Institute for Public Policy. Perth, WA
At this time of heavy travail for agriculture this seminar is trying to cultivate the right paddock - the patch outside the farmer’s gate.
Most agricultural industries face international competition and, in the economic sense of the term, each whole internationally competitive industry, covering the span which includes production on farm to final consumption, is efficient. While most foreigners producing competing products have reduced their real (inflation-adjusted) costs of production and benefited from subsidies., most Australian agricultural industries have only had recourse to increased efficiency to remain competitive. But most have remained competitive. The exceptions include tobacco and milk products which have depended on Australian government - or more correctly taxpayer -support. The fact that whole industries have remained competitive is not to say that every link in the long chain from farmer to consumer in the red meat, wool and grains industries has carried its share of the pain of adjusting to the cost-price squeeze, or that each link is now equally efficient.
Although it is made difficult for, say, individual wheat farmers to compete freely on price and quality, Australian agricultural industries are made up of at least somewhat competitive individual farmers which contrast with the monopolistic handling and selling organisations which service many of them. In such circumstances theory leads us to expect that most of any adjustment to deteriorating terms of trade will be made by the more competitive sector. Theory leads us to expect sectors sheltered from competition to be characterised by outdated practices, overmanning, industrial disputes and other waste, largely absent from competitive sectors. There is much anecdotal evidence from Australian agriculture to support the theory. For instance manning levels at the Sydney grain terminal are five times greater per tonne loaded than at comparable terminals in North America; rail charges are about 50% higher in Australia than in the more competitive North American systems. It may even be fair to say that the handling and transport authorities are greater barriers to Australian agricultural trade than EEC subsidies and Australian tariffs. While such an assertion would certainly not be inherently unreasonable there is no adequate empirical evidence for it, nor do I believe that any is likely to be forthcoming. But the case for more sensible policies does not rely on finding such evidence. All that has to be done is to show where Australian producers bear substantial, unnecessary costs. AIPP has recently commissioned David Trebeck and Denis Hussey of ACIL, both of whom would be known to you, to explore grain handling - but that is only one of several sub-industries in need of the long hard look.
Further, we should bear in mind that inefficient railways, bulk ‘handling authorities, Marketing Boards, abattoirs and much else affect not only international trade, but also trade between States and between farmers and end-users. Bear in mind the unproclaimed milk levy Acts, wheat varietal restrictions, bans on trade in wheat, sugar, eggs, etc, etc. All of these things reduce the overall efficiency of Australian agriculture and reduce Australian living standards. Most directly lower the living standards of farmers but some, like the Tobacco, Milk and Egg Boards, transfer more than enough wealth from Australian consumers to farmers to offset the costs of regulation to themselves.
My brief today, however, concerns international trade and it is in that context we will deplore these self-imposed inefficiencies.
Exports are critical to all of our major rural industries. The wool industry exports 95% of its production, the red meat 55%, grains 75%, sugar 75% and milk 25%.
How often have you heard it said that Australia is a great trading nation? Well it is not. Big economies like the EEC or the United States produce somewhere at home most of the things they wish to consume and improve their living standards by trading within their borders. To enjoy as much variety of goods small economies must trade with other nations. The point is most easily understood by thinking of a very small Pacific island selling copra and tourist accommodation or an oil rich Sheikdom like Bahrain. These tiny economies buy cars and butter and flour only by selling those few things they are good at producing. There is a limit to how much enjoyment can be gained directly from oil or copra and the sole point in producing an exportable surplus is to buy other things.
Since Australia is in truth a relatively small economy - about half the size of California - we should expect a high proportion of what we produce to be exchanged with foreigners. When we trade outside our most immediate fifteen million friends the statisticians will call it ‘foreign trade’; when an American trades outside his most immediate fifteen million friends there is a high probability that the transaction will be classified as ‘domestic trade’.
For a small economy, Australia trades a small portion of its gross domestic product and by this measure our ranking as a trading nation has been getting lower over the last thirty years or so. Our share of total world trade has also declined. France, West Germany and Italy all have much bigger economies than ours. In the 1950s, as one would expect, they traded a smaller portion of GDP than we. By the l970s we had slipped behind them. It is not surprising that our economic growth is poor and our standard of living is not keeping pace with that of other countries.
