Productivity growth across the developed world continues its long-term slide, denying nations the prospect of the increases in prosperity that defined the post-war era until the end of the 20th century. Now, and into the foreseeable future, western nations will engage in a futile squabble with developing countries over which gets the bigger share of any growth. These contests, too, will sharpen within each developed country’s borders.
In the immediate post-war period, with the formation of the General Agreement on Tariffs and Trade – the GATT – a consensus was built around the virtues of encouraging trade among nations, reaping the gains from specialisation in accordance with the Ricardian law of comparative advantage.
Trade liberalisation was good for peace, too, as nations became economically interdependent following the isolation and protectionism of the interwar years. The mission of the trade liberalisers – to avert World War III – was being achieved.
China’s economic rise since the late-1980s, and the increasing militarisation this increasing wealth has enabled, has spooked much of the western world – near-neighbours and the US especially – setting up superpower rivalry in the Asia-Pacific region.
An early casualty has been the post-war rules-based trading system. Once the leading champion of trade liberalisation, the US no longer believes in it. By refusing to appoint new judges to the World Trade Organization’s Appellate Body, the US has destroyed the dispute-settling system.
Without blinking, President Biden earlier this month announced a 100 per cent tariff on Chinese electric vehicles, along with sharply increased tariffs on Chinese steel and aluminium.
Biden is desperate to ward off the threat from Donald Trump at the coming presidential election, needing to hold onto the swing states he won from Trump in 2020.
Trump considers American-made exports to be good and imports into the US to be bad. It’s at the heart of his philosophy to Make America Great Again (MAGA). The MAGAs have gained control of the Republican Party that once was a bastion of free traders. On his first day as President, Trump tore up President Obama’s pivot into Asia – US membership of the Trans-Pacific Partnership.
For the first time since World War II, there is bipartisan American political support for protectionism and against free trade.
Despite criticism of some features of the Future Made in Australia, it could not be said that the major parties have abandoned the Hawke-Keating open, competitive model extended by the Howard, Rudd, Gillard and Turnbull governments. Indeed, the Albanese government has announced to removal of 500 so-called nuisance tariffs https://www.afr.com/business-summit/chalmers-to-abolish-500-nuisance-tariffs-clears-way-for-gas-tax-deal-20240307-p5fahz, taking Australia closer to Singapore as a tariff-free country. It is also streamlining foreign investment approval processes and a new, Hilmer-style competition policy reform program is being developed.
But a demographic trend is underway that is questioning the open, competitive model. Young voters and those approaching middle age are replacing the Baby Boomers. They are disposed to voting for the Australian Greens and, like the Greens, want more, not less, government intervention.
Unless they are the children of the wealthy, they deeply resent the affluence of many Boomers that is being denied them. Nowhere is this more evident than in the housing divide; many young voters have lost hope that they will ever be able to afford their own homes.
Greens polices such as rent control, which would make matters worse by crimping the supply of rental accommodation, are nevertheless popular, if only because the Greens are seen to empathise with their plight.
At the other end of the political spectrum, the Coalition has identified curtailing immigration as the solution, hoping to appeal to those voters who are not enamoured of migrants.
A robust debate about tax reform in relation to housing supply is desperately needed. What are the merits of reconsidering negative gearing for new dwellings and reducing the capital gains tax discount for investors in rental properties? How do we get rid of one of Australia’s worst taxes – state stamp duty on property transfers?
As for wider tax reform, broadening the base to lower the rates of personal tax is the right principle, but oh, the squeals from the wealthy and their backers in the parliament and the media if any such proposals are contemplated!
Almost none of the reforms proposed in 2010 by former treasury secretary, Ken Henry, have been implemented and one of the few that was legislated – a tax on mineral rents – w rescinded by the Abbott government, along with the carbon price.
The open, competitive model is the only pathway to assured prosperity shared fairly. The hostility towards it among disheartened younger Australians will make economic reform even harder.
Following the next election, the federal government should work with the states on housing tax reforms that give young people some hope of owning their own homes. Unless, of course, the major parties are pressured into ruling out every reform proposal by a craven media during the election campaign.
Craig Emerson is managing director of Emerson Economics. He is Director of the APEC Study Centre at RMIT University and an adjunct professor at Victoria University’s Centre of Policy Studies. He was Australia’s trade minister from 2010 to 2013.