Reviewing government assistance to business

The Australian Productivity Commission’s latest annual Trade and Assistance Review was released quite recently.  These, statutorily required, reviews contain

the Commission’s latest quantitative estimates of Australian Government assistance to industry

as well as useful discussion and analysis of key recent developments in the trade and industry assistance area.  As the Commission notes in the Foreword to this year’s report

Views inevitably differ on what constitutes industry assistance and whether it is warranted. Fundamental to these questions is transparency of measures. The annual Review seeks to identify government arrangements that may be construed as assistance, as well as their target, size, and nature. This information provides a basis for considered assessment of the benefits and costs of the arrangements.

Transparency  alone usually can’t stop daft policies being adopted or continued, but without good empirical estimates and disinterested analysis it is harder to push back against the special interests lobbying governments for this deal or that.  Such deals are almost invariably dressed up as being in the public interest, but perhaps rarely are.

The Commission highlights one particularly egregious example in this year report –  the decision to build the new submarine fleet in Australia  (characterized by many as marginal seat retention scheme  –  and the Cabinet minister most often mentioned did retain his seat at the recent election).  As the Productivity Commission’s report tartly observes

Paying more for local builds, without sufficient strategic defence and spillover benefits to offset the additional cost, diverts productive resources (labour, capital and land) away from relatively more efficient (less assisted) uses. It can also create a permanent expectation of more such high‑cost work, as the recent heavily promoted ‘valley of death’ in naval ship building exemplifies. Such distortion detracts from Australia’s capacity to maximise economic and social wellbeing from the community’s resources. The recent decision to build the new submarines locally at a reported 30 per cent cost premium, and a preference for using local steel, provides an illustrative example of how a local cost premium can deliver a very high rate of effective assistance for the defence contractor and the firms providing the major steel inputs (box 3.1). While based on hypothetical data, the example reveals that the effective rate of assistance provided by purchasing preferences can be higher than the peak historical levels recorded for the automotive and textiles, clothing and footwear industries prior to the significant economic reforms of protection. It is notable that this cost premium does not include any delays in deploying the new submarine capability.

Effective rates of protection, in 2016, higher than those provided to automotive, textile, clothing and footwear industries in the bad old days of high industry protection.

I wrote briefly about last year’s review, which included material which the Sydney Morning Herald described as scathing attack on preferential trade agreements of the sort that Australia (and New Zealand) governments have been enthusiastically signing.  The Australian Productivity Commission  –  a body strongly committed to open and competitive markets – has a well-established record of skepticism around the wider economic benefits of such deals.  Here is their box summarizing the issues and concerns.

Box 4.1           Conclusions in regard to the merits of trade agreement

The Commission has previously raised questions about the merits of trade agreements (including PC 2010, and the Trade & Assistance Review 2014‑15). The overall conclusions are as follows:

·       Multilateral trade reform offers potentially larger improvements in national and global welfare than a series of bilateral agreements. While the slow progress of the Doha Round of multilateral trade reform has accelerated preferential agreement making, the trade‑diverting effects of bilateral agreements should not be forgotten.

·       Australia gains more from reducing its own tariff barriers than from the tariff reductions of a bilateral trade agreement partner.

·       The benefits of increased merchandise trade emanating from bilateral trade agreements have been exaggerated.

·       Different and complex rules of origin in Australia’s preferential trade agreements are likely to impede competition and add to the costs of firms engaging in trade.

·       The nature and scope of negotiating remits should be assessed from a national structural reform perspective before entry into negotiations, rather than primarily for export opportunities. The text of proposed trade agreements should be made public and a rigorous analysis independent of the negotiating agency published with the final text.

·       The Australian Government should seek to avoid the inclusion of Investors‑State Dispute Settlement (ISDS) provisions in bilateral and regional trade agreements that grant foreign investors in Australia substantive or procedural rights greater than those enjoyed by Australian investors.

·       The history of Intellectual Property (IP) being addressed in preferential trade deals has resulted in more stringent arrangements than contained in the multilateral agreed Trade‑Related Aspects of Intellectual Property (TRIPS). Australia’s participation in international negotiations in relation to IP laws should focus on plurilateral or multilateral settings. Support for any measures to alter the extent and enforcement of IP rights should be informed by a robust economic analysis of the resultant benefits and costs.