Unless we give our produce away, exports must be paid for with Australian dollars earned by selling things to us. Imports and exports must roughly balance (if we include capital flows and invisibles). A barrier to imports is a barrier to exports. One should not have to say anything so obvious but even today, though the debate is far better than it was, some NSW lamb producers and the Metal Trades Industry Association obviously still believe in fairies.
In the 1982 Giblin lecture, Professor Richard Snape had this to say about the ratio of trade to GDP: “The movement of the ratio against the trend is no doubt attributable in part to the maintenance and increase in the barriers facing Australia’s agricultural exports; it is also attributable to the virtual refusal, apart from the lifting of import quotas in 1960 and the 25% tariff cut in 1973, of Australia to join in the substantial reduction in the barriers to trade in most industrial products undertaken by other developed countries. Australia’s relatively high tariff barriers are supplemented in most sensitive areas by non-tariff barriers.”
I will look at the most important barriers which other nations erect against our agricultural exports and then at the barriers we erect against our agricultural exports. I will spend more time on the latter because as we shall see they are far more important; and because there is close to damn all we can do about the former, particularly when it comes to pious international lectures ,we are seen to be complaining about motes and ignoring beams.
The European Economic Community (EEC) and the Common Agricultural Policy (CAP)
The European Economic Community is comprised of nations which twice this century have torn each other to pieces. Its leaders are more than usually determined to see that it does not happen again. They have experimented with and tolerated the Council of Europe, the Common Market with a group outside, and now the enlarged European Economic Community. They tolerate even that expensive and powerless talkfest, the European Parliament, partly for the sake of peace. They also believe that the Comm unity has brought them economic benefits and probably it has. They are the same benefits that Federation brought to Australia and Closer Economic Relations (CER) with Australia will bring to New Zealand. It is the opportunity to trade among a greater number of people with a greater diversity of opportunity within a given set of trade barriers. Clearly the biggest and best group to trade with is the whole world, but it is possible, if the group is very big, for the gains from increased trade within the group to more than offset the cost of maintaining some of the barriers, once maintained by some of the parts, around the whole. Many people believe that this is the case for the EEC. What is important to us is that the EEC believes it.
However, that argument ignores what is to be gained from the example of close friends. It seems unlikely to me that if Reid’s free traders had continued in NSW and Deakin’s protectionists in Victoria (both interspersed with labour) the NSW lesson would forever have been lost on the Victorians. I once feared that Australia, to accommodate New Zealand in CER, might slow down the rate at which it reduced its trade barriers. I now hope, since Lange’s brave start, that New Zealand may show us what can be done and perhaps even be Australia’s entrepot port. What irony if New Zealand were to become to Australia what Singapore has been to Malaysia. Such is the stuff of beautiful if wishful dreams.
Although I am sure that most politicians now know that the Common Agricultural Policy is keeping the community poorer than it could be, it is still seen by most as the price which must be paid for the EEC’s ‘political and non-agricultural economic benefits - or, by the more cynical, as the price of their seats.
In Europe as in Australia, there are few barriers to the technical efficiency of individual farms, and production per hectare has increased enormously. But in the economic sense of efficiency the farms are inefficient, producing at high cost for artificially high prices. Since the prices are more than consumers will pay for the quantity produced, the cost of maintaining and disposing of butter and wheat mountains, wine lakes, etc, is hurting Europeans. Britain, which has the most economically efficient agriculture in Europe, is complaining about the price of food, but she complains more about her share of the budget needed to subsidise produce eaten in Europe and sold on the world market for whatever price can be obtained. She may help to stop the CAP. The EEC is in effect conducting a massive indiscriminate foreign aid programme which is transferring wealth from Europeans to those who buy her surpluses, including several Communist nations. We should expect no help from those who buy the EEC produce. Like all foreign aid the EEC CAP inhibits competitive production.
