from manufacturing to services employment has coincided with, and contributed to, the economic empowerment of Australian women.

What about Australia’s regions? Have they done it tough because protectionism has been abandoned? This is harder to answer because unemployment data becomes problematic with such small sample sizes and the ABS has only been collating it since 1998. So the best we can say is that unemployment in the “rest of Victoria” outside Melbourne was 7.6% in 1998 and 4.4% now — though it has been above 5% for much of this year. In the rest of South Australia outside Adelaide, unemployment was 9.8% and is now 5.7%; in the rest of Queensland outside Brisbane it was 8.2% and is now 6.2%. But you can find some regional Queensland centres like Townsville and Mackay where unemployment is now higher than in 1998, even if other traditional manufacturing centres like Geelong have lower unemployment.

So, at best the evidence that recent economic policies have been bad for regional employment is mixed — especially when you take into account that, despite the best efforts of the Nationals, agricultural productivity has surged in Australia and employment in that sector has actually declined in real number since the 1980s while the rest of the workforce has grown substantially. So whatever else protectionism might have accomplished, there’s no evidence that it provided more employment for Australians. And Australian women have benefited from the economic changes partly wrought by the ending of protectionism.

And there’s one final reason to reflect on why protectionism won’t help. If we put up our barriers to trade, other countries are more likely to follow suit. That means we’ll sell fewer exports, reducing our national income and increasing unemployment. We’ve been here before, in the 1930s, and it was only a global conflict and mass slaughter that got us out of that.

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32 comments

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32 thoughts on “Protectionism provided few jobs and made life tougher for working families

  1. old greybearded one

    Well yes and no. 8% was the unemployment rate counted, not surveyed on the basis that an hour a week is employed. We could buy machinery parts in Australia because it was made here. We also didn’t need as many jobs because you could (imagine this Bernard) live on one income, a house in Greenacre cost about two years wages. John Howard as treasurer had interest rates at 22.5% on overdrafts in 83. More unemployment, how odd. I also challenge you to find this no protection economy anywhere outside of a tax haven.

  2. barry.hindess@anu.edu.au

    The case against a generalised protectionism is hard to dispute. Abandoning protectionist tariffs and other barriers to free trade makes us all better off in the long term, albeit at the cost of short term disruption in particular sectors. It simply does not follow that protecting particular industries or regions is always a bad thing. Without disputing the abstract case for free trade, Hamilton and List argued in C19 USA & Germany respectively made the case for protecting particular industries.Keane’s polemic does not prove them wrong.
    The short term problem with abandoning protectionist measures is that those who suffer most from the consequent disruptions – for example, by losing their jobs – are not the same as those who benefit from abandoning tariffs. Nor does the anti-protectionist polemic take any account of the short-term distributional effects of doing away with tariffs

    1. Decorum

      Your own polemic, this week’s “Word of the Month”, contains within it the seeds of its own refutation, Brother Hindess. You note short-term problems with trade liberalisation but do not contest the long-run gains (“…makes us all better off in the long term…”) Surely that points to an appropriate policy mix (that economists have suggested for eons, by the way) of liberalisation accompanied by measures to alleviate the short-term impacts: subsidies, if you must, or targeted trade adjustment assistance.

      By the way, BK may not prove List, Mill and Hamilton wrong any more than you prove them right, but they were wrong, nevertheless, by virtue of the simple observation that the ends they sought could *always* be achieved by less costly means.

      1. barry.hindess@anu.edu.au

        I agree that ‘polemic’ is too strong. I used it basically because I’m tired of Keane preaching anti-protectionism in his Crikey columns. I don’t deny the long-term benefits of free trade but I seriously doubt the capacity of Australia’s political system to design and maintain a policy mix able to increase liberalisation and still protect its short term victims.
        I’m no fan of List, Hamilton and, even less, of Mill but they do raise issues that need to be addressed in any critique of protectionism. The claim that the ends they sought could ‘always’ be served by other means raises the issue noted above concerning the capacity of our political system to enable rational policy making.

  3. Petra Raptor

    The benefits of globalisation and free trade have floated to the top. Those at the bottom did not do well – and more of them are sleeping in the street.
    Who decided that the benefits should float to the top? Does that build a society that is good to live in?

    1. Lee Tinson

      Clearly the top, who have always been those who really run things, made that decision as they always do. They just have to come up with new ways to say it or do it every time they get found out. The latest one is globalisation. I wait with anticipation their next attempt.

      Whenever a government decides to create new jobs by funding a new project, it’s always “the top” (and Bernard) who come out swinging, screeching about protectionism and ignoring the fact that the money granted actually stays in the economy because the benefit doesn’t all go to the top on its way to Bermuda or some other like place.

  4. David Coles

    The numbers tell one story and it is probably true. There is another one. A couple with a few kids live in a regional town. Small manufacturing firm they both work for goes under. Couldn’t compete with cheap imports. Both unemployed but with benefits they can get by for a while. They need to retrain in something that gives them a chance to find a job. Then, or in time, they will need to move to a much larger place away from family, friends and a place they belong.

