Protection in History
Australia might not have happened. Well, certainly its land mass was discovered, many times, but federation between the six British colonies was not inevitable. They could have remained separate, if the quarrel about protection versus free trade had not been settled. For a time. The lopsided tariffs levied by the customs houses at the colonial borders were at once an incentive to federate, because no other action could eliminate that nuisance; and also the greatest obstacle to federation.
Victoria passed legislation imposing tariffs in 1866, enabling it to build a competitive edge in manufacturing, a primacy which survives today. In 1901 Victoria's protectionism became Commonwealth policy and became orthodoxy. Political scientist J.D.B. Miller was able to write in 1966: 'The argument was hotly carried on, but is of little importance now.' That is, until the neo-classical school gained control of mainstream economics in the 1970s and free-wheeling, free-trade New South Wales gained control of the prime ministership in 1983. Yesteryear's orthodoxy is now heresy, for both major parties have unambiguously endorsed liberalisation of trade and investment. Both parties deny that they have elbowed alternative opinion out of their ranks, because 'There is no alternative'.
The reasons advanced a century ago for the tariff show how far modern Australia has abandoned the earlier consensus as to what is fair in public policy. Then, protection was seen as allowing manufacturers the financial space to innovate and to develop competitive muscle; nowadays, tariffs are seen as obstructing innovation and competitiveness. Then, and especially during the World Wars, tariffs were seen as a tool for achieving self-sufficiency in manufactures in an uncertain and hostile world; nowadays, tariffs are seen as an obstacle to a US-led global economy. Then, tariffs were seen as enabling manufacturers to pay a 'fair and reasonable wage' to employees -- the 1906 Excise Tariff Act even gave that link statutory force; nowadays, economists want to abolish tariffs to force wages and conditions downwards.
A century ago it was widely held that competition with imported products of underpaid foreign workers was unfair. Yes, there was a racist edge to this viewpoint, but it was more than that: Australians believed that workers were due a fair reward for their labour. Now, our trade enthusiasts rejoice at the bargains that consumers can steal by undercutting local labour through outsourcing goods from overseas, no matter if produced in near-slave conditions.
The Theoretical Case
There is so much commentary proclaiming the merits of free trade that it seems unnecessary to do more than list the arguments briefly. Protection encourages laziness in domestic industries, while exposure to international competition encourages replacement of obsolete plant and so greater productivity. Tariffs feed on themselves by increasing the costs of components which local manufacturers use in their products, compounding their uncompetitiveness and flowing through to higher prices throughout the economy. Protection insulates firms from the keen winds of consumer preferences, leaving them to churn out yesterday's products or neglect customer service. Above all, protection obliges consumers to pay higher prices.
The trap is that these generalisations are partly valid. If they had been completely false, their shallowness would have been obvious. Yet shallow they are. For example, they are singularly and unfairly lacking in concern for the welfare of producers.
The intellectual case for free trade rests on the theory of comparative advantage, expounded by economist David Ricardo in 1817. Countries which lack some natural resource or other capacity can benefit by exchanging goods or services that they can produce 'efficiently' for those they cannot. For example, Australia's prosperity was long underpinned by the wool that the world needed and that we exchanged for specialist manufactures.
This theory was erected upon several assumptions, some shared with economics generally, one specifically focused on trade. This is the assumption that labour and capital are not mobile across international borders. This is manifestly nonsense in a world where hot money chasing fractions of a percentage point can slosh around the financial markets at the speed of electronics, bankrupting companies or countries without a pang of conscience. Ninety-seven percent of world transfers of funds are not supporting transfers of tangible goods and services. There is no point in saving labour internationally through specialisation, if industries can be stranded for reasons unrelated to their efficiency in their domestic economy.
Any theory is valid only to the extent that its underlying assumptions are valid. If just one fails, the theoretical case for universal free trade collapses.
Whose Interests are Being Served?
It cannot be possible for every country to run a trade surplus, as world totals must sum to zero. The trade-fuelled growth of the Asian 'tigers' in the past 20 years has been at the expense of the countries (including Australia) which have run up huge trade deficits. If the deficits become entrenched, the cost of the interest required to service them is added to the total, which snowballs.
Further, importing staple goods brings not growth but decay: unemployment, declining real wages, shuttered factories, loss of industrial diversity and reduced public revenues. This loss of vigour bears unfairly upon working people, as their job prospects, wages and security evaporate. 'Those jobs have disappeared forever', pontificate the (salaried) commentators.
