Tariff Lesson for Obama – and Us

November 14, 2011 • Commentary
This article appeared in The Australian Financial Review on November 14, 2011.

The US should follow Australia’s example in dealing with protectionist pressures, writes Daniel Ikenson. United States President Barack Obama will pay a long overdue visit to Australia this week. Hopefully, his hosts will shed light on Australia’s trade policy history, which is instructive for US policy. The discussion might also remind Gillard government officials of the successful policies and institutions of Labor governments past.

The ambitious tariff‐​reduction programs launched under the Hawke and Keating governments in the 1980s and early 1990s exposed Australian industry to international competition and helped transform the country from an economic laggard to one of the world’s most competitive economies, ushering in two decades of sustained growth and job creation. That such success was the product of reforms that included a tariff reduction from a manufacturing sector average of 22 per cent to 5 per cent by the time of the Howard government affirms the benefits of unilateral liberalization.

Trade barriers and subsidies, while burdensome to foreign companies, are foremost matters of domestic economic policy. Australia’s experience affirms that the most compelling case for dismantling trade restrictions is not that they are “concessions” to exchange for foreign market access, but domestic reforms that benefit the domestic economy, regardless of what other countries do with their own trade barriers.

Central to public understanding of that premise is a regime of domestic policy transparency. In Australia’s trade liberalization experience, the politically independent Productivity Commission and its predecessor agencies fulfilled the function of credibly informing the public about the economic benefits and costs of reform. Indeed, many credit the PC’s role as instrumental in convincing the Australian public of the imperative of trade reform.

Many US trade policy errors — and much of the public’s skepticism about trade liberalization — are driven by misconceptions that exist because of the absence of a domestic transparency regime. Instead of an independent, non‐​partisan, objective agency informing the public about costs and benefits, that role is filled by interested parties who have stakes in the policy outcome. Since the interests with the largest stakes are those that have the most to gain from protection, the public is exposed disproportionately to negative perspectives.

That must change. An American‐​style productivity commission would be enormously helpful in conveying the truth to the public, and in reducing the leverage that special interests hold over elected officials. Presently, a domestic transparency regime could help Obama fulfil his top trade priority and it could help overcome resistance to anti‐​dumping reform.

The Obama administration is heavily vested in the National Export Initiative, which aims to double US exports over five years. In and of itself, that ambitious goal is not objectionable. But the strategy in play is myopic and should be broadened to include elimination of duties on imports — particularly on imported raw materials and intermediate goods. Exporters are producers first and, as such, are consumers of capital equipment, raw materials, and other industrial inputs and components. Many of those inputs are imported or their costs are affected by the availability and prices of imports.

In 2010, “intermediate goods” and “capital equipment” — items purchased by downstream producers — accounted for more than 55 per cent of the value of all US imports. That $US1.1 trillion represents costs of production to companies in downstream import‐​consuming industries. Those costs were $US15 billion to $US20 billion higher last year on account of import duties, so slashing those duties would go a long way toward improving the competitiveness of US companies.

Yet the NEI commits not a single word to the task of eliminating or reducing those US government burdens, choosing instead to focus on foreign barriers. Without the heft of a domestic transparency regime, the President is reluctant to raise the ire of import‐​competing industries and unions opposed to foreign competition.

The same dynamic is at play with respect to the anti‐​dumping law. In the past decade, the US government imposed final anti‐​dumping measures in 164 cases. Intermediate goods accounted for 80 per cent of those measures. So, as US producers of hot‐​rolled steel, saccharin, polyvinyl alcohol, non‐​malleable cast iron pipe fittings, and silicon metal were “winning anti‐​dumping relief” from import competition and being liberated to raise prices, their US customers — producers of appliances, car parts, foodstuffs, pharmaceuticals, buildings, and solar‐​panel components — were bracing for disruptions to their supply chains and inevitable cost increases.

In none of those cases were companies in downstream consuming industries given a seat at the table. Under the statute, the authorities are required to ignore any potential impact of anti‐​dumping measures on downstream industries — and on the economy at large. That is a statutory absurdity that has absurdly eluded reform, and which will likely continue to elude reform without domestic transparency.

If Obama absorbs these Australian lessons this week, an astute follow‐​up question for Julia Gillard might be why her government prescribes a diminished role for the Productivity Commission in its transparency regime. Her answer could be consequential.

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