Can free trade be fair?

The Biennial Sir Alan Westerman Lecture in Australian Trade Policy, Canberra

Speech, E&OE, check against delivery

8 November 2011

“We remain committed to the principles and practice of free trade.”

Prime Minister Gillard
Speech to the International CEO Forum 10th Foreign Investor Dialogue
15 June 2011

Public discussion of trade policy is often couched in terms of a conflict between free trade and fair trade. Under this paradigm, if trade is made freer it must become less fair, and the only way to make trade fairer is to make it less free. But can free trade be fair?

In a recent debate with 2UE's morning radio host and former One Nation staffer, David Oldfield, I argued that it was not unfair of an Australian government to allow the duty-free importation of goods produced in countries with lower wages than ours.

Mr Oldfield countered that the existence of lower wages in poorer countries proved the playing field was not level and it was unfair that Australia should have to face this disadvantage.

Mr Oldfield was expressing One Nation views of fairness. He has plenty of sympathisers; he wouldn't be a compere on Sydney commercial radio if he didn't. And at least Mr Oldfield is up-front with his views, making a debate possible.

The reason I retell the conversation — or shouting match — with Mr Oldfield is that it traversed the two main controversies: what is fairness and fairness to whom?

I will deal tonight with these issues as a precursor to a discussion of whether free trade can be fair, and whether it is time for Australia to ditch its adherence to the world trading rules and the open, competitive model in favour of the Far Right's Fortress Australia.

What is fairness?

Those who argue that the existence of low-wage countries makes the economic playing field uneven and therefore unfair are, logically, arguing for a single global wage rate payable to all. This is a fascinating proposition advocated by the Far Right, but closely attuned to the philosophy of Karl Marx.

The Far Right believes in global conspiracies to establish a One World Government. It seems they are so resigned to its formation that they are developing its work program, starting with setting and enforcing a single global wage rate.

Pending the formation of a One World Government setting a One World Wage Rate, the Far Right will continue to argue for tariffs and other restrictions on imports of goods from low-wage countries.

Australia's minimum wage is $15.50 per hour. Wage rates in overseas factories producing cheap socks and underpants are around 80 cents per hour. A tariff in excess of 1,000 per cent would be needed to cancel out the competitive advantage of low-wage countries over Australia, enabling Australian workers to produce socks and underpants while still receiving the minimum wage.

The effective rate of protection on socks and underpants reached 180 per cent during the mid-1980s, but never quite made it into the thousands.

The alternative remedy for Australia's competitive disadvantage in producing socks and underpants would be to drive Australian wages down towards 80 cents an hour. But why should Australian workers be required to enter into a race to the bottom, competing on wages with poverty-stricken, low-wage countries, just so that we can produce our own socks and underpants?

Australia's future is as a high-skill, high-wage country. It is in the interests of working Australians that we compete in the production of goods embodying high levels of skills and innovation, not on the basis of low skills and low wages.

And what of those people in poor countries who, having moved out of subsistence agriculture, are doing better by gaining a wage producing socks, underpants and other low-wage goods for export? Does the Brotherhood of Man extend to them or is it confined to Australians?

Ask the Far Right and they will tell you charity begins at home — we should look after our own and disregard foreigners, who are just as likely to be disease-carrying terrorists. If this sounds exaggerated, please check out Pauline Hanson's speeches.

But Bob Hawke retells the counsel of his Dad, Reverend Clem Hawke, who, in espousing the virtues of egalitarianism and fairness, taught Bob: “If you believe in the Fatherhood of God, you must believe in the Brotherhood of Man.” If God is our Father, we must all be brothers and sisters, Clem was logically arguing.

You don't have to be a Christian to believe that the world's people are our brothers and sisters. The socialist Internationale calls on the world's masses to stand up and band together in struggle to unite the human race.

Christians and socialists should empathise with the poor and oppressed, allowing them to gain paid work as a pathway out of poverty and misery.

On many occasions I have been described as a “neo-con” — a neo-conservative — for arguing against trade restrictions in rich countries that prevent poor people gaining a living by producing goods for export to Australia.

If having compassion for the poor and the oppressed makes me a neo-con, then I'd rather carry that burden than agree to consign them to unrelenting poverty by shutting their produce out of rich-country markets.

The existence of people struggling on very low wages is not unfair to rich countries; it is unfair to them and the families they are trying to support. For them, free trade is fair and if we have any compassion for them we should agree.

Fairness to whom?

Within any society there are two categories of people: producers and consumers. All producers are consumers but not all consumers are producers. Advocates of trade restrictions argue that limiting imports is in the national interest. But import restrictions increase the cost of living for consumers. How can it be in the national interest to impose higher living costs on consumers?