When two countries trade, the higher-wage partner is able to buy goods at prices less than their domestic cost. Intuitively, this is unsustainable. It is also unfair, because the low-wage partner does not share the windfall. Free trade obliges poor countries to purchase their sophisticated imports such as machine tools, computers, oil and foreign expatriates at prices set by the industrialised producers, but they can sell their commodities only in competition with other poor countries, driving prices down so that the rich countries can pick bargains.
Trade causes rich and poor countries alike to dedicate their raw materials, labour, infrastructure, industrial capacity and perhaps their educational system to producing goods for the benefit of countries other than their own.
Ambiguous Definitions of 'Efficiency'
The prices for which goods and services can be sold internationally depend on many factors: notably direct costs of production; overhead costs such as domestic taxes and transport; exchange rates of the relevant currencies; tariffs or subsidies -- and erratic factors such as wars, geopolitical deal-making, corruption, hedging, financial speculation and natural disasters. Current orthodoxy is committed to minimising overheads and removing 'distorting' tariffs and subsidies, but a level playing field will result only if the other factors are internationally comparable, which they plainly cannot ever be. The impartiality of the global marketplace is a mirage.
For example, manufacturers are locked into Australia's high level of civic amenities -- such as libraries, universal education, CSIRO, public transport, the ABC and the social welfare net motivated by the fair go ethic. Trade-fuelled pressure to reduce taxes and the size of government is directed at squeezing these 'overheads' out of the cost of doing business. In a globalised economy, say the pundits, 'There is no alternative'. The end result can only be a decline in the quality of civic life -- and, ultimately, in manufacturing, which also benefits from these forms of infrastructure.
Clarity is obscured by elastic use of the word 'efficiency'. In economics, efficiency refers to capacity to market a good at a lower price. In common language, efficiency refers to capacity to produce a good less wastefully. The meanings diverge when a differential in price derives not from better manufacturing but from a difference in the other factors, all being beyond the producer's control. So although the transport of similar goods between countries is wastefully 'inefficient' in use of resources, it may be economically 'efficient', that is profitable, simply because of differentials in the value of money.
Measuring Stick is Warped
The benefits that trade is said to bring are in part an illusion created by using an unreliable ruler, Gross Domestic Product or GDP. This is a measure of consumption, not of how well the economy is positioned to generate future prosperity. By GDP, a country's well-being is measured by the quantities of goods and services that it consumes.
GDP does not detect symptoms of fundamental economic malaise such as unfair distribution, crushing debt, starvation of research or irreversible borrowing from the future by dissipating natural capital. GDP could be rising and the financial press could be praising those responsible, all while the economy is degenerating in a self-reinforcing vicious cycle of unemployment, indebtedness, consumption and waste.
Under GDP, economic activity by foreign corporations is counted as gain to the host country. But much of the wealth that foreign investment appears to generate in developing countries eventually bleeds away in the form of profits, dividends and underpriced resources. Corporations can make off with the natural assets and human resources of the developing world and GDP calls it advantage for the poor.
In any case growth in GDP is not correlated reliably with openness of borders to trade: many growth centres would have been snuffed out in the absence of protection, at least in their sunrise stages. Australia's infant industrial economy found its feet behind tariff fences of a kind which it now, unfairly, seeks to deny to developing countries.
Conclusions
Australia's industries are now feeding on their own flesh. In the 1980s and 1990s tariffs were reduced to force so-called fat and lazy industries to reduce costs. Now manufacturers and farmers are being told that their costs must be reduced in order to match international prices, that is, to maintain low tariffs.
Is there an alternative? Yes. Self-reliance is a valid alternative objective. Development studies in the 1960s came to the conclusion that to be successful, development had to be home-grown. Now, however, the very notion would bring mirth in orthodox circles.
Under self-reliance, trade liberalisation would revert from being an unwavering goal to a selectively applied tool. We could reach out in compassion to those developing economies struggling to scrape foreign exchange together while setting a higher hurdle for the tigers with sizeable trade surpluses. We could coax the legendary slumbering industries to sharpen up while preventing the energetic and innovative from being crippled by poorer and cheaper imitations.
Thirty thousand workers were thrown out of work when Mozambique's cashew nut industry collapsed in 2001 after the World Bank imposed policies that removed tariff protection, triggering massive exports of raw nuts from India. The European Union has granted $US12 million to help the country, perhaps the poorest on earth, to boost its cash crops. Why cash crops? To provide Europe with cheap commodities and to allow Mozambique to generate the income to pay interest on its debt to international moneylenders, mainly Western banks.
This may be a case of free trade, but it is not fair. If trade is not fair, it must not, and will not, be allowed to endure.