Chasing the Norm

Australian academic and blogger on politics, international relations, and culture

Tag: Free Trade

The Free Trade Left

I’ve already raised the issue of ending the ban on parallel imports of books. The Productivity Commission has now released it’s final report and its findings are clear:

the Commission has
• concluded that the PIRs place upward pressure on book prices and that, at times,
the price effect is likely to be substantial. The magnitude of the effect will vary over
time and across book genres.
• Most of the benefits of PIR protection accrue to publishers and authors, with demand
for local printing also increased.
• Most of the costs are met by consumers, who fund these benefits in a nontransparent
manner through higher book prices.
• PIRs are a poor means of promoting culturally significant Australian works.
– They do not differentiate between books of high and low cultural value.
– The bulk of the assistance leaks offshore, and some flows to the printing industry.

Alan Fells, former head of ACCC and now at the Australian New Zealand School of Government has suggested that means a cost of up to $200m for consumers.

But what is most interesting (though if you know your history not surprising) is that most of the push for this end to protectionism has come from the left. It was Chris Bowen, in the Rudd government who initiated the Productivity Commission’s survey. It has been most publicly championed by Bob Carr, former ALP premier of NSW. And has received support from a variety of quite left wing types such as the ACT’s own rising star Andrew Barr (as I noticed this morning via his facebook – who says blogs don’t break news:P). Whilst the libertarians at Catallaxy have of course been forthright in wanting a change, I could only find this lukewarm press release from the Liberals Competition policy shadow minister Luke Hartsuyker, with not a single mention by Malcolm Turnbull.

This may seem counter-intuitive if you think the right is pro-free trade and the left against it. Yet whilst the two party structure of Labor and anti-labor sometimes creates that mould, the history is quite different. The single largest reduction in tariff’s in this country occurred in 1973 under the Whitlam Government. After some drift under the conservative Fraser, Hawke and Keating picked up the mantle and effectively ended the way Australians had run their economy by reducing almost all tariff’s. This was encouraged by Howard (having supped from the classical liberal economics of Reagan and Thatcher), but his own government whilst rhetorically adamant, ended up doing very little on the free trade front. It liberalised small areas such as CD’s (in the way now proposed for books) and seeing the flaws of multilateral deals pushed into bilateral deals with mild success. The two big areas still under the umbrella in agriculture and cars remained protected, or got effective protection through constant handouts. In fact if you examine Australian political history, it has been the moderates and liberals within both the ALP and Liberal Party who have lead the move towards free trade in this country (Howard being the obvious exception). The more conservative forces, much like the union-left have largely been against such moves. Take for instance this piece by Tony Abbott writing in 1995:

‘His [Keating’s] Asian crusade is simply the second phase of a long battle – hitherto fought around Australia’s economic structures – to extripate the legacy of Menzies. The first phase meant changing Australia’s economic structures and breaking down the old business establishment. The second centres on smashing the Crown which he thinks is the ultimate icon of conservative Australia. Asia played little part in his drive to ‘reform’ economic institutions – after all, most Asian governments pursue pragmatic interventionist economic policies similar to those of pre-Keating Australia’ (p220)
Abbott, Tony in Sheridan, Greg (1995) Living with Dragons: Australia confronts its Asian destiny Sydney: Allen & Unwin

Abbott went along with, even championed Howard’s economic ideals, but never was at the forefront of the debate, and with his mentor out of the game, it will be interesting to see which way he turns in his forthcoming book. Whilst the forces of free trade have largely won out (both due to argument and circumstance), don’t be surprised if there is a slight shifting back amongst the right should the conservative forces lead by Abbott take charge. As i’ve predicted many times before, I see the two party system shifting to a more liberals vs conservative basis instead of the weird cross-overs we saw under the Reagan/Howard coalitions, but either party could take either role, depending on their internal struggles. Long story short the “common sense” idea in the media and the general public that the right is pro-free trade and the left against it is not sustainable in current policy nor historically accurate. As the new left begins to develop it’s form, I have little doubt that a strong stand for free trade will be at the heart and soul of its economic system. Only such a system can encourage universal rather than national sentiments, international organisation, healthy free competition and the free flow of ideas and people.