I think the important points for Australian farmers to note about the CAP are three:
• it is unlikely to go away;
• it is only possible because in Europe there are strong and big manufacturing and services sectors able to carry a relatively small high cost agriculture, a situation which has no parallel here;
• and if we want our politicians’ complaints on our behalf to be taken seriously we must encourage them to reduce our own barriers to the import of cars, textiles, milk products, footwear and other things.
USA farm deregulation and the possible trade war with Europe could present us with an immediate serious problem, but in the long run we should benefit from not having to compete with subsidised grain farmers in the world’s markets. We will probably get some more beef into the USA; it may well be at lower prices. Our immediate problem seems to be the United States’ willingness to use its own subsidised surpluses to’ teach the EEC a lesson over its even more subsidised surpluses. When elephants fight the ants get trampled.
Barter trade: Complete swaps are a rarity, but costly arrangements like offset agreements - an Australian specialty - are common enough. Without going into all the detail, we can say that unless each of two parties happen to hold exactly the quantity and quality which the other wants then barter involves an overall loss of welfare when compared with cash transactions. I can think of three reasons for barter:
• to avoid tax;
• to avoid paying one’s debts, including International Monetary Fund obligations; and
• to hide the real cost of something.
While the first is by much the most common, it applies mainly to domestic transactions. I think the last must be the main reason for international barter. The Australian Government simply does not want to admit that the cost of keeping the Australian aircraft industry alive could be as much as another Squadron of Fl8s. The Rumanians do not want to face up to the cost of either living with their outdated steel industry or of closing it down -they could buy iron ore at best price and sell steel at best price. This would cost them less but the loss would be apparent. There are many similar examples, but I do not see them dominating agricultural trade. Should we be offered a barter opportunity our task must be to see that we are getting full value for the agricultural produce we trade and not some unwanted good which will damage some other part of the Australian economy.
Tariffs and import quotas and all other barriers placed in the way of imports are also barriers to exports. Most of us during the continuing argument over the rightness of sheltering some industries from the rigours of international competition have heard it said that the burden of tariffs falls on exports. This has been repeated often since 1929 when the Brigden Committee reported that it was so. Samuelson’s “Economics”, a standard textbook, says, “The Brigden Report was to exercise great influence over informed opinion in Australia (and to some extent elsewhere).” Time and again I have heard Bert Kelly repeat, “We all know that in the end the exporters have to pay.” It is remarkable that even after so much “influence over informed opinion” and so much repetition by Bert and others, we do not all know. It is remarkable that so much uninformed opinion can still be found not only among protected manufacturers and Unions but among farmers too, and politicians.
I asked a friend to comment on my paper. I am an ex-politician and I cannot resist quoting him verbatim here: “Perhaps the explanation lies not so much in opinion that is misinformed but in attitudes which are narrow minded, short sighted, selfish, and, in the case of politicians, downright gutless.”
The times they are a changing, though. Even the National (Country) Party, which under McEwen led the protectionist charge, now has a crop of young members who have at least caught up with 1929. The NCP may yet return to its free trade origins. The Liberal Party has dried out considerably. As it escapes from the all-pervading influence of Melbourne it runs the risk of becoming liberal in many ways including trade. The Labor Party has discovered that tariffs are not only a highly regressive tax but one which is denying them the economic growth needed to pay for transfers to the poor. Labor, the mad Left element aside, runs the risk of actually becoming what it claims to be, a social-democratic, egalitarian party.
There have been several attempts to put some numbers on the taxes which exporters must pay to prop up uncompetitive import-competing industries. The National Farmers’ Federation and a predecessor, The Australian Woolgrowers and Graziers Council, attempted to quantify these costs either per farm or in terms of costs per unit of farm production - per tonne of wheat, beast, etc. Professors Clements and Sjaastad estimated the proportion of nominal tariff protection which is paid by exporters at about 70%. Their argument, although challenged, played a significant part in the argument between the National Farmers’ Federation and the Government about just how much Australian farmers were disadvantaged by Australian import barriers.
The original AWGC calculation, nearly a decade ago was $12,000 per farm. The later NFF figure, based on the same Clements and Sjaastad methodology, put the figure at around $19,000 currently. Although no one was too confident about the precision of the figure, there was no reasonable doubt about the general order of magnitude. It was big! Again to quote Bert Kelly: “When your foot is being crushed by a wagon wheel, it is no comfort to be told that it is difficult to determine the weight on the wheel.”
