GLASS PYRAMID ‘EXCLUSIVE’ SEALED SECTION CONTENT

Update:   Unfortunately, last night QandA managed to spend well over an hour on everything (including railway crossings in Melbourne) other than the top secret proposed TPP agreement.  The QandA producers apparently thought it not worth the time to allow a single question to the Minister responsible for keeping it a secret. 

On Monday 20 April 2015, Mr Andrew Robb, the Minister for Trade and Investment will appear on ABC TVs QandA program.   This special post is designed to give the QandA audience and viewers food for thought (and perhaps ideas for questions) whatever political tribal scarf they prefer to wear.

If anything, traditional conservative viewers should be the most concerned by Mr Robb’s efforts.

The focus of this post is the proposed but top secret Trans Pacific Partnership deal and the various “FTA” agreements that Mr Robb has been signing with unseemly haste on our behalf since the LNP took government in 2013.

The 6 key points about “Free Trade Agreements”.

1.     Free Trade Agreements are not about trade.

Free trade agreements are not really about trade in goods and services.  Or to put it another way, improving trade in goods and services (especially Australian goods and services) is not the reason that our trading partners want to sign FTAs with Australia.

Over the last few decades Australia has UNILATERALLY reduced the majority of its tariff and other trade barriers on imported goods and services.   That is why our shops are simply packed to the rafters with cheap overseas goods from the four corners of the globe.  Even our few industries with some remaining ‘trade protection’ – like cars – have very low levels of protection compared to most of our trading partners.

About the only remaining barrier to goods and services landing on our shop shelves are quarantine barriers and even those are under ongoing attack by our trade competitors who would prefer that our industries suffer from the same diseases as theirs.

Australians already have great freedom to buy goods at the lowest possible cost from whoever they want so if someone (say Mr Robb) tries to tell you the TPP and the FTAs about improving the flow of cheap toasters, T-Shirts and TV’s you can politely yawn as we have “been there done that” and we didn’t need a FTA to do it either.

2.    Free Trade Agreements are about capital flows.

Because our trade competitors do not need easy access to our markets for their goods and services – we have already given them that without asking –  the reason they are keen to sign FTA’s with Australia is because they want an easier path to pursue their preferred business model which is to manipulate their exchange rates by exporting capital.

When a mercantilist country (i.e. a country that manipulates exchange rates to protect their domestic industries) or its banking system buys Australian Government bonds, Australian banking sector IOUs or acquires the ownership of Australian assets, it is driving up the $AUS and driving down their own currency.

As you might expect this makes their domestically produced goods and services cheaper than those produced in Australia.

Australian industry finds its output cannot compete on the international market and against imports because our trade competitors are effectively placing a tariff ON our domestic producers by manipulating their exchange rates. So when Mr Robb applauds large new inflows of unproductive capital from our trade competitors – keep in mind that it makes OUR industries LESS competitive.  Loony stuff.

At this point it is important to distinguish between productive and unproductive capital imports as in theory some capital imports are productive and useful.   The problem is that Australia is drowning in unproductive capital imports that are more about exchange rate manipulation and the “currency wars” than anything else.     See this Glass Pyramid discussion and this recent note on the sale of Toll Holdings to Japan Post for more details and discussion of the differences between productive and unproductive capital inflows and how to pick the difference.

Be ready to note the way Mr Robb will blur the distinction to make it sounds as though we have to accept a mountain of unproductive capital from our trade competitors to get the limited forms of productive capital that we need.

3.    When it comes to Mercantilism – It takes two to Tango

A mercantilist country cannot export capital and manipulate its exchange rate without a willing partner (boofhead is a more accurate word) as someone has to accept those capital exports.  If the preferred transactions used by a capital exporter are regulated and restricted, the exports cannot happen – or cannot happen easily.

The worst thing a country can do if it is concerned about trade warfare by its trading partners is to make it even easier for those trading partners to export capital to that country.

