Global 20 per cent Tariffs – not a scary prospect

Reserve Bank modelling indicated that, if there were global 20 per cent tariffs on EVERYTHING,  the effect on Australia would be minimal. Clearly, tariffs are not a curse, or evil, or even a serious problem; and there are significant upsides to revisiting tariffs.

Reserve Bank of Australia

A recent freedom of information request resulted in the release of Reserve Bank modelling that concluded that, if there were a regime where every country slapped a 20 per cent tariff on every other country (global 20 per cent tariffs), the effect on the $A was not significant (it could appreciate or depreciate – implying it was a line ball). The effect on unemployment would be minimal – a 0.25% increase, and the effect on GDP would also be minimal – it would shrink by 1% by 2021.

This is not a proposition that is ever likely to been fairly considered by Australian Treasury, since it is ideologically committed to unrestrained free trade, as the relevant Australian government ministers make clear at every possible moment. However, it is a proposition that I presented for discussion in January 2018.

Consequences of Global 20 per cent Tariffs

While Reserve Bank modelling shows that global 20 per cent tariffs could be easily accommodated in Australia, such a change to the global tariff regime is also likely to have positive impacts on the body politic, which is the major interest of this blog. Two of these impacts are considered under the following headings:

  1. Reduced top-level income.
  2. Higher wages and more jobs.

Both of these movements in income will have the effect of reducing inequality across the Australian landscape. The question is whether this will be good for Australia as a whole. I would say “Yes,” but that is a personal and political judgment, not an economic one.

A regime recommending global 20 per cent tariffs would provide an economic model that aims to provide jobs for persons of every skill and education level, instead of the current model that leads to a winner-takes-all economy. Indeed, all western countries have a system in which some segments are able to compete very effectively, but with the rest of the population being left relatively worse off. This is source of current trend towards more inequality – it is not caused by a wicked capitalist plot. The source of this problem is the dominant economic theory, supported by major parties in most Western countries. (In Australia the strongest supporter of this economic theory was Prime Minister Malcolm Turnbull, a lifetime beneficiary of this approach. While it was not this Achilles Heel that brought him down, it did not help his cause, even though he was oblivious to this fact. The king is “dead;” long live the (new) king!)

Reducing Top-Level Income

Without being privy to the details behind the Reserve Bank modelling, one can be sure that the knock on GDP would primarily come from a decline in incomes of those who are currently winners in the current regime. These are globally competitive Australian firms, who would lose part of their first-mover-advantage. Since we do not have many of those, the impact would be relatively small. It would also impact on CEO salaries, since company boards would no longer have to select a CEO who can be the “best in the world,” in order to compete successfully with ever other CEO in the same industry. Competition would more likely to focus on finding a CEO who can compete within Australia. (Finding the “best CEO” is not always the best outcome, with Telstra’s and AGL’s unhappy experience being useful pointers in that regard.) This change would also have the socially desirable outcome of reducing inequality.

Higher Wages and more Jobs

Australia (and other Western nations obsessed with free trade) are currently following a view of an ideal world in which every country aims to do only those things that it is best equipped to do. Theoretically, a country does not grow its own food if someone is able to do it better; it does not make its own goods if someone else is able to make them cheaper; it even doesn’t educate its own people if they can get a better education elsewhere. It sells off all its businesses to the highest overseas bidder, ignoring the long-term consequences of this action.

Under this scenario, the government of each country allows the global market to have free play, based on the argument that, under this system, the collective entire global system is better off, in the (faint) hope that this will then trickle down to individuals in each and every country. At the same time, economists pay no attention to need for each nation to provide jobs for its own people, despite their respective education and skill levels. The world is considered to be a single pudding, with everyone having an equal chance to get their own piece (whether small or large).

The real world is not like this, thank God. In the real world most governments are responsible to their own people, not to some super-intelligent bureaucracy. (The EU is a notable exception, giving extraordinary powers to un-elected bureaucrats – a living lesson in the folly of delegating policy to a “super-intelligent” bureaucracy.)

The simple fact is providing jobs in a diversity of industries, businesses and government services provides better opportunities for everyone to get a job that suits his or her own talents. It is no good talking about Australia becoming a “knowledge economy” – not everyone has the talent to  be a part of this new dreamland economy that “our betters” are planning for us.

While there is a place for a safety net, wages are best set as a function of the demand for workers, so that when there are more jobs than workers, wages will rise for those workers. Australians certainly do not want to repeat the situation in France where restaurateurs are short of workers and want to employ migrants who currently do not have legal rights to work, rather than attracting more entrants into their industry by increasing the wages of their own workers!

Any reasonable and competent government would work towards ensuring that a virtuous situation of jobs for all continues to lift the income of lower paid workers, through education, and improved skills at work.

Efficiency & Global 20 per cent Tariffs

There is a lot of nonsense spoken about the improvement of efficiency as a result of removing tariffs from Australian manufacturing. The plan fact is that the combination of tariff cuts and the currency revaluation were so severe they led to the smashing of Australian manufacturing. The car industry is a case in point. The EU have a 15 per cent tariff regime for cars; Australian leaders thought that a 5 per cent tariff was so good it reeked of “economic virtue.” Yet the EU still has a car industry, despite competition from Asia. Add to this the failure to effectively manage the $A during a period of over-valuation of the $A against the $US, which meant an effective 40% negative tariff working against Australian manufacturing. We congratulated ourselves on our economic management while “Rome burned!”

Innovation

Australia’s political leaders hope that “innovation” will be Australia’s economic saviour in the coming uncertain times. Having smashed manufacturing in a search for impossible to achieve domestic efficiency – sufficient to overcome cheaper labour overseas and larger domestic markets – these leaders need to find something new.

There is some hope of this front. Australia’s mining industry is a world leader, and has generated sufficient profits to be able to fund continuous innovation. Australia’s innovation potential has delivered three world-competitive health product and service companies – CSL, Cochlear and ResMed. It has also delivered four world-class players in Information Technology.

In this way, we can see innovation has delivered good returns for those who are able to be central players in these fields. The profits generated mean that further innovations are able to investigated and pursued if they look promising. The same profits are also able to fund above average salaries.

Yet innovation of this kind is of little direct assistance to those who are not in the top 10% of ability and advantage. It is too easy for the government to just sit back and admire the success of those firms and sectors. The real challenge for the nation’s government is to aid the remaining 90% to achieve success appropriate to their own natural abilities.

Given the natural creativeness of Australians, and their aspirations for a “better” life, all the Australian government has to do is ensure that Australian firms can earn sufficient profit to fund their own innovation programmes. Yet it cannot do this by crushing employee wages and thereby helping firms to increase their own profits by that route. It must somehow increase the potential for higher margins between revenue and costs.

Insofar as governments have any role in this, the first step is to decide whether it wants to establish conditions that serve primarily to increase efficiency of firms – by making all businesses compete on a “level playing field” with the rest of the world – or by providing local firms with a small advantage over global competitors.

