It’s not often you go to a conference on agriculture and come away feeling quite scared for the future. But this week’s Abare’s 2017 Outlook conference
featured a talk on the future of trade that painted a dire picture of
trade barriers and nations moving into blocks that engage in trade wars
and perhaps more violent conflicts. It was a stark warning to those who
value the benefits of trade of the need to also value the concerns of
those who miss out on those benefits.
In a conference featuring the usual talks on innovation in agriculture and pest management, the Abare conference also featured a speech by Rabobank economist, Michael Every that had me – and most in the audience – wondering if it was time to start collecting canned food and building a bunker.
His speech was on the changing nature of trade relations and how under the Trump presidency things might get rather precarious.
While economists love trade, it has extremely political ramifications. And it is politics that in Every’s view is driving the world back to a 19th century style trade world. A world where after a period of free trade, high tariffs were set up and where trade became a conflict involving domination of one country over another.
And the problem is that economic conflict can quickly become real conflict.
It was a scary prospect – not only would raising trade barriers
reduce our standard of living – but if the path of the next 10 years
follows the path of the late 1800s and early 1900s then the world gets
very dangerous very quickly.
The biggest difficulty for those selling the idea of free trade is that a soon as you start talking about things such as “comparative advantage” people quickly switch off. It’s much easier to understand trade in what is known as a mercantilist sense – the “domination” point of view, where the aim is to export more than you import.
That is certainly the view of Donald Trump and his trade advisor, Peter Navarro, who has recently argued that because GDP is made up of consumption, government spending, investment and net exports (exports minus imports) reducing the US trade deficit is a good way to grow the US economy.
The problem with that view is that in the US – as in Australia – the size of net exports pales in comparison to consumption, investment and government spending.
That doesn’t mean exports are not important – currently exports are a leading driver of Australia’s GDP growth – but if your focus is just on reducing the trade deficit by lowering imports, then you will actually harm the economy because we use imports to produce things.
You want net exports to grow because you are producing more exports or getting more tourists or foreign students, not because you are making imports more expensive.
The best way to improve economic growth is by increasing the participation of people in the workforce and by having those people be better at producing things – i.e. increasing productivity. Trade is actually very good at increasing productivity because it forces local companies to compete with those overseas and also allows them to import items they need at a cheaper cost.
And the benefits of trade need not just be about Australia exporting more than another nation.
If trade enables a poorer nation to become stronger economically that can help us in the long run because, as we have seen with China, a growing middle class in that nation can be a boon for us.
But of course trade is not all about winners.
Michael Every gave the example of a parent with two children – one who was good at cleaning bookshelves and general dusting, and another who was good at cleaning toilets. An efficient parent would have each child do the chore that they were best at, but clearly the child cleaning the toilets might soon think this unfair. In response the parent might offer other rewards to that child to compensate for doing the less enjoyable work.
We don’t have a world government that can replicate this and so some nations end up with the international trade equivalent of cleaning toilets with no real recompense.
But the analogy can also work within individual nations, where the children both end up cleaning the toilets and the parents hire a cleaner to come in and do the dusting.
In a real-world sense this is when workers shift to jobs that pay less, or have less permanency, fewer hours, but a greater requirement to work weekends.
In an economy-wide sense this can be good. It can see workers being more productive – as trade forces local firms to compete with the rest of the world, and also see workers move to industries in which Australia is most productive.
But unless workers are receiving the benefits of this greater productivity, the system breaks down and talks of the wonders of trade will get pretty short shrift.
Is it any wonder that the US has turned more protectionist when, as a research paper out this week highlighted, the wages of workers since 1980 have not kept up with their productivity improvements?
Had the wages of US workers risen in line with productivity, as occurred from the end of the second world war until 1980, an American now earning around $40,000 would instead be on $61,000.
The problem has been that those arguing for the benefits of freer trade have too often also been those arguing for the benefits of smaller government, lower welfare and less workplace regulation – such as minimum wages and penalty rates.
And it is easy to see why – free trade has a nice pro-business aspect, and can sucker you into thinking that greater competition and the free market will cure all – especially if you look to GDP numbers to validate your position.
