Posted: January 12, 2005

Exports are a cost!

John Garnaut in Rail and sea snarls blamed for trade loss, published in today's Sydney Morning Herald says that our trade position is deteriorating because of transport bottlenecks in shipping and rail. He says "bottlenecks in those areas were blamed for the country's second largest trade deficit in history ... New figures released yesterday by the Bureau of Statistics showed Australia imported $2.66 billion more than it exported in November, with the level of exports falling below that of four years ago." It appears we cannot get enough production out of the country to feed the Chinese boom and the Government is going to "commission a broad review of the distribution, pricing and adequacy of infrastructure."

The ALP trade spokesperson, Simon Crean, said it was a priority to remove infrastructure constraints -[Bill: over what other priorities?] ... and according to Garnaut went on to say "But I don't think you can put it down just to infrastructure failures ... It's a more fundamental failure over a much longer time." Ok! Please elaborate! Why is it that the ALP always wants to sound deep and meaningful but usually come out sounding totally vacuous and demonstrate as little understanding of any issue as the neo-liberals have. Sorry, I shouldn't be puzzled? They are neo-liberals.

Garnaut also documents that "Import prices have fallen by an average of 5 per cent for each of the past three years ... Imports rose to $15.54 billion in November, up $237 million since October and $2.13 billion over the past year. Exports were $12.88 billion, down 2 per cent over the first five months of the financial year but up by 10.5 per cent over the year."

Now to the misnomers! Garnaut reports that "Analysts said the continuing trade rut would put pressure on the dollar later this year and could push official growth forecasts out of reach" He then quotes some currency forecaster who invokes the usual fear by claiming that the speculators would soon "abandon the currency" if our interest rates rose relative to those in the US. The speculator told Garnaut that "The fundamental reality of the trade deficit will come home to roost very, very rapidly." I love it when commentators use the term 'fundamental reality' as it usually means they are just saying something obvious but need to sound authoritative.

Yes, it is a reality that speculators will chase relative margin. But the notion that a current account deficit is something that is a problem is well-rehearsed in the orthodox economics literature and public debate. We have been instilled with the notion that exports are 'good' and imports are somehow 'bad'. I don't see it that way. If we take a material perspective (which all economic measures do and this debate is no exception) then exports are a real costs and imports are a real benefit. If we can persuade the rest of the world to send more ships packed with goods to us than we have to send to them then we are relatively (in real terms) better off! Repeat: exports are a cost. They constitute real resources that we send away and cannot consume ourselves.

The issue about us buying imports is this. If we buy more imports than we sell in exports then in net terms we are using up 'purchasing power' and that means that we will not have enough private spending capacity to purchase all of the domestic goods and services which we could produce if we fully employed everyone and everything (capital). The solution - the Federal government has to run budget deficit (net spending) of sufficient magnitude to fill this spending shortfall. The benefits of this are obvious but typically lost on neo-liberal economists: (a) we have full employment - only frictional unemployment of short duration remains; (b) we enjoy the benefits of higher government spending - both households and private producers benefit from better infrastructure, better public services, and such AND/OR we enjoy lower taxes; (c) we enjoy access to the commodities from abroad - that is we can consume BOTH whatever we can produce AND whatever the rest of the world wants to (net) send us.

That does not sound like a trade rut to me. A rut is something you never want to get stuck in. The only problem with the deficit in net exports is that the Government does not have an appropriate policy response - it should be running higher budget deficits to ensure there is sufficient aggregate demand to plug the output gap and thus push us to full employment.

And what of the speculator's warning about currency markets abandoning our currency? From a 'money' perspective, the fact we can ship less and receive more (trade gap) reflects the fact that foreigners have a current desire to net save in $A financial assets. The only way they can realise this desire is to net export to us hold the net $A as cash or financial securities denominated in $As. It does not have any connotation that we are dependent on foreign borrowing to maintain our 'profligate' importing. It just means that offshore investors want to hold $A financial assets. Our trade gap 'finances' that desire. Everyone is better off! We get lower priced imports provided as foreign producers compete among each other for our business (to get the $A).

So what about when they 'abandon' the $A? Sounds bad, sort of like dumping your kids! Despite all the fear rhetoric that pours out daily from the spokespersons with vested interests from the financial markets, all they are saying is that there may come a time when the foreign investors lose their desire to hold $A which means they will either spend them here or not sell us products to begin with - which means the current position we enjoy in real terms (more imports, less exports) will move more towards a balanced trade position. It could mean some adjustment in foreign currency markets as the $A is sold down - this is reality but not a financial crisis for Australia. It just means it is harder to buy imports at the previously attractive terms.

The left also get it wrong. They talk about 'exporting jobs' to cheap labour countries. Domestically, the appropriate use of fiscal policy (deficits) is the way to ensure that we all have enough spending power to purchase both our own full employment output and anything the foreign sector may wish to sell us to meet their savings desires. If we do not like the labour or environmental practices of some of our trading partners then we deal with that by Government to Government dialogue, which may mean the Australian Government (legitimately) bans some imports and/or provides consumers with adequate levels of education and information so that we will also not purchase unfair traded goods.

Is there any role for tariffs? Not generally, they are massive profit subsidies to capitalist interests and provide disincentives to invest in best practice, high productivity, high real wage capital. Some industries are considered to be of strategic importance - such as the steel industry - in times of war you need to build tanks (do you anymore?). In that case, tariffs still are not useful. Once again a straight Government decree that defence contractors have to buy local steel would be sufficient. Non-strategic steel would then be cheaper but we can still wage our wars!

Blog entry posted by bill