One of the great myths is that there is nothing a country can do to stop a mercantilist trade rival exporting capital and thereby manipulating the exchange rate.   There is a lot that can be done but our banking/FIRE sector and their buddies in the political parties make heaps of money facilitating those predatory “currency war” capital transactions so restricting them is always described as being ‘impossible’, simply not discussed or mocked as being ‘old fashioned’  – “we are completely free capital flow fans now”.

No surprise at all that Wall Street and the City of London – the twin centres of the capital transaction “ticket clipping” universe think that unregulated international capital flows is a brilliant idea.  No surprise that the middle and working classes of both countries are being shafted as a result.

When members of the ALP make those types of comments it is embarrassing and demonstrates just how cluelessly they have hoovered up “econ speak” that has nothing to offer a party claiming to represent the lower paid members of the community.

When members of the LNP make those types of comments it demonstrates just how far the coalition has abandoned the “forgotten people” it was established to represent.

Free and unregulated capital flows is nothing more than an article of economic ideological faith.

4.     Mercantilists hate people exporting capital to them.

If you are still harbouring doubts about the preferred weapon of the mercantilist country or “currency warrior” just look at the attitude of those countries to other countries trying to ‘export’ capital to them.    They are extremely careful when it comes to people deploying mercantilist capital exporting strategies against them.   If they even allow capital imports they are generally very closely regulated and limited to forms of imports that are most likely to result in the transfer of intellectual property and technological know how and business and systems skills to their people.

In other words they limit capital imports to only allow ‘productive’ capital imports that are likely to increase the productive capacity of their economy while Australia is busy allowing capital imports that either ‘hollow out’ our productive capacity or transfer ownership of it to offshore interests.

A good examples of this are the requirement for joint ventures and restrictions on out right ownership by foreigners of capital assets or land.  Requirements that local staff are employed and restrictions on imported staff are designed to enhance the knowledge transfer.

Japan did this brilliantly throughout the 19th and 20th centuries and provided the model that many countries including China have followed since. In the Chinese FTA, that according to Mr Robb allows massive Chinese capital exports to Australia, Australians are limited to investing in a couple of narrow industries in China – like aged care – selected no doubt by the Chinese in order to obtain Australian skills in management and systems in those areas.

5.     Mercantilists will only agree to ‘relaxing’ their controls on imports of goods and services reluctantly

The Mercantilist objective in trade negotiations is to improve their ability to export capital and thereby manipulate exchange rates and their competitive advantage.  If they are able to achieve that goal, in principle they could be more generous in allowing goods to be imported to their country as their domestic production has the benefit of the effective tariff created by the manipulated exchange rate.

However, mostly they see no reason for such weakness and instead fight tooth and nail to maintain as many of their existing tariffs as possibly and postpone for as long as possible delivering whatever concessions they actually agree to make.

Classic examples of this strategy include allowing a higher % of some import (say cheese to Japan) at some point in the future, maybe, if they feel like it.

6.     Trade competitors will try to increase protections on some of their exports if they agree to reduce their protection on others

The classic in this area is intellectual property.   Our trading rivals who have lots of intellectual property wish to maintain its value for as long as possible so they can keep exporting it to Australia at a high price.    However, foreign intellectual property can only be protected if Australian law protects it, so the trade rival wants Australia as part of a trade deal to promise to give their exports even more protection.

To get that agreement our trade rivals will often promise that if we give greater and longer protection to their intellectual property they might marginally reduce some of their tariffs and other barriers to entry on our existing exports. Say allow a bit more beef or wheat or sugar in 10 years or so.    They know that 10 years is plenty of time to come up with some strategy that has the effect of countering whatever relaxation they agree to now in order to get Australia to protect Snow White and friends (and other US knock offs of European fairy tales) for another 50 years.

The US-Australian FTA signed by Howard remains a classic of the ‘genre’.

Incidentally,  all that stuff in the press about people downloading US movies and TV is largely about the extent to which the Australian government will help US Intellectual property producers gouge the highest possible price for their intellectual property exports.

Yes – some protection of intellectual property is probably a good thing but it is much less than the US and other major IP owners are demanding.

So how do Mr Robb’s desperate and dateless efforts to strap Australian into a TPP and various FTAs stack up?

