The Productivity Commission has again used its annual Trade and Assistance Review to challenge key aspects of the government’s economic management, slamming a number of decisions for undermining free trade and investment.
Last year, the PC used the report to attack the government’s preferential trade agreement agenda, the secrecy with which the Trans Pacific Partnership had been negotiated and then-trade minister Andrew Robb’s wild hyping of the benefits of preferential trade agreements (dubbed “free trade agreements” by the government).
[New TPP leak reveals how we’re trading our sovereignty for cheap tariffs]
This year, the commission has taken aim at a number of decision central to the government’s increasingly protectionist economic agenda:
- It renews its criticisms from earlier this year of the increasing use of Australia’s anti-dumping regime to keep out imported steel;
- It continues its criticism of preferential trade deals, warning that Investor-State Dispute Settlement measures (which are at the heart of the TPP) and intellectual property restrictions should be avoided;
- It repeats its concerns expressed in last week’s draft agriculture regulation report about anti-investment regulations targeting foreign investment;
- It attacks regional investment grants programs as having “little systematic monitoring and public reporting of the actual outcomes. The limited evaluations that have been conducted suggest the funds were not as effective as intended” and they “are likely to be a costly and ineffective approach”; and
- It criticises Barnaby Joyce’s agricultural competitiveness white paper for proposing measures of dubious and warns that “some measures may hamper much needed adjustment in certain agricultural industries”.
The PC specifically attacks the shibboleth of protectionists, “food security”, in a passage citing a report from the Rural Industries Research and Development Corporation that is worth quoting in full:
“Where an Australian agricultural asset being sold is already devoted to export production, this concern about food security is counter-intuitive. And it overlooks Australia’s position as a food exporter that ‘is highly self-sufficient as well as food secure, producing more than twice it consumes’. Moreover, the sentiment would seem to be deeply at odds with the otherwise persistent description across all levels of agriculture’s leaders that Australia offers a solution to the growing demand of Asia’s burgeoning middle class for higher quality food. Food security seems to be a misrepresentation of the issues.”
But it is the government’s neoprotectionist decision to locally source coming generations of naval vessels, in particular the next generation of Royal Australian Navy submarines, that the PC devotes considerable effort to dissecting. The PC has devoted previous trade and assistance reviews to the damage caused by favouring local defence procurement, but the government’s submarines decision has caused it considerable angst.
The report points out how the government’s decision to locally source steel for the submarines will add to the already exorbitant cost of local construction — in itself expected to add 30% to the tens of billions the project will cost taxpayers — and also criticises the lack of transparency and inability to accurately assess the trade-offs related to local versus open procurement. “There does not appear to be a public evaluation of whether, in the past, the ‘insurance policy’ of local manufacture was either necessary or useful in maintaining ADF operational capability,” the report points out. “There are notable examples, such as Australia’s over-the-horizon radar technology, which is likely to be superior to other available systems. However, it is equally likely that some capabilities do not pass the test.”
[Government gets it part-right on submarines]
The commission dismisses the “valley of death” concept on which the government has relied in recent decisions (and to attack Labor), saying it is “a permanent expectation of more such high-cost work” and notes that the submarine decision means an effective rate of assistance higher than even the highest levels of protectionism afforded manufacturing in the bad old days before reform.
“The recent decision to build the new submarines locally at a reported 30 per cent cost premium, and a preference for using local steel, provides an illustrative example of how a local cost premium can deliver a very high rate of effective assistance for the defence contractor and the firms providing the major steel inputs… the effective rate of assistance provided by purchasing preferences can be higher than the peak historical levels recorded for the automotive and textiles, clothing and footwear industries prior to the significant economic reforms of protection.”
In many of the concerns raised by the commission, however, there is no political opposition to the government: Labor supports anti-dumping and the submarine local build and has proposed even more generous assistance to dying industries like steel-making, although it has been critical of foreign investment restrictions driven by the xenophobic Nationals. There is, perversely, a consensus between Labor, Nick Xenophon and the Commission about ISDS provisions, but on the broader drift to protectionism across economic policy in Australia, the commission is now the main opposition to a government looking more and more like an outfit from the pre-Hawke era.