For those of us who seek a fairer society, tariffs and quotas are regressive — they impose a disproportionately heavy burden on the poor. In this respect, tariffs and quotas have exactly the same regressive distributional effect as a consumption tax, a GST. Progressives support a progressive taxation system rather than a flat tax. Yet tariffs and quotas are a flat tax.

If I am a neo-con in making this indisputable point, then I am joined by two other neo-cons: Bob Hawke and Paul Keating.

In announcing the 1991 tariff reduction program, Prime Minister Hawke told Parliament:

“The most powerful spur to greater competitiveness is further tariff reduction.

“Tariffs have been one of the abiding features of the Australian economy since Federation. Tariffs protected Australian industry by making foreign goods more expensive here; and the supposed virtues of this protection became deeply embedded in the psyche of the nation.

“But what in fact was the result? Inefficient industries that could not compete overseas and higher prices for consumers and higher costs for our efficient primary producers. Worse still, tariffs are a regressive burden — the poorest Australians are hurt more than the richest.”

Treasurer Keating added:

“The package of measures announced today ends forever Australia's sorry association with the tariff as a device for industrial development.

“By turning its back on tariffs, Australia will be further propelled in its quest for international trade and efficiency, a search begun with the opening up of the economy in 1983 when we floated the dollar and abolished exchange controls.”

Hawke and Keating were and are progressives — champions of a fairer society. Yet they were also champions of free trade. They did not consider free trade to be inherently unfair.

But Hawke and Keating understood, as the Gillard Government does, that reducing domestic trade barriers can be very painful for workers in the affected industries.

That's why the big tariff reduction programs were accompanied by structural adjustment assistance plans for affected workers. It was considered only fair that the wider community, as beneficiaries of reductions in trade barriers, should contribute taxpayers' dollars to assisting displaced workers into alternative employment through retraining and mobility programs.

Now that quotas have been removed and tariffs are at zero or negligible levels, attention has turned to the new burden on manufacturing imposed by Australia's unprecedented mining boom. The high exchange rate is placing heavy pressure on Australian manufacturing as it tries to compete on international markets and at home against imports.

It is extremely frustrating for the workers, management and owners of efficient manufacturing businesses that they are losing markets under the pressure of the high exchange rate.

To the great credit of the Australian trade union movement, union leaders, urged by their members to do something about the effects on manufacturing jobs of the high exchange rate, have not called for the re-introduction of tariffs. Through the recent jobs summit they successfully called for the development of plans that would enable local suppliers of major project inputs to compete with overseas rivals on level terms, but they have not demanded mandatory local content obligations. They have displayed a responsibility that has evaded the Far Right.

Fairness through the world trading rules

In the aftermath of the Great Depression and World War II, major countries decided to establish a set of rules by which world trade would be conducted. In promoting free trade, the General Agreement on Tariffs and Trade (GATT) developed rules designed to ensure free trade was actually fair.

The architects of the GATT understood that free trade could not be achieved and sustained unless it was done in accordance with a set of fair rules. Successive rounds of multilateral trade negotiations have widened and strengthened these disciplines of fairness.

Members of the GATT's successor body, the World Trade Organization, are not allowed to increase tariffs above the rates at which they have agreed to bind them. They are obliged to comply with limits on subsidies they apply to domestic industries. They are constrained in dumping products onto export markets.

When the GATT was formed in 1947 it had only 23 member countries. By the time the WTO was established in 1994 it had 128 members. Right now the WTO has 153 members. Russia and several other countries are expected to join the WTO in December.

The World Trade Organization is a club everyone wants to join. China joined in 2001 and Russia has been trying for 18 years.

Not one country has decided to leave the WTO — not one.

Members are protected from unfair practices by other members, but non-members enjoy no such protection.

The philosophy of the WTO is free trade conducted under fair rules; there's no inherent conflict between the two.

But the world trading rules are far from perfect in ensuring fairness.

Some countries have high tariffs while others have none.

Some countries have tough quota restrictions while others have none.

Some countries have many nasty non-tariff barriers in place behind their borders while others have few.

Some countries have big subsidies on domestic production of agricultural and manufactured goods while others have none.

Some countries dump their surplus products onto export makets at below-cost prices while others do not.

Some countries heavily subsidise their offshore fishing industries — contributing to fishery depletion — while other countries do not.

Clearly the WTO's rule book contains loopholes and has pages missing, such that trade is neither free nor fair, though it is freer and fairer than would be the case if there were no rules.

The big question, then, is: should the world go forward or backward on trade?

Some critics of the inadequacy of the world trading rules argue that since some countries can skirt around the rules, others should too, to make it fair for all.

It's a strange line of reasoning: the best way of dealing with inadequate rules is to abandon them and engage in a free-for-all.

