Trading the US vote

In his memoir, former Australian Prime Minister Malcolm Turnbull tells of how he persuaded former Japanese Prime Minister Shinzo Abe to save the Trans-Pacific Partnership (TPP) after the United States withdrew from the trade pact.

Click image to zoom Tap image to zoom

Now, with Joe Biden leading Donald Trump in the US presidential election campaign, there is an opportunity for Australia to make a potentially more important contribution to global trade reform.

"Like Australia and other advanced economies, the US still is coming to terms with the industrial revolution in Asia, Latin America and Eastern Europe.”

The World Trade Organisation (WTO) is in need of reform - as was acknowledged by its exiting director-general, Roberto Azevêdo. And so is the broader process of multilateral trade reform over which the WTO presides.

Trade liberalisation was grinding to a halt long before the collapse of the Doha Round. The gains from earlier tariff cuts were being undermined by the proliferation of non-tariff barriers, many of which were outside the WTO’s jurisdiction.

If elected, Biden would have considerable influence over the direction of global trade reform. Australia, in turn, could draw on the experience of its transformational trade reform to inform the deliberations of the new president.

Trade history

Australia’s successful model of trade reform and the role of its Industries Assistance Commission (the IAC, now reconstituted as the Productivity Commission) are internationally recognised.

There also is a history of US and Australian collaboration on the issue of trade reform. At the 2004 APEC summit, John Howard and George Bush committed to taking a leadership role in restoring progress in the WTO.

Biden has a history of supporting trade liberalisation, including the North American Free Trade Agreement, the TPP and the normalisation of trade relations with China.

His promise to American voters hurt by the emerging market economies’ export-led growth has been a stronger social safety net and major investment in education, infrastructure and manufacturing to equip "our workers and our communities ... to compete and win in the global economy”.

Like Australia and other advanced economies, the US still is coming to terms with the industrial revolution in Asia, Latin America and Eastern Europe that has added more than 1.5 billion workers to the global manufacturing workforce.

Biden's preferred policies could help to shift US labour and capital away from industries no longer competitive in America's high-income economy while avoiding the damage caused to the US economy by Trump’s tariff barriers.

Click image to zoom Tap image to zoom

But, like President Obama after the global financial crisis, Biden would be operating in a charged political environment with voters impatient for prosperity and an economy beset with slowing productivity growth, depressed regions, elevated unemployment and rampant rent-seeking.

He would need strong institutional assistance to rebuild support for free trade - and that is a subject about which Australia should be able to offer useful advice.

Public opinion

Australia's important trade-policy innovation with the IAC was to create an independent institution to expose the costs of this country’s long-standing, high trade barriers.

When it was established in 1973, high trade barriers were popularly seen as necessary both to protect Australia’s high living standards and to secure its future as a modern industrialised economy.

Yet, thanks to the IAC’s forensic analysis and transparent inquiries, public opinion changed to the extent that in 1988 the Hawke government was able to announce a general, phased reduction in tariffs. By the second half of the 1990s Australia’s average tariff rate had been cut from 35 per cent to 5 per cent.

Click image to zoom Tap image to zoom

Importantly, the Hawke government’s tariff cuts were unilateral. They were about increasing the efficiency of the Australian economy.

As a former head of the IAC Bill Carmichael explains, in trade reform the greatest gains for each country result from reducing its own barriers.

The tariff cuts were part of a broader program of economic reform that resulted in accelerating productivity and export growth, including exports of elaborately transformed manufactured goods. Manufactured exports grew at about twice the rate of traditional exports.

Protected industry

The key to the IAC’s success in changing the public's attitude to protection was its independence, its expertise and the transparency of its public inquiries in which the arguments of vested interests could be openly tested.

A crucial feature of the IAC’s methodology was its economy-wide analysis which exposed the true cost of propping up uncompetitive industries.

That cost included the artificially high prices faced by consumers who were denied access to cheaper imports and the reduced competitiveness of unprotected industries that were forced to pay inflated prices for their inputs and compete against foreign producers with an artificially high exchange rate.

Protection was like a drug for Australian industry: it reduced the need for protected industries to innovate and make themselves internationally competitive.

Of course, Australian governments did not always accept the IAC’s analysis and advice but over time the domestic politics of protection shifted in favour of reform.

The economy's growth accelerated after tariffs were cut because Australia was no longer using a substantial part of its economy to produce high-cost substitutes for goods that could be more efficiently and cheaply supplied by foreigners.

As imports expanded their share of the Australian market, Australian capital and labour specialised more in producing the goods and services in which we had a comparative advantage. Like people, countries maximise their incomes by specialising in what they do best.

The arguments about tariffs and trade are a bit more complicated in a big economy like the US but most of the basic issues are the same.

Click image to zoom Tap image to zoom

Economists warn Trump's tariffs on imported steel will cost more jobs in the steel-consuming industries than they save in US steel producers. Political pressure on American producers to dismantle their global supply chains to boost higher-cost domestic production also threatens to undermine their competitiveness.

Moreover, tariffs imposed by the US risk damaging America’s export markets.

Production chains

But perhaps the most important risk is that rising US trade barriers will increase political pressure for higher tariffs and non-tariff trade barriers in other countries – partly in retaliation against the US but more generally because the US actions lend political legitimacy to protectionist arguments everywhere. There is never any shortage of demand for protection against competition.

The spread of protectionist policies would cut global trade and economic growth, especially if the impact of the tariffs were magnified by global production chains.

To turn this new wave of protectionism around, Biden would need a mechanism for winning the support of the American public. Australia’s trade reform process, based on transparency and a sophisticated understanding of the role of trade in raising living standards, offers a successful model for both the US and the WTO.

Even before the collapse of the Doha trade negotiations there was increasing recognition of the dominant role of domestic politics in driving trade negotiations and policies. If voters wanted protection against imports politicians would find a way to provide it, regardless of their international agreements and the WTO’s surveillance.

Trade reform is politically hard but it is made harder by the way the WTO and governments go about it. Governments perpetuate the myth that exports are good and imports are bad. They demand that their trade negotiators win increased market access for their exporters while resisting demands to open their own markets to imports that might endanger their uncompetitive industries.

It’s a poor bargain: a country is better off if uncompetitive industries are allowed to contract and their workers are re-employed by competitive industries. The key is for governments to help the affected workers and regions to adjust.

Back in business

Which brings us back to Biden and the WTO. If Biden and the new Congress were prepared to spend the money needed to upskill, relocate and re-employ America’s victims of import-competition, they could open the way for the stronger long-term growth that Trump’s protectionist policies promise but cannot deliver.

If the WTO could persuade its member states to subject their own trade barriers to rigorous and transparent analysis, it is likely that their domestic politics would embrace reform, as happened in Australia.

There would be more trade, countries would specialise more, and their incomes would rise, the global economy would expand, and the WTO would be back in business.

Alan Mitchell is a bluenotes columnist and former economics editor of the Australian Financial Review

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

editor's picks

06 Aug 2020

Weighing up post-COVID reformation

Alan Mitchell | Columnist, bluenotes

The economic shock from the pandemic has impacted both supply and demand. Greater reforms must be investigated for the economy to fully recover.

18 Jun 2020

Globalisation goes back to the future

Alan Mitchell | Columnist, bluenotes

The COVID-19 pandemic is a major threat to the globalisation of trade and supply chains but barriers are not what the economy needs right now.