History In recent times Australian Government Ministers and media have commented upon problems and benefits with Australia’s Free Trade Agreements (FTA). There appears to have been little clarification on the pros and cons of these far reaching agreements. This essay seeks to throw light on some of the issues and how they may affect Australia.
In the age of modern empire (16th to 19th centuries) world trade was constrained by the Mercantilist theory by which governments regulated the empire’s economy such that state power was augmented at the expense of rival maritime powers. The policy reduced imports from rival nations and maximised exports which, in part, fuelled the Industrial Revolution. The effect was to remove subject peoples and colonists from foreign products; this policy was a trigger for the American War of Independence.
Prior to the Second World War, European and American industry imported raw materials from colonies and exported manufactured goods to tied markets round the globe – it was a closed trading loop.
Due to the two ‘World Wars’ in the first fifty years of the 20th century, global trade was severely disrupted. The European empires and Mercantilist trade vanished and trading patterns were ad hoc. The mid-century post-war reconstruction boom generated unprecedented factory growth across the Western world that generated high labour costs and this has sown the seeds of serious labour pains in the industrialised West in the closing years of the 20th century and the opening years of the 21st century.
From mid-20th century, Western world companies commenced a slide towards low-cost labour in Asia and South America causing closure of many Western world factories. This resulted in an inexorable under-employment or job losses that is now bedevilling the working class of the Industrialised world. The flood of cheap imports to the West from industrialising Third World countries has skewed world trade, created trading surpluses, particularly in China. This situation has contributed to low global inflation, deflation, low interest rates and under employment This global situation has contributed to the rise of European Right Wing parties: the popularity of Mr Trump, the Brexit vote and the phenomena of Bernie Saunders (Democrat,USA) and Jeremy Corben (Labour, UK).
Free Trade Agreements Economic theory suggests free trade agreements are the best way to proceed to raise global living standards, particularly in the Third World. However, not all in the Industrial West benefit. In effect, the practice is producing interconnected global trading blocks with reduced tariffs and quotas. With increasing complexity of trading blocks, the process might spawn the rise of mercantilist groups by another name. Negotiations by nations are complex as each participant endeavours to maximise trade benefits. Currently the advantages of free trade over mercantilism are:
- nations benefit from a greater source of goods at lowest prices
- mercantilism restricts imports resulting in high prices
- the free trade system makes the nation, not necessarily the individual, more prosperous
- mercantilism forces nations to fight over resources – under free trade goods and services are peacefully traded. Since globalisation is not a homogenous process, rival free-trade blocks could have designs on the same resources.
World Economy The world economy has been moving towards an interconnected globalisation. In today’s world no national economy is completely immune to the health or sickness of other national economies:
- Globalisation ensures a majority of people benefit through new investment, but high labour costs in outdated industries can create unemployment. The Brexit ‘leave’ vote was lead by those who were ‘left behind’. Mr Trump’s support is, in part, from the disaffected working class.
- Globalisation can produce lopsided unstable capitalism. There is, within Western World, unease that infrastructure and industrial projects will proceed in Third World countries where labour costs and tax rates are low.
- Since Britain’s Brexit vote in June to leave the EU, five industrialised European nations anti-establishment parties are clamouring to erect trade barriers (tariffs) and close borders to immigrants.
- Increasing globalisation has established that the real incomes of 66% of households in advanced economies have fallen between 2005 and 2014. The few gains have gone to the ‘salaried gentry’. (McKinsey Global Investments)
- There is growing belief that globalisation benefits elites but much less so for the broader population in advanced economies.
- China’s integration into global trade, by joining the the WTO, has caused lasting damage to workers in the Industrialised Economies.
- China’s global penetration of low cost goods has risen from 2% (1991) to 20% (2013).
- Of the six million American job losses in recent years, 29% are directly related to the import of Chinese goods.
- With globalisation and increasing free trade, there is clear evidence in the Advanced Economies that wage inequality is growing with growing risk for low and mid-skilled workers.