Australia had tried the “efficiency route” and delivered a very unpleasant smelling result. It is about time it tried the “innovation route” and then to see what this will deliver.

Global 20 per cent Tariffs & a Level Playing Field

There is no such thing as a “level playing field.” Each country is different, and the pursuit of a level playing field will just mean progressively lower wages for everyone except the most successful of our fellows. This is because of the current world surplus of labour; this means global capital can always seek out the lowest wage employee that can do the job that it wants to have done. Ironically, this is the course of action required by governance conventions – boards have little choice in this matter.

The current WTO objective of “lifting all boats” by lowering all tariffs to zero rating is entirely misconceived. Rather, this strategy will trap developing nations in a permanent dependency on the West. It is something that China will never countenance, nor should any nation, whether developed or developing.

A regime with a target of global 20 per cent tariffs would give emerging industries in developing and developed countries a chance to find a modest level of support so that they can find their feet. It never needs to be reduced below 20 per cent, unless there really is a compelling case for goods to be 20 per cent cheaper. What would be the argument for that? The wealthy getting luxury goods cheaper?

Conclusion

It is cringe-worthy for economists to cite 1930s protectionism as if it provided the evidence for embracing free trade. Don’t they know that the 1930s were a very difficult period because of the crash of the world economies from over-active speculative activities in the 1920s?  A similar thing happened in 2007 and 2008, and the worldwide rejection of protectionism did little to make recovery faster than in the 1930s. Food for thought, eh?

Don’t economists know that America’s economic powerhouse was established in the 19th century, building its strength behind tariff walls? Don’t they know that the world became a much more prosperous place at the same time as protectionist regimes were in place in most of the nations of the world, namely, in the 1950s, 1960s and 1970s?

Rather than protectionism being ridiculous, as opponents of Donald Trump seem to think, the arguments presented here are just standard economic principles. Unfortunately, free trade advocates  have stopped thinking from first principles, and have adopted a convenient, if bogus, theory.

If economists did a bit more original research, as well as looking at history, they would realise that an approach that led to global 20 per cent tariffs would benefit all nations, and certainly “lift the boats” of all developing nations. All that is required is for national economic leaders to seize the moment and the opportunity and argue the case cogently.

Argentina’s Economic Malaise

Argentina’s economic malaise is almost entirely due to blindly accepting prepared economic prescriptions, rather than finding its own way forward. It started with socialism and then accepting Ricardo’s theory about Comparative Advantage, leading to the collapse of a once thriving economy.

Argentina is in the unique position as a country that had achieved advanced development in the early 20th century but experienced a reversal. This has inspired an enormous wealth of literature and diverse analysis on the causes of this decline, but there is little evidence that this analysis has come close to discovering the reason for Argentina’s economic malaise.

Argentina’s Economic Malaise & comparative advantage

The history of Argentina’s economic health is littered with pointers to the unhealthy consequences of the “advice” of economists.

Economic historians point out the Argentina’s economic advantages, placing it squarely in the real of Ricardo’s “comparative advantage.” Here is a summary presented in Wikipedia:

Argentina possesses definite comparative advantages in agriculture, as the country is endowed with a vast amount of highly fertile land. Between 1860 and 1930, exploitation of the rich land of the pampas strongly pushed economic growth. During the first three decades of the 20th century, Argentina outgrew Canada and Australia in population, total income, and per capita income. By 1913, Argentina was the world’s 10th wealthiest state per capita.

Ignoring the economists’ mantra that each country should concentrate of its own comparative advantage, from 1930 to 1976, the various governments of successfully diversified the nation’s economy by engaging in a process of industrialization, behind a protective tariff regime.

To the amazement of economists and economic historians, “Despite this [Argentina’s protectionist regime], up until 1962 the Argentine per capita GDP was higher than of Austria, Italy, Japan and of its former colonial master, Spain.” So one economic historian amazingly concluded, “Beginning in the 1930s, however, the Argentine economy deteriorated notably.

So one can see, even though economic policies that do not respect Ricardo’s theory can serve a country very well, most economists are so blind they cannot see what stares them in the face.

What they cannot or will not see is that no country is better off in the long term by concentrating only on their strengths. Only a diverse economy can work for everyone, not just those who are occupied in the “advantaged field.”

Argentina’s Economic Malaise – Peronism

Part of coup that seized power in 1943, Juan Perón became Minister of Labour. Campaigning among workers with promises of land, higher wages, and social security, he won a decisive victory in the 1946 presidential elections. Under Perón, the number of unionized workers expanded as he helped to establish the powerful General Confederation of Labor.  This sowed the seeds for the later humiliation of Argentina’s economy.

Beginning in 1947, Perón took a leftward shift in economic policy, first breaking up with the “Catholic nationalism” movement. This led to gradual state control of the economy, reflected in the increase in state-owned property,  control of rents and prices. The expansive macroeconomic policy, which aimed at the redistribution of wealth and the increase of spending to finance populist policies, led to inflation.[95]

Thus it is with socialism everywhere! The Whitlam experiment is Australia’s practical demonstration, with unsustainable higher wages, out of control inflation, and leading (socialist) economists saying, “There is nothing to see here – all is OK.”

In the 1950s and part of the 1960s, the country had a slow rate of growth in line with most Latin American countries. Stagnation prevailed during this period, and the economy often found itself contracting, mostly the result of union strife.[50]  Is this not the story of Australia after Whitlam, until Labor’s Hawke and Keating brought it to an end?

The story of Argentina’s economic malaise can be repeated, with a varied story line in many countries.

Argentina’s Economic Malaise – After Peron

Arturo Frondizi won the 1958 presidential election in a landslide. He failed to restore prosperity to the nation. He was replaced in another coup in 1966, which sought to restore national prosperity, beginning with more state control of money, wages and prices.

After 1966, in a radical departure from past policies, no doubt encouraged by the “smartest economic minds,” the Ministry of Economy announced a programme to reduce rising inflation while promoting competition, efficiency, and foreign investment. The anti-inflation programme focused on controlling nominal wages and salaries. It had striking benefits, with inflation decreasing sharply, decreasing from an annual rate of about 30% in 1965–67 to 7.6% in 1969. Unemployment remained low, but real wages fell, as they always will once Comparative Advantage theory is allowed to take control of economic thinking.

By 1970, the authorities were no longer capable of maintaining wage restraints, leading to a wage-price spiral. The lower real wages that are inevitable under the new economic orthodoxy are completely unacceptable to the majority of the people. In a democracy there can be only one outcome – an change of government.

Despair over the incompetent economic management of the post-Peronist period led to the election of the Peronist, Hector Cámpora in 1973 and then Perón himself soon after. When he died in 1974, he was succeeded by his wife, until she was deposed in a military coup in 1976.

The new Perónist regime was characterized by an expansive monetary policy, which resulted in an uncontrolled rise in the level of inflation. Here we have the same problems being repeated again – when will socialists ever learn?

