Used by date: free trade

Once industry protection was removed in 1988 and again in 1991, balance of payments outcomes become an important measure of underlying philosophy and theories.
 
Compiled from:  ABARE Commodity Statistics 2010, Macroeconomic variables

Graphical analysis provides an evaluation of structural reform of Australian industry. Despite euphoria over the mineral boom and resource prices, Australia’s current account as a percentage of GDP remains a net drain on domestic production. This comes about from chronic current account deficits being funded by overseas borrowing.

Interest and other income payments are netted out to give a net income variable on the current account. Net Income is presented as a positive value to identify the comparative volume of GNP that is required to meet offshore debt payments relative to that which remains for domestic distribution as GDP.  

Chronic current account deficits such as Australia’s require the capital account to subsidise losses on the free trading current account. Prior to free trade being adopted, protective instruments and currency adjustment would have been used to support Australian industry and balance the current account.  

Net subsidisation of losses on the current account is paid for by ordinary Australian’s paying higher interest rates on the monies borrowed. Chronic deficits, such as experienced by Australia, indentify an overvalued exchange rate. Capital inflow is therefore required otherwise the currency value would collapse.

To successfully fund a chronic current account deficit, the RBA must hold Australian interest rates above other comparable official interest rates. A chronic overvalued currency supported by overseas borrowing, identifies monetary policy’s preoccupation with domestic price stability. The negative effect of such discretionary policy indirectly subsidises imports whilst imposing a tax effect upon exports.

An overvalued currency then is anti exports, anti-employment and anti-industry. Any industry debate that does not address monetary policy administered by an unelected and politically unaccountable institution is a debate without substance.

The GFC became the very public failure of neoclassical economics. It is poetic justice that six from the elite G7 Group of nations (UK, USA, Italy, France, Japan, Germany) that have been so influential in maintaining the philosophy post 1976 are now faced with severe domestic dislocation. Token protestations by isolated Australian trade union officials and retailers concerns will achieve little.

To change policy direction, public rejection of political parties must occur when they cannot or will not provide full employment, an equitable distribution of income, and rising living standards in modern economies. In the mean time, political instability is likely to become entrenched as growing numbers of the excluded wield increasing electoral power at the ballot box. It will be interesting to see if notional political protestations by some trade unions and business groups grow a backbone and strongly mount the argument that free trade has reached its used by date.