- Advocates for free trade admit gains come from greater manufacturing and productivity efficiency not from additional jobs. However, imports are cheaper.
American Trade Agreements As a backdrop to Australian trade agreements, the American experience is reviewed. Since 1985, fifteen separate free-trade agreements with twenty countries involved the export of high-value products. Note that these were one-to-one trade agreements not an international consortium master-minded by an American panjandrum. Employees benefited as wage premiums of up to 18% were paid compared to those in non-export industries who were unable to compete with cheaper imports.
In 1998, the United States and China signed a trade pact whereby American export tariffs were reduced from 24% to 9% while import quotas were abolished. Subsequently there were huge job losses in the American industrial heartland, but millions of Americans benefited from cheaper products. Bernie Saunders, a Democrat Presidential aspirant, noted that trade deals are a disaster for American workers.
Trans Pacific Partnership (TPP) Twelve countries have been co-opted and others are being cajoled to join. Negotiations have continued over five years. It was hoped to sign a binding document in 2016 but Partners have delayed until 2017. The TPP was the initiative of President Obama to counter the growing economic might of China. The current membership represents approximately 40% of global GDP and is summarised in the table along with some critical economic indicators. The Philippines, South Korea, Thailand and Taiwan have expressed an interest in joining. China is specifically excluded as its financial controls and social issues are not considered acceptable. (geopolitical futures.com, 8 August, 2016)
TABLE 1 Trans Pacific Partnership. Members Economic Indicators.
|Country||Population (m)||GDP (tr) & Ranking||Budget as % of GDP||Average Wage $'000||Unemployment %|
Clouds on the horizon are an antagonistic American Congress that is required to enact the TPP into law, while both Trump and Clinton are opposed to this trade deal. Malaysia, Canada and New Zealand have delayed ratification until 2017.
The Roosevelt Institute has poured cold water on the proposed Partnership (DrJ Stiglitz, Columbia University):
- middle incomes will be suppressed
- tariffs are already low (average 2.7%) so a strong American dollar will swamp benefits
- the World Bank opinion is that the proposed Partnership will have zero effect on the American economy
- the inequality jeopardising the American middle class is a defining challenge to social instability.
The Australia-China Trade Agreement Before commenting on the TPP, a smidgin of history. This agreement came into force in June 2014. It is a contentious document as revealed on ABC News, October 2015. (abc.net.au/news) Benefits are summarised as:
- Australians will enjoy cheap Chinese Imports, a 5% tariff will apply.
- Within 2-4 years, Chinese tariffs of between 3-10% will be eliminated on imports of coal and aluminium.
- Within 9 years, Chinese tariffs of up to 30% will be eliminated on dairy and animal goods.
- Australian aged-care homes and some hospitals can be established.
- Improved access to legal and financial partnerships will be expedited.
- The Foreign Investment review Board will scrutinise all investments by Chinese State owned companies.
- There is excessive leeway for years and tariff adjustments.
- No tariff reduction for sugar, rice, wool, cotton, wheat, maize, canola.
- Customs duties will apply on beef and milk powder if quotas are exceeded.
- For Chinese investment projects exceeding $150 million temporary workers will be permitted.
- Under ISDS legislation, the Australian government can be sued if Chinese interests are damaged by subsequent legislation.
- Acquisition/investment limits have been raised from $252 million to $1,094 million – excluded are investments in media, telecoms and defence.
Trans Pacific Partnership (TPP) The Prime Minister spoke briefly, in glowing terms, on the benefits accruing to Australia from its membership of the TPP. (ABC rn, 7 November 2016) There is growing unease in Australia and among other participants on the conditions of and fall-out from the TPP once it is possibly ratified in early 2017. This concern is a realisation that the trade initiative may be politically designed to corral Pacific rim nations to further the corporate interests (hidden agendas) of United States industry. (The Drum, June 2015) The twelve nations involved, but not all irrevocably committed, account for 40% of global GDP. (geopolitical futures.com) For Australia, this Partnership does appear to be a lifeline for its economic growth and stability since 70% of its trade passes through the east Asian region. The long-term growth projections based on the TPP for participating countries have been assembled by the World Bank. (June 2016), Table below:
TABLE 2 Modelling Projection under Trans Pacific Partnership to 2030
|Country||GDP Growth %||Exports %|
World Bank, 10 June 2016
Australia and Mexico appear to have similar disappointing growth projections.
