Protectionism won't make Australia great again

Trump-like tariff shelters for 'strategic industries' would shrink the economy and make genuine reform impossible to achieve.

If some business representatives had their way, a few microeconomic changes such as cutting the company tax rate and putting workers on individual contracts would place Australia on the road to redemption following the recession triggered by the COVID-19 pandemic. Tariffs, too, might be making a comeback, with a key member of the Federal government’s National COVID-19 Coordination Committee, Andrew Liveris, having defended the Trump tariffs as part of a “long game” against China.

Liveris has advised Trump on manufacturing and trade policy. Upon his appointment to the  Coordination Committee, Liveris signalled https://www.afr.com/politics/liveris-calls-the-start-of-the-on-shoring-era-20200408-p54i37 the advice he would provide: "Australia drank the free-trade juice and decided that off-shoring was OK. Well, that era is gone," adding “If I can achieve anything like what we achieved in nine months with Trump, I'd call it a massive success."

There’s been lots of talk about self-sufficiency in strategic industries. Oh, to be considered a strategic industry! I warned here two weeks ago https://www.afr.com/policy/economy/road-out-leads-back-to-productivity-20200420-p54lbe, beware the ideologues, especially the rent-seeking variety who purport to champion free enterprise but in truth favour private enterprise financially supported by taxpayers.

Genuine microeconomic reform is impossible in a shrinking economy. Try explaining to workers, the unemployed and people dependent upon government support that yes, a policy reform is sending them backwards, but they should be grateful since they would go backwards even further in the absence of reform.

Reform is possible only when a government is helping make the pie bigger and everyone gets a share of it. That was the recipe of the Hawke-Keating reforms. And it worked. A Productivity Commission report https://www.pc.gov.au/research/ongoing/trade-assistance/2018-19/trade-assistance-review-2018-19.pdf released last week, but overwhelmed by the blanket media coverage of COVID-19, reported on Australia’s tariff reductions that began with the 25 per cent across-the-board tariff cut by the Whitlam government in 1973, accelerated by the Hawke and Keating governments, with the Howard government applying the finishing touches.

Labor governments took on supporters of tariffs who had no problem with the Fraser government’s effective rates of protection of 140 per cent on cars and 250 per cent on clothing and footwear.

The Productivity Commission explains: “As a result, Australia has become a more globalised and competitive economy, generating vast benefits for consumers.” Those benefits have come in the form of lower prices for cars, whitegoods, shoes and clothes, especially the cheaper shoes and clothes bought by poorer people.

The Labor Party of the 2020s hasn’t turned its back on those reforms, as confirmed recently by its shadow trade minister, Madeline King https://www.afr.com/policy/economy/why-free-trade-can-save-us-20200427-p54ngt but the rent seekers within the business community are back. A virus pandemic is just the tonic for the rejuvenation of protectionism.

While manipulators of industry policy flirt with tariffs and subsidies for designated strategic industries, let’s not forget the free-trade agreements Australia would be violating with the United States, ASEAN, China, Japan, Korea, Malaysia, Indonesia, our Trans-Pacific partners, the members of the Regional Comprehensive Economic Partnership and those fuddy-duddy nations in the 164-member World Trade Organization.

As we breach the agreements we have negotiated and signed in good faith, please spare the outrage and indignation when our trading partners retaliate, blocking off access to their markets as they seek to create their own strategic industries.

It’s true that President Trump is getting away with violating the global trading rules by slapping tariffs on steel and aluminium imports not only from China but also from the European Union and other allies, on the pretext of national security. The US has invoked an otherwise dormant national-security clause in the 1947 General Agreement on Tariffs and Trade, the predecessor to the World Trade Organization.  

Trade Minister, Simon Birmingham’s push back last week https://www.afr.com/world/europe/trade-minister-takes-aim-at-european-push-to-bring-supply-chains-home-20200430-p54oss against renewed European calls to re-shore industries behind new tariff walls was refreshing, a voice of reason in an international sea of insanity. Have the Europeans forgotten the lessons of World War II and the reasons for establishing global trading rules shortly thereafter: to help prevent World War III? 

In the absence of accommodative monetary and fiscal policy, there will be no V-shaped recovery. Many heavily indebted companies, burdened with the massive loss of revenue from the shutdowns, will collapse when creditors can no longer carry the weight. Workers, fearful of their job prospects, will refrain from discretionary spending. Under pre-existing policy settings, businesses, already refusing to invest before the COVID-19 crisis, will not take chances with risky, new investments.

Reducing or removing the disincentives to invest inherent in Australia’s company tax base is essential. Cutting the rate doesn’t do that. Rather, it confers a windfall gain on profits from all prior investments made at the 30 per cent rate. And companies are gifted the tax rate cut regardless of whether they commit to new investment.

Getting the macroeconomic settings right to grapple with a recession of a magnitude not seen since the Great Depression is paramount. But if policy makers delve into the Trump playbook and seek to make Australia great again in a return to our protectionist heyday, they will impoverish a generation of our most vulnerable citizens.

Craig Emerson is a Distinguished Fellow at the ANU, Adjunct Professor at Victoria University’s College of Business and Director of the Australian APEC Study Centre at RMIT. He was an economic adviser to Bob Hawke.