David Uren of The Australian has a nice piece today on the national shift towards trade protection:
The Coalition’s industry policy, released yesterday, says the onus of proof will be reversed, with foreign companies forced to prove their pricing is fair, rather than requiring Australian companies to establish that their market is being undermined.
The legal advice of the Department of Foreign Affairs and Trade is this would be in breach of the World Trade Organisation rules, however Abbott is unmoved. “We will have fair-dinkum anti-dumping rules in place so that our manufacturers are competing on a level playing field.”
Labor also says it has manufacturers’ interests at heart. Launching the new anti-dumping commission last month, Home Affairs Minister Jason Clare declared that its $24.4 million in resources was “good news for Australian manufacturers and workers”.
…The idea that selling goods in Australia for less than they are sold for in their domestic markets is, in Clare’s words, “cheating”, but this overlooks the fact that Australian companies do it all the time. Indeed, Austrade recommends it. Calculating a separate price for each export markets is important, Austrade argues, because the price that end users are willing to pay will not be the same in all markets. “Beachhead pricing can reduce the time to get market entry, while sacrificing early margins,” Austrade says. When Holden was selling Commodores in the US, the cars were $10,000 below Australian market prices.
It would only be a problem if a monopoly were temporarily lowering prices to drive competitors out of business so that it could extend its monopoly to a new market. This is predatory pricing. However, the Productivity Commission says that for virtually all the goods that Australia has targeted with anti-dumping measures, there have been multiple sources of global supply.
Anti-dumping rules are a classic example of what diplomats like to describe as “behind the border” protections that prevent global competition.
Regular readers will know that I have strong sympathies with the notion that manufacturing is an essential national interest sector for both prosperity and security. The first point is based upon the notion that manufacturing is a key driver of productivity in any economy. As McKinesy shows:
But it’s no good just having manufacturing. It must be “vibrant manufacturing”, or productivity gains become much more difficult to build. Only competition can deliver that and thus anti-dumping and other “behind the border” protections are, largely, self-defeating.
So, what is the answer if protection is useless?
As I’ve argued many times, you must re-frame your macroeconomic settings. For decades Australia’s fiscal and monetary settings have massively favoured two sectors above all others. The first is housing which enjoys an extraordinary array of special supports across demand and supply from explicit banking guarantees , favourable tax regimes to construction bottlenecks and even immigration policy. This is what I describe as the politico-housing complex. These settings over-inflate land and asset prices, facilitate over-consumption that is financed by offshore borrowing which drives up the value of the dollar and wages beyond our productive capacity.
The second sector is resources which enjoys better returns in Australia than just about anywhere. We have as spectacular resource endowment that is allowed to run riot rather than be managed for long term benefit. We have generous royalty regime that doesn’t shift enough with price booms and very little in the way of rent taxes to ensure that excessive returns from non-renewable and publicly-owned resources don’t distort activity during good times. This also drives up the currency, squeezing out other tradables. The excessive returns also mean capital is uninterested in anything else.
In short, housing and resources enjoy all sorts of rent-seeking advantages that means we borrow excessively offshore, drive up the value of our currency and perpetually inflate input costs into industry, making it very uncompetitive at both a macro and micro level. There is no ‘natural decline’ in Australian manufacturing, as Treasury and the RBA like to argue. It is a feedback loop of our choosing.
So, you can ask government to step into the breach and protect what’s left of your manufacturers. It’s the easy answer and perhaps has merit in the sense that some skills are preserved for that fateful day when we change our macro settings, but in the meantime, without competition, it’s not going to add a lot to your economy and will probably make your other rent-seekers worse. As David Uren concludes:
In a speech last week, former Productivity Commission chairman Gary Banks bemoaned the return of the “rent-seekers”: businesses seeking to gain competitive advantage through gaining government preference. They had been frozen out as governments pursued reform that exposed business to the rigours of the market. Their return to influence in Canberra was, Banks said, a bigger threat to prosperity than global financial instability or the ageing of the population.
The houses and holes economy has served us well for three decades but with an unholy trinity of Australian rent-seekers now encircling the economy and the strains of falling competitiveness obvious, you have to ask yourself where we go from here.