Free the books!

I missed it initially, but over at Catallaxy, Sinclair Davidson has put up a well researched post on the move to allow parallel imports:

From The Australian: When the Howard government removed import restrictions on compact discs in 1998, it was accused of gutting the music industry and jeopardising the income of musicians. But industry data shows royalties increased from $81.8million in 2003 to $108m in 2007, and the number of performers receiving royalties also increased. Meanwhile, the average price of a CD album has fallen by 32per cent.

The Australian voices telling Australian stories argument is simply rent-seeking and doesn’t stand up to empirical analysis. We’ve heard these arguments before

As a keen book buyer (I sometimes fear I like buying books more than I do reading them), seeing an end to the ban on parallel imports would be a great step forward for this country. There is no reason why I need to wait longer and pay more for an Australian version of the book I desire. When your stock reading is the latest non-fiction quasi-journalism, the delay on new books as they wait to see if an Australian publisher will pick it are infuriating and tend to actually reduce my willingness to buy these books. Those who suffer from it most are poor students (especially post-grad!), forced to pay heavily to import foreign books, or simply denied access to the tools of their trade. In education, and encouraging a reading public, the book ban has been an ongoing disaster. And as we enter the era of digital books, a direct link can be drawn between our book ban and the lack of digital readers emerging in Australia. If the ban on parallel imports was removed, Amazon.com could add a .au and begin selling Kindles at a viable cost. In fact as we begin to see the outlines of a digital era in books both distribution and display, the idea of country based barriers becomes simply laughable.

Meanwhile, as much as current authors may fear losing even their meager returns from the status quo, those with talent have nothing to fear from the contest. Their fear of losing local voices telling local stories seems based on the absurd assumption that book buyers who pick up Australian content, do so only because there is nothing else on offer. That their allegiance is so weak that when stories of life on the Mississippi or Thames flood in, everyone will abandon the Peter Carey’s, Bryce Courntey’s and Matthew Reilly. If this is not the case, and book buyers are choosing based on an actual interest in the material, then they have nothing to fear from the competition and perhaps a chance for wider exposure, distribution and breaking away from the horribly monopolistic and talent squandering process that is the publishing industry.

The sooner the Rudd government moves on this the better.

The Economics of Peace

There’s some interesting new research out on an idea which is as old as the idea of free trade economics: More Trade = Less chance of War

In a recent paper (Lee and Pyun 2008), we assess the impact of trade integration on military conflict based on a large panel data set of 290,040 country-pair observations from 1950 to 2000. Results show that an increase in bilateral trade interdependence reduces the probability of inter-state military conflict between the two partners. If bilateral trade volume increases 10% from the world mean value, the probability of military conflict between the two trading partners decreases by about 0.1% from its predicted mean probability, other variables remaining constant. The peace-promotion effect of bilateral trade integration is significantly higher for contiguous countries that are likely to experience more conflicts. For example, an increase of 10% in bilateral trade volume lowers the probability of military conflict between two contiguous states by about 1.9%.

More importantly, our study finds that global trade openness also significantly promotes peace. An increase in global trade openness would reduce the probability of military conflict as it leads to an increase in bilateral trade interdependence. However, when the level of bilateral trade interdependence is held constant, the effect of increased multilateral trade openness on the probability of bilateral conflict is not clear. Countries more open to global trade may have a higher probability of dyadic conflict if multilateral trade openness reduces bilateral dependence on any given country, thus lowering the opportunity-cost of military conflict. In a recent paper, Martin, Mayer, and Thoenig (2008) find that an increase in multilateral trade raises the chance of conflict between states (see their Vox column). In contrast to their findings, however, our study finds that multilateral trade openness in fact lowers the probability of dyadic conflict with the bilateral trade partner, and by a larger magnitude than bilateral trade does alone. An increase in global trade openness by 10% from the world mean value decreases the probability of the dyad’s military conflict by about 2.6% from its predicted mean.

The most interesting point here is that multilateral trade reduces the chance of war far more than bilateral trade. Which seems slightly-counter initiative if we look at this as a pure economic consideration, as going to war with a bilateral only partner risks the entire trade relationship, whilst if they are just one within many in a multilateral deal, their importance to you is significantly reduced.