Reports favouring the TPP from the Australian perspective have been issued by the Department of Foreign Affairs and Trade (16 July 2016 ) and the Parliamentary Joint Standing Committee on Treaties (2016). Summarised, their conclusions are:
- there is a great potential to drive job-creating growth across the Australian economy
- there is new market access for Australian exporters and investors
- there will be transparency of regulations of the twelve participating nations, hidden agendas excepted
- there will be certainty for business, cost reductions and consolidation of supply chains
- tariff elimination
- Australian competitiveness will be enhanced which will promote Australia as an investment destination.
Government agencies, being politically controlled, have painted a soft rosy glow on the advantages of the TPP. Disadvantages of the TPP have been expressed in unequivocal terms. Dr M Rimmer, ANU College of Law, states “Australian consumers have been deluded. The intellectual property chapter of the TPP is a monster. The proposals in regard to copyright law, trademark law, patent law and data protection would hit Australian consumers hard.”
Getup (getup.org.au), the Australian political commentator, noted in 2016:
- the TPP represent a ‘closed door’ deal driven by big business, pharmaceuticals and tobacco
- foreign companies will be able to sue the Australian government for loss of earnings under the Investor-State Disputes Settlements (ISDS) scheme
- significantly, the proposal deals extensively with investment not trade.
The Drum (29 June 2015) noted: ‘preferential trade deals, not free trade, add to the complexity of international trade. In this, the Productivity Commission and the Australian Chamber of Commerce agree. It is the opinion of the World Bank that the TPP will have zero effect on the American economy.’
The last round of the TPP talks were concluded in New Zealand during August 2016 with 98% of the deal agreed to. Sticking points are monopolies demanded by the pharmaceutical companies requiring twelve years exclusivity on their products, while other members require only a five year period. This issue has significant ramifications for Australian health costs. The next TPP meeting is scheduled for November in the Philippines.
Apples upsetting the Cart Recently, four potential Partners and/or angry citizens have had second thoughts or condemned the TPP document:
- New Zealand. The New Zealand Herald (July 2016) reported wide-spread opposition to pharmaceutical and sovereignty issues, It was reported over 170,000 citizens were involved in the rallies.
- Canada. The Council of Canadians (November 2016) has held a number of protest rallies that has delayed a Government decision on the TPP until January 2017.
- Malaysia. Officials have announced that the Government has delayed a formal decision until sometime in 2017.
- Australia. In May 2014, unions, church groups and community organisations endorsed a letter prepared by the Australian Fair Trade Network to Trade Minister Robb warning of draconian and unfair clauses dealing with public health costs, ISDS provisions, workers rights, environmental protection, copyright provisions and Australian media content. Currently, cyber space across Australia is clogged with damming reports on a poor outcome for Australia if the Trans Pacific Partnership is ratified. The latest word from the Government, risking repetition, was on the 7th November (ABC rn) when the Prime Minister extolled the virtues of the TPP but none of its iniquities.
What to think. What to do. There are very clear messages of concern coming from across the globe; the Australian government is publicly studiously ignoring them. There are two factors to the TPP. Firstly, it is a political construct to counter the growing might of China and secondly, it is perceived by the Australian government as a life-line for the nation’s future prosperity.
The attached tables can generate some uncomfortable deductions. From Table 1 the average wage ratio to GDP is instructive. Results are United States 316, Japan 145, Canada 35 and Australia 25. Australia’s productivity has been a concern; this data supports that contention. Table 2 provides an uncomfortable World Bank projection to 2030 of Australia’s growth compared to other members of the TPP. Australia’s GDP growth % and exports % are among the lowest among the industrialised cohort. Australia’s salvation has to to lie with high-tech exports on the back of its existing exports.