In the emerging GFC stage 2 there will be increasing protectionism around the world. Perhaps we should be ahead of the curve.
The productivity commission is an interesting fish: we are supposed to take comment to the effect that protection for local builds of submarines “can be higher” than that provided earlier to clothing. We must bow down before possibilities, it seems, especially when the PC mulls over them. I would listen more intently to the PC, if it said that the local build “WILL have a local cost premium of 30%” rather than a “reported” such premium and that protection for the local build “WILL exceed” that clothing, footwear, etc.
I would listen more intently to the PC if it even managed to grasp that there can be a number of reasons for putting up with a cost premium on a local build just for a submarine. Submarines are not just submarines. They are possible weapons of war. If the purpose of our having submarines is to engage in parades and sail byes, then I might listen a bit more to the PC. It does seem wasteful to buy submarines that will only ever be used in naval parades at a higher price.
Here the PC concedes that a local build of over the horizon radar is a good idea. Why is not clear. A radar is a radar, however superior its design. Why not get it built overseas, if the only consideration is to have parades where we show off the thing? The PC is alive to the idea that an overseas build might see other countries developing the system.
With submarines it thinks, though, that ““There does not appear to be a public evaluation of whether, in the past, the ‘insurance policy’ of local manufacture was either necessary or useful in maintaining ADF operational capability.” This is vague. Certainly, it might well not be necessary or useful in maintaining ADF operational capability in peace time. But it might well be necessary in some future time of war: perhaps the PC thinks we can foretell what enemies we might have in war and what capabilities they might have to interdict supply of submarines from France on the Atlantic seaboard. Or the PC might think that our present fleet might never need local repair or replacements, even in time of war. Certainly, there needs to be a public study, but such a study will be difficult with the assumptions of perfect knowledge that economists often rely on. The fact is, an ADF insurance policy is not for known future possibilities, where the possibilities can be specified precisely and probabilities assigned to them.
Perhaps the PC should look at the necessity and usefulness of the economic analysis it engages in.
Actually the PC have alrady stuffed it up in regards to atleast the submarines considering there 30% premium doesnt actually apply as the Rand institute has clarified that 30% only applied to stop start production, as the submarine build (and most every other ship in the future) will be on a continuous basis (ie: wont be any breaks in production even when introducing a new class of ship) the premium is actually around 15%. They also don’t take into account job’s created just in the manufacturing of t he submarines, taxes kept in country or advanced manufacturing that will benefit from a local build. Just on a defence point of view, it becomes increasingly difficult and more costly to maintain a submarine in country that we didnt build or have the local industry to sustain (issues that we actually had with the Oberon’s as good as they where) them. Best case scenario we have to import all of the spare part’s into Australia which is far more costly and time consuming (one of the reasons the Tiger attack helicopter has failed for Australia is the poor supply chain and that is a relatively simple peice of tech compared to a submarine) or worst case we have to send them over seas to be maintained in which case we may as well scrap the submarine service as we would be unlikely to have any submarines available for operational use.
Can’t speak to most of the other stuff as it is out of my wheel house but in regards to defence the PC have really buggered it up.
If the US gets tired of maintaining its prescence in the Western Pacific Australia will have to deal by itself with three very powerful resource-hungry regional powers: China, Japan and India. Having enough locally sourced military equipment to make an invasion painful for the invader could be considered a good investment. Personally if I were running Australia I would be trying to obtain from somewhere at least twenty to thirty nuclear warheads and the means to deliver them as far as Beijing and Delhi, just to ensure that any invasion would be seen as too painful to contemplate.
The Americans are as likely to quit the Western Pacific as they are to stop supporting Israel. Containing China seems pretty high on their priority list these days.
Our steel is superior to that of imported steel, there is no better reason to use it. Chinese steel used in new Tasmanian railway wagons has crumpled liked sardine cans apparently, do we want a submarine to do that?
1. Most of the steel used in Australia is imported from Japan (not China), because it is both low cost and high quality
2. Why not weigh up the quality vs cost decision by cost-benefit analysis, rather than arbitrarily decide to buy Australian no matter the cost?
What’s money against pork – for keeping this government in a position to be able to hand it out?