Voters, sooner or later, will reject political parties that resolutely defy the laws of economics. Britain’s Conservative Party suffered that fate. A Trump-led Republican Party would follow. As would a Dutton-led Coalition if it is serious about its recently announced policies.
Adam Smith didn’t conjure the idea of the gains from the division of labour. Nor did David Ricardo contrive the notion of comparative advantage. Both existed as immutable laws since the dawning of civilisation.
In 2016, Britain’s Conservative prime minister, David Cameron, himself a remainer, announced a referendum on Brexit, responding to the idea promoted by Nigel Farage and the United Kingdom Independence Party (UKIP) that it was better for Britain to sell into its own small market than into the European Union’s big market.
Boris Johnson jumped aboard the SS Brexit, the referendum passed with less than 52 per cent of the vote, the economy tanked, inflation hit 10.7 per cent and now, less than one-third of Britons consider Brexit was a good idea. Brexit has become Regrexit.
Meanwhile, across the Atlantic, Donald Trump was elected President of the United States on a promise to Make America Great Again (MAGA) by spurning the rules-based global trading system. Trump withdrew the US from the Trans-Pacific Partnership on his first day in the Oval Office and soon began waging a trade war against not only China but also the European Union, Mexico and Canada.
In the MAGA world view, imports are bad, the only gains from trade being from selling American products abroad. The Biden administration has kept most of the Trump tariffs in place in the hope of retaining the swing states it won to defeat Trump in 2020.
In response to investigations into Chinese government subsidies on the production of electric vehicles, the European Union is imposing tariffs of around 30 per cent on imports of the three main Chinese models, while the Biden administration has announced a plan to almost quadruple tariffs on Chinese-made electric vehicles to 102.5 per cent.
Trade wars were a major contributor to the outbreak of World War II. A second Trump presidency would re-create those preconditions.
Mercifully, in Australia bipartisan support for free trade remains, the Albanese government having nudged it further by announcing the removal of 500 nuisance tariffs and agreeing to remove anti-dumping duties on a range of Chinese steel products.
The Albanese government’s A Future Made in Australia has attracted criticism. Comprising support for private sector initiatives for the energy transition and for the development of critical minerals in an increasingly fraught geopolitical environment, it amounts to A$22.7 billion over a decade – less than $3 billion per annum. It is dwarfed by the energy transition subsidies in the Biden administration’s Inflation Reduction Act, which exceed A$1,100 billion.
It would be dwarfed, too, by the Coalition’s plan to re-nationalise the baseload electricity generating system in Australia. Its promised fleet of seven nuclear power stations would cost taxpayers hundreds of billions of dollars.
While not all privatisations of government business enterprises have worked out well, nationalisations rarely do. The demise of the Soviet Union was testimony to that.
And since the Coalition has committed to baseload nuclear power stations that couldn’t be operating until at least the latter years of the next decade if not the early 2040s, it would need to oblige taxpayers to pay for the refurbishment of Australia’s fleet of ageing coal-fired power stations until then, and probably build new ones.
In addition to renationalising the electricity generating system, the Coalition has promised to give the courts the power to order major supermarkets to divest some of or all their stores where they have been found to misuse their market power.
Forced divestiture of supermarkets is a policy opposed by my independent review of the grocery code of conduct, by former ACCC chairman Professor Graeme Samuel, former Productivity Commission chairman Peter Harris, the ACTU and the National Farmers’ Federation.
Curiously, while the Nationals joined hands with the Greens in advocating forced divestiture at the commencement of a Senate inquiry into supermarkets, neither they nor the Liberals supported it in the inquiry’s final report. Yet they both supported it a couple of months later.
Introducing greater competition into Australia’s supermarket industry has merit, but that is best achieved by removing restrictions such as planning and zoning laws that have the effect of protecting incumbents.
Governments ignore the immutable laws of economics at their peril. Doing so might help them get elected as voters are attracted to populist proposals. But when the cost of the policies emerges as weak incomes growth and high inflation, those politicians will be tossed out and condemned as failures.
Craig Emerson is managing director of Emerson Economics. He is director of the APEC Study Centre at RMIT University and adjunct professor at Victoria University’s Centre of Policy Studies.