For too long, Australian governments have strutted on the world stage advocating free trade whilst the four largest economies in the world (US, China, Japan and Europe) have feigned support but manipulated their economic policies for their sole benefit. Free trade is a noble ambition for the world, but the blind faith (or is it ignorance?) placed by Australia on the integrity of our trading partners is breathtaking.
Negative interest rates, unlimited quantitative easing, currency manipulation, underpayment of labour and unfunded fiscal deficits are examples of economic policies that are actually anti-free trade. Such policies are designed for the benefit of the instigators and are harmful to their trading partners. Despite this, Australian politicians seem oblivious to the effects of overseas economic policies on Australia.
In our view, it has simply been convenient for Australian governments to hide behind the “free trade” slogan as an excuse to avoid hard decision making in our own economy. While successive governments crow about the benefits of free trade in creating wealth for Australia, recognised by our high per capita income, it has also created ongoing trade deficits and net foreign indebtedness of $1 trillion dollars. While Australia has had 23 years of continuous economic growth, is this really the result of free trade? If it is, then why have other free trade proponents not been so fortunate?
The absolute proof of the success of free trade as a policy is not as clear-cut as some might imagine; many of our partners maintain trade with both overt and covert trade barriers. For instance, Japan is our largest “two way” trade partner, but its quantitative easing program is designed to shelter it from the rigours of international indebtedness and therefore from global competitiveness. Australia’s major trading partners seek open capital flow arrangements in their trade agreements; and while Australia grows its trade, foreign capital swamps the country ensuring that our capital account is never likely to be balanced. Most recently, the nonsensical allowance of non-resident investment in residential property is an example of Government seeking trade agreements at any cost.
The free trade slogan is a smoke screen for delaying the hard decisions. Perhaps President-elect Donald Trump will expose the paucity of political leadership across much of the western world. It is our view that his inauguration will lead to a spotlight upon those leaders that persistently duck both hard economic decision making and those that have avoided confronting anti-trade economic policies.
No-one really knows what kind of president Trump will be, but at the moment, markets are seeing the glass as half full.
Trump said a day or two ago that the US will quit the Trans-Pacific Partnership (TPP) trade deal on his first day in the White House. The TPP trade deal was signed by 12 countries, including Australia, which together cover 40% of the world’s economy. Other countries involved include the US, Japan, Malaysia, New Zealand, Canada and Mexico, but it has yet to be ratified by the individual countries. Its economic aim was to deepen economic ties and boost growth, including by reducing tariffs, but there was a geopolitical aim too – to marginalise China.
The TPP also includes measures to enforce labour and environmental standards, copyrights, patents and other legal protections. Opponents say it was negotiated in secret and favoured big corporations – thus inviting opposition from both left and right of the political spectrum.
During the election campaign, Trump described the TPP as “another disaster done and pushed by special interests who want to rape our country, just a continuing rape of our country”. In another speech he referred to the TPP as “the greatest danger yet”. Announcing the plan to pull out of the TPP, he said that the US would “negotiate fair, bilateral trade deals that bring jobs and industry back onto American shores”. But let’s be frank: in bilateral deals, American interests will always be paramount!
Frankness can be in short supply at the global talk-fests. Indeed, that has been our consistent criticism of the G20 and APEC forums. They are akin to “love ins” where no one challenges the elephants in the room, such as open-ended QE or negative interest rates. They are true hot wind events exemplified by the recent APEC output in Peru –
“We reaffirm our commitment to keep our markets open and to fight against all forms of protectionism.”
President Obama on a world farewell tour chipped in with his comments in Peru, which pre-empted Trump’s decision to pull the US out of the Trans Pacific Partnership (TPP).
“I think not moving forward (with TPP) would undermine our position across the region and our ability to shape the rules of global trade in a way that reflects our values and our interests.”
President Obama at news conference at the end of the summit.
That was a pointed comment, and it seemed lost on the journalists that the focus “on our values and our interests” was rhetoric from Obama that will soon be replaced by actions of Trump. Indeed, if President Trump follows through on his policy to unwind free trade agreements in North America (NAFTA) and imposes tariffs on Chinese imports, he will force the Australian government to review our policy settings and focus upon Australia’s long term interests. That is not to suggest that trade agreements should be jettisoned, but there is now a heightened requirement to balance policy settings that promote the exports of “valued added goods and services”.
Further, the requirement to allow capital to freely flow into our economy for anything other than the creation of export generating investment should be reviewed and regulated. Australia has abundant capital through our superannuation system to fund growth. There are enough savings available to fund the Australian government debt – provided there was a policy decision to do so. If the Australian government managed the economy and our balance sheet to restrict foreign debt, then the current heightened concern regarding our credit rating would not be nearly as acute.