The Australian: Unions Push ALP to Protectionism

It was no suprise that Labor's new industry policy package, announced over the weekend, aims to force greater use of Australian suppliers on Australian resources projects. The Australian Workers Union had been campaigning for "Australian Industry Participation Plans" on major projects for over two years, AWU secretary Paul Howes said in welcoming the announcement.

It is an increasingly common pattern: the Rudd/Gillard government rushing to legislate economic protectionist measures demanded by union bosses. Look at the Illegal Logging Prohibition Act passed last year. Was the motivation to save forests around the world? A statement from the timber workers' union CFMEU, calling for the bill to pass "without delay", suggests the real motivation was old-style protectionism: "Wood products represent the second-largest sector in Australia's manufacturing industry and cheap, imported products are costing workers their jobs and killing their communities," the CFMEU said.

Another law passed last year is supposed to "revitalise coastal shipping" by making it harder for foreign-registered ships to operate in Australian coastal waters. A report from Deloitte Access Economics prepared for the cement industry and others reliant on coastal freight estimates this will lift shipping costs by up to 16 per cent. What was behind these changes? According to the Maritime Union of Australia: "The federal government introduced shipping reform in June 2012 after a 17-year long campaign by the MUA." The idea that imports should be discouraged or restricted as a means of protecting local businesses and jobs is a longstanding one.

Over the years, many forms of protectionism have been pursued. They have included tariffs on imports so they are more expensive than locally producedproducts; measures requiring purchasing from domestic suppliers; and legal restrictions on foreign suppliers. The evidence from economic history is clear: protectionism ends up hurting economies in which it is imposed rather than helping them. To start with, tariffs act as a tax on consumers by forcing them to pay higher prices for goods than they would otherwise pay. Another problem is that protectionism attracts resources (labour and capital) to protected industries and diverts them from industries where Australia is world-competitive.

The comparative prosperity of industries rises and falls all the time. That is why you want your economy to be as flexible as possible so investment and workers can move to sectors which generate most value. RBA governor Glenn Stevens gave a good example a couple of years ago, pointing out that a shipload of iron ore exported from Australia was worth about 22,000 imported flat screen TV sets whereas five years previously it had been worth only 2200 flat screen TVs. Of course businesses should be free to have a go in any sector they want to and Australians should be free to take a job in any sector where there is one. But the real question is whether government policies that boost\ particular sectors, and burden others, make sense. According to the Productivity Commission's most recent Trade and Assistance Review, there was nearly $18 billion of industry assistance in 2010-11, including nearly $9bn in tariff assistance.

Some sectors benefited manufacturing got net assistance of nearly $6bn; and some were harmed with services paying a net penalty of nearly $5bn. Another reason why protectionism is a bad idea is that if one country starts to do it, other countries are likely to retaliate. As a country with a small domestic market, Australia has a strong interest in being able to export freely to countries around the world and indeed our exports of resources and agricultural commodities, as well as services like education, have been key to our prosperity. In the quarter century preceding the Rudd-Gillard government, there was a bipartisan consensus in favour of liberalising Australia's economy, making it more open, competitive and efficient. A big part of that process was reducing tariffs and other protectionist measures. Under the Button car plan, the automotive sector was restructured and import tariffs fell from 57.5 per cent in the early 1980s to 40 per cent by 1990.

By 1997 they were 25 per cent, and by the end of the Howard government years they were 10 percent. Sadly, the bipartisan consensus on reform ended with the Rudd-Gillard government. Instead of providing economic leadership for the nation, it has been more interested in responding to the unions' agenda with a range of sector-specific protectionist measures. As retiring head of the Productivity Commission GaryBanks recently said, prosperity steadily fell until the 80s through self-inflicted policy failures "built on the myth that interests could be protected 'all round' from the realities of the markets." Hard bipartisan policy work turned things around but under the present government we are sliding back to protectionism at the behest of the unions. It is a dangerous path.

Paul Fletcher is a federal Liberal MP