Comparative Advantage – Continuing Problems

The dominance of the economic theory of Comparative Advantage led to a process of continuous decline. Just how the Argentinian economists thought that Argentina could compete with the USA with its own comparative advantages, which are numerous, is incomprehensible. Holding up manufacturing firms via state support just was not an effective band-aid solution. Argentina’s industrialization fell to levels maintained in the 1940. So much for a diversified economy, full employment, high wages, and political stability.

Argentina’s Economic Malaise – Today

The socialists were thrown out in 2015 and Mauricio Macri became president. At least Macri rejected socialist lies, but nothing would be fixed since he had swallowed economists’ Free Trade Lies. When he tried to implement the economists’ prescription to get Argentina back on its feet, he failed and Argentina’s Economic malaise continues today.

Yet economists still think that the solution to Argentina’s economic problems is more of the same, with the Financial Times completely perplexed that Macri’s presidency has not solved Argentina’s problems.

Argentina has embraced economic orthodoxy before, only to be blindsided by financial markets. This week’s mounting panic, which has seen the peso plummet and prompted the central bank to raise interest rates to 60 per cent, is just the latest example, prompting many to wonder: what has President Mauricio Macri got wrong?

The Financial Times cannot accept that the problem is in the economic model that it pushes every day of the week. Instead, it comes up with the lame excuse that one answer is “poor communication.” Actually, it is the only answer that it is willing to offer.

The same article cites an Argentinian economist, who says that there is no explanation for the current crisis.

“There is no logical explanation for what is happening,” said Christian Buteler, an Argentine economist, who called on the authorities to explain this “alarming” situation that is “completely out of control”.

The article concludes with argument from another Argentinian (capitalist) economist, reminiscent of arguments that I heard from (socialist) economists during the Whitlam era, “There is nothing to see here – all is OK.”

“[The problem is small] compared to the size of the market fear,” he says, arguing that the financing gap was small for Argentina’s $545bn economy.

Capitalist economists seem to think that ordinary workers in developed nations should accept ever falling wages and less secure employment. If challenged, they say that automation is the problem and will be increasingly the problem. Yet this is another lie. National states coped with the automation of industrial processes, but they will never be able to cope the with automation of other process if the real economic levels are handed over to global corporations in a fit of ideological blindness.

Political Policies in Australia

Political Parties need coherent political policies. The recent elections in Australia, UK and USA prove that personalities do not matter as much as believable political policies.

Here are a range of policies that non-socialist Australian political parties could forward believably to the Australian electorate, and which would be appealing to a majority of voters.

Employment and Business:

  • Our primary goal is “a job for everyone who wants one.”
  • We consider that jobs are more important than “low prices for everything!”
  • To create jobs, the nation needs business investment.
  • Investment and profit from investments is a necessary part of a successful economy.
  • Improving the profitability of Australian businesses is a key goal of our party.
  • Improved profitability allows businesses to employ more people and to pay better wages
  • We believe improving profitability is more important than reducing business taxes.
  • To achieve these things, we will:
    • Encourage export activities where Australia has a relative comparative advantage, or where an Australian-driven innovation gives a particular business an advantage.
    • Fund the CSIRO to continue to do fundamental research that the organisation believes to be in Australia’s interests. The CSIRO will report annually to the Parliament on the previous year’s activities, demonstrating the relevance to Australia’s prosperity of the focus of their work.
    • Introduce a base-level 15% tariff on all inwards goods and services. We will also a support higher tariffs on goods and services where these are imported from countries which are judged by Australia to be unnecessarily allowing their own people’s wages to be set too low.
    • We will not require tariffs to be applied to high value equipment imports. Instead, we will support any local manufacturing of these via a subsidy.
  • We believe Australia should be active in reforming WTO rules, which are currently out of touch with the current economic environment. The WTO will not be permitted to frustrate our legitimate national ambitions.
  • The Productivity Commission will be required to assess the employment consequences of their recommendations, including assessing the real alternative employment prospects for displaced workers.

Monetary policy:

  • We believe that Australian businesses can have access to the necessary local financial resources to fund most of their own development, and should not be overly dependent on overseas cash flows into the nation. Therefore:
    • The Reserve Bank will be required to restrict the over-valuation of the Australia dollar, with appropriate interest rate policies, and by offsetting speculative currency flows into Australia.
    • The Foreign Investment Review Board will be required to assess and report on the non-financial benefits and costs of intending foreign purchases of existing very large Australian businesses and assets.

Budget repair:

  • We will establish a route towards a small “situation normal” budget surplus by 2021.
  • We will require new superannuation contributions to fully-fund individual pension needs, until the individual’s new superannuation money runs out.
  • Medical insurance will no longer be subsidised. Instead, all doctors will be encouraged to bulk-bill, including for hospital work. Medicare rebates will be lifted to provide a level of income for GP and specialists that is judged to be appropriate given the training, skill and risk involved in this work.
  • We will closely monitor and eliminate all attempts to use government funded programmes in a way that exploits too-easy government funding.
  • Tied grants to the States for state responsibilities will be eliminated.
  • Any significant new funding commitments will be met by increasing taxes, and will not proceed without appropriate funding (no more unfunded NDIS-type and Gonski-type commitments).

National Government

  • We support a federal model of government for Australia, with clearly defined responsibilities for the Federal and State arms of government.
  • We will work towards the goal of State Governments being self-funding.
  • We support fixed 3 years terms for the Federal Government, with the caveat that the Governor-General (G-G) be empowered to call an election where the G-G believes that it is in the nation’s interests. The G-G must formally advise the Parliament and the public of the substantive reason for calling an early election: it cannot include reference to advice from the Prime Minister, but must explain the substantive reasons for the G-G’s decision in relation to the nation’s interests.
  • We support the appointment of a Governor-General by a majority of the members of the House of Representatives. This will happen three months after returns are finalised for each general election, and otherwise only if the office is vacated by the G-G due to death, resignation, or a Full High Court determination of incapacity.

Industrial relations:

  • We will work towards establishing and maintaining fair working conditions for both employees and employers.
  • We will support workers’ wages with policies that encourage private sector employment at fair wages.
  • The Fair-work Commission will set the minimum wages for each work category, replacing union-based awards.
  • The Fair-work Commission will be required to set penalty rates for weekend work and overtime to reflect community standards and to ensure that small businesses are not disadvantaged in comparison with large businesses.
  • Unions that seek to intimidate workers or businesses will be closed and funds confiscated. Such confiscated monies to be returned to members on the basis of member contributions over the previous 5 years. Any funds deemed to be illegally obtained by the union will be retained by the relevant government body and used for general expenditure purposes.

Agriculture:

  • We support a strong agricultural sector, both for export and local consumption.
  • We believe that, wherever possible, each nation should aim to be self-sufficient in agricultural staples. Therefore:
    • We see a role for large-scale agriculture in being a swing producer in the world market for grains and similar staples. We support on-farm storage of grains and we are willing to provide financial support for farmers carrying large stocks of these goods from season to season.
    • We support modest Australian tariffs for high-labour-cost products, such as citrus fruits and market gardens.
  • We support the export trade in livestock, as well as developing more regional abattoirs.

