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High price of the true-blue protectionists' siren song

20 Feb 2013 THE AGE - MICHAEL PASCOE IS A BUSINESSDAY CONTRIBUTING EDITOR.



THERE was Bill Shorten on ABC radio the other day desperately trying to spin cutting back R&D tax deductions as a job creation plan, when he dropped General Motors Holden in the muck as a trade cheat.

Shorten said one of the things the government was doing to save AWU membership numbers was cracking down on dumping. OK, he didn't quite say that - it might have been manufacturing jobs rather than AWU members, but we know what he means with an election in the offing and even some of the rusted-on votes flaking off.

Governments of both colours ramp up the anti-dumping rhetoric from time to time, but the rhetoric is easier than the action. And all sorts of companies from all sorts of nations indulge in a little dumping from time to time. Shorten defined dumping as foreigners selling stuff here for less than they do at home. So in his opinion, Holden selling rebadged Commodores in the US for $10,000 less than they can be bought for in Australia must be, er, dumping - that bad thing the government wants to stamp out when other countries do it.

And Holden, along with Ford and Toyota, is the happy recipient of substantial government subsidies of one sort or another. In the spirit of international trade law, that would make dumping worse.

It starts to look not just like a manufacturer with excess stock flicking it at a loss in some far corner of the globe, but a national policy to compete unfairly, subsidising uneconomic activity for domestic political motives. Cue tirade against Chinese state-owned enterprises.

So, again applying Shorten's definition, Australian taxpayers are subsidising American car buyers to very expensively preserve a few blue-collar jobs in Melbourne and Adelaide at the cost of a few blue-collar jobs in Detroit. With Australians voting with their wallets by buying fewer Commodores and Falcons, it seems a strange use of scarce public funds.

Of course, the spirit and the letter of international trade law can be quite different things and I'm sure those nice people at Holden and in Canberra are careful to arrange their subsidies and international sales in such ways as to be perfectly legal. And there wouldn't be any illegal transfer-pricing or profit-shifting either, the way there isn't at Google and Apple and eBay and Amazon and all the others.

We learnt a collective lesson last century about trade legalities when the Howard government was done over for subsidising the export of our beautiful Howe leather - Howe wasn't how to do it.

Besides, just about everyone does it, one way or the other - but that is no excuse for expensive policy and clouds another issue about the government's latest appeal to its heartland: what's the big deal about creating or preserving blue-collar jobs, as opposed to collars of any other hue?

It will sound like heresy to some in the manufacturing lobby and trade unions, especially those who seem to have a hold on the Prime Minister's attention, but there is nothing intrinsically superior about a manufacturing job compared with a services job or primary industry or extractive job or any other job. The idea that the only jobs that really count are the ones that make something you can touch is plain wrong.

Even within the loop of manufactured goods, the actual manufacturing can be the least rewarding aspect, as previously illustrated by the Barbienomics story: breaking down the economic content of a Barbie doll, the Chinese manufacturer actually makes the least after the retailer, the wholesaler, the intellectual property owner (brand name), the logistics chain, the packaging and raw materials have had their share.

That's not the case with all products and it is nice to have internationally competitive manufacturers, but if we want a country with high wages and high living standards, the colour of our manufacturing collars will be mainly white, not blue.

The key justification for subsidising manufacturing - whether directly or indirectly by such things as suppressing gas prices - is that if it's not supported, there will be nothing left here when our strong currency eventually weakens. That is a simplistic view as the strong dollar is already pushing manufacturing further up the value chain and forcing manufacturers to become more productive, which they are.

Some can't survive and their failure can be hard for the people involved, but the track record of protectionism is that it lowers standards and, perhaps counter-intuitively, the protectors end up paying substantially more than the protection is worth.

It could be a long wait yet for our dollar to weaken - until sustainable fiscal policy replaces indulgent politics and bad management in the US, Europe and Japan. Falling for the protectionists' siren song could come at a high price, whatever shade your collar.