It isn’t exactly the enthusiasm of New Zealand or Australian governments for deals such as TPP (although the Commission does not comment at any length on that specific deal).

One can always argue what value publications like these add – given the fondness for daft policies that governments continue to show. But given how badly the incentives are skewed against citizens, provisions that require officials to publish reports of this sort seem appropriate. Information is one of the few tools citizens have to push back.

In New Zealand, the Taxpayer’s Union has done sterling work in highlighting some of the cost of “corporate welfare”, but it might be a good part of improving New Zealand’s economic governance if provisions requiring an annual report of this sort were included somewhere in New Zealand legislation.  At very least, it would help to prompt something like the annual modest round of stories in the Australian media about just what governments are doing  –  and at what cost –  in this area.  In a small country, with a lightly-resourced media, we probably need such official reports even more than Australia does.

8 thoughts on “Reviewing government assistance to business

  1. Perhaps the current migration policy can also be considered Government assistance to business? In that it appears to grant easy access to cheap relatively unskilled labour that suppresses wages and supplants capable New Zealand job candidates (to whom the Government then has to pay the unemployment benefit) Too cynical?

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    • I think that is right – the intention clearly is to “assist business” (as ever with a belief that it is the wider public interest). My argument is that across the whole immigration programme, what it mostly does is hold back overall economic performance, and skew conditions (eg the real exchange rate) against firms in the tradables sectors.

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  2. The PCs view of the ISDS provisions I find a little interesting. In principle, I think the concept of ISDS is very important, and I’d be more willing to extend those rights to local firms before deciding that they ought not be in place at all.

    As a rule, I think it’s quite important to be able to take a state to an independent court to rule on decisions which could be just anti-free trade provisions by stealth. For instance, for a long time we’ve had very strict provisions on the import of cars from overseas, which aren’t tariffs but they might as well be. If the government enacted new restrictions – I think any firm ought to be able to challenge those.

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  3. I’m at the opposite end of the spectrum. There are lots of bad things govts do, and mostly we have to fight those by argument, evidence, mobilization etc – ie thru the political process rather than the judicial one. I’m not convinced the foreign trade or investment needs to be different – we didn’t have such provisions in the first great age of globalization, and they mostly grew up because of the advent of countries with very shonky domestic judicial systems (for basic contract enforcement) and perhaps even more questionable domestic political processes. from memory, the first ever IDSD provision involved Pakistan

    I’m also quite influenced by James Allan’s (UofQ, ex Otago) book on consitutitions, courts etc and the cautions not to put much trust in committees of ex-lawyers

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    • I can see where you’re coming from there. Marginal Revolution carried a great op-ed by the late Supreme Court Justice Antonin Scalia on economic rights, where he effectively said that you shouldn’t entrust a court to rule on an economic right if that right isn’t adequately fought for in the public realm. That stayed with me.

      That said, the ability of a state to erode away at a free trade agreement through erecting non tariff barriers which are just as effective makes a mockery of a free trade agreement. If you concede that, I’m not sure if the free trade agreement is worth the paper its written on. Though I’d absolutely also question the merits on a free trade agreement which carries many hundreds of pages of caveats on country of origin definitions.

      This all makes me long for the simplicity of the freedom of movement of goods and people which existed at the apex of the British empire. You want to emigrate to Canada? Just go. You want to build a new town in Bendigo? Knock yourself out. You want to sell Indian tea in England? Go crazy.

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  4. Yes, but like the PC I’m very skeptical of the case for free (or “preferential”) trade agreements – I hanker for unilateral dismantling of our own tariffs and other barriers, and NZ firms can take the rest of the world as they find it/ Ideally free, but generally no doubt not.

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    • I think you and I have just switched seats in the idealist vs realist camps: I the idealist on housing and planning policy reform and you the realist, and I the realist on free trade agreements and you the idealist.

      I think you’ll get unilateral tariff reduction in Australia and NZ when you’ll get full blown deregulation of urban planning rules… never, that’s when.

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