US President Donald Trump has torn up the Trans-Pacific Partnership (TPP) based on his claims that free trade deals kill American jobs, but how founded is his claim that all free trade is bad? Tim Harcourt looks at what free trade means in Australia, and what the future holds for our future trading with the US.
Whether you love or loathe the US President, Donald Trump can get an economic policy issue media attention, as well as himself. Take the issue of trade and jobs, for example. After being a niche research topic that a few trade and labour economists (like me) were involved in, but few others in the media paid attention to, the Trumpster has thrust trade and jobs into the headlines. It dominated the presidential election campaign especially in the swing states of Pennsylvania, Michigan and Wisconsin (which remarkably Hilary Clinton didn’t visit) and even at the APEC Summit at Lima.
I was gob smacked to hear Australian Prime Minister, the Hon. Malcolm Turnbull and Trade Minister, the Hon. Steve Ciobo talking about trade deals that are “good for workers” all the time at press conferences in Peru. Although back in 1992, former US President George Bush said he signed the free trade agreement with Canada (the predecessor to NAFTA) because he wanted to create “good jobs at good wages”. Whether he did achieve this wish in reality it seems, can be tested by the 2016 election outcome, where blue collar voters rebelled against free trade agreements.
This issue has an important history in Australia too. In 2000, when I was newly appointed as chief economist of the Australian Trade Commission (Austrade), I wrote a paper for the Centre for Applied Economic Research (CAER) at the University for New South Wales that showed that on average Australian exporters, as employers, paid 60 per cent higher wages than non-exporters. Exporters also achieved higher levels of standards in occupational health and safety, equal employment opportunity, employment security and invested more in education and training, on average, than non-exporters. Also they were on average more unionised than non-exporters, and utilised certified agreements (enterprise bargaining) than minimum wage awards. Therefore, as a former ACTU economist I thought that exporters, on average, were good employers and an open economy worth supporting.
I concluded, that on average, exporters had been good for workers as they had progressively ratcheted up wages and conditions – at home and abroad – and created at least as many new jobs as we lost in import competing areas like textiles, clothing and footwear. However, this wasn’t a mercantilist (“exports good, imports bad”) argument as two-thirds of those companies who exported simultaneously imported or used imported components in production. The evidence showed that the exporting sector or more precisely, the traded goods sector, was generating “good jobs at good wages”. The results were published in the Australian Financial Review, on the day that Doug Cameron was about to debate the late Senator Peter Cook about “free trade versus fair trade.”
This debate also raged in Organisation for Economic Co-operation and Development (OECD) countries with British economist Adrian Wood seeing the loss of blue collar jobs in western countries, but employment growth in the developing world. The issue also became entangled with the questions about the role of technology, which now is causing disruption to white collar jobs (even journalism) as well as blue collar jobs. You can see this influence too in the immigration debate in the post Trump world with Bill Shorten toughening his stance on guest workers with 457 visas.
However, in all the noise over the trade and jobs debate, politically there are three conclusions that can be drawn from the evidence so far.
Firstly, not all trade agreements are good. Some can be distortionary in terms of trade, some can go too far into non-trade issues (like plain packaging cigarette advertising or the pharmaceutical benefits scheme) and some can cause harm by cutting other trading partners out.
Secondly, you can be for an open economy, even if you are against a certain free trade agreement. Many traditional neo-classical economists hate “preferential” free trade agreements and prefer multilateral trade liberalisation (even though the WTO is as dead as a Doha) or even unilateral liberalisation (Australia in the 1980s and 1990s).
Thirdly, who advocates a free trade agreement will make a difference as to how it plays electorally. If the free trade advocate wants trade liberalisation because its “good for workers”, but is in other fora opposing minimum wage increases, workers’ rights or wanting to strip away penalty rates, then it’s unlikely to get such a good hearing.
Finally, it’s important to remember in light of Donald Trump’s triumph, that Australia is not America. The deterioration of working conditions in the US, particularly in the previous “blue wall” of Democrat-held swing states, made the anti-free trade anti-immigration rhetoric of the “Trump-licans” (Trump Republicans) appealing. The minimum wage has lost pace with living standards, 90 per cent of Americans have received no real wage gains in 20 years, there’s growing wage inequality and the American labour market is losing the labour mobility it was once famous for. In fact, Vermont Senator Bernie Sanders tapped into that same anger in the Democratic primaries, that Trump drove home in the general election, whilst Hilary Clinton was found to be flat-footed instead making an unusual speech about a “basket of deplorables”.
By contrast, Australia does have a federal minimum wage that is regularly adjusted, and a labour market that has delivered employment growth for nearly 26 years after we embraced an open economy (we in fact cut tariffs in 1991 during the last recession but achieved a quarter century of economic growth since).
By contrast to the US, the rise of Asia economically has been seen as an opportunity rather than a threat. But Australia also needs to remember that embracing open markets can only be done with well-developed labour market institutions and social safety nets to be successful. And this has been the historical Australian judgement of balancing the right of the exporter-entrepreneur to have a go with the right of the Australian worker to have a fair go. That is why we are better placed in tackling the trade and jobs issue than President Trump is, especially if it’s all about tariffs on Chinese goods (that would be most likely counterproductive by inviting retaliation) and nothing is done about the decline of US labour market institutions.
Lastly, what does Trump’s stance on free trade mean for the Australian and global economy? On his first full day in office, President Trump made good on his promise to kill the Trans-Pacific Partnership (TPP) agreement with Australia and other Pacific nations. This has led to speculation that the US may try to renegotiate the US-Australia free trade agreement.
Should we be worried about the consequences this will have for our trade with the US, and therefore the effect it will have on the Aussie and global economy?
I believe there is no basis for this fear. The US trade surplus with Australia under the so-called AUSFTA had grown from $14 billion a year to almost $25 billion in the decade since it took effect.
If the US wanted any changes why not add a chapter rather than tear it up and start all over again? Additionally, I believe it’s unlikely the US tax reform will extend to trade of services as Trump’s policy is geared toward protecting the car manufacturing industry. It’s unlikely they are worried about a flood of Australian bankers coming to America.
To trigger a recession all countries would have to act like Trump, and I don’t think it’s in China’s best interest to have a trade war.
Tim Harcourt is the JW Nevile Fellow in Economics at UNSW Sydney. He hosts The Airport Economist on Sky News and Qantas www.theairportecopnomist.com. He is a member of the CEDA Council for Economic Policy.