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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New MP training

I was in new MP training at Parliament House yesterday, and the sessions continue today. A few impressions:
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Territory Rights

With Gai Brodtmann and Kate Lundy, I've put out a statement today on the issue of ACT political rights and euthanasia. Full text over the fold.

Territory Rights

Senator for the ACT Kate Lundy, Member for Canberra Gai Brodtmann, and Member for Fraser Dr Andrew Leigh reaffirm their strong commitment to the political rights of Territorians.

Senator Bob Brown’s proposal regarding the 1997 Euthanasia Laws Act is an issue where there will obviously be strongly held views on all sides of the debate.

The Labor Party has previously allowed Members of Parliament to express their views on this issue with a conscience vote and if, as a result of these discussions, a conscience vote is called for, there is no reason why Members of Parliament would not be afforded this opportunity again.

As members of the Federal Parliamentary Labor Party Senator Kate Lundy, Ms Brodtmann, and Dr Leigh will be urging their federal colleagues not to override the rights of the ACT Legislative Assembly. 

Canberrans should enjoy the same political rights as all other Australians.

Senator Lundy, Ms Brodtmann and Dr Leigh will continue to strongly advocate on behalf of Canberrans.
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Pensions Up

Good news today for nearly 30,000 Canberrans, who receive an increase in their pensions thanks to twice-yearly indexation. With my colleagues Gai Brodtmann (the member for Canberra) and Senator Kate Lundy, we've put out a media statement providing more details. Full text over the fold.

Pensions to increase on 20 September

Senator for the ACT Kate Lundy, Member for Canberra Gai Brodtmann and Member for Fraser Andrew Leigh today reminded Canberrans that due to indexation, around 29,029 people will receive an increase in their pensions from 20 September 2010.

Pension payments will increase by $15.00 per fortnight for singles on the maximum rate, and $22.60 per fortnight for couples combined on the maximum rate.

Following these increases, total pension payments for those on the maximum rate, including the base rate and pension supplement, will be:

  • $716.10 per fortnight for singles; and

  • $1079.60 per fortnight for couples combined.

“Pensioners in the ACT have received increases of around $115 per fortnight for singles and $97 per fortnight for couples combined in pension payments, as a result of Federal Labor’s major pension reforms delivered in September last year, and higher indexation in March and September 2010,” Member for Canberra Gai Brodtmann said.

“During our first term, we overhauled the pension system to make it adequate for the more than four million Australians who depend on it.

“Local pensioners have been big winners from Federal Labor’s reforms to the pension system, and we are committed to delivering a sustainable pension system,” Member for Fraser Andrew Leigh said.

Pensions are indexed twice a year to the highest increase of three measures: the consumer price index (CPI), the pensioner and beneficiary living cost index (PBLCI), and growth in male total average weekly earnings (MTAWE).

The September 2010 pension rise was driven by movement in the pensioner and beneficiary living cost index in the six months to June 2010.

People eligible for the Age Pension, Disability Support Pension (adult rate), Carer Payment, veteran income support payments, Wife Pension, Widow B Pension and Bereavement Allowance will all benefit from the increases.

For more information visit
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Trade Talk

I'm speaking in Sydney tomorrow at the NSW Parliament House. The event is the National Economic Review 2010, being organised by Global Access Partners. I'll be speaking on international trade - why Australia has benefited from taking rocks out of our harbours, and what the future might hold.
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Office Works

I'm delighted to report that I've appointed all the staff in my electorate office. I'll have five people, with two of them job-sharing. It was an arduous process, since there were 80 applications, and I could happily have staffed several electorate offices with all the talented people who put in applications. But in the end, I've made my decisions, and I think the office will work out extremely well.

Rick Youssef, who worked for Annette Ellis for several years, will be my office manager. My other staff are Lyndell Tutty, Shobaz Kandola, Alex Cubis and Ruth Stanfield.
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Cnr Gungahlin Pl and Efkarpidis Street, Gungahlin ACT 2912 | 02 6247 4396 | [email protected] | Authorised by A. Leigh MP, Australian Labor Party (ACT Branch), Canberra.