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A continuing debate? Protectionism and free trade in Australia

By Binoy Kampmark - posted Wednesday, 21 September 2011


The Australian Foreign Minister Kevin Rudd is worried. Just prior to flying to the US for defence talks, he extolled the merits of free trade. Economies, small or large, had 'to maintain an open international trading system.' Artificial trade tariffs had to be avoided. Crisis was no excuse for protection.

In his keynote address at the Australian Historical Association's Perth meeting in July last year, Ross McKibbin, currently of St. John's College, Oxford, noted the role protectionism played in shaping Australia's political, and in so many ways, its social path. Instead of embracing the free trade dogmas of Britain, Australia, at its foundation, decided to impose a tariff regime. This was a social ethos in action.

Within Australia itself, divisions over whether incipient industries should be protected were rife. In the 1890s, New South Wales preferred to avoid tariffs while Victoria took the opposite route. After federation, trade within Australia would be deemed free, as long as a tariff would be imposed on goods coming into the fledgling state.

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By 1905, the protectionists were in the ascendancy, and Alfred Deakin's policy gained prominence. To qualify for protection, companies had to pay their employees 'a fair and reasonable wage."

The 1907 Harvester Case, in which Mr Justice Higgins of the Commonwealth Court of Conciliation and Arbitration delivered his renowned judgment on the 'living wage,' confirmed what became a remarkable statement of social policy in Australia. According to Higgins, Sunshine Harvesters could only receive protection from North American competitors in the event it provided its workers with what amounted to the living wage.

'The Australian form of wage determination was,' McKibbin points out, 'intimately connected to the fiscal system, and when in the 1980s a serious attack on that system was made, the consequence was also a serious attack (only partly successful) on the existing structure of industrial relations and wage-fixing.'

Higgins' role has been seen as nothing short of remarkable. The federal system was fragile. For one thing, the union movement hardly expected him to hand down the ruling he did. Some academics speculate that Higgins might himself have been dabbling in a bit of nation building.

The legacy was not something that would last. Protectionism as an idea started to gather dust. Australia, somewhat eccentrically, then took the high road with free trade. In the 1980s and 1990s, its market was deregulated by successive governments, with devoted enthusiasm.

The Australian dollar was floated. Microeconomics – the study of the firm rather than the study of macroeconomics – became the scientific mantra of governments. From 1970 to 2001, according to Andrew Leigh, the current federal member for Fraser, industry assistance, as an average measure, fell from over thirty percent, to under five.

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Leigh also goes on to note that three significant decisions on the reduction of trade barriers took place in Australian trade policy – 1973, 1988 and 1991, all incidentally, being made by Labor Governments.

Free trade tends to be spoken about in absolute terms when it tends to be relative. Few countries genuinely follow an unadulterated model, mixing and matching interests they feel fit their local economies.

Australia, oddly, is an exception, allowing an assault, to take one blatant example, on its Pharmaceutical Benefits Scheme via the Medicines Working Group. The assault, conducted via the free trade agreement with Washington, was mitigated to a certain extent by public health advocates in this country. The PBS, as a result, has been hampered in its efforts to keep down prices.

A certain game of shadow play takes place - some industries are protected, others are not. The Obama administration continues to shield trade and jobs against cheaper Asian competition and is hardly likely to budge on this. The criticism by such independents as Bob Katter, who has always taken a strong stance against a policy he sees as crippling to rural Australia, is not without cause.

Accused of going troppo where the sun beats down too heavily, Katter has seen the more destructive effects of policies that have emptied the interior of services and industries. Rural Australia only matters now because residents of those five teeming sores, as the Australian poet A.D. Hope put rather graphically, yearn for its product.

One sometimes wonders where the madness lies – in Katter's easily dismissed warnings and wishes. For example, the remarks of Guy Rundle in Crikey (Jun 6): "Crazy Bob Katter brought the crazy to politics" – or in the complicity of a consensus with the followers of Australia's mining conquistadores.

Any country blessed with natural resources is invariably cursed by it. This is the dilemma so wonderfully captured in the German term 'robber economy' (Raubwirtschaft). Australian manufacturing is barely a murmur on the world stage, obscured by the enthusiastic plunder of the mining boom. In 1984, manufacturing employed 17.5 percent of the workforce. It has now dropped to somewhere around 9 percent.

Any overly energetic and wealthy sector of the economy is unhealthy. To take the analysis of former federal Treasury secretary Ken Henry, Australia now operates on a three-speed model: The accelerator, dull as ever, lies in a happy-go-lucky cheap form of mining; then come industries such as manufacturing; then sectors which are not primarily dealing with trade.

According to James Glynn of the Wall Street Journal, the data reveals narrower trends – Australia is, effectively operating no a two-speed model. Pharmaceuticals, recreational and electrical-goods outlets are all, in an assessment of the chief economist of Commonwealth Securities Craig James, experiencing a slump. To sum up: If you are not in the mining industry, you can hop it.

Now, philosophers such as John Raulston Saul are making an argument that globalism – the philosophy whereby markets are deified and rendered sacred – is obsolete. An open market is never a recipe for doing nothing to control it, precisely because our freedoms have always been gained by action, intervention and an awareness of their dimensions.

The conscience of a Higgins eventually wins out over the free-market ideologues of the Chicago School. Countries have reacted to the financial crisis by wholeheartedly embracing measures of intervention in preventing the bad from getting worse. Few government officials, leaving aside Rudd's concerns, are willing to take their hands off the wheel of the economy. To do so would be perilous.

There is little reason to assume that Australia will not, at some point, adopt a policy that moderates the distortions that are now rife in the economy. The potential collapse of the Euro zone amidst the continuing sovereign-debt crisis, with the EU still being an important trade partner, may make the worries of Rudd academic.

The decisions on European trade policy are hardly going to be swayed by Canberra, and its humble officials may have to follow suit. Protectionism, in short, may well return to Australian shores.

Politics is a continuous practice of contradiction. According to the political theorist Hannah Arendt, it is even a flagrant one. But it is not merely the political idea that holds sway. To that we have the economist, the contemporary astrologer who gazes at stars in the hope of discerning the mystique of the money cosmos. John Maynard Keynes's statement in The General Theory of Employment, Interest and Money, authored in the depressed world of 1936, is still relevant – be they right or wrong, ideas 'of economists and political philosophers, are more powerful than is commonly understood. Indeed, the world is run by little else.'

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About the Author

Binoy Kampmark was a Commonwealth Scholar at Selwyn College, Cambridge. He currently lectures at RMIT University, Melbourne and blogs at Oz Moses.

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