It's time to consign protectionism to the history books

Simon Cowan

20 June 2020 | Canberra Times

It is tempting to dismiss Katter’s stunt as ridiculous, and his motion futile. After all, the car industry was on death watch for years before taxpayers were finally put out of their misery. Despite having contributed $30 billion to the car manufacturing industry between 1997 and 2012, taxpayers were continually told more money was needed.

That Australians no longer wanted the style of cars being produced was not to be mentioned. That Australian manufacturing could never reach the scale or efficiency of plants in the rest of the world – and so prices were unreasonably high – was dismissed out of hand.

Like King Canute attempting to issue orders to the tides, there are some things governments just cannot will into being.

The best thing the government could do to aid the recovery is to get its own house in order by figuring out where it is blocking efficiency and frustrating the efficient functioning of the market; and get out of the way.

Yet more serious claims than Katter’s – but equally flawed – are being made in favour of protectionism in response to COVID-19.

For example, last month saw reports a key advisory taskforce associated with the government’s COVID-19 Co-ordination Commission was recommending massive government investment in gas as a way of boosting the manufacturing industry.

This taskforce is led by Andrew Liveris, who has long advocated protectionist policies.

Australia has long been a global champion of free trade, though we are constantly fighting protectionist instincts in parts of the economy. Some industries, like manufacturing, retained tariff protection for far too long, or replaced this with ongoing industry assistance, even though other more efficient industries struggled under foreign tariffs.

Moreover, protectionist policies sometimes masquerade as “fairness measures”. For example: anti-dumping provisions designed to punish more efficient foreign producers; or measures to protect small businesses from competition by big business.

Australia must either choose to recommit to the economic reform project of the ’90s that generated almost 30 years of uninterrupted economic growth, or follow the global trend towards moribund European-style social democracy that has generated misery in Greece, Italy and elsewhere.

It is not just business that favours protectionism. Unions have an equally long history of seeking to shelter workers and businesses from foreign competition. As we saw with the car industry, businesses that are beholden to government are easy targets for union wage and condition demands.

Coronavirus represents a threefold threat to international trade.

First, there is the potential for xenophobia to spread in the wake of a virus that has its origins and transmissions in foreign countries. Negative attitudes to foreigners can easily spill over into negative attitudes to trade.

Second, there is the risk (or perceived risk) of spreading infections via the shipping and handling of international goods. These risks are manageable with proper procedures; but a society that has been terrified into submission by COVID-19 is ripe for scaremongering.

Third, protectionist policies that purport to “put Australian jobs first” are inevitably more popular during economic downturns such as the COVID-19 recession, especially in light of the rapidly rising unemployment we’ve seen recently.

None of these arguments should stand. Protectionism doesn’t work. Protected industries don’t gain the strength to stand on their own two feet. Jobs propped up by government simply do not become viable: they tend to remain dependent on government support and they disappear once the subsidies end.

Not only does intervention fail at the micro level – as Griffith University professor of economics Tony Makin strongly argued in a CIS report released last week – macro level stimulus policies aimed at generating sustainable economic growth from government spending don’t work, either.

Government can’t spend its way out of recession and it cannot just recreate the jobs that have been lost in the coronavirus recession.

In fact, there are good reasons to think government intervention impedes the return to strong growth in the real economy, whatever short-term effect it has on the national accounts.

First, by propping up failing businesses, the government is preventing the reallocation of capital from inefficient businesses to efficient businesses. This prolongs the downturn.

Second, government subsidies distort future capital investment, incentivising investment in subsidised industries over efficient industries. This delays the upswing.

For example, (though it may seem like heresy to suggest it) there is no reason to assume manufacturing businesses are more “worthy” of investment capital than other businesses. On the contrary, there is a fair bit of evidence to suggest Australia does not, and cannot, create a comparative advantage in manufacturing.

Government spending taxpayers’ money in the vain attempt to recreating a viable manufacturing industry is money wasted.

And speaking of money wasted, the generic solution of investment in “infrastructure” won’t deliver commensurate returns unless it is invested in economically necessary projects. Given that both sides of politics prioritise politically attractive projects in marginal electorates for infrastructure investment, much of this money is also likely wasted.

There are broader principles at stake here as well.

For a long time, many in Australia have been complacent about economic reform, thinking things were largely going OK without further tinkering, and we were better off focusing instead on second order issues of redistribution and inequality.

Those same people are now arguing the solution to our economic downturn is to somehow give everyone handouts at the expense of everyone else.

Microeconomic reform, including substantive deregulation and privatisation, has also been shunned for fear of being seen to give an “unfair” advantage to big business.

This complacency is no longer possible. Australia must either choose to recommit to the economic reform project of the ’90s that generated almost 30 years of uninterrupted economic growth, or follow the global trend towards moribund European-style social democracy that has generated misery in Greece, Italy and elsewhere.

Protectionism, much like Australia’s car manufacturing industry, belongs to the past. It is not our future.

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