Published daily by the Lowy Institute

Free markets: Purity is impotence

Free markets: Purity is impotence
Published 4 Mar 2013 

Australia has a pretty consistent record of playing by the 'free market' rules in its international economic relations, with low tariffs, restrained use of anti-dumping restrictions, acceptance of international intellectual property norms and openness to international capital flows.

By and large, this is in our own interests. We do better if everyone plays by the 'free market' rules, and to encourage this, you have to stick to them yourself. In any case, some elements (like low tariffs) are a good idea whether or not everyone sticks to them. Even if other people damage themselves by putting rocks in their harbour, we shouldn't compound the problem by putting rocks into our harbour.

We have also remained 'pure' in the current 'currency wars'. As a legacy of the 2008 crisis, interest rates in most advanced countries have been abnormally low, which has been one factor keeping the Australian dollar at levels which are painful for many of our trade-exposed industries. We have not, however, followed the example of Switzerland in fixing the exchange rate. Nor have we followed the example of Japan and the UK in talking down the exchange rate to gain competitive advantage.

But there may be cases where we make too much of a virtue of hands-off openness. Here are a couple of examples of how things are done elsewhere. [fold]

First, note this news item reporting that the Glencore/Xstrata merger is being delayed because it has not been approved by China. China has some concerns that the dominant position of the merged companies in commodities presents pricing and supply concerns. Given the bulk of the merged company, its history and its non-transparent governance centred in an obscure Swiss canton, these concerns seem to have some basis.

The concerns were not limited to China; the merger also needed to be ticked by the EU and the South Africans. But in Australia, where a large proportion of Glencore/Xstrata's physical assets are located, we don't seem to have had much official interest, despite the fact that we have as much at stake as the Chinese in fair pricing (we are suppliers; they are customers), and more interest than anyone in ensuring that Glencore/Xstrata pays its proper share of tax and royalties.

Foreigners buying up Australian companies have to pass through the Foreign Investment Review Board process, but look how widely the net was spread when Chinese company CNOOC took over Canadian oil-producer Nexen. Not only did the Canadian authorities have to approve this deal (which they did, with conditions, the main one being that this would be the last of this type of take-over approved), but because the company has some petroleum leases in the US, these leases had to be in a form approved by the Americans before the deal could go ahead.

Perhaps the most contentious issues arise where the 'freedoms' embodied in international treaties come into conflict with domestic laws. A case in point is the legal efforts by Philip Morris to use the disputes-settlements provisions of an old free-trade agreement to oppose Australia's new cigarette packaging requirements. These requirements were not without controversy here in Australia, but after a public debate, they have been put into law and have a high level of public support. How can the general provisions of a trade treaty over-ride this?

While this is being fought out in the courts, the same general issue is under debate with regard to the negotiations for the Trans Pacific Partnership agreement. Australia has said it will not be party to the disputes-settlements clauses of the TPP draft that give foreigners the sort of leverage which Philip Morris is attempting to use. A US Under-Secretary of State affirmed last week that this clause is non-negotiable

Let's hope the Australian negotiators get the political backing they need to protect Australia's sovereignty (and that they ensure that foreign investors have no special exemptions or advantages over domestic investors).

One of the central characteristics of the TPP is that it goes well beyond simple trade issues. Whereas there is overwhelming support among economists for the idea of free trade, this blanket endorsement does not carry over to other aspects of the TPP. Issues such as intellectual property rights require specific measures to ensure an equitable sharing of the benefits between producers and users of IP. Issues such as labour markets and foreign investment rules are legitimate areas of difference between countries.

The general presumption in favour of free trade should not be invoked to create a halo effect over other issues where there is room for legitimate differences of national interest.

Photo by Flickr user Lightmash.

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