But as Every noted, trade is as much about politics as it is about economics. The economics of free trade work best at a national GDP level; the politics of free trade is personal and local.
Those politicians who wish to avert the high protection and militarily belligerent state of the late 19th century need to focus less on trying to convince voters of the goodness of free trade and more on ensuring the benefits of it are distributed equally.
Let us hope it is not too late.
In a conference featuring the usual talks on innovation in agriculture and pest management, the Abare conference also featured a speech by Rabobank economist, Michael Every that had me – and most in the audience – wondering if it was time to start collecting canned food and building a bunker.
His speech was on the changing nature of trade relations and how under the Trump presidency things might get rather precarious.
While economists love trade, it has extremely political ramifications. And it is politics that in Every’s view is driving the world back to a 19th century style trade world. A world where after a period of free trade, high tariffs were set up and where trade became a conflict involving domination of one country over another.
And the problem is that economic conflict can quickly become real conflict.
The biggest difficulty for those selling the idea of free trade is that a soon as you start talking about things such as “comparative advantage” people quickly switch off. It’s much easier to understand trade in what is known as a mercantilist sense – the “domination” point of view, where the aim is to export more than you import.
That is certainly the view of Donald Trump and his trade advisor, Peter Navarro, who has recently argued that because GDP is made up of consumption, government spending, investment and net exports (exports minus imports) reducing the US trade deficit is a good way to grow the US economy.
The problem with that view is that in the US – as in Australia – the size of net exports pales in comparison to consumption, investment and government spending.
That doesn’t mean exports are not important – currently exports are a leading driver of Australia’s GDP growth – but if your focus is just on reducing the trade deficit by lowering imports, then you will actually harm the economy because we use imports to produce things.
You want net exports to grow because you are producing more exports or getting more tourists or foreign students, not because you are making imports more expensive.
The best way to improve economic growth is by increasing the participation of people in the workforce and by having those people be better at producing things – i.e. increasing productivity. Trade is actually very good at increasing productivity because it forces local companies to compete with those overseas and also allows them to import items they need at a cheaper cost.
And the benefits of trade need not just be about Australia exporting more than another nation.
If trade enables a poorer nation to become stronger economically that can help us in the long run because, as we have seen with China, a growing middle class in that nation can be a boon for us.
But of course trade is not all about winners.
Michael Every gave the example of a parent with two children – one who was good at cleaning bookshelves and general dusting, and another who was good at cleaning toilets. An efficient parent would have each child do the chore that they were best at, but clearly the child cleaning the toilets might soon think this unfair. In response the parent might offer other rewards to that child to compensate for doing the less enjoyable work.
We don’t have a world government that can replicate this and so some nations end up with the international trade equivalent of cleaning toilets with no real recompense.
But the analogy can also work within individual nations, where the children both end up cleaning the toilets and the parents hire a cleaner to come in and do the dusting.
In a real-world sense this is when workers shift to jobs that pay less, or have less permanency, fewer hours, but a greater requirement to work weekends.
In an economy-wide sense this can be good. It can see workers being more productive – as trade forces local firms to compete with the rest of the world, and also see workers move to industries in which Australia is most productive.
But unless workers are receiving the benefits of this greater productivity, the system breaks down and talks of the wonders of trade will get pretty short shrift.
Is it any wonder that the US has turned more protectionist when, as a research paper out this week highlighted, the wages of workers since 1980 have not kept up with their productivity improvements?
Had the wages of US workers risen in line with productivity, as occurred from the end of the second world war until 1980, an American now earning around $40,000 would instead be on $61,000.
The problem has been that those arguing for the benefits of freer trade have too often also been those arguing for the benefits of smaller government, lower welfare and less workplace regulation – such as minimum wages and penalty rates.
And it is easy to see why – free trade has a nice pro-business aspect, and can sucker you into thinking that greater competition and the free market will cure all – especially if you look to GDP numbers to validate your position.
But as Every noted, trade is as much about politics as it is about economics. The economics of free trade work best at a national GDP level; the politics of free trade is personal and local.
Those politicians who wish to avert the high protection and militarily belligerent state of the late 19th century need to focus less on trying to convince voters of the goodness of free trade and more on ensuring the benefits of it are distributed equally.
Let us hope it is not too late.
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