Don’t you see that the whole aim of Newspeak is to narrow the range of thought?
George Orwell, 1984
A powerful agent is the right word.
Mark Twain
No nation was ever ruined by trade.
Benjamin Franklin
President Bush left for Canada today to attend a trade summit. Reportedly, the trade summit got off to an awkward start when the president pulled out his baseball cards.
Conan O’Brien
ECINYA SUBMISSION: MORTIMER TRADE ENQUIRY
The following is a submission made by the Ecinya editor to the Mortimer Trade Enquiry in 2008. The enquiry was undertaken to assist the development of an integrated trade policy that would “drive productivity growth, enhance international competitiveness and improve export performance”. The ideas introduced, including an increased role for government and the importance of containing the trade deficit remain central to future growth, and as the economy shows signs of a possible recovery it is timely to review these issues.
1 April 2008
David
This is meant to be extremely broad brush, more in the nature of a conceptual framework rather than specific in terms of direction or solutions.
1. The major aim of this submission is to introduce two Ecinya concepts to the debate: The expression ‘beneficial trade’ should replace ‘free trade’. The expression ‘balanced free enterprise’ should replace ‘capitalism’.
2. Words do have a precise meaning. How can we speak of bilateral trade agreements on one hand, and ‘free trade’ on the other. Better that we look for a new expression and ‘beneficial trade’ might be the descriptive answer.
3. It is clear that there is a role for government in relation to matters economic. The days are past when unfettered capitalism was a useful description of the way developed economies work, or a reliable framework for poorer economies to attain sustainable prosperity. The recent exotic debt implosion and the previous dot com bubble/bust are contemporary examples where capitalism has clearly failed. In each of these busts the government was found wanting. It is axiomatic that ‘socialism’ has failed, but the welfare state is far from dead. The challenge for free enterprise economies is to define the limits of government involvement, and the scope and manner of intervention.
4. Prosperity is the tide that carries us all to realisation of our material and social aspirations and trade is an aspect of the attainment of prosperity. It is axiomatic that an effective trade policy requires a strong and balanced domestic economy. ‘Balance’ requires a viable and progressive tax system. It is obviously outside the scope of your enquiry, but one cannot but feel that while-ever we exempt food from GST we cannot achieve real tax reform that delivers reward for merit and also provides an appropriate social safety net within an efficient and targeted welfare system.
5. The government sponsoring a trade enquiry is sufficient evidence that government aim to play a substantive and positive role in commerce. Government expenditures as a share of GDP is probably the clearest statement of all.
6. Why trade at all? University economics tells us that overall living standards can be raised via trade. The theory was the comparative advantage would lead to the appropriate scale, best productivity outcomes, and the lowest price within a defined quality. But we now know that the expansion of education over the past 25 years or so has meant that knowledge and skills has enabled relatively poor countries to produce the goods and services that were the exclusive domain of the developed countries.
7. “Globalisation” is the broad expression used to partly describe how the theory of ‘comparative advantage’ has become obsolete. Yet one cannot but feel that ‘globalisation’ was the American response to its inability to control the American manufacturing unions and so jobs were exported as American companies found it easier and cheaper to manufacture abroad. The longer-term and perhaps inevitable result has been the rise of Japan, followed by Taiwan and South Korea, and now China. European trade with Asia has also expanded rapidly over the past few years which is probably a belated recognition that an inept welfare system and union power has cooked the European manufacturing goose.
8. America’s response to the demise of local manufacturing, using the advantage of being the world’s reserve currency, was to become a ‘service economy’, a nation of bankers. However, having lost the will to manufacture, America then lost the skills. Ultimately, we now have many, many products that are produced abroad that are of comparable quality – form pianos to barbeques, from television sets to cars etc. The problem ultimately becomes that a nation that produces little has to import a lot. Having lost the desire to produce, you then lose the capacity to produce on a competitive basis. Consumers, who had manufacturing jobs, end up with few jobs, and/or declining incomes, and consumption has to be propped up by lower interest rates. So you end up with the worst of all possible worlds – low employment growth, declining incomes (except for bankers), an indebted consumer, and an intractable current account deficit mainly brought about by the trade deficit.
9. TRADE IS NOT A ONE WAY STREET: Too often when we have a trade enquiry all we talk about is exports. But IMPORTS are just as important. In looking at the trade balance we need to look at the question of import replacement. What industries do we wish to maintain our skills in? Should we maintain a basic capacity in almost everything? Why should we import olive oil and jam when we can grow our own inputs and put them in a can or jar? Why create a job in China at the expense of losing all of our jobs in that product category in Australia? What goods are we not producing, when with some investment, we could produce them? Perhaps all of these questions can be asked and solutions addressed within the concept of ‘beneficial trade’.
10. Beneficial trade means that we will import from, and export to, countries where it is beneficial to us. China buys our resources in large quantities, we buy their manufactured goods. Brazil exports iron ore to China why should we buy their farm produce when we can grow our own? We grow olives and can produce olive oil, why buy Italian olive oil in such quantities? We buy enough of their suits anyway.
11. Running a persistently high trade deficit means that we are consuming more than we are producing. This cannot last forever. It is bad longer-term policy. We need a local manufacturing policy that works, and dove-tails with our export capacities and aspirations.
12. ‘Beneficial’ might mean politically beneficial in some instances e.g. to assist a poor or emerging country to become more viable we will develop a trade relationship. We have no doubt that China has benefited from trade to such an extent that democracy is less than two decades away. As living standards rise the demand for democracy grows.
13. SO THE OVER-ARCHING QUESTIONS become: How much trade OUT do we want? How much trade IN do we want? What good and services should it be? Who with? What investment do we need now in order to get it in the right balance later? If it cannot be now, when can it be? Why trade with that country in that commodity when we can trade with another? Where are our good relationships?
14. Once upon a time in economics the real economy (the production of goods and services) used to drive the symbol economy (money and credit). That has now changed and money and credit seem to be the primary driver. But it may be swinging back with the fast reducing role being played by the US given their entrenched economic problems – twin deficits, wars over time and budget, oil prices, health, education, infrastructure. The multi-nationals are a big factor in trade flows. A dividend paid to a foreigner producing locally, is the same as an import as regards the current account deficit. Hence the role of foreign investment is another aspect of a beneficial trade policy.
15. As Rudyard Kipling said: “I keep six honest serving men, They taught me all I knew, Their names are What and Why and When, And How and Where and Who.”
16. Or as Ecinya once put it – “Research is to contemplate the possibility that intuitively you may not know the answers, and worse still, you may not even know the questions.”