    It will all work out if they make the right decisions, find a TAFE provider which isn’t dodgy, if the kids can transition into different schools and if they can find a house in reasonable proximity to prospective jobs. They can do it. Many have done it before. Will they be peeved at having their lives up ended and take out their frustrations where they can. Fair chance of that wouldn’t you say?

    1. Decorum

      But this is true for all sorts of sectoral shifts, isn’t it? Take your story and replace “small manufacturing firm” with “coalmine” and “cheap imports” with “increasingly cheap renewables”. The rest of the story still goes through but what’s the moral? To protect coal from renewables competition? Surely not. Surely it’s to enable the change and implement adjustment policies that lessen the burden on the people on whom the losses are concentrated.

    2. mike westerman

      But surely the management of transitions is an essential role of government, rather than the role coalition government’s prefer of merely pulling the legs from under the table and letting it fall except where they need the porkbarrel.

      Quite apart from the fact that “cheap imports” represent paid work in developing countries. If there is a fault to be laid in that, let it be laid at the feet of Western companies who don’t insist that those jobs come with minimum standards at least in HSE.

      1. Decorum

        Yes, I agree entirely that the management of transitions is an essential role of governments; indeed, its absence is a large part of Trumpism etc.

        1. David Coles

          Management of the transition is indeed critical. Very difficult at the moment with the stuffing up of the TAFE system by governments. It isn’t that hard to predict that industries will change with changes in the global environment, even though some will always hide their heads in the sand. The role of any competent government is to predict the change and put in place measures to assist people in the transition. They will, and should, be marked down if they don’t and the field will open for the ignorant the and the egotists.

  5. rumtytum

    I’d be more open to Keane’s thesis if the figures didn’t sound so heavily cherry-picked. Employment figures now can’t be used for comparisons as they describe a workforce in which only a small proportion work full-time. And why 1985? Why not 1960? I presume it’s because that date makes Bernard’s case look stronger. I wish this piece didn’t make Crikey look too much like a Murdoch publication.

    1. Lee Tinson

      Also the official figures are so heavily massaged for political purposes that they don’t represent any Australian reality. When 1 hour of work per week gets you off the unemployment count, any statement using it as a justification is meaningless.

  6. AR

    Bah humbug, BK and a lump of coal in your stocking. Enjoy Christmas and have a healthy New Year when the Beast of Protectionisms Past will have vanished with the sunburn.

  7. @pfh007

    Unfortunately Mr Keane ignores the most important form of protectionism, one that places a tariff ON all Australian industry and workers. This form of protectionism is as old as the hills and since the GFC has been the technique of choice of most of our trading rivals/partners.

    If you are a mercantilist. like Germany, Japan, Korea, China, Thailand etc you seek to put downward pressure on your exchange rate (to improve the competitiveness of your exports) by exporting capital to other countries. You do this by buying their government bonds, extending credit to their citizens and buying up their assets.

    Most sensible countries heavily restrict unproductive capital inflows – inflows that do not directly and clearly add to the productive capacity of their economy – because they understand that those flows are about manipulating trade.

    There is a reason that Japan still has a manufacturing base in a range of goods and it has nothing to do with being smarter etc – unless you consider exporting capital and manipulating your exchange rate smart.

    Unfortunately, Australia is NOT a sensible country and is run by a bunch of neoliberal obsessives who think that all capital inflows are “investment” and do not understand the difference between a productive and an unproductive capital inflow.

    A productive inflow clearly and unmistakable adds to the productive capacity of the economy. Building a new factory, office or home is productive. Merely acquiring ownership of an existing asset is not.

    Mr Keane is silent on this issue so it is hard to say where he stands but generally people who talk about the evils of protectionism but do not talk about how mercantilist trade rivals manipulate exchange rates, simply do not understand how capital flows are deployed to distort world trade.

    If you are thinking that it must a terribly hard thing to defend a country from unproductive capital inflows it is actually quite easy. Much easier than keeping out Cane Toads and much easier than trying to stop capital outflows – as China is currently discovering. The reason it is easy is that capital inflows by definition involve acquiring title to something within your legislative control. All you need to is to restrict certain classes of capital flow transactions. The big three – and involve HUNDREDS of billions of exchange rate distorting capital flows.

    1. Restrict the quantity of govt securities sold to foreigners. When Mr Morrison sells a government bond to a foreigner it does not expand the quantity of $AUD. He just gets his hands on existing $AUD that are controlled by a foreigner. Selling bonds to foreigners just pushes up the $AUD and the foreign buyers know it.

    2. APRA impose restrictions on local ADI banks from using offshore wholesale markets to support their mortgage operations where the security is existing real estate. The last thing we need is to drive a house price bubble with taxpayer guaranteed foreign debt.

    3. Limit the mere transfer of ownership of Australian capital assets, land and infrastructure without clear evidence and agreement that the productive capacity of those assets will be increased. If they fail to deliver on their promises the foreign buyer will be forced to divest. None of the dodgy FTA that the LNP have strapped up recently have this requirement.

