Places, everyone!

Peter Hartcher of the Sydney Morning Herald has presented a fascinating analysis of the political maneuverings of PM John Howard and Mark Latham as against each other in re: the AUSFTA. I'm reproducing the entire article here for posterity. It should be interesting to observe how the (election) game is played out from hereon.

Game of bluff against all interests
August 6, 2004

The debate between free trade and protectionism was the original divide around which Australian politics was organised. It wasn't just a lively subject of debate. The names of the two main political parties reflected the overwhelming importance of the issue - the Free Trade Party and the Protectionists.

The question was settled decisively in favour of the protectionists. It didn't work. Australia moved away from protectionism from 1983 when the Hawke-Keating-Button regime dismantled tariffs and quotas that had been designed to keep Australia prosperous. Instead, they had bequeathed the country what Hawke's industry minister, John Button, described as an "industrial museum".

It was hugely controversial. Together with a brace of other economic issues, this was one of the reasons that the big political arguments in Australia in the 1980s were all about the economy. Today it's foreign policy, not the economy, where the big arguments rage.

Australia's two main political parties have reached consensus on the big economic questions. Both sides are committed to keeping the federal budget in surplus; both sides agree on an independent Reserve Bank; and both sides favour free trade.

Mark Latham threw this consensus into doubt in February. When the Labor leader heard the news that the Howard Government had agreed on a free trade agreement between Australia and the US, he said it did not to appear to be in the national interest and Labor was inclined to oppose it. This was a mistake - Latham didn't know the content of the agreement. John Howard put Latham on the rack. He taunted him for obstructing Australia's economic opportunity, for being indecisive, for being viscerally anti-American.

The big news this week is that Latham changed his mind. "Despite several flaws in the agreement, it has net economic benefits for Australia," said Latham's statement on Tuesday. "Over time, the agreement will allow Australia to establish closer economic relations and integration with the world's largest economy with increased two-way investment flows. This will be of long term benefit to Australia." The deal "will increase access to US manufacturing, agricultural, services and government procurement markets".

Latham proposed two amendments necessary to put the deal into law. Neither would interfere with the trade agreement; both are designed to guard against any harmful side-effects. One seeks to protect local content rules for Australian TV and radio; the other seeks to guard against any abuses of the Pharmaceutical Benefit Scheme by multinational drug companies. "We won't be giving an inch" on these two conditions, he said.

Latham's tactic was to turn a necessity into a virtue. He had to agree to the trade deal, but rather than appear to be merely capitulating to Howard's agenda he would portray himself as the protector of Australian culture and health.

Howard agreed to the first amendment, but not the second. Latham's amendment to safeguard the PBS was unnecessary and unworkable, he said. Howard was too emphatic too soon - he should have reserved his position until he saw the text of the Labor amendment. It was Howard's turn to make a political blunder.

Now, Latham is in favour of new economic opportunity by supporting the trade deal. Now, Latham cannot be accused of being viscerally anti-American, and now he is the defender of the PBS, a mainstay of Australia's universal health system and an electoral sacred cow.

Howard's position instantly does four important things in the shadow world of public perception.

First, it turns the national political conversation to the subject of health. This is an advantage for Latham. The electorate trusts Labor on health much more than it does the Coalition - by 42 to 36 per cent according to a June 20 Newspoll. And if we're talking about health, we're not talking about the subjects of perceived Coalition strength - the economy and national security.

Second, it casts Latham as the defender of the system and throws into doubt Howard's commitment to it. Third, it denies Howard a major prize - he cannot harvest the fruit of his labour, the free trade agreement.

And fourth, the people most disgruntled and chagrined by this happen to comprise key Howard constituencies - big business and the farm sector. And, despite the controversy about this trade deal, it also frustrates the national interest.

Free trade does not work for all countries. Some are not equipped to exploit the opportunities as others are. Trade liberalisation has been critical to East Asia's rise from poverty over the last half-century, but has not worked to the advantage of Latin America. But where a country has risen to prosperity, trade liberalisation has been a vital component of its success. In short, free trade is a necessary condition for prosperity, but it is not a sufficient condition.

Since 1970 world trade has burgeoned from $US1.5 trillion ($2.13 trillion) in today's dollars to $US8 trillion, or from 13 per cent of world economic output to 25 per cent.

Countries that made major trade liberalisations in the 1990s enjoyed an average national economic growth rate 2.5 percentage points higher than those that did not, according to the International Monetary Fund.

Despite the doubts and fears about Australia's ability to compete in the world, it is one of the countries that has benefited from embracing open markets. The protectionists said dismantling of protection for Australian manufacturing would wipe it out. Many uncompetitive firms did go under. But overall it has been one of the major sources of vigour in Australia's economy.

Manufacturing output has surged by 40 per cent. Tariffs on imported cars have fallen by two-thirds, and Australia's car industry, instead of collapsing, has emerged as an export success story. It was sadly uncompetitive, but today exports 32 per cent of its output and generates $5 billion in export earnings a year.

We know, from experience, that Australia will stagnate if it hides from the world, but that it can prosper if it embraces openness and seizes the opportunities the world trading system presents. One job in five in Australia depends on exports, according to the Federal Government, and one job in every four in rural Australia.

Bilateral trade deals are not ideal. But with the ideal - global market-opening deals negotiated through the World Trade Organisation - in an eight-year twilight of indecision and anti-climax any prudent government must take trade opportunities where it can find them.

Howard knows this and has done a great deal to advance Australia's trade agenda. The national interest, and his political interest, impel him to correct his blunder, cut a deal with Latham, and grasp the fruit of his labour. He does not have much time - Parliament's sitting, possibly the last before he pitches the country into an election campaign, ends next Thursday.