For many years Dick Smith and his team at Dick Smith Foods have worked hard to encourage more Australians to support local manufacturers and food producers.
Putting together a range of products, working with producers, distributors and retailers to give consumers access to locally produced goods does not just happen. It takes years of hard work and commitment.
However, no matter how hard people work to explain why buying locally helps to support Australian businesses, growers and workers, the exercise will always be an uphill struggle if Australian produced goods and services are burdened with a massive effective tariff.
Unfortunately the nature of the effective tariff on Australian produced goods is poorly understood in Australia and is rarely discussed.
In short the effective tariff arises when the value of the Australian dollar is driven up by unproductive capital inflows rather than by trade performance.
What is so crazy about this situation is that whether or not Australia accepts unproductive capital inflows is entirely within our control. It is the policy decisions of our governments that are robbing Australian workers of jobs and Australian businesses and food producers of income.
An example will illustrate the issue.
Dick Smith OzEHoney (400g) is advertised by Woolworths at a price of $AUD8.20 which is approximately $AUD2.05 per 100 g.
- That means when the Australian dollar is trading at $1 US the price of a jar of OzEHoney in $US dollars will be $US8.20 or $US2.05 per 100 g.
- When the Australian dollar is trading at $0.72 US (as it is today) the price of a jar of OzEHoney in $US dollars will be $US5.90 or $US1.48 per 100 g
- When the Australian dollar is trading at $0.50 US the price of a jar of OzEHoney in $US dollars will be $US4.10 or $US1.03 per 100 g
So what does honey sell for in the $US at a discount retailer like Walmart?
Great Value Clover Honey (16 ounce / 454 g) sells today for $US4.47 which is approximately $US0.98 per 100 g. Judging from the product description it sounds like a reasonable quality US produced honey. It may not be as good as Dick Smith Foods OzEHoney but it sounds like it may be comparable.
Immediately it should be obvious how important the $AUD exchange rate is to whether Australian produced goods can both compete in export markets and compete against imported goods.
At today’s exchange rate of $US0.72 Dick Smith’s OzEHoney ($US 1.48 per 100g) is approximately 51% more expensive than Great Value Clover Honey ($US0.98 per 100 g)
But at an exchange rate of $US0.50 Dick Smith’s OzEHoney ($1.03 per 100 g) is only 5% more expensive and at an exchange rate of less than $US0.47 the OzEHoney is the cheaper product.
And that is comparing one of our expensive oligopoly grocery chains with super cheap Walmart.
Is the exchange rate of the Australian Dollar completely beyond our control?
One of the great economic myths is that having a floating exchange rate means the exchange rate is set purely by the market and essentially it cannot be controlled or managed and to do so would be to “distort” a wonderfully free market.
That is complete poppycock. Since the GFC (and well before in some cases) our major trading partners have routinely sought to massively manipulate exchange rates with all manner of tools including interest rate policies, trade and capital movement restrictions.
This graph gives a good indication of which of our trading partners are the worst exchange rate manipulators.
The $AUD exchange rate is the product of a large number of capital flow transactions and whether some of those capital flow transaction take place and the extent to which they do is completely a matter of Australian government policy.
If the Australian government allows the banking system to borrow hundreds of billions of dollars from foreign parties to drive down the cost of local mortgage rates that puts significant upward pressure on the AUD exchange rate.
Likewise if the government decides to sell hundreds of billions of dollars of government bonds to foreign parties that also puts significant upward pressure on the AUD exchange rate
If the government allows a massive sell off of locally owned land, offices, factories, brands, infrastructure (electricity distribution systems, ports and toll roads) to foreign parties valued in the tens if not hundreds of billions that also puts significant upward pressure on the AUD exchange rate.
The issue of unproductive capital inflows and the great reverse tariff they place on Australian business and workers is discussed by the Glass Pyramid in depth here.
The key point is that if we don’t take seriously the factors within our control, that distort our exchange rate and drive it above what our trade performance warrants, the good work by people like Dick Smith foods and Buy Australia will always be pushing cow pats up a hill.
It is about time we had a serious discussion about the policy choices by our government in Canberra that are costing Australian workers jobs and Australian businesses and food producers income.
Does macrobusiness commenting have more effect than Facebook ads?
Hard to say – I think the Facebook ads are seen by people who would never visit macrobusiness and so may not have previously encountered the collected ‘works’ of pfh007 and the Glass Pyramid. Hopefully, a few people give some of the issues some thought – even if only to think about why they disagree. That would be enough for me.
Please send your blog to every independent in Australia, the main parties are a waste of time. We have been conned, our jobs go to countries with lower standards of living where people are paid very little (no regulation) and do not have the cost of living we do (thanks to an inflated banking sector), we cant compete, where do u sit on that issue?. Many say to me, get rid of regulated pay rates and conditions, to me they are the things that set us apart from these countries. I cannot believe that economists have been so asleep or corrupt, to not question what has happened. I listen to ABC radio and find myself angered by the things both reporters and politicians say, there is no method of correcting statements either party make, they are unaccountable and a law to themselves.
Thanks Watson, On the issue of jobs being off-shored and not being able to compete.
My position on that is fairly straightforward. First we must stop the unproductive capital inflows. If we do that, and it is completely within our power, we remove a distorted and over valued exchange rate as a factor. While that does not guarantee that jobs return from offshore it is a big step forward. If that is not sufficient further measures can be considered but I suspect they will not be necessary. Once you strictly limit the use of unproductive capital inflows it is a lot more difficult to export all your production jobs and live off a supply of credit and asset sales.
As for why some many economists ‘get it wrong’ that is mostly because they are using simplistic models that do not reflect either reality or the interests of a community. They assume a world, that does not exist, but makes their simple models compute. When reality intrudes they huff and puff and complain that people need to comply more closely with THEIR assumptions.
Watson – feel free to forward a copy of the post to your local member and ask them to state where they stand on the issue.
Thankyou for the suggestion, have just done so
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