Free trade could be expensive for Australia

So what will Australia do? 

Sure we will take China’s money, although one doubts that authoritarian China will be allowed to take control of strategically important national companies. If public opinion allows it, Australian governments may even seek to boost GDP and help boost real estate values by allowing more rich Chinese to settle here. Already, some nations are easing citizenship requirements by offering enticements to attract foreign money to help restore their economies with more than 1000 people applying for EB-5 visa (US investment immigration) in 2009, double the 500 in 2008. With Europe less attractive for China’s rich immigrants because of strict policies and complicated procedures, the US, Canada and Australia are favoured more as ideal immigration destinations.

For now, Australia appears fortunate, but who knows what the future will bring given some concern about inflationary risks in China ultimately being exported to economies like Australia.

And there remains the prospect of greater economic tension between the US and China given that Americans cannot go on fuelling the world economy forever through higher and higher debt levels. Along with Table 2 indicating US decline in key industry sectors, US share of world merchandise exports fell from 12.6 to 8.2 per cent between 1993 and 2008 while China’s proportion increased from 2.5 to 9.1 per cent.

Table 2: Exports: Agriculture, fuels and manufacturing (billions of $US)

Although Americans are also concerned about manufacturing jobs being lost offshore everywhere, it remains to be seen how long the US (and other Western nations) are prepared to allow China to maintain an undervalued currency (and other protectionist measures) which has allowed it to sustain huge trade surpluses and accumulate more than $US2 trillion worth of foreign exchange reserves.

While the proportion of offshore employment for US manufacturing firms between 1957 and the late 1980s increased from 10 to 22 per cent, US multinational corporations in 2009 employed 21.1 million in the US and 10.3 million in other countries. GE now employs more people abroad than at home (54 to 46 per cent), and Oracle (maker of computer hardware and software) employed 63 per cent of its workers offshore by the end of 2010.

Sure Western societies must give developing nations their own trade opportunities, and there is a cost to the domestic economy from protection. After all, higher domestic prices benefit producers yet penalise consumers, and exporting such higher cost goods will deliver lower profits to domestic shareholders who own shares of companies making profits offshore.

But it is rather wishful to believe that Western governments should simply promote the greatest efficiency of the international economy forever in a belief that “manufacturing operations will continue to move to other countries until that point at which it is no longer efficient for them to do so”.

In reality, pure free trade will never exist as long as a hierarchy of wealth exists between competitive nations. Even the US continues to support anti-dumping and countervailing duties as part of the WTO process as a “safety valve” to help sustain a broad political consensus in favor of trade liberalisation by allowing WTO members to raise tariffs in specific cases where the pain of competition becomes too great.

No wonder the WTO Director General Pascal Lamy just days ago noted that differences between countries over how much to cut manufactured goods tariffs were “unbridgeable”, despite a hope that all parties would agree to further cuts via two formulas, one for developing countries and one for developed countries http://www.reuters.com/article/2011/04/21/us-trade-wto-doha-idUSTRE73K8I220110421