Yet here Constructivism offers an important insight. Relations between countries are not governed by the market value of the wealth/materials traded, but by the value placed on that trade and relationship by both participants. Take the case of China and Australia. Our export of Iron Ore is worth 2.4 billion, a sizable amount, and critical for China’s development. Yet, whilst worth much less, Australia also exports 300 tonnes of Uranium to China, and has 23% of the worlds supply under our soil. Australia could harm China’s nuclear power supply, and perhaps its nuclear weapon capability one day in the future (we only export for power purposes currently). As such, China has a great interest in increasing its relationship with Australia, and maintaining peaceful conditions with us. (Of course the ANZUS alliance & EU condemnation are the main determinants against China invading Australia). So it is less the dollars or numbers, than the value placed on that trade

But this goes much further when several countries are brought in to interact: Not only is there the material value of the multilateral trade, but countries are careful to be seen by their fellow nations as acting in an appropriate spirit and character. Just as you may observe your friends offering to buy the next round at the pub, or being nice to someones new girlfriend -who no one can stand- countries interact in a social fashion and shape rules or “norms” about those interactions. Gradually those ties can bind countries together, such that the mere realist thought of pure power domination for material advantage is never even considered (Australia could for instance invade New Zealand, but i doubt it has ever seriously come up in a Cabinet discussion in this country, despite the potential advantages and the ease of such a victory).

Thus, even if countries were confident that other nations would continue to trade with them despite going to war with one of the mutilateral trade partners, they would still be dissuaded due to the socialisation that had built up between all of the countries, and brought them to think of themselves as part of a common group, with common ways of interacting. (Of help here is also the fact that most multilateral trade deals are regionally based)

As I’ve said, this is one of the oldest ideas in classical economics and seemingly a common sense one, whether we take an economic or a constructivist view. Yet surprisingly, this was also an idea that met with significant student resistance when I was lecturing a unit on International Relations last year. Whilst the classes were largely young and left wing, there was a fair amount of diversity in their midst, and realist and conservative arguments could be regularly expected to be raised and debated. Yet, in spite of even my own publicly professed support for the idea, it met with strong disagreement, through both tutorials and written assignments.

It was only when I came to look again at who the public faces for this claim were that, I began to see perhaps why such a seemingly common sense idea is rejected out of hand; and just how trashed the free trade brand has become. Whilst the student body hasn’t suddenly gone socialist let alone communist (there literally are no alternatives!), the marketing of these ideas is in an incredibly bad state. The idea’s are strong, the evidence around, but people have become very skeptical that this is anything more than the big end of town favouring its own. Despite the billion plus brought out of poverty by Globalisation (though now at risk thanks to the GFC) and the general prosperity of the last 30 years) the public tend to see such ideas purely within an individual gain/loss prism. They see it as an incentive to increase their income, participate in the stock market, or begin a business, but almost never connect these to the wider social idea. The workchoices reforms suffered a similar issue. Both the advertising for the policy, and the union response against concentrated on what these changes meant for YOU. You’ll have more flexibility/You’ll get less rights or higher/lower pay. Almost no where was there a discussion about the benefits to the economy, the increased employment, flexibility in tougher times. I’m a skeptic of the workchoices reforms, so I don’t think the wholescale benefits overcame the individual negatives, but to see the government accept such a framing amazed me. This is also something that I think many Libertarians simply do not get in their support for such ideas and bewilderment that the wider public look on them so negatively.

The evidence may be there that increased trade reduces poverty and reduces the chance of war. Yet the Baby Boomer generation has abjectly failed to sell the idea, and I dont see the Gen X’ers doing any better (if anything they are more arrogant and less capable). Instead I think it will come through members of Gen-Y who have grown up within the free trade bubble (ie Born after 1982 when such ideas were in the ascendency) and who have experienced the benefits (prosperity and peace being the mainstays). We have in short been socialised to these ideas, and thus more able to see them for the potential they are, rather than the fictions of a ‘perfect market’ vs a ‘bastardy & Greed’ meme’s that dominated past generations of ideologues thought.