For Australia, there will be further job losses as GDP increases with the development of high-tech industries in the years to come. Is the TPP, with associated noxious clauses but associated with 40% of world trade, the real issue or is there an advantage in developing comfortable individual trading agreements with many nations?
- A Pleasing set of Numbers (Hockey – September 2014)
- A Terrific set of Numbers (Hockey – June 2015)
- The Best Growth Rate since 2012 ( Morrison – September 2016)
- Then why oh why are:–
- Australian living standards falling?
- Young Australians unable to afford to buy a home?
- Interest rates at 1,5%, the lowest ever?
- Salvation lies in consistent positive Terms of Trade.
What is the proper message we should hear from Australian Government Treasurers? Below is a potted summary of the Australian financial situation from mid-2014 to mid-2016. It will be shown that the above adjectives tend to disguise the situation. This is a call aux armes citoyens to drive up our Terms of Trade and to ensure we are not bamboozled by misleading commentaries from our ruling elite.
The catalyst for this offering is Treasurer Morrison’s embrace of Australia’s mid-2016 accounts. To place his enthusiasm into context, we start with Treasurer Hockey in mid-2014.
In September, 2014 Mr Hockey indicated the National Accounts were “a pleasing set of numbers” which confirmed a consolidating economic momentum. As Mr Hockey was speaking, the Reserve Bank Governor, Mr Stevens, was warning of a dangerous bubble in the housing markets. It was ingenuous of Mr Hockey to indicate the GDP figure had risen by 0.5% in the June quarter but he had omitted to indicate that the real GDP had fallen by 0.3% due to the unfavourable Terms of Trade. The Reserve Bank of Australia considers the real GDP is a more meaningful measure of economic health. Treasurer Hockey knew this well. Was this deliberate omission or a senior ministerial moment? (SMH, September 2014)
Now forward to June 2015. The National Accounts for the the quarter ending June 2015 indicated GDP rose by 0.1% with an annual growth of 2.3%. (ABS) Treasurer Hockey enthused “a terrific set of numbers”. He indicated the Australian economy was among the fastest growing in the world. What Mr Hockey did not mention was that this period constituted the fifth quarterly drop in the Terms of Trade which was squeezing company profits, taxes and wages and that real net disposable incomes was now less than that in the September quarter 2008. (GFC) Australian living standards were falling for the first time in fifty years – and this is not a short-term trend. People are now spendings savings to make ends meet. This reduces domestic demand which knocks on to fewer job opportunities. (Financial Review, 3 June 2016)
Concurrent with Treasurer Hockey’s upbeat comments the Boston Consulting Group, Sydney, opined that Australia’s low interest rates (then 1.75%) and Government spending was producing a potential spiralling national debt burden. Compounding this fragile transition away from resources investment, the non-dwelling construction activity declined by 4.9%. What is happening in the economy is that national productivity is falling as growth moves away from low labour profitable mining to low paid intensive labour in tourism and hospitality. These are issues lurking behind the Treasurer’s enthusiasm. (Financial Review, 3 June 2015)
Forward again to September 2016. Treasurer Morrison has commented with gusto on the National Accounts for the June quarter. We are told there is no sign of a downturn in the economy which has grown by 3.3% – the best growth since 2012. There was also fulsome comment that the growth rate is a tribute to hard working Australians. No where, apparently, was there reference to a need to encourage exports and thus improve the Terms of Trade. Mr Morrison noted that the Terms of Trade for July showed a $285 m reduction on the June figure (ABS 5368.0) due to slightly increased exports and decreased imports which might indicate less disposable income was available for overseas goods.
- Exports. June $25,706m. July $26,425m
- Imports. June $28.957m. July $28,835m
What was not made clear by the Treasurer was that the 3.3% GDP growth was boosted by pre-election Government spending and, curiously, on increased expenditure on hepatitis C drugs. (SMH, 7 September 2016) Currently brakes on the economy are weak household spending, weak wages growth and a decline in the national hours worked. Irrespective of encouraging statements by the Treasurer, the historic low interest rate, now 1.5%, and low inflation rate of 1.0% (RBA band 2 – 3 %) is indicative of a sluggish economy.
