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Government on the rack over lamb

By Graham Young - posted Thursday, 15 July 1999


It might be early in his career, but perhaps not too late, for new Trade Minister Mark Vaille to be run up the race and off to the abattoir. His early stumbles on the lamb issue don’t augur well for his ability in a field that all primary producers ought to understand well. Not that he is on his own in mishandling the issue. The whole Howard Government appears not to be championing the open economy as they should, perhaps because they don’t fully understand that devaluation of the dollar and the lowering of tariffs have done more than the last four Howard Budgets to ensure Australia’s current prosperity.

Howard’s greatest contribution to Australia’s current economic growth is that he was prepared to allow Paul Keating the room to make radical, fundamental economic reforms. This is not a criticism of the last four budgets, just a recognition that the earlier reforms were always going to produce the biggest gains.

Vaille’s presumably intentional change of direction and Howard’s initially misdirected reaction to Clinton’s imposition of tariffs and quotas on Australia’s lamb exports threatens to reverse the momentum for change.

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Howard needs to steady himself now, and prepare to defend Australia’s adoption of the open economy, even in a world where foreign governments are happy to tilt the playing field towards their own industries.

The Prime Minister has tended to play up the significance of the US decision – this is a way of putting pressure on Clinton. Unfortunately it also puts unnecessary domestic pressure on Howard, particularly as his decision to sling $5 Million to the sheep meat industry legitimises Clinton’s industry assistance and encourages other Australian industries to put their own hands out.

This situation calls for the Prime Minister to be honest and analytical in his public pronouncements. And honestly, this US decision is not going to do anything like the damage to our industry that the newspaper headlines suggest.

I don’t know a lot about our lamb exports to the U.S., but I have gleaned two valuable facts from radio broadcasts. Our lamb is a superior product to the U.S. one, and it wholesales for significantly less. So cheap is it, that an Australian farmer on the ABC claimed that his American competitor received the same price for just one leg of lamb that he received for the whole carcass. Apparently the competitive advantage, when all other things are washed into it, is around 30%. No wonder we have been making inroads into the US, as well as expanding demand for the product. A superior product should sell at a premium, not a discount.

That being the case, the 9% initial tariff applied to the exports which fall inside the quota will have virtually zero impact on the industry, while the 40% tariff applied for over quota exports, while a significant impost, will slow, but not destroy, growth. The major effect of the measures will be to expropriate taxes from US families for the three-year period the measures will be in effect. Instead of talking to the President, perhaps our Government should be talking to the housewives of America.

On top of this we are talking about an industry whose foreign earnings were only $100 Million last year. While the pain to individual farmers might be significant, from a national perspective this is a minor skirmish.

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Pointing this out should have been the first leg in the Prime Ministerial reaction.

The second leg should have been to point out that Australia is a small economy that relies heavily on trade, while the US is the largest world economy, with a much smaller proportion of its economy devoted to overseas trade. Australia cannot win a trade war, and it is a waste of money to even try. Polling figures show that 70% of Australians favour protection, but those figures are rubbery. Once voters realise that the war has to be paid for out of their own pockets, they won’t even care whether it can be won or not, they will become instantaneous conscientious objectors.

Added to that should have been some appeal to National pride, coupled with ridicule of the "mighty" US. The line should have been "Sure the US has damaged our interests, but we are so good we will survive and prosper. There are other markets to be exploited. Look at how quickly our exporters found alternative markets when traditional markets in Asia collapsed. This will be no different. The spirit of ANZAC lives." Howard has won elections because he was perceived as the underdog. The same ploy can work domestically on issues of foreign affairs.

Besides, history shows these types of protectionist measures will backfire on the US. Smart foreigners move some of their base into the US and repatriate a highly profitable proportion of the US industry assistance back to their own countries. There is nothing to stop Australian lamb meat producers buying US operations, or forming strategic alliances. They supply genetic material and commercial expertise in return for a large slice of the $100 Million that Clinton is splashing around in industry assistance. Nice work when you can get it.

Given the underdeveloped nature of the US lamb meat market, and the access in the US to additional sources of capital, as well as the industry assistance, there is no reason that this strategy could not provide Australia with more national wealth than the current one. In this world it is service providers who reap the large rewards, not manufacturers. Sheep farmers don’t need to own the paddocks or even the beasts to make a good living from their skills.

There are very strong protectionist sentiments around. If policy makers and politicians are unwilling to take them on, then they will begin to prevail, and that means a decline in National wealth and an increase in poverty and social misery. The Government has dealt with the GST, and will soon have dealt with taxation reform, thus creating a policy vacuum on the economic front. It needs to lift its game on selling an open economy if it is to keep the twinkle in the Treasurer’s eye as he listens to the ringing of cash registers up and down the nation’s economy.

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About the Author

Graham Young is chief editor and the publisher of On Line Opinion. He is executive director of the Australian Institute for Progress, an Australian think tank based in Brisbane, and the publisher of On Line Opinion.

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