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.