I is a pleasure to read that an economist can occasionally question free trade.

I have commented several times that without a significant manufacturing industry our citizenry will be doomed when our minerals become depleted. I wrote the following to the SMH in 2000. The letter suggested a series based on "Yes! But.." confusion.

Howard’s Way is a Slippery Slope.
In a radio interview today (18/2/2000) P.M. John Howard ruled out any re- regulation of banks and financial institutions. Who could expect anything different as he was responsible for the Campbell Report which led to the deregulation of these institutions in the first place.

Who on the Campbell Committee represented and protected the common good? The committee chairman was very experienced in the financial industry and expecting a commerce specialist to formulate just and fair rules to protect the Australian citizens’ currency was worse than leaving rabbits to guard the lettuce.

We need at least sufficient regulation to divert financing activities towards developments which promote the scope and efficiency of our export and import competing industries.

The present activities of financial institutions cause many middle and upper crust Sydneysiders, for example, to feel wealthy through inflating property values and share prices. This is a recipe for generating a rise in the unnecessary import of Beemers and their like.

Banks currently lend up to 80% of the market value of shares in major companies including themselves and this is a perfect example of George Soros’s concept of reflexivity which is simply that, if you give something a high valuation and lend a high proportion of this value, then the price will increase.

Applied to real estate this same concepts lead to heavy drains on the lower levels of family incomes as people struggle with higher mortgage payment than would otherwise be necessary.
(cont.)

(Continuation)

Service industries are not part of a solution to Australia’s economic problems. Those industries generate mainly downstairs jobs in an upstairs/downstairs economy.

Between developed economies there are few comparative advantage industries except those related to the size of their respective domestic markets or their natural resources.

We need our finances directed towards those industries where we are not at a significant comparative disadvantage. If the disadvantage is largely due to low foreign wages in what are near slave economies we would be wise to apply a high import duty and apply part of the funds raised toward overcoming the oppression in those economies.

We keep hearing the argument that international trade should be free. We forget that jobs in Australia generate employee income tax to support our health and education services etc.. Surely import duties should be sufficient to replace this lost revenue particularly when the imports are from tax free havens such as the industrial park on Batam Island near Singapore or parts of China.

A solid article in the main, with just a few blind alleys.

The main thrust - that US manufacturing is not dead - is perfectly accurate. And the reason is that fundamental economics win out over flag-waving jingoism pretty much every day. It was perfectly correct to source product from overseas when this was the cheaper option, just as it is equally correct to repatriate manufacturing where the competitive (pricing) balance has changed.

So far, so obvious.

The currency debate is of course just as real. China has consistently managed its exchange rate to its own advantage, an activity that is not as freely available to the US, given its de facto position as the world's reserve currency. But this will also even itself out in the long run, for exactly the same reason: China will not be able to maintain such a disparity, as its population becomes more prosperous and two-way trade with the rest of the world becomes subject to the same fiscal disciplines.

However, there is absolutely no consistent message that Australia can learn from this.

We have never at any time had the kind of competitive manufacturing base that the US has created, developed and maintained over the last century. By definition therefore we cannot experience the same kind of renaissance that the US will enjoy in the coming years. We have existed successively on the sheep's back and the mineral bounty. Not at any point in our past have we actually found any manufacturing process that we are actually good at, let alone world-beating.

Or even vaguely competitive, in world terms.

Rather than imagine a manufacturing future where the taxpayer is asked to subsidise incompetence, we would be better off working out what we might actually contribute to the world once the minerals run out.

I suspect it might come as something of a shock, when we do reach a conclusion on that question.

If America couldn't manufacture the arms which flood our world, they would quickly become a banana republic.

American, which harbors pretensions of being a world leader, is leading the world into a state of endless war because it makes money from war and killing.

Yes, manufacturing is important to America but only while certain nations, like rats, follow the warmongering piper.

Why don't we give war a miss and let the brutal piper and his greedy followers disappear from the pages of history.

Chris, if your argument is right, why not have government undertake all manufacturing? Where is the cut-off line? What is the principle by which you distinguish production that should be undertaken by the criteria of profit and loss, and production that should be undertaken based on handouts paid for by confiscating the products of some other producers? How do you figure out whether the losses were worth it.

People who praise an "economist" who reaches his anti-free-trade conclusion by simply ignoring the costs of his policies, only show that they are confused or invincibly ignorant

Peter, it is difficult to know all the answers, whether you are a pure free trader or for more govt intervention. My gut feeling is that any modern society in this competitive world should have a manufacturing industry. Even many market economists expect this in the case of the US, which does not have Austt's fortune of lots of goodies in ground to export.

And, at least based on my observations thus far, states that do well in manufacturing mostly make deliberate decisions to do so.

Therefore, each nation will have to weigh up the pros and cons of doing so.

As the article suggsts, hovever, wages and productivity, rather than govt assistance or leadership alone, are critical factors.

BTW Foyle, I am not an economist.

Chris Lewis writes: “We need our finances directed towards those industries where we are not at a significant comparative disadvantage. If the disadvantage is largely due to low foreign wages in what are near slave economies we would be wise to apply a high import duty and apply part of the funds raised toward overcoming the oppression in those economies.”

Absolutely right! Free trade is an engine designed to drive a race to the bottom wages, conditions, environmental protection and tax-funded social infrastructure. That’s what it’s for. Low import prices can come from a number of factors: Economies of scale, efficient production practices in other democracies such as Germany, currency manipulation as in China, a cheap, cowed work force as in China, state subsidies as in some countries’ farm production.

The answer is to run our economy for our inhabitants. That means tariffs to offset price advantages from foreign government subsidies and currency rigging, low wages and working and social conditions (much of Asia), environmental plunder (e.g. timber from Indonesia) for all items imported. Also in some special cases in our national interest (e.g. vehicles) where importation benefits from economies of scale. But no tariffs to protect poor production practices including capital underfunding, featherbedding and bad management.

These remarks are for Australia but would be just as valid elsewhere including America.

Emporer Julian,

Foyle wrote the words you quote.

Emperor Julian and Chris
That presupposes that you know how to run an economy.

You don't.