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  • Writer's picturePete Jonson

Free trade, protection AND 'strategic sense'

Updated: Jun 2, 2020

l'Australia needs a complex, capable and technically proficient economy, able to conceive, design and produce the things needed to secure its strategic interests. It therefore requires a manufacturing sector much larger and more capable than it has now, but achieving this without ditching the current free trade ideology will be effectively impossible'. Craig Milne, April 2020.

Trade theory, as I understand it, has two objectives - efficiency and equity. Free trade focusses on efficiency and therefore wealth. Protection focusses on equity and therefore fairness. There is a third objective, which is strategic.

Modern Australia started as a new colony whose strategy was 'survival'. For many decades its trade involved receiving rations from the homeland. As it happened governor Philip was a fair man. When the Second Fleet failed to arrive on time, rations became stretched. Governor Philip cut rations for all members of the small group camped in Sydney Cove.

Gradually the colony in Sydney Cove became larger and new governors were not all as fair as Philip. Other colonies grew up and not all leaders were as orderly as the senior men running the colony at Sydney cove.

As some stage wool from sheep were exported to England. Then in South Australia minerals were discovered. In England someone probably muttered 'We're beginning to get some return from the people in Australia.' The new Australians' first idea was probably 'survival', at least until large quantities of gold was discovered in Victoria and New South Wales. History says 'equity' as between convicts and others was quickly adopted. Gradually 'Efficiency' became the major objective of industry.

For much of the nineteenth century and well into the twentieth century 'efficiency' was probably the dominant strategy, as Australia became a standard capitalistic nation. However, in the tradition of most ambitious new nations, economists recommended that manufacturing industries be built behind tariff barriers. The economists and some at least politicians understood that tariff barriers would protect the manufacturing industry and the net result was to make Australia more self sufficient with a larger population than would have existed if only efficient farming and mining were the dominant industries . As I understand it, the main reason for this approach was 'national security'.

In the second world war a wise government decided Australia should devote itself to building arms, warships and aeroplanes. The CEO of BHP was appointed the man in charge (and kept overseeing BHP). The new wartime industry was not world's best of their kind but sufficed to make Australian warfighters moderately competitive. Quite an achievement.

In world war II Australia still had a reasonable base of manufacturing expertise. Australia's 'protected' industries rose to the needs of the time. 'National security' with product and the expertise needed at the time.

Such a response made somewhat inefficient manufacturing worthwhile.

After the second world war the first big industrial achievement was the 1950 wool boom. Farmers became rich and that industry was riding high, equal to just about any similar industry in the world. In 1960 there was a recession that just about wrecked the Liberal-National government. The government decided to relax limitations on resource exports. This opened a whole new industry which fairly quickly became the equal to any similar mining enterprise in the world, and more efficient than most others.

Most economists of stature seized on these results and the main idea became 'free trade'. Tariffs on manufacturing and other 'protected' industries were systematically reduced and relevant industries were reduced. With little incentive to keep up with world leader nations in armaments, Australia could no longer repeat the WWII achievement of producing competitive weapons.

Australia became richer, more efficient in agriculture and mining but weak on the issue of 'National security'. This is the nub of the difference between Craig Milne and Michael Porter. Craig believes Australia should rebuild a competitive manufacturing industrial base and Michael wants us to keep getting richer, relying on our great military allies such as the United States, the United Kingdom, Japan, New Zealand and perhaps Indonesia or India. Paying the French to build submarines, with thirty years wait, paying the Americans to build our fighter-bombers, fortunately now being delivered. But, in a pinch, are either of these great nations certain to give us the support we had in WWII?

In my view both extreme views are unable to be relied upon. I'd like Australia to build world's best tractors, and motor cars. I'd like a richer Australia able to afford to build or buy better weapons. But these are not the best way to secure our future. In my view we need to become like Israel. Spending at least 5 % of GDP each year on better weapons. Training young people as troops and being ready to participate in wars when necessary. Developing or buying nuclear weapons and/or developing horrible viruses along with vaccinations that would be provided to Australian citizens.

With sufficient things to defend ourselves, I would hope we'd never need to fight a war with anyone. And other great nations would wish to be our friends. Australia needs to develop what I call 'Strategic sense'.

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