Trans Pacific Partnership deal signed - what does it mean?

The Trans Pacific Partnership (TPP) was signed in New Zealand on Thursday. It creates a free trade area that accounts for 40% of world trade and 800 million people.

Economists know that when trade barriers are reduced there will be more specialisation, more trade and higher real income. On the whole people will become better off. So why are there so many protests against the PTT?

The problem with removing protection from domestic industries (by removing tariffs in the case of the PTT) is that expensive domestic production is replaced by cheaper overseas production (known as trade creation). This is good for consumers, but bad for workers who earn their living in the previously protected sectors. While overall society is better off the pain of the deal is concentrated on a few.

There will be some losers outside of the TPP. Those who now find themselves uncompetitive because they continue to pay tariffs on their exports to TPP members. This 'trade diversion' is, according to studies, quite small.

The TPP is a significant change to world trade. The BBC page below links to a number of others that explore the new Free Trade Area, which includes Australia. The winners and losers are explained and the details of the deal are explored.

The BBC front page is here

This story is relevant to both IB and VCE Economics. 

VCE students should look at this and be able to explain the pros and cons of the deal and be able to explain how it will affect the standard of living in Australia.

IB students should be able to apply the theory of trade to the TPP. There are numerous opportunities to find good IA source material.

Government refuses a subsidy to Coca-Cola

Yesterday the government decided not to give $25 million to a Coca-Cola subsidiary to help fund restructuring of a factory.

The factory in question is SPC Ardmona, which is Australia's only fruit processing factory (they basically can or package the fruit). The firm claim that they need the money to be able to reorganise and retool their factory so they can compete.

The decision of the government not to support the restructuring with public money has made a lot of people unhappy. This is an important issue and there are arguments on both sides. Amazingly the idiot Abbot has some good points on his side.

Those who want the government to subsidise SPC argue that without it jobs will be lost in the Shepparton area. Not just those who work for SPC, but also farmers who grow fruit locally.

In support of this argument there is the point that those unemployed will claim benefits paid by the very same taxpayers who would have to provide the $25 million investment. In the long-run this could prove to be a higher cost to the taxpayer. Also Shepparton may well decline as a regional centre and the farm land around it fall into disuse.

Another argument, that is sadly used all the time in Australia, is that it is all the fault of cheap imports. The implication being that their cheapness is somehow ‘unfair’.

The government argues that it is not their job to fund private firms, but to create the conditions where firms can operate profitably. (This is a supply-side argument.) They say that if firms can’t operate profitably it is better for them to shut down and the resources will be employed elsewhere where they can.

The argument about cheap imports is spurious. Cheap imports benefit the majority of the population; those who buy the fruit. The only losers are inefficient producers and their employees; a much smaller group.

Overall there is a short-run versus long-run argument here. In the short-run protecting (by subsidy) Australian firms can prevent immediate unemployment. By not protecting Australian firms mean in the long-run the economy will become more efficient as resources are released to new and profitable endeavours.

The Australian reports the story below. Notice how Tony Abbot implies that the working conditions of the workers are contributing to the high operating costs of SPC.

This is a matter we need to debate.

The Australian article is here

The protection of QANTAS raises fares for passengers

Australia likes to protect its jobs, regardless of the harm it does to the bulk of the population. This has been a hard road for politicians to travel but many barriers to competition and trade have been reduced since the Hawke/Keating governments.

But the airline industry remains an area where the government allows significant barriers to entry to remain. There are two specifically:

1. QANTAS must be at least 51% Australian owned
2. International carriers need permission to fly into Australia

The result is that an oligopoly market in air travel with high barriers remains both within Australia and flying internationally. The result is that airfares are higher and service standards lower than would otherwise be the case.

The government are considering relaxing the rule on QANTAS ownership. This would allow a foreign carrier to buy the airline and operate it. They would be less sensitive to Australian jobs, such as servicing the aircraft abroad, but passengers would benefit from lower fares due to reduced costs.

However the best thing the government can do is sign up to the 'Open Skies' policy that operates in most of the developed world. Any airline can fly to and from a country as long as there are take-off and landing slots spare. This intensifies competition and lowers fares. The evidence suggests that international  air fares in Australia are considerably higher than for comparable journeys.

Currently the government will not grant any more flights to foreign airlines, even though they ask on a regular basis.

Imagine if Etihad, Emirates, Thai, Singapore and all the other big carriers could fly into Melbourne six or seven times a day. Plenty of spare capacity and so cheaper seats available. Some jobs would be lost at QANTAS, but more would be created by other airlines and all travellers will benefit.

Competition works and its about time the government let it.

The reaction to the QANTAS proposals is reported here

Wikipedia on Open Skies here

The dangers of not competing

Qantas have announced they will stop maintaining aircraft at Avalon. Despite the protests of the engineers they have themselves to blame to some degree.

The decision will mean that part of the Qantas fleet will be maintained abroad where it is much cheaper to do so. While this is unfortunate, especially for Geelong who might welcome Australia's first nuclear power plant right now, it is an illustration of the benefits of trade.

As Qantas will be able to save money on maintenance by this move they will be able to charge lower fares. Those lower fares will benefit Qantas consumers directly and other passengers as it adds to competition in the market.

There is no point complaining about lower wages abroad or lower quality (first may be true but the second isn't). The fact is that countries should specialise in what they are comparatively best at and import the rest. In the long run nobody wins by subsidising uneconomic industries, the taxpayers and consumers pay more for a brief period of higher wages and employment for the inefficient.

The actual answer is to invest in human capital via education and training to make Australia competitive in the high tech, knowledge based industries that will allow Australians to maintain their standard of living. The alternative is to drop living standards to those of the bulk of the Asian Pacific region. There will be few takers for that.

The Age reports the Qantas decision here