The benefits of taking rocks out of our harbours

Here's the full text of the speech I gave on trade at the recent GAP National Economic Review conference.



The Outlook for Australian Trade in the 21st Century
Andrew Leigh
Member for Fraser


Global Access Partners’ National Economic Review 2010
Sydney, 17 September 2010


I would like to begin by acknowledging the traditional owners of the land on whom we are meeting today. I would also like to thank Peter Fritz, Catherine Fritz-Kalish, and Lisa Middlebrook for involving me in this really stimulating discussion. 

As I understand my role, it is to provide a relatively high-level overview on trade to kick-start discussion with the other speakers, who will focus on more direct policy-relevant topics.

My interest in trade comes about partly as an economist - it's almost a stamp of entry into the profession that one must be a free trader.  But also then having a policy interest through having worked for 18 months for the later Senator Peter Cook. 

Peter Cook was at that stage the Labor spokesperson on Trade and somebody who believed passionately that if you were committed to globalisation you must be a social democrat.  And if you were a social democrat then you had to be committed to globalisation.  Peter Cook was a man who very much took the argument on free trade    to his Labor colleagues.  He taught me a lot about how a great politician ought to behave. 

The underlying approach I have to trade is to think of it as an official case of the principle of comparative advantage.  Most things I attempt in life have been better done by other people.  If I were to appear before you today having cut my own hair and my own clothes, I would be a rather more dishevelled person than that stands before you today.  If I had fixed my own car I probably would not have even got here. 

The notion of comparative advantage was described by Paul Samuelson as the best example in the social sciences of a principle which is true and non-trivial. That is that many educated people still do not understand the subtleties of comparative advantage.  And, of course, in the world of free trade what comparative advantage means is that the person who can perform the service or supply the good better than you, is sometimes a foreigner.  That means that when countries trade with another then they both benefit from that. 

It is a simple proposition, but one which policy makers been extraordinarily unsuccessful at persuading the general public of.  I have not been able to find a recent public opinion survey looking at free trade versus protectionism.  However, the last one I could find, about a decade old, suggests that when you ask Australians whether they prefer free trade or protectionism, the protectionists outnumber the free traders two to one.  This is despite the fact that Australia has seen a substantial reduction in tariffs over recent decades.   

There has been a strong bipartisan consensus in the Australian parliament that trade liberalisation is good for Australia.  But we failed to convince Australians that as a nation we benefit from being free traders. 

This is despite the historical record, which shows large social welfare large gains from freer trade.  For example, Federation can be thought of as a battle between the Free Traders and the Protectionists within the national parliament.  But Federation itself is a huge free trade movement, because the Constitution required that the former colonies not impose trade barriers on interstate commerce.  There were huge economic gains in Federation delivered by getting rid of those different colonial borders. 

In more recent years, we have seen large social welfare gains from removing barriers to trade across national borders. For example, the Department of Foreign Affairs and Trade estimates that the tariff reduction that have taken place in the last two decades have delivered somewhere between three and four thousand dollars back into the pockets of the typical Australian household.  That is a substantial boost in anyone's language. 

I think back to when I was a kid, and buying a new pair of school shoes was a really big deal.  Those school shoes were an expensive item my parents had to shell out for each year.  And the largest proportion of that cost came from footwear being subject to very large tariffs, sometimes over 100 percent.  The removal of the tariffs on kids' school shoes has made many households better off and meant that the typical working household in Australia today does not have to worry about scrimping and saving for a new pair of school shoes at the beginning of the school year.

Thinking also about the impact that trade liberalisation has on social welfare, it is important to recall the great backsliding that occurred in the 1930s, when the US raised tariffs and Australia followed suit.  That huge increase in tariff barriers made Australian consumers dramatically worse off, but it also hurt Australian businesses.  It means that Australian businesses were much less exposed to the new ideas, less exposed to the new innovation that that occurs when competing with the best countries and firms in the world.  In more recent times, those competitive benefits that Australia has enjoyed over the last couple decades have been to a large extent due to more recent tariff reductions.  

There is also other sort of other, less tangible benefits from free trade.  Tim Harcourt just joined us now and his terrific book The Airport Economist has a lot of wonderful little anecdotes talking about trade building those little interpersonal ties.  Business people travelling across borders meet friends who speak other languages, have other customs.  School children are encouraged to learn a language not their own, and in that sense Australia becomes more deeply enmeshed in the region in which we live.  So trade has definite interpersonal benefits. 

Recent work by Daron Acemoglu and Pierre Yared has also shown that countries that do more trade spend less on their military.  So far from thinking that we ought to bunker down and produce everything ourselves in case war comes, we are actually better to trade with the rest of the world because by that action we make one another safer. Countries that trade are less likely to go to war.  You can name exceptions for this, but a general rule is that as trade expands militarisation declines and military spending goes down. 

Trade liberalisation has brought enormous simplifications to business as well.  The 1987 tariff schedule, which ran to five hundred pages because it had different tariff rates for everything from bicycle inner tubes to umbrellas.  Stripping that away means one less thing that business needs to spend time worrying about.  Another simplification which would allow businesses to focus on what they do best. 

Trade of course is not universally good.  We can easily point to products like AK-47s and heroin that flows freely across borders, but on balance the world is far better off on balance for having greater flows of trade. 

What that means in a policy sense is that - as the great Cambridge economist Joan Robinson used to say - we benefit from taking the rocks out of our harbours regardless of whether other countries do the same.  The main beneficiaries of trade liberalisation and tariff cuts are Australians.  In a secondary sense, overseas countries keen to export to Australia benefit as well, but we are the first to benefit from removing those rocks in our harbours. 

In terms of reducing global trade barriers, successive World Trade Organisation deals have substantially boosted world GDP, with the impact of each successful round begin equivalent to a large injection of foreign aid across the world.  However, we have not had a WTO round concluded since 1993, a trade deal which was then negotiated by Senator Peter Cook, for whom I worked, and signed off on by Bob McMullan, my predecessor as the member for Fraser. 

One reason that a new WTO round has been a long time coming is that there are more countries to deal with now than in the past.  At the end of World War II, there were 74 countries in the world. Today, there are nearly two hundred.  That means when you get everyone in the room and you try to ask them to strike a consensus trade deal, it is harder than it ever for countries to agree. 

Ironically, one of the reasons that countries are proliferating is because of free trade -- as tariff barriers have fallen, splitting up is easier to do.  I think there is a little window for another hard push on WTO rounds after the US mid-term elections.  It is going to be a tough push in any case, but I think that's the moment at which we can try and get the next WTO round over the line.  It will be hard to achieve, but if successful would greatly raise world living standards.

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