Andrew Leigh

TRUMP UPS THE ANTE IN TRADE WAR

Sydney Morning Herald, 2 August 2018

After campaigning hard for tariffs on imported washing machines, US manufacturer Whirlpool was delighted in January when the Trump administration imposed new import duties. Whirlpool chief executive Marc Bitzer told an investor call: "This is, without any doubt, a positive catalyst for Whirlpool." The company’s share price jumped by about 10 per cent.

A few months later, things weren’t looking so rosy. The Trump administration announced that it would impose steel tariffs: meaning that the price of one of Whirlpool’s main raw materials would increase substantially. According to the Wall Street Journal, Bitzer warned investors in April that "there continues to be uncertainty regarding potential future tariffs and trade actions". Whirlpool’s share price had fallen by about 20 percent.

But the biggest losers weren’t shareholders, they were consumers. In the three months to the end of June, prices of washers and dryers in the US rose by one-fifth, the largest increase in more than a decade.

At first blush, tariffs can seem a tempting solution to help local firms. If you want to encourage local jobs, the argument goes, why not make it harder for foreigners to compete with them? Surveys find that most people in many advanced nations support the proposition that tariffs are a good way to support the domestic economy.

Perhaps this is why, despite the Whirlpool experience, the White House threatened on Wednesday to ratchet up its proposed tariff on US$200 billion of Chinese imports from 10 per cent to 25 per cent. China immediately promised countermeasures.

From Federation to the early-1970s, my political party basically shared the view that tariffs supported the local economy. In the post-war decades, Labor supported the policy of "protection all round", in which manufacturers were sheltered from global competition by high tariffs on most imports. From televisions to T-shirts, anything that came from overseas had its price marked up at the border.

The big change came when Gough Whitlam’s government in 1973 reduced all tariffs by 25 per cent, in an attempt to curb inflation and boost the competitiveness of Australian industry. The Hawke and Keating governments would follow suit, with significant tariff cuts in 1988 and 1991. Labor understood the wisdom of the great Cambridge economist Joan Robinson, who pointed out that it is worth removing the rocks from your own harbours even if your trading partners don’t take the rocks out of theirs.

Australian consumers were among the biggest beneficiaries of Australian tariff cuts. Inflation and wage growth has seen pay packets grow considerably over the past generation. But as I found in Choosing Openness, someone selling shoes or cars in 2017 could still have used the same price stickers as in 1987.

Anyone concerned about the regressive impact of the GST should also be worried about the regressive impact of tariffs. With stagnant wages, the last thing that struggling families need is a rise in prices. In the longer term, tariffs hurt the innovative capacity of the Australian economy, as firms shift from focusing on what they do best to lobbying government for protection against global competition.

The year after the 1929 stockmarket crash, American politicians Reed Smoot and Willis Hawley banded together to impose tariffs on more than 20,000 imported products. Other countries quickly followed. The resulting trade war didn’t cause the Great Depression, but it did prolong the slump. The Smoot-Hawley tariffs are a reminder of the risks to the global economy of a retreat from trade. Trade wars hurt everyone, but they pose a particular risk to a medium-sized economy like Australia, which is enmeshed in the global economy.

Australia has a proud tradition of working with other nations to reduce trade barriers. We created the Cairns Group of agricultural free-trading nations, were instrumental in successfully concluding the Uruguay round of trade talks and spearheaded the role of APEC. When the global financial crisis hit, we worked to raise the profile of the G20 and to reduce the risk of tit-for-tat trade barriers.

Now is the time for us to step up to play that kind of role again. We should be more active in multilateral talks, creating space for the World Trade Organisation to play a larger role. Bilateral trade deals can be helpful, but economists agree that the largest gains come when everyone is at the table. That way, trade talks are sure to create economic activity, not merely divert it.

Making the case for trade isn’t easy, but as the Whitlam, Hawke and Keating governments proved, Australia’s path to prosperity lies in engaging with the world, not retreating from it. At a time when others are putting rocks in their harbours, we should be pointing out the fact that global commerce isn’t a zero-sum game. Just as your barista doesn’t defeat you when you buy a coffee, Japan doesn’t win when you buy an imported power drill. Both countries benefit from specialising in what we do best. Australia must do more to defend openness.

Andrew Leigh is the opposition spokesman for trade in services and author of Choosing Openness: Why Global Engagement is Best for Australia. This was posted online by the Sydney Morning Herald on Thursday, 2 August 2018.

Authorised by Noah Carroll, ALP, Canberra.