The consequence, of course, would be no different from what the world experienced the last time this happened, before a rule book was written. It was called the Great Depression.

Jobs would be destroyed on a massive scale in implementing such a policy of mutually assured destruction; or MAD for short.

The objectives of both free trade and fair trade are best served by applying the rules to everyone, and making sure the rules cover all unfair practices.

That's exactly what the Doha Development Round of global trade negotiations has been seeking to do for more than a decade now.

A successfully-completed Doha Round would result in the elimination of agricultural export subsidies, the application of strict limits on farm subsidies, further reductions in industrial tariffs and tighter disciplines against dumping, to mention but a few fairness-enhancing improvements.

That's why Australia has been such a strong advocate of completing the Round.

Prime Minister Gillard has set out a new pathway for completing the Doha Round and won support for her plan at the G20 meeting meeting held in Cannes late last week.

In keeping with a belief in the Brotherhood of Man, Australia has pledged access to our market for 100 per cent of goods from the 48 Least Developed Countries free of tariffs and quotas. The Prime Minister has urged other countries to make pledges as well.

Australia's plan is then to break the Round into more manageable parts and bring them to conclusion as they become ready, rather than waiting for one grand bargain to magically emerge — an agreement that has eluded negotiators for more than a decade.

And while these negotiations are underway, countries would commit not to succumb to protectionist pressures at home.

A prime candidate for early agreement could be trade facilitation. This would involve expediting the movement, release and clearance of goods, including goods in transit.

Australia would ensure that any agreement will provide technical assistance and capacity building to developing countries and improve cooperation between customs and other authorities to assist businesses.

One example of a measure that has been shown to provide trade facilitation benefits is the making of advance rulings.

Advance rulings involve customs authorities providing confirmation of how a good will be treated upon arrival to that country.

This can provide certainty to traders as to how their goods will be classified, how they will be valued, and what tariff rates they will incur.

The European Commission released a study in October 2011 which estimates that a trade facilitation agreement could boost global GDP by around US$67 billion.

Much of the gains would flow to developing countries, with Africa, South East Asia and South American countries receiving more benefit from trade facilitation outcomes than from any other part of the Doha package.

That same study from the European Commission estimates the effect of successfully completing the full Doha Round would be a boost to global GDP of US$152 billion.

The trade facilitation agreement therefore would constitute an estimated 44 per cent of the total global benefits of the Doha Round — well worth having, and worth having sooner rather than later.

These fairer rules would help liberate millions of the world's poorest people from poverty, allowing them to gain jobs producing for developed country markets to which they would have fairer access.

Forward with fairness

As Prime Minister Gillard remarked at the G20 meeting, “We are a great trading nation and so we've got nothing to fear from freer and freer trade.” This from the Leader of a Party that is conventionally characterised as being to the Left of Centre.

On numerous other occasions, Ms Gillard has committed her Government to supporting free trade, telling Parliament her Government is keeping up Australia's credentials as “a great free-trading nation”.

Yet the Right in Australian politics is being infected with a new bout of xenophobia of the One Nation strain.

It needs to be remembered that at least one in five Australian jobs is a direct consequence of trade, and working people engaged in exporting earn around 60 per cent more than those employed in non-trading parts of the economy.

Australia is benefiting enormously from its economic integration with the Asian region in this, the Asian Century. Visionary leaders such as Bob Hawke, Gough Whitlam and Paul Keating have ensured Australia is in the right place at the right time.

Whitlam officially recognised the People's Republic of China in one of his first acts as Prime Minister, and cut tariffs by 25 per cent.

Hawke engaged the leadership of China, Japan and India, Keating strengthened the relationship with Indonesia and both fashioned Australia's open, competitive economy.

Howard and Costello continued the Hawke-Keating reforms, further opening up the Australian economy.

Rather than succumbing to pressure from her political opponents to return to the Fortress Australia of the 1960s, Prime Minister Gillard is intent on strengthening and broadening Australia's economic integration with Asia through her Asian Century White Paper project.

Australia, like the rest of the world, is at a defining point in economic history. Should it press ahead with the free-trade philosophy of the last quarter century or should it revert to economic isolationism?

The Gillard Government is charting a course of freer trade that, in bolstering the world trading rules, would be fairer too. Fairer to the world's poorest people. Fairer to working Australians employed in export industries as it opens up other countries' markets to our products. Fairer to the Australians working in import-competing industries by strengthening the rules against subsidies and dumping by overseas competitors.

Economic Hansonism, xenophobia — call it what you will — might be a political opportunity for some.

The Gillard Labor Government will refuse to contest the field, sticking instead with the great program of advancing Australia as an open, competitive economy and a champion of global free trade.

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