Trade policy: the role of public enquiries

Economic Papers (Economic Society of Australia), March, 2006 by Peter Lloyd

1 Trade Policy

Trade policy is at once one of the most complex of economic subjects, involving as it does the whole macro-economy of the country and its interrelations with other countries, and a subject about which most Australian households have an opinion. This combination of complexity and common concern is a dangerous mix from the point of view of the formation of public policy. It introduces numerous possibilities of interest groups misrepresenting policy issues. They can do so by exaggerating their individual losses, and misrepresenting their private interests as national interests. They can hire 'experts', who are really articulate spokespersons for some interest group.

In this policy environment, the quality of advice given to our parliamentarians is crucial if they are to pass legislation that promotes the interests of Australia as a whole. This is the subject I take for the 2005 Lecture--how can we make sure that parliamentarians receive the best advice before they legislate to change trade policies? I shall argue that we need to improve our processes of public enquiry.

I am honoured to be given the opportunity to expound on this important question. Stan Kelly, in whose memory this Lecture Series is named, was a member of the Tariff Board from 1929 to 1939. He passed away even before I arrived in Australia but I am fortunate in having known his son, the late Bert Kelly. Bert chose two fora to put forward his passionately-held views on tariffs and related issues of trade policy. He was the Liberal Member of Parliament for the South Australian seat of Wakefield. But he was also a journalist. While still a Member of Parliament, he was the author of the column that appeared regularly in the Australian Financial Review and the Bulletin under the pseudonym 'The Modest Member' and later 'the Modest Farmer'. The column was both enlightened and brilliantly witty. (1)

But it had another characteristic, which helps to explain its large following. It was superbly well written. It was a model of how to convey a message to ordinary people--John Howard's 'battlers'--by the use of simple language. Bert wrote columns with headings like

        
    
    
    
    
   How our high tariffs lower our standard of living.    How if we do not sell, we cannot buy.    How in a land of import licensing we could become a land of beggars. 

In making my presentation, I shall try to emulate his plain speaking. My first heading is 'Trade policy matters'.

2 Trade Policy Matters

Let me explain how trade policy matters to Australian households.

First, there is the 'Principle of Comparative Advantage'. In plain language, firms in a given nation seek to specialise in what they produce efficiently by comparison with firms in other nations. This means that they must give up the things that they do not produce efficiently. When trade is freed, the total supply of goods and services available to Australians increases and with it the welfare of Australians collectively. And importantly, we should add, the choice of final goods and services is increased. Freedom of trade is freedom of choice. But this is only part of the story of free trade. This benefit is a 'once-and-for-all' effect.

Second, freeing trade may affect permanently the long-term rate of growth of the economy. There has been a vigorous controversy among economists about the effects of liberalising international trade in goods on the long-run rate of economic growth. In a number of ways, international goods-trade liberalisation may increase the rate of saving and capital formation and it may assist the transfer and adoption of new technologies and the rates of growth of factor productivities.

What is the evidence bearing on this aspect of trade?

The results of empirical studies are remarkably consistent, not only in terms of finding a positive association between opening of economies and higher economic growth but even about the magnitude of the effect. (The empirical literature is conveniently summarised by Lewer and Van den Berg, 2003.) Holding other growth-inducing factors constant, a one percentage point increase in the growth of exports is associated with a one-fifth percentage point increase in the rate of growth of real GDP per capita. Thus, a country whose exports grow more rapidly by, say, five per cent per year as a result of opening up the trade sector, can expect to have an increase in its annual growth of per capita output of one percentage point. This is a big gain.

Accepting, then, that trade policy matters for the residents of a nation, there is an immediate corollary: policy advice matters.

3 Where do Governments get their Advice?

But the advice a government receives on any trade matter comes from many different sources and advice from different sources can conflict. Conflicts arise because a change in trade policy leads to changes in the prices of the goods and services that we trade and--more importantly to many households--this induces changes in their factor incomes: the wages and salaries of workers; the prices of capital assets employed in industries that will expand or contract when border prices change; and farm and mineral rents. The real incomes of some factor owners will increase and those of others will decrease. (2) Thus consumers, workers and asset owners will press a government to make or to not make a proposed change in trade policy, depending on whether the real incomes of individuals in each group are increased or decreased by the change. This is completely normal and desirable in a democracy. But how are governments to weigh conflicting advice?