Resources

  • We support a strong state-based resources sector.
  • We confirm that states should charge royalties as they see fit.
  • We will not support any “Super Tax on Ordinary Profits,” charged at a federal level, irrespective of its configuration.

Superannuation

  • We will ensure that, in future, the Superannuation Guarantee Levy actually does its work of reducing the reliance of ordinary workers on a government-funded pension.
  • Existing Superannuation funds that are not set aside for a pension replacement income stream will be taxed at a reduced rate, but will no longer be tax free.
  • We support allowing access to accrued Superannuation money to fund the purchase of a first home. (A home is both a lifestyle asset, and an asset that is useful in retirement: it is a good use of Superannuation money.)
  • We are pledged to review the Superannuation Guarantee Levy over time with a view to reducing it, or giving employees earlier access to their own money by other means.
  • Australian governments to provide public-servant-run superannuation funds, each with a different profile, including an investment focus on Australian infrastructure and companies. Low fees will be a feature of all these funds.

Commonwealth-state relations:

  • States will be treated as adults, responsible to their own voters for how they spend their money, whether raised independently or from the GST.
  • GST will be spread per state on per-capita basis, but with a re-instated federally-funded Grants Commission (with a fixed annual budget).
  • We will establish clear definitions of federal/state responsibilities for funding and service provision, so that Federal / state duplications can be removed completely.

Indigenous Affairs:

  • We support the idea of innovative self-funding and self-governing indigenous communities.
  • We believe that all remote indigenous communities should be encouraged to provide most of their own services for themselves.
  • Therefore:
    • Where there is a clearly expressed desire for this to happen, we support indigenous communities being able to elect their own representive councils.
    • Such indigenous councils to raise their own rates, and to spend the money in ways that benefit their own communities.
    • As a starting incentive, federal government subsidies to be provided to such councils on a $1 for each $1 raised, with a plan to progressively reduce this assistance over a number of years.
    • Indigenous communities to be encouraged to have their own indigenous plumbers, carpenters and other relevant trades, living in their own communities.
  • As far as is possible, all services to indigenous communities to be provided locally, even where this is perceived not to be the cheapest way of providing these services. Federal funding will only be used locally and only used to pay wages to members of that indigenous community at the current Fair Work wage rates for work certified to be completed.
  • We will support moves towards state-based negotiations for a treaty with the descendants of First Australians. We will not support a federal treaty. We believe that a treaty is a regional issue, affecting every “mob” differently.
  • We will not support a change to the Australian Constitution to recognise the descendants of First Australians, unless there is a clear indication that an overwhelming majority of these descendants want this to happen.

Climate change:

  • We will target for a cap of 2.5 tonnes CO2 emissions per person per year by 2040 (current emissions are 15 tonnes per person).
  • We will argue in international forums for a target maximum CO2 level of 450 ppm (currently CO2 level is around 405 ppm, and growing by 2 ppm per year).
  • Preference and funding will be given to measures that will physically reduce emissions, rather than concentrating on failed economic schemes designed to achieved that effect.
  • Initially, stability will be returned to the Australian electricity market by mandating that no RET subsidy will be paid for electricity generated when it is not required. The RET targets will be adjusted accordingly. Furthermore, the current RET scheme will be capped at the legislated levels (adjusted as above), and not changed, up or down.
  • Renewables, beyond current RET scheme provisions, will be required to stand on their own, and not receive further subsidies.
  • We do not expect that this will cause any difficulties in achieving the above ambitious CO2 reduction target.

Education:

  • We support basic education standards being set federally, but states and schools being able to set curriculum within those standards.
  • We support state management of state-government schools. We propose federal oversight of non-government schools.
  • We will support 80% of all school funding being federally provided, based on Gonski 2.0 funding calculations.
  • We believe that education should be linked to students’ abilities and aspirations; not every student wants to go to university, but the vast majority of students want education to lead to meaningful employment.
  • We will enforce strict rules on HELP-funded technical education providers to ensure that they provide value for money.
  • We will work to provide an environment where state-based TAFE colleges can thrive.

Hospitals:

  • We propose federal funding of doctors’ fees in hospitals based on a fixed payment per procedure.
  • We propose that the states continue to fund all other costs in state hospitals.
  • We support state management of state government hospitals and propose federal oversight of non-government hospitals.

NDIS:

  • Operation of NDIS scheme will be closely examined and fine-tuned in order to keep funding and expenditure within community expectations, while taking into account community willingness to contribute to its funding.

Immigration:

  • An active immigration program will be supported, with a mix of humanitarian immigration and business-driven immigration.
  • In humanitarian immigration, preference will be given to those who are at high risk of systemic persecution and those who have a very good prospect of integration into Australian society.

Environment:

  • We will protect the environment in accordance with the best science and in line with community expectations.
  • We will examine whether increased water storage facilities can be built economically and sustainably.
  • We will work towards the reduction of the usage of plastic bags and packaging.

ABC and SBS:

  • ABC and SBS will be required to demonstrate that they are meeting community expectations across all communities.
  • Funding of these organisations will be reduced if they cannot demonstrate this to Parliament’s satisfaction.
  • There will no further funding of SBS’ Viceland service.

Lower Company Tax Rates will NOT fix Economic Malaise

Company Tax Rates are not the reason that economic growth is sluggish in the current global economy. Lowering Company Tax is not a priority

While cutting company tax rates to attract and keep businesses in the country is currently an attractive idea, it is without proper theoretical justification.

Company tax on Domestic Earnings

If I can earn 2% profit on domestic sales of $1b = $20m, and pay 10% tax, then the net income I can earn is $18m. However, if I can earn 5% profit on sales of $1b = $50m, and pay 25% tax, then the net income I can earn is $37.5m. I am much better off if I can increase my profit margin, rather than seeking lower company tax rates.

If imports are subjected to a 5% tariff, then this situation is more than possible.

Furthermore, if I need a 5% profit in order to profitably invest, then I won’t invest in a high-cost country. This is closer to the real situation in the world, where there is not a problem with corporate tax rates, but there is nothing in which to invest in the West. Competition from the East is driving away all investment opportunities, which is actually also hurting the East, since it markets are drying up.

The current situation is both appalling and lacking in a theoretical justification, despite the dominance of this ideology among the elites. If they don’t wake up, they will lose all influence in the West, as is beginning to happen in the USA, France, and even in Australia.

Global Trade Reform is required

As Donald Trump has demonstrated, the West’s voters are calling for a trade realignment. None of the main-stream parties are really on board (even the Republicans are running on Trump’s coat-tails and are not “true believers”). Indeed, President Trump has created a catalyst for global trade reform. The USA could use this opportunity to implement reform via WTO that will work for both developed and developing nations. Yet it remains to be seen whether Global Trade Reform will happen.