The tentative conclusion, is that statements by recent Australian Treasurers cannot be accepted at face value. Their statements must be evaluated within the wider picture of the Australian financial situation. The driver for the future is a positive Terms of Trade that, initially, balances the budget from this jobs and growth and other benefits will follow.
JOBS AND GROWTH
Prologue This offering attempts to place the ‘Jobs and Growth’ song line into Australia’s current and projected economic situation. Background is Australia’s terms of trade, past innovations, the imperative for export income and closes with comment on poor academic achievement and Government funding as drivers for growth into the 21st century.
Preamble The slogan, ‘Jobs and Growth’ generates two issues:
- If Australia is to prosper ‘growth’ must be directed toward generating export income.
- In an expanding 21st century, economy improving education is necessary but unemployment is still forecast.
The policy of encouraging domestic employment will not increase the national wealth in an expanding population – it will merely churn the money supply. This activity will encourage quantitative easing, a devalued currency, deflation and more expensive imports – as experienced in Europe today.
‘Growth’ for Australia must be directed to generating export income. Much has been made of a ‘transitioning economy’ but the Government has apparently not articulated a specific sense of direction, although small business has been given a boost – but how much product is export oriented?
For Australia to prosper, the monthly terms of trade must be returned to positive, such that the national budget at least returns to break-even; this will stabilise the national debt. The flip side is that high tech export industries do not require a large relatively unskilled work force. Canada found transitioning toward a high tech economy does not substantially reduce unemployment but it does increase GDP.
Australian Exports, Imports and Terms of Trade In 2013, Australia produced a positive terms of trade (DFAT April 2016, dfat.gov.au/trade):
- Top Exports – $329 billion. Iron ore, Coal-Gas-Petroleum, Wheat, Copper, Aluminium, Cotton, Wool, Gold, Financial services.
- Top Imports – $318 billion. Travel-Freight-Transport services, Motor vehicles, Computers, Refined petroleum, Furniture, Telecommunication equipment, Heating/Cooling equipment, Iron-Steel-Aluminium structures, Professional services.
- Terms of Trade + $11 billion. Additional impost is the interest on National Debt – $16 billion.
Since 2013 the terms of trade have moved into deficit. In the first half of 2016, the terms of trade ($ billion ) were: January 3.42, February 3.41, March 2.16, April 1.58, May 2.22, June 3.19 – that is around $15 billion. (tradingeconomics.com)
The budget deficit for 2016-17 is $37.1 billion which is forecast to decrease to $6 billion in 2019-20. (Australian Government Budget 2016-17) It is these deficits, among other factors, that provoked a warning from the Ratings Agencies on Australia’s AAA credit rating.
Jobs and Growth Australians cannot maintain their living standard by creating domestic jobs thereby churning the money supply. Our Nation must export more to improve the terms of trade. Government policy appears to be promoting any jobs rather than export oriented jobs – possibly a hidden agenda to reduce unemployment and maintain social stability. The main game is jobs that create export income. It is a sad fact that successive Australian governments have presided over the closing down of labour- intensive manufacturing industries, in part due to thin internal markets, high production costs and a strong currency boosted by a vibrant natural resources industry. To illustrate past, current and probably future closures, below is an incomplete list;
Ford-Toyota-Holden car plants, SA/Vic; Electrolux, NSW; Smiths Crisps, WA; Amcor, Vic/Qld; Buizen Yachts, NSW; Arrium, SA; Blue Scope Steel, NSW/WA and food producers Rosella, Windsor Farm Foods, Dairy Bell.
The picture is concerning despite, during 2015, over 300,000 jobs were created. Unfortunately, many were part-time and there was a trend for monthly hours worked to decrease. (Fact Check March 2016 and ABS June 2016) Critical missing information is the distribution of labour between domestic and export oriented jobs. ABS should collect this information.
