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INTERVIEWS
WITH ECONOMISTS
PROFESSOR
RICHARD SNAPE
Professor Richard Snape is Deputy Chairman of the Productivity
Commission. He has been a commissioner on a number of Industry
Commission Inquiries including Broadcasting, International Air
Services, and Textiles Clothing and Footwear. A Professor of Economics
at Monash University since 1971, his main research interests are
in international trade policy. He has held visiting professorships
in Stockholm and Geneva, served at the World Bank for two years
in the late 1980s and, in 1998, was a member of a dispute panel
of the World Trade Organization. He was co-editor of the Economic
Record for a number of years. His publications include Australian
Trade Policy 1965–1997: A Documentary History (with Lisa
Gropp and Tas Luttrell), and Regional Trade Agreements: Implications
and Options for Australia (with Jan Adams and David Morgan),
together with several other books and reports and more than 60
articles. He was the main Australian contributor to a 13-part
international co-production television series The Global Economy,
shown in Australia on the ABC on Open Learning.
How has the opening of the Australian economy to international
trade over the last decade or so influenced the pattern of economic
activity?
Since the mid-1980s barriers to imports to Australia have fallen
significantly. Imports have increased substantially as a proportion
of total expenditure, but so have exports as a share of production.
These developments are linked: Australia has become more integrated
into the world economy. Production of goods and services which
could be imported more cheaply have declined, while exports for
which Australia is well-suited, including many services —
tourism, education and medical services, for example – have
increased. Opening up to imports has facilitated this expansion
of exports, through effects on the cost of inputs, for example,
and also through imports of technology and effects on the exchange
rate.
Industries in Australia have needed to become — and have
become — more flexible, responding to international developments.
This flexibility has helped Australia to adjust to the East Asian
economic crisis of the late 1990s, and to continue to grow in
its wake.
Reducing trade barriers may impose short run costs on a particular
industry. These adjustment costs have often been cited as a justification
for maintaining barriers. What can be done to reduce these short-run
costs?
Reducing trade barriers is like the introduction of new technology
– it brings general benefits but it hurts those in competing
industries. Should those who are hurt receive special assistance?
Protecting
them by resisting new technology or by shutting out the imports
disadvantages the rest of society and ossifies the industrial
structure. Should there be specific adjustment assistance? All
change – whether it is caused by a policy change or not –
hurts someone. It is impossible to compensate, separately, those
hurt by every change in policy, tastes and technology. So should
we rely on the general social security safety nets? Or should
we concentrate on major sources of injury, be they natural disasters
or major changes in international trade policies? But how big
is major?
The adjustment costs arising from changes in international trade
policies probably are no greater than those from changes of other
economic policies. Australian governments often phase in policy
changes that are expected to have significant adverse effects
on some groups of the community, so as to facilitate change and
reduce adjustment costs. Sometimes changes are announced well
in advance for the same reason. Often there are impediments to
mobility – between locations or between occupations –
which governments have it in their power to reduce. Indeed, in
some cases, the governments themselves have erected the impediments.
Examples are taxes on the buying or selling of houses, and legislative
or other barriers to the opening of new businesses.
It is probably fair to say that there is no way that is fully
satisfactory for those who gain from economic change to compensate
those who lose. Nor is it easy to compensate them without creating
an incentive to obstruct change so as to be compensated. It is
also fair to say that stopping economic change that has general
benefit is no solution. Indeed, stopping change in one part of
the economy frequently simply shifts the burden of change onto
others.
What role does politics play in the achievement of the gains from
international trade?
Typically, ‘gainers’ from the reduction of particular
import barriers are dispersed widely throughout the community
– many people each gain a little. Those who stand to lose
are typically concentrated – a few people each stand to lose
a lot. The incentive for each person in the latter group to take
political action to stop the change exceeds the incentive for
each of the potential gainers to press for the change. This is
often so, even though the gainers in total may stand to gain much
more than the losers stand to lose. Further, those who stand to
lose tend to be clearly identifiable, while the potential gainers
may not be identifiable in advance of the change.
Those who may lose from increased imports often claim that it
is only foreign exporters who will gain from Australia reducing
the barriers to its imports, while Australian producers will suffer.
Benefits to Australian consumers or users of the products are
overlooked. Claims of exploitation of cheap foreign labour, of
failure of foreign producers to match our environmental or labour
standards, and of other ‘unfair’ practices, are potent
politically. But different labour costs or standards may simply
reflect those differences between countries that determine comparative
advantage – Australia has relatively abundant land while
many Asian countries have relatively abundant labour and low labour
productivity. Differences in environmental controls may reflect
inability to afford the controls and/or political choices of sovereign
governments.
Starting in the mid-1980s Australian governments have been liberalising
on a broad front, both in international trade policy and in internal
policies. In so doing, they have increased the constituency of
gainers from economic reform: many of those who have been adversely
affected by some changes have gained from others. (Whether they
are as conscious of the gains as the losses is another matter!
And people tend to attribute success to their own efforts and
their failures to others, particularly to the government.)
Australian governments also have entered into trade agreements
(multilateral, regional and bilateral with New Zealand) which
have reduced the barriers to Australia’s exports. The gains
achievable by the exporters benefiting from the reduced barriers
abroad have provided a base for a political counterbalance to
the concentrated losses of the import-competing industries. Further,
international commitments and obligations under the General Agreement
on Tariffs and Trade (now expanded under the World Trade Organization),
APEC (Australia–Pacific Economic Cooperation), and the Closer
Economic Relations Agreement with New Zealand, have been used
by Australian governments to buttress their stance against sectional
pressures.
What are the main impediments to achieving the gains from international
trade?
Achieving the full potential benefits of liberalisation depends
on labour and capital moving into the industries in which new
opportunities develop. If the labour in declining industries became
unemployed while there was no expansion of employment or output
in the industries favoured by the liberalisation, the gains to
the community would be small or non-existent.
But there is little or no evidence in Australia, or elsewhere,
that the total level of employment in a economy — as opposed
to the employment in particular industries — has fallen over
any significant time as a consequence of trade liberalisation.
Indeed some studies suggest that aggregate employment has risen
with liberalisation, at least after short-term adjustment has
occurred. Like many economic propositions this is somewhat counter-intuitive,
and the fact that it is counter-intuitive is often used by opponents
of liberalisation. But being counter-intuitive does not make it
false: the facts that Earth is a sphere and moves around the sun
are equally counter-intuitive to those with limited vision.
Other political and economic impediments to trade liberalisation
are implicit in the answers to questions 2 and 3 above.
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