Since this not now (May 2018) likely to happen, governments need to look at smaller changes that they can make. For example, in Australia, the government could introduce an Overseas Out-Sourcing Tax. This should be levied to cover the additional costs that Australian companies have to pay for locally sourced labour. These costs are: Superannuation Levy 9.5%, payroll tax 5%, and leave payments 5%+. That then adds to a 20% levy that should be charged for every company purchasing services from overseas – it is just a case of moving towards the (impossible to achieve) aim of a “level playing field” (I use their terminology against my opponents). This can be easily collected via a self-assessment system, added into the BAS.

Company Tax on Export Earnings

In regard to exports, why would I set up in any high-cost country to export to the world? The reason must be the quality of the staff that I could employ, and the higher export sales (or lower final costs) I can achieve. Let us follow that scenario.

If I can earn 2% profit on export sales of $1b = $20m, and pay 10% tax, my net income will be $18m. However, if I can earn 2% profit on export sales of $2b = $40m, and pay 25% tax, my income will be $30m. If this were the situation, my decision to move my business to a high-cost country would be entirely rational on the grounds of higher potential net profit after tax, even with a higher rate of tax.

Surely, few can dispute the significant advantages of more skilled staff. If anyone wishes to do so, please explain why tech companies are located in high wages, high taxes, California, rather than in Bangladesh, with low wages, and a tax holiday.

Domestic Demand drives most Business Income

Most businesses primarily service domestic demand. If that fact were given more attention, the current economic malaise would be fixed overnight.

Nevertheless, mainstream leaders like to mix with the (export) winners, not with domestic players. Their obsession with a particular economic ideology will see the world being changed, but not in the direction they are planning. Lowering company tax should NOT be a first priority.

Elite Capitalism – It is NOT the Future

Elite Capitalism has been running the world’s governments for 30 years, but it has failed to deliver for ordinary voters.

Elite Capitalism and Free Trade

The ideology of Free Trade is built on the premise that each nation should concentrate of those things upon which it has comparative advantage. It is a static theory, which has not changed much in over 200 years. Nor have the advocates been willing to learn from the downsides of the theory that have been experienced over the last 200 years.

The ideology of Free Trade began with the theory that, in 1820 and forever afterwards, Portugal should continue to concentrate on wine, and the UK should continue to concentrate on textiles. It is theory that is based on a static world, and actually one in which entrenched poverty should be endured forevermore. And so it has happened.

Free Trade is also built on the premise that getting goods 20% cheaper is worth whatever disruption is caused by open trade borders, even to the extent that it can cause 10% more unemployment than before. Given the loss of social cohesion of such a policy, it should never have been accepted.

Even though it was not the intention of the original theorists, Free Trade has led to intolerable levels of inequality within nations, and between nations. This is because Free Trade puts too much power in the hands of global corporations, since they are able to move operations to the cheapest place in the world, and to wherever government regulations and taxation are the weakest.

Phony arguments of Elite Capitalism – Trade

In Australia, we have a government that was elected on a mix of the ideologies of Democratic Capitalism and Elite Capitalism. In simple terms, the Nationals support the principles of Democratic Capitalism (the economy must serve the interests of the voters), and the Liberal Prime Minister, Malcolm Turnbull believes the nation is best served by following a model of Elite Capitalism.

Turnbull approach has some appeal, since it can lead to a higher overall national GDP. Yet in defending his theory, it is appalling that he has decided to follow the UK example of “Project Fear” (in opposing BrExit). In the last Weekend Australian he made the claim that “Protectionism leads to Poverty.” This is an absurd claim that has no foundation in history or theory.

Of course, there are sufficient examples from history to show “Isolationism leads to Poverty!” If that were Turnbull’s position, there would be no problem in accepting it, but that was not what he claimed. Turnbull is ideologically committed to Free Trade. He proves to everyone that he does not have a rational argument in favour of unrestrained Free Trade, since he resorted to this pathetic argument in its favour. Don’t stand in the way of an ideologue when he (or she) is in full flight!

Rather than being hurt by protectionism, Australia’s egalitarian society was built on protectionism: it cannot be said that it led Australia into poverty. Australia had unemployment running at around 2%  until the Labor government, blinded by ideology, decided to revalue the currency upwards and reduce tariffs over-night. Since then, unemployment has reverted to world’s average of about 5%, and global capitalists have had a freer hand to control Australia’s economic life.

The world-ranking US economy was built on protectionism in the 19th century. If the Free Traders had won the argument in the middle of that century, the US would have remained an economic backwater, mostly growing cotton and other agricultural products, and the UK’s industrial base would have kept on growing and growing. Is that what Free Traders want for the developing nations of the world? Fortunately for China (and to a lesser extent India), it thumbs its noses at the Free Trade rhetoric of the West, while taking advantage of the ideological blindness of its trading partners.

Phony arguments of Elite Capitalism – TPP

The most objectionable part of the TPP is entrenching the power of global corporations via ISDS clauses. These clauses allow global corporations to sue national governments if those national governments pass laws to reduce their ability to make a profit (even at the expense of the interests of ordinary voters). These clauses are the greatest threat to national democracy in the modern world.

Even if the TPP becomes enforceable, it will be a Pyrrhic victory for Elite Capitalism. This attempt to use the rule of law to enhance the interests of corporations over voters will not be tolerated by ordinary voters. In Australia, the first sign of difficulties to come can be seen in the attempt of Philip Morris to use the ISDS clauses of a Free Trade agreement between Australia and Hong Kong to overthrow Australia’s plain-paper cigarette packaging legislation. It was the first sign of problems to come. Success would not have led to the abandonment of the rule of law in international trade, but it would have sown the seeds of that outcome.

TPP is designed to entrench the power of Elite Capitalism forever, putting ISDS clauses into law, so they cannot be overthrown by future governments. It is the enemy of Democratic Capitalism. If the current Australian government cannot see that, they are inviting other parties to take up the ground of democracy that they are abandoning. Already the Liberals are losing ground with the electorate, and it is only the complete unacceptability of the ALP opposition that is keeping the Liberals within reach of re-election to government.

Phony Arguments of Elite Capitalism – Angela Merkel

Angela Merkel has said the economic and political problems can best be solved via global solutions. She opposes Donald Trump’s proposition that nation states should solve their own problems. In this, Merkel is wrong: most problems are local, and are best solved with local solutions. Donald Trump is right.

20 years of the Euro has shown that, even in Europe, region-wide solutions don’t work. Portugal, Spain and Greece are still struggling, while Germany is going very well. It is not surprising that Donald Trump correctly says that the EU gives Germany hegemony (at least in economic matters). At least we can agree with Merkel’s response, namely that the EU can look after itself (implying that it doesn’t need Trump’s gratuitous advice). Exactly, the EU problems don’t need a global solution, they need a EU solution. It is a pity that Merkel won’t consider the obvious solution – abandoning the Euro.

Most developing nations have a dominant agricultural sector. One thing is certain from a study of economic history – global trade in agriculture has mostly led to impoverishment of the agricultural sectors of less developed nations. It has led to the over-development of single crop economies (the so-called banana republics, etc.), which has made those nations vulnerable to global price movements. Yet the agricultural sector is something that national governments could enhance, as has been done in Australia for about 100 years, starting with government funded and run storage and pricing schemes. Now, in Australia, these are often run by individual farmers, who store crops on their own farms. Such is the nature of dynamic local solutions, designed to solve local problems.