Export industries up and running and with scope for immediate expansion are tourism and education:
- Tourism, year ended June 2016. Recorded 7.85 million visitors – conservative income $6 billion.
- Education for 2015. School/University students 270,000, Vocational students 70,000. (AFR December 2015)
To promote export industries, Australia has a rich gene pool of scientists, engineers and lively minds to draw upon. Examples of Australian brilliance are:
- Science and Engineering. Aircraft Black Box, Electric Drill, Winged Keel, Frazier Lens, Racecam, Refrigerator, Splayds, Triton Work Centre, Atomic Absorption Spectrometer, Permaculture, WiFi, Underwater Torpedo, Photo Lithography, Stump Jump Plough, Mitchell Thrust Block Bearing, Humespun Pipes, Dethridge Wheel, Self Propelled Hoe, Coupé Ute, Froth Flotation, Quantum Bit, Anti-hacking Software, Blast Glass.
- Medical. Spray-on Skin, Pacemaker, Cochlear Implants, Ultrasound, Plastic Lenses, Zinc Cream, Gene Silencing, Pollilight Forensic Lamp, Blood Test for Still -borns.
- Commercial. Polymer Bank Notes, Feature Films, Si-Ro-Set Creasing, Tank-bred Tuna, Wine Casks, Coolgardie Safe, Automatic Totalisator, Surf Ski.
Australians are innovative and growth should be directed towards universities, research establishments and selected ‘garage’ entrepreneurs in a bid to improve Australia’s terms of trade. Despite the Turnbull quote “Innovation is the critical aim of the Administration”, both the Abbott and Turnbull Governments have reduced the influence of the CSIRO by budget cuts and retrenchments. Recently however, the CSIRO has been boosted with a $300 million Innovation Fund to promote a data driven economy, co-investment and an acceleration program.
Universities have also endured funding cuts in the 2016 Budget. A recent Vice-Chancellors’ meeting recorded “a deep disappointment at the proposal to reduce public investments”. Among the reductions was a $2.5 billion cut over the forward estimates to 2019-20 and a withdrawal of an efficiency dividend of $1.2 billion. These cuts are inexplicable in the light of a statement by Professor Ian Jacobs, Vice-Chancellor, UNSW who indicated on ABC RN (18 August) that in 2014 Australian universities contributed $60 billion to the Australian economy by way of innovation and commercial research.
The dilemma for the Australian Government’s ‘stairway to the stars’ is financially compromised by the competing requirements of Health, Social Security, NDIS and Education,; the latter, perversely, being critical.
Another brake on Australia’s drive toward an innovative future (jobs and growth) is the poor uptake by Australia’s youth in the STEM subjects. The OECD global education ranking for Australian fifteen year olds in maths and sciences was 14th. Rankings are: 1 Singapore, 2 Hong Kong, 3 South Korea, 4 Japan, 5 Taiwan——- —11 Poland, 12 Vietnam, 13 Germany, 14 Australia. As if on cue, there has recently been disappointing comment on NAPLAN tests in Australia.
In transitioning to a 21st Century high-tech industrial economy, Canada announced in 2015 their GDP increased but with little opportunity for increased employment.
A critical driver in the 2016 Budget to promote ‘jobs and growth’ is the reduction of tax rates from 30% to 25% over the forward estimates such that by 2026-27 cost to the taxpayer will aggregate $48.2 billion. (theaustralian.com.au/budget, 6 May: Smart Company, 3 May 2016) If the principal outcome of this initiative is to boost domestic employment supplying a domestic market, it will increase GDP but the terms of trade will deteriorate as business imports will increase, it is vital these tax benefits promote export growth. To round out this policy, the Government must actively encourage Australian industry to establish export markets and reward successful companies for this. This must become the mantra for ‘jobs and growth’ otherwise living standards will continue to fall.
Epilogue This opinion piece has attempted to examine issues lurking behind the Government’s song line ‘jobs and growth’.