    Mr Keane’s general point about tariffs and quotas are fine but to leave out the unproductive capital inflow elephant in the room is a major omission.

    1. Flynn

      Fantastic comment.

      Might I also add the point that an undiversified economy is a weak and volatile one. Producing only raw commodities or services that are easily offshored or geared wholly towards discretionary spending isn’t sustainable. Only a foolish nation wouldn’t seek to capture the value in its own economy in all sectors.

      Manufacturing is complex and capital and R&D intensive. This takes money, time and patience that businesses can’t deliver alone. This requires government to take an active role in investment in building our industries so that others can form around them.

      By all means let’s not prop up businesses competing against low cost-nations, but let’s take a long term, strategic view on this and pursue some value-creating industrial policy. Looking at similar, high-cost but great value for money nations such as Sweden, Finland or Germany is a good place to start.

      1. @pfh007

        Flynn,

        That is a good point.

        It is hard to tell how the ‘profile’ our economy might change as we pursued a deliberate policy to heavily restrict ‘unproductive capital inflows’ but it is likely to become more varied especially if we limit the export volumes (and auction off the permits to the highest bidder) of particular minerals to avoid an economy becoming single point sensitive.

        Until our public debate (and in that respect Mr Keane can play an important part) about trade extends to the critical issue of distinguishing between productive and unproductive capital inflows we will continue flounder around wondering why OUR economy is unable to compete and the mountain of foreign debt – public and privately owed – and foreign owned assets continues to grow.

        It is bad enough hearing the mantra that all inflows are “investment” from carpet baggers in the LNP but when it comes from the likes of Senator Wong or Joel Fitzgibbon it is depressing.

        1. Flynn

          Yes, it is a depressing pissing contest based on blunt numbers. I think they’ve lost sight of what it is they’ve been elected to do – deliver the country a net benefit, at the very least.

          The whole gas royalty debacle and lack of domestic reservation policy are probably the most egregious examples of our parliamentarians’ attitudes towards our economic development.

          1. @pfh007

            If it were just about blunt numbers it might be understandable but it is depressing because I don’t think they have a clue about capital flows. Whenever you hear an ALP or Green or independent politician agreeing with the idea that a developed first world economy DEPENDS on capital inflows from developing countries like China you are listening to a goose who has not thought for a second about the implications of what they are saying. If anything a developed country like Australia should be an EXPORTER of capital to the developing world.

  8. Peter Hamish

    I would gladly pay a bit more for anything in my shopping trolley if I knew it goes to keeping someone in a job and a better way of life for the broader community. Please stop the scare mongering, Bernard.

    1. Matt Williams

      The thing is, you still can. Bernard is merely saying you shouldn’t be forced to.

  9. Don Willoughby

    Why start with the high cost of living in the 70s and 80s? Costs for clothing and consumer goods for my wife and I with a young family in those years were ridiculously high by todays prices but how was it that I as a lower than average wage earner could support a wife on full time home duties, buy our homes, educate 3 children and drive a 7 year old car, even buy a colour TV for the family at a stupendous $440 in 1976. Most things we bought were made in Australia by companies paying Australian employees with the manufacturers and employees paying taxes in Australia. It didn’t matter that you paid 3 times the price because most of the money stayed in Australia for re-investment and jobs that all kept things ticking along nicely. My family’s month’s wages for a 21″ TV would seem outrageous today but my purchase bought jobs and substantial government revenue via sales, income and company taxes.
    Under the globalised market corporations shift profits to the lowest taxing country they can find, pay staggering incomes to executives whilst destroying wages by transfer of jobs to the poorest countries. The vast hoarded incomes are tucked away or put into further corporate investment participating in the same process. There is no trickle down of wealth, just higher expectations of a growing number of the ordinary populations of nations. Other than the so called pundits, who can be surprised to see the political response from an increasingly disillusioned populace. I just preceded the baby boomer’s and reckon we experienced the best. Can’t say I am optimistic for my grand and great grand children’s world. A pox on “free” trade.

  10. Damien Flattery

    It seems BK will keep throwing “facts” at us, but even after all the recent upheaval STILL hasn’t grasped what is missing.

    A narrative.

    Obviously people should be happier that they can now afford to throw out perfectly good school uniforms because a sweat-shop worker locked in a structurally unsound factory in Bangladesh is churning them out by the container-load (complete with disastrous environmental footprint from excess raw material consumption).

    Because there is only value in quantity and low cost, not in dignity.

    Likewise the whingers should just accept that their manual labour is now worthless and settle into “services”. Who needs pride, a sense of accomplishment and a secure income when you can join a growing pool of desperate people living hand-to-mouth “servicing” those richer than themselves…much like a prostitute or a serf.

    Embrace the future, don’t resist it…because there is only value in quantity and low cost. Not in dignity.

    https://www.project-syndicate.org/commentary/trump-win-economists-responsible-by-dani-rodrik-2016-11

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