Elite Capitalism is the problem – not the solution

It is time we recognized that Elite Capitalism is the source of the world’s problem with increasing inequality. It is inevitable it will lose its hegemony. It is also ironic: Donald Trump is the only one willing to call out, “The Emperor has no clothes!”

Stable Electricity Supply & RECs

The oversupply of wind-power has seen the question of “stable electricity supply” enter into public debate in Australia. It is now very urgent that Renewable Energy Certificates (REC) scheme be modified to make it work for the nation, rather than just for “Green Advocates.”

Excuses are not enough

Update 10 February 2017. Now we discover that the REC scheme is even causing gas fired generators to be turned off. This situation is ridiculous.

RECs undermining a stable electricity supply

Who would seriously contemplate implementing a scheme that encouraged wind-farm operators to produce electricity in the middle of the night, when it is not needed? The Australian government did, via the REC scheme, in 2000. Surely it is the responsibility of governments to implement policies that result in a stable electricity supply, not an unstable one!

Under the current REC scheme, wind-farms can even deliver electricity to the grid at a negative price, since this apparent loss can be offset by approximately $25 per MWh. This is currently the approximate rated proceeds for each certificate produced, whether the electricity generated is really needed for successful grid operation or not. The electricity retailers buy this undifferentiated certificate, since this helps them to meet their “renewable obligations,” and they have no need or way to differentiate such certificates for themselves.

The downside of this is approach is that coal-fired generators (and nuclear for that matter), cannot be affordably run if they have to be shut down every day because there is insufficient demand from the grid for the electricity they would generate during the night. Unlike a wind-farm, coal-fired generated cannot be just “run on idle,” since they need the back-force of generating the electricity to offset the fierce power of their steam-driven turbines. Yet Alinta’s Port Augusta coal fired generators were turned off at night, causing Alinta’s operation to be unprofitable, and therefore to be shut down forever.

Who would support a scheme that caused the former back-bone of the South Australian electricity supply market to be shut down prematurely, causing unemployment in Port Augusta, and for South Australian businesses to consider moving interstate? The South Australian Labor government did and still does.

It is ideological madness to continue with this short-sighted approach, involving undifferentiated “Certificates” that do not distinguish between the “no need” electricity pushed into the grid by wind-power during the night, and the truly “useful” electricity generated by wind-power during the day.

Did the South Australian government know that too much wind-power was already causing disruption to the electricity supply in 2011? Yes. That was when an academic study showed the problems in the supply situation and called for an upgrade to the high voltage inter-connector to Victorian brown-coal backup power, as a way to address the difficulties. (My 2012 comments on this report can be found here.) So the inter-connector was upgraded, which led to even more wind-farms being installed in South Australia. Folly, built upon folly.

Wind-power – a viable Renewable option

The risk to the wind-power project is palpable. Yet wind-farms (and nuclear – but who wants that after Chernobyl & Fukushima?) are the only current viable solution to the need for long-term renewable electricity supply.

Despite the support of the Greens & government funded ARENA, current generation solar is a mickey-mouse solution, only able to supply electricity economically at the household level, not at the grid level, with or without batteries, except during peak periods.

Of the ARENA funded solar projects, only the Genex proposal to use grid-supplied electricity to create pumped-hydro electricity makes sense. This is a Queensland project, a state where there is almost no wind-power, despite the Queensland government dreamland proposal for a rapid uptake of renewable energy.

Grid-supplied electricity, generated overnight and purchased from the grid for about $25 MWh, and sold back to the grid at $275 MWh can make good logical sense, provided the capital cost is not too high. Pumped-hydro will deliver a stable electricity supply. This particularly applies to wind-power, because most wind-power is generated at night, when the wind blows more strongly, but also when it is not needed. By utilizing pumped hydro, “unneeded” electricity can be stored over the whole night and then released during the day. Yet it is not happening. Obviously there needs to be a push to force governments and the wind-farm industry to utilize pumped hydro. This can be achieved just by encouraging the Australian government to tweak the REC scheme.

RECs & a stable electricity supply

(Updated 10 February 2017)

My proposal is that RECs should NOT be counted if the electricity is generated in off-peak periods (10 pm to 7 am). This will allow the market-distorting effect of undifferentiated RECs to be eliminated.

Excluding electricity generated during off-peak periods means that wind-power will not soak up all the available demand during the night. Therefore there will be sufficient demand for base-load generators to keep working all night, and that unnecessary, costly, inefficient, and high carbon-emitting shut-downs and start-ups will be avoided. While it may be too late for Alinta’s Pt Augusta plants to be re-instated, it could allow the remaining Victorian Latrobe Valley generators to keep working until there is sufficient wind + pumped hydro capacity to permit them to be finally and rationally phased out. It could also mean that Engie’s Pelikan Point facility could be kept running.

While the concept outlined here may be a challenge for Greens voters and politicians, they should get on board. It is the only currently viable approach to achieving the higher level of renewable energy generation that they would prefer. At least, if the current REC scheme is continued, they are likely to see the de-industrialization of South Australia, so perhaps they will rejoice over that!

Changes to the REC Targets

(Added 10 February, 2017)

In the Australian system, given the highly politicized nature of the debate on this subject, changes to the REC target are likely to be too difficult to implement. This applies even though such changes would be needed to effectively keep the current arrangements in place. Therefore, it is proposed that no change be made to the REC Targets, but rather that, after this scheme is implemented, renewable energy providers be allow to issue a REC for each 0.625 MWh generated (rather the current arrangement of 1 REC per 1 MWh).

APEC 2016 in Peru discusses Protectionism

While the national leaders at the APEC 2016 conference in Peru are willing to acknowledge that “some people have been left behind,” there is little agreement on the action required to fix this.

Peru points the way

In an interview translated on SBS TV (in Australia), Peru’s Finance Minister, Mercedes Araoz said, “What they [the discontented voters] are taking issue with is valid in all societies in the face of globalisation, and perhaps a bit of rejection of it. The request is to apply some mechanism to make it more inclusive.”

Nowhere is the need more obvious to make national economies stronger & fairer than in the developing world. Apart from their own entrenched income inequalities, they are also faced with a most daunting prospect: the first-mover-advantage over them of developed nations. Indeed, it was the intention of the TPP to entrench that advantage well into the foreseeable future. For the sake of Peru, and other vulnerable nations, it is fortunate that this treaty has been put on hold. May it be buried forever, and along with it an attempt to game the system in favor of the largest corporations in the world.

Ms Araoz’s plea

Responding to Ms Araoz’s plea, I argue that the required first step is to convince national governments that they can manage their own affairs. Once that concept begins to be reconsidered, then each national government can look at the way in which it can increase the prosperity of its people.

