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Rationalists run for cover in free-trade debate

By Ross Gittins
July 5, 2004

Have you noticed how little the usually noisy economic rationalists are having to say about the pros and cons of the free-trade agreement with the United States? It's not a good look.

With the notable exception of Professor Ross Garnaut of the Australian National University and a few ex-Productivity Commission econocrats, the rationalists are missing in action.

They're not backing up Professor Garnaut in his untiring opposition to the deal but, by the same token, they're not coming out in support of it, either. No, they're all terribly busy staring at the ceiling and whistling Dixie.

Their silence raises doubts about whether the rationalists are all they claim to be. They claim to be objective and disinterested. They claim the economic prescriptions they espouse are based on science and are quite apolitical.

Their support is not for business interests, but for the role of markets, which have proved so remarkably good at delivering prosperity to all of us. And when it's necessary to take sides, their sympathies are always with the consumer, never the producer.

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That's what they claim. The alternative explanation is that, for the most part, the economic rationalists are just a bunch of right-wingers, who instinctively sympathise with capital over labour, are big on individual freedom and hate paying taxes.

They love the neo-classical model of economics because they find it fits so easily with their political prejudices, seemingly elevating them to the level of scientific truth.

And that, you see, is why the case of the free-trade agreement is so significant. Here we have a deal that's hard to reconcile with the tenets of economic rationalism but which is being pushed by a conservative Government with its back to the wall and joyously received by virtually the entire business community.

It's crunch time for the rationalists. Do they stick up for their principles and oppose a government they sympathise with? Do they risk giving uncomprehending offence to their business employers, sponsors and mates?

Do they risk being accused of anti-Americanism? Do they get into the same bed as a bunch of protectionist unions and paranoid actors? Or do they simply button their lips for the duration?

I repeat the challenge. Where are all the right-wing think tanks when we need their contribution? Where's the Centre for Independent Studies? Where's the Melbourne-based Institute of Public Affairs? Where's the fearless Des Moore and his Institute for Private Enterprise?

Where are the rationalists patiently explaining to the punters that the so-called free-trade agreement isn't actually about free trade but, rather, a preferential trade deal between two countries?

To the business community, we've been invited to enjoy special entree to the biggest and most advanced economy in the world. How could there possibly be any objection?

Where are the rationalists explaining to their business mates that it's a lot more complicated than that?

Where are the rationalists explaining that the trouble with preferential deals is that, as well as creating additional trade between the two countries giving preferential treatment to each other, the deals also divert trade from third countries?

And that the cost of this diversion has to be counted against the benefits of the extra bilateral trade.

Preferential trade deals generate a lot of wasteful administrative cost because of the "rules of origin" that go with them. These are needed to ensure goods from third countries - or goods with too many imported components - don't gain preferential access to the other country.

A lot of time and money is wasted checking that goods comply with the rules of origin. And the incentive to change a good's components to make it comply involves not just trade diversion but a form of hidden protection.

Where are the economic rationalists explaining these grubby facts of life to their starry-eyed business mates?

Professor Garnaut's great concern is that the move to bilateral trade deals will come at the expense of genuine free trade via further rounds of multilateral trade negotiations under the auspices of the World Trade Organisation.

In the bad old days Australia used to be part of an "Imperial preference" trade system centred on Britain. If the Yanks keep on making bilateral deals, we'll end up with an imperial preference set-up centred on the US.

So where are the rationalists patiently explaining to the misguided Professor Garnaut and his Productivity Commission supporters that their fears are unfounded, that bilateralism is just a ploy to advance multilateralism and that the Americans can be trusted to act in the interests of the world, not just themselves?

The business community's grasp on the basics of trade economics is so tenuous that many business people would probably be quite put off to learn that, according even to the econometric study paid for by the Government, the deal is expected to worsen significantly our bilateral trade deficit with the US.

Our imports from them are expected to grow twice as much as our exports to them, adding about $3 billion a year to the deficit.

So where are the rationalists explaining that this isn't the bad thing it seems to be? Where's the Adam Smith Society explaining, yet again, the error of mercantilism?

And then there's the stack of interventionist queries that arise over the proposed accommodation of American drug companies' interests in the Pharmaceutical Benefits Scheme, the potential inhibition on the marketing of generic drugs and the seemingly crazy proposal to retrospectively extend copyright protection from 50 to 70 years after the author's death.

When you remember that intellectual property law constitutes the imposition of a legislated monopoly on the free market - with all the inherent potential for "government failure" and capture by vested interests - you'd think this the perfect opportunity for the self-proclaimed independent rationalist think tanks to make a contribution.

So why the deafening silence? Lost the courage of your convictions?

Ross Gittins is the Herald's Economics Editor.