This part of the paper is now probably redundant as most readers are probably thinking – OMG – we have been sold out by our leaders – on both sides but mostly by the LNP.

Some key points about those recent FTAs that support the above analysis

• Mr Robb has made a big deal about how the FTAs he has signed allow for much larger and faster unproductive capital exports to Australia by our trade competitors. Up to $1B per transaction no questions asked. He acts as if it is a good thing when in fact all he done is opened the way to our trade competitors to manipulate their currencies even more than they already do.
• All of the deals retain tight restrictions on capital exports from Australia to those trade rivals. No buying land in China or major industries etc.
• As far as capital flows are concerned the deals are a one way street, capital exports to Australia are enabled, capital exports from Australia remain tightly restricted.
• The deals do not even allow the same freedom to export Australian goods and services to our trade competitors as we already allow to the import of their goods to Australia.  Even though we unilaterally removed our restrictions years ago our trade competitors STILL will not remove their restrictions on our exports and the FTA’s signed by Mr Robb do not require them to.
• Even worse our trade competitors are requiring that we give even more protection to their exports (like intellectual property goods) as a condition for reducing some of their restrictions on Australian imports.

As noted at the top of this paper, the issues surrounding FTAs and TPPs should be of great concern to traditional conservative voters who generally have some sense of the importance of national sovereignty and that the economy is part of the social fabric and a healthy balanced economy is fundamental to a healthy community.

The approach to trade agreements being promoted by the government is a radical agenda based on a very dodgy and flimsy economic ideology that the GFC demonstrated belongs more in the world of fairy tales and things you tell to scare small children.

There is nothing conservative about this government.  They are ideological warriors seeking to pursue a radical and extreme economic model that has, in the form being promoted by the current government, has a track record of failure – unless an unbalanced economy dependent on a few cash crops and asset prices bubbles is your idea of success.

Most shocking of all is that even if you like the FTA/TPP ideology, Mr Robb and the current government have been cutting us terrible deals and we are being taken to the cleaners by our smarter and more ruthless trade rivals as Mr Robb and Co rush to sign on the bottom line in order to be seen to be doing something.

Final Note:

By now you might be wondering, how have our politicians got away with selling us out for so long.   The answer to that is simple.  Australia’s total (public and private) net foreign debt is $860 billion.  If you are not sure how a big a number that really is keep in mind that the market capitalisation of Woolworths is only $36 billion.

The politicians have been encouraging the country to run up a massive private/household debt without properly informing the public that it is happening and the consequences of doing so. Encouraging the country to live off debts to foreigners and assets sales is the political soft option. Soft option…Oz Politician…starting to see the connection? To cut them some slack it is fair to note that our mainstream commercial media promotes the interests of those FIRE industries that benefit from the nation taking the soft option, and the pollies are very scared of the big end of town.

Everyone feels rich and doesn’t ask too many questions while our lifestyle is being funded by foreign credit and selling off the capital and natural wealth of Australia.  No surprise that this strategy is very popular with lazy politicians who would not know real reform if it bite them in the behind.  The LNP in particular are notorious for running the country on private debt while pretending they are adults because the growth of private debt allowed them to run smaller deficits or surpluses (public debt).

Check out the explosion of private debt under Howard in this excellent graph from macrobusiness.com.au.  Easier to run a surplus when the private banks are flooding the economy with fresh debt generated money. (If the idea of private banks creating money sounds odd to you read this paper from the Bank of England right now)

Whether public or private, selling IOUs on a massive scale and flogging off assets by the truck load, is intergenerational theft on a massive scale.  Politicians of both major parties like to encourage the process because having households clock up record debt that stimulates the economy delays the need for politicians to actually do something. It is little more than ‘out-sourced’ fiscal policy.

That the time for delay is coming to end can be seen in the panicky looks on the faces of government ministers as they start to realise that it is getting harder and harder to be a “do nothing” government cruising along on mining booms and residential asset price bubbles fueled with cheap mortgage debt.

Over to you audience members to ask Mr Robb some tough questions on Monday night but don’t forget the ALP representative either as they have a bad habit of going missing in action on this important issue as well.