We can look at the USA as an example. Prior to the current obsession with globalization, which started about 30 years ago, the USA domestic sales of goods and service was about 94% of GDP. They made stuff and consumed it themselves. It was a happy and prosperous period, when people served each other and shared a national vision. Now domestic sales are about 84% of GDP, and there is considerable angst throughout large sections of the nation.

Higher exports and imports in the USA have had three results:

  1. Many goods are much cheaper now than before, thus making the consumer (who has a job) better off.
  2. Businesses are more able to compete in the export market because they have access to cheaper labor, such as from Mexico.
  3. Whole cities have been devastated by loss of entire industries, and in many once large and prosperous regions of America the people are desperately looking just to survive. The cheap goods are not much use to them.

So one could ask, “Has the move towards free trade been worth the cost?” The answer has to be both yes and no, depending upon who you ask. Winners have won even more, losers have lost most of what they had before.

A new Economic Mechanism from APEC 2016

When it comes to finding a new economic mechanism at APEC 2016, one doesn’t need to be too concerned about developed nations. They have mature democracies, and the voice of the people will guide their leaders to work through the issues that I have discussed. The role of the leaders of APEC 2016 should be to find a new mechanism that will be useful for developing and emerging nations.

Thinking people must know that, while developing nations have improved their national GDP by exporting to the developed world, this is not a very good long-term strategy. If developing nations look forward to a future as just being a source of cheap imports for the West they are condemning themselves to a future of relative poverty. While there is any nation in the world that doesn’t take control of its own destiny, there will always be a cheaper source of labor upon which the West can depend.

Ms Araoz’s plea at APEC 2016 implies the need to create a mechanism that will enable each developing nation to develop a diverse economy, in which all its people can prosper. Such a mechanism would enable the full talents of its own people to be exercised within that nation, with the more skilled and talented being able to raise the (economic) boat for the entire nation.

Yet the question is, “How can this be done when the West owns almost all of the intellectual property, both that which is patented, and that which is inbuilt into their entire economic, government and educational system?”

A 20% Tariff would Level the Playing Field

The APEC and WTO objective of lowering all tariffs to zero rating is entirely misconceived. Such a strategy will not “lift all boats.” Rather, it will trap developing nations in a permanent dependency on the West. If APEC 2016 doesn’t change direction, the meeting can be considered to be a failure.

One of the strategies that could be adopted by APEC 2016 is to support the introduction of an extra 20% tariff across the board. This would give emerging industries in developing countries a chance to find a modest level of support so that they can find their feet. It never needs to be reduced below 20%, unless there really is a compelling case for goods to be 20% cheaper. What would be argument for that? The wealthy getting luxury goods cheaper?

A Hypothetical Example

Let us assume that there is a country with a population of 10 million people. In this country, the top 10% of the population earn 90% of the nation’s income. Most of the rest are either subsistence farmers or poorly paid factory workers. Let us assume that the national GDP is $40 billion, with the top 10% earning $36,000 each per year and the rest earning $450 each per year. In this country 40% of the national income is from exports, and it spends this on imports.

Now let us assume that a 20% tariff is applied across the board in addition to any current tariff. After this, innovative entrepreneurs are likely to see the opportunity to make many of the goods consumed by the top 10%, which were previously imported. As a result, demand for labor increases and whole new class of more highly skilled workers develops. As a result, a number of those previously in the bottom 90% now find themselves in a new echelon of society. Now the society’s division is 20% who command 80% of the nation’s GDP. While some of the relatively very rich will have lost some of their income along the way, following the disruption brought about by this reform, let us say that the nation’s GDP has now grown to $50 billion. All of this extra goes to the new top 20% of the population, so that their average income is now $23,000. This is lower than the previous average of $36,000, but it is spread over more people. The nation is already better off, but nothing has been done from the remaining 80% of the population.

Because there are now more relatively wealthy people, the service sector in the nation can grow as well, thus pushing up both wages and paid activity. The extra $10 million is now spent in the service sector, increasing the nation’s GDP to $60 billion. Most of this will go to the 80% poorer part of the population. This sector previously earned $450 per year; now these 8 million people share in the extra $10 billion, pushing up their average income by $1,250 per year.

Any reasonable and competent government would work towards ensuring that this virtuous circle continues to lift the income of these lower paid workers, through education, and improved skills at work.

Conclusion

It is cringe-worthy of the Australian Prime Minister, Malcolm Turnbull, to cite 1930s protectionism as if it provides the evidence for embracing free trade. Doesn’t he know that the 1930s were a very difficult period because of the crash of the world economies from over-active speculative activites in the 1920s?

Doesn’t Malcolm Turnbull know that America’s economic powerhouse was built in the 19th century, building its strength behind tariff walls?

Even less excusable, doesn’t Malcolm Turnbull know that the world became a much more prosperous place at the same time as protectionist regimes were in place in most of the nations of the world, namely, in the 1950s, 1960s and 1970s?

Rather than protectionism being ridiculous, as Obama and Turnbull seem to think, the arguments presented here are just standard economics. Unfortunately, free trade advocates, many of whom are gathered at APEC 2016 seem to have stopped thinking from first principles, and have adopted a convenient, if bogus, theory.

A “protectionist scenario” has been replayed in every developed nation: it is now being played out in China. Why shouldn’t the rest of the developing world be encouraged to follow the same pattern?

 

Muslim Integration into Australia

In Australia, a recent poll found that 49% of Australian want Muslim immigration to be stopped, citing lack of integration as the key issue.

Muslim Leaders

There is little ordinary Australians can do to overcome their fellow countrymen’s fears about the lack of integration of Muslim immigrants into Australia. There is much that Muslim leaders can do to address the perception.

They could speak out about the following obvious sore points:

  1. Argue that the full face covering of the burka is not appropriate in a multi-cultural country like Australia.
  2. Argue that polygamous marriages are not allowed under Australian law, and should not be practiced in this country.
  3. Argue that payment of taxes is a good way to demonstrate that Muslims can be good citizens.
  4. Argue that work, not welfare, is the way to be a useful member of the Australian community.

Muslim integration failures = reduced immigration.

There will be no overt “anti-Muslim” rhetoric from the Australian government, but there are many actions that a democratic government will take to address the perceived fears surrounding a lack of Muslim integration.

One of the leading ways for Muslim immigration to be restricted is to cut back on the “family reunion” programmes. This can be done just be restricting the number of visa allocated for this purpose in any one year.

The government could adopt a non-Muslim bias in accepting refugees. Since there are many worthy refugees seeking asylum in Australia, even from the Middle East, there is no reason for Australia to take any more Muslim refugees.

Muslim Integration

If Muslim leaders want to overcome the perceived “bias” in Australia against Muslim immigration, it is entirely in their hands. Open days in mosques will not cut it. It really requires Muslims to act as if they really want to live in a multi-cultural country like Australia. If they don’t, they will hurt those they love the most.

Protectionism – A Rational Economic Framework

A rational re-adoption of protectionism is the key to returning economic strength to every nation and to the world as a whole.

Radical Protectionism

In an ideal world, every country would impose a 20% tariff on all imported goods and services, across the board. This would require no policy decision making on individual industries, and every sector would share in the same level of protection from cheap imports. This would allow every nation to develop new industries, with at least a modicum of protection, to help them get started. This would be the help that developing nations to succeed in the face of hot competition from the developed nations, who are presently living off the “wealth” of their first-mover-advantage. Such an approach would certainly not lead to a trade war.

However, this idea is far too radical for most politicians and economists, and would require a Trump-like revolution to bring it about.

Rational Protectionism

Rational protectionism would be much easier to sell, being targeted at the difficult spots in each economy, leaving the current arrangements in place for all other sectors.

In the USA, Donald Trump’s proposal to put a higher tariff on US companies re-importing goods into the USA is a case in point. His proposal impacts on companies that have moved their plants off US soil to utilize low labor costs elsewhere.

Actually it is a more reasonable way to protect US intellectual property, rather than trying to bully other nations via a TPP. Ideas that are developed in the USA, using all the resources and experience of the USA, in a way actually “belong to the USA”. Thus there is a rationality to imposing the kind of tariff that Donald Trump has proposed. It could be extended to cover any products made in foreign countries, and imported into the USA, which substantially incorporate expertise developed in the USA, whether patented or not.

The concept would also make sense in Australia, which has developed many great ideas, but for which the market here is too small to properly exploit. The Cochlear implants are an obvious case in point.

Another rational use of tariffs in Australia would include horticultural products. Here we have a natural advantage in our developed agricultural methods, but this is offset by an actual disadvantage in labor in Australia being much more expensive per hour than elsewhere. Since Australia has a emotional and rational attachment to producing its own food, it would be a good first case for the doctrine of “rational protectionism” to be adopted.

A similar case applies to the foreign outsourcing of labor services. The current outsourcing framework is far from rational. In Australia, we have payroll tax (also crazy) and a superannuation levy (rational), but suppliers of outsourced labor in India do not have to face such cost hurdles. Also India’s labor cost per hour is a simple fraction of Australia’s cost per hour. Unless something is done, more and more jobs will be outsourced to foreign countries, leaving even high skilled Australians with no jobs that they can fill.

Conclusion

Protectionism is not a “danger” to the world, but if adopted rationally it will restore economic health to every nation, and actually help to build up developing nations.

TPP – A Way to Preserve First-Mover-Advantage

The TPP is presented as opening up trade between the Pacific nations, but the sub-text is preserving first-mover-advantage.

TPP – Staying at the Top

The main thrust of the TPP is intended to extend the rule of law to cover intellectual property. A secondary purpose is to stop nations from passing laws that hurt an already established advantage in the market place. In other words, to preserve whatever first-mover-advantage has already been earned (or achieved by whatever means).

It may not have been the clearly thought through intention of the legislators, but the outcome is to ensure that nations that are already poor remain relatively poorer than the richer nations.

In Australia, we have the naive dream that we will be a supplier of intellectual goods to Asia. If this dream is realized, what is the result for Asia? Are all Asian supposed to be satisfied with supplying cheap consumer goods to Australia, while the Australians supply the more expensive and more profitable intellectual goods to Asia? At least, if the TPP deal is agreed in the USA, then Australians will be able to hang onto whatever first-mover advantage it has, and the Asians will be the poorer as a result.

The USA is beginning to feel the first winds of change resulting from the availability of cheap Asian goods. Its leaders also have a dream of hanging onto their hard-won first-mover advantage, which they hope will ensure that alternative jobs will become available from those that are lost. This, of course, is a forlorn hope, as current experience with structural unemployment in the USA has already shown.

Nevertheless, despite the weakness of the case for even more free trade, the intention of the TPP is to ensure that the developing and emerging nations will remain on the teat of the West for intellectual property for as long as this can be sustained, thus keeping them relatively poorer than the West.

First Mover Advantage

Any newly emerging nation would know that an existing first-mover-advantage is very difficult to overcome. It was an issue faced in the USA during the 19th century, when the cloth and clothing manufacturers on the US east coast found that they could not compete on a “level playing field” with the British manufacturers. Those politicians in the US who wanted to build up a US manufacturing industry argued for the imposition of tariffs. Eventually the advocates of the so-called American System, which involved introducing tariffs, won the political argument, and the USA went on to become a manufacturing power-house. As a consequence, UK manufacturing dominance came to an end. It was a hard-fought fight, even though it is obvious to us now that the advocates of the American System were in the right.

China has its own strategies for overcoming first-mover-advantage. This involves a combination of tariffs, subsidies and other protective measures to support its developing and established industries. It is also claimed that the Chinese use industrial espionage and the blatant stealing of secrets to leap-frog the hurdles standing in the way of developing high-tech industries. The TPP is designed to counter both of these, at least within the developing nations that are signatories to this deal.

So, if tariffs and cheating are not open as a means of overcoming first-mover-advantage what are the options for developing nations? If anyone knows what they are, please comment on this post.

Fraudulent Arguments for Free Trade

Advocates for Free Trade often argue that it lifts poor nations out of poverty. This is only partially true; and has a very limited impact. The wages in Bangladesh for textile workers have increased from $1 day to $2 day as a result of increased exports of finished garments. Yet any attempt to push wages higher, towards Western standards, is met the fierce resistance from the textile manufacturers. They probably use the argument that an increase in pay like that will make them noncompetitive. So unless Bangladesh can come up with new industries in which they can compete, so that there are other opportunities for the Bangladeshi people to gain work at higher pay, it looks like the future for wages in Bangladesh is likely to stop at a maximum of $5 day.

Also, the advocates of Free Trade are unlikely to be the workers who will be the first to be displaced in Western nations. If Western nations can claim to be virtuous by opening their industries to fierce competition from Asia (and from Mexico and South America), it is not the advocates of this policy that will bear the cost: it is the ordinary workers on those nations. These are the workers who are unlikely to get jobs in the “winner-takes-all” high tech jobs, such as in Apple and Google.

Another fraudulent argument for Free Trade is to cite China as a shining beacon. Certainly it has benefited from the opening of trade in Western nations. But it has made the most of this situation by protecting its own industries at the same time. With this protectionism (and possibly cheating as well), it is unlikely that China would have been able to move hundreds of millions of workers from farms to the cities. It is not Free Trade on its own that has helped China to develop. It also required the Chinese government to look after the interests of its own people.

TPP is a Moral Fraud

The TPP is advocated on the basis that it will help developing nations to develop. In fact, what it is designed to do is to entrench privilege. This is not the privilege of entire nations, but rather the privilege of corporations. It is not privilege of all corporations that is being protected: it is the privilege of those corporations that have an edge that makes them the best in the world.

I don’t want my world to be come a place in which only the “very best” or most successful have a reasonable share in its abundance. I want a world in which everyone has a fair chance of success, and a reasonable opportunity for each to share in the success of his or her own nation. That is why agreements like TPP are an anathema to me, along with anything that reduces the power of democratic governments to shape their societies according the needs and aspirations of their own peoples.

Do you agree?