Both the NFF and Clements and Sjaastad divided the consequences of protection into two components. One component, which might be termed the efficiency effect, the dead weight loss, or the amount by which a whole nation is poorer, they put to one side. They concentrated only on the transfers between the various groups in the economy caused by protection. Since exporters must also bear a portion of the dead weight loss, the burden they carry is therefore understated.
The case against protection based on its transfer effects is quite simple. The purpose of a tariff or import quota is to enable Australian producers of import-competing goods to raise prices above the duty free landed cost of imports. These higher prices are either paid by other industries directly, as when steel or textiles are protected, or indirectly through consumer prices and wages, as when clothing or footwear are protected. The cost is passed along from industry to industry until it reaches an industry which cannot pass it further: namely, as the Brigden Committee noted, the farmers and miners and others who sell in foreign markets.
The exporters’ tariff-induced burden could be offset by paying an export subsidy. Uniform tariffs and export subsidies together would have the same effect on prices as devaluation accompanied by full wage indexation, raising prices all round and protecting no one. However, the sole purpose of protection is not to raise all prices but to alter relative prices to reward some industries.
The methodology used by NFF to calculate the cost of protection borne by farmers was challenged by the Bureau of Agricultural Economics and Commonwealth Treasury. Following further research and a number of meetings a figure of $12,000 on average per farm was ‘determined’ but $12,000 remains a lot of money. Of course, farmers also get several benefits from the Government. After deducting the value of Government assistance to the rural sector, the net cost per farm of protecting inefficient manufactures is about $9000 per year, $3000 of which is estimated to be lost by farm labour. Where are the Australian Workers’ Union protests? This is still big enough to get excited about particularly when it is born in mind that:
(1) the dead weight costs - that is, loss in overall living standards -are excluded from the calculation; and
(2) the number of farmers is inflated and hence the amount per farm is reduced by many who get substantial income from non-farm sources.
Protection is robbing Australian Peter to pay Australian Paul only part of what was robbed. Unilateral trade liberalisation, however much it might be welcomed by our trading partners, is fundamentally restoration of equitable treatment for Australian exporters. Protection rarely punishes foreign competition as thoroughly as it destitutes a Government’s own constituents engaged in the export sector.
Unlike EEC protection, Australian protection is within the jurisdiction of Australian Governments. It is your task and mine to make the consequences of protection so widely known that not only does it become politically feasible to do something to reduce Australian trade barriers, but so that it becomes politically infeasible not to do something about them. Senator Button’s efforts in this regard compare favourably with his so-called ‘free enterprise’ predecessors.
I said that the various analyses left the dead weight cost to one side and concentrated on the transfers alone. Australian living standards have, been slipping back. After the Second World War we were about the fifth most well-heeled people in the world: we are now about twentieth. The most likely reason for our decline is our failure as traders. The dead weight costs are sufficiently great that every country that has reduced its own trade barriers - Japan, Taiwan, Singapore, Spain, and even poor little Sri Lanka to name a few - has quickly achieved high rates of economic growth and rising living standards. That simple fact, rather than your own self- interest, or even justice, which in this case unlike some others is undoubtedly on your side, is, or should be, a telling ally in the political fight that is being waged now against protection. If you believe that you can any longer afford to leave the fight to the Bert Kelly’s, I don’t. If you believe you can fight it without the hard work of mastering the facts and logic of the argument, I don't. If you believe that others will always carry your argument for you so that you never have to master the art of presenting it, again I don’t.
Now let us look at a class of burdens, which in many cases might accurately be described as self-imposed, and about which you can do more than you can about Government policies which are intended to enhance the fortunes of others but which only incidentally injure you. I refer, of course, to the many monopolistic handling and marketing arrangements. I am a wheat farmer, and it is from the wheat industry that I will, take my examples, but wheat farmers have no monopoly of folly.
In fairness to many people, among whom the name of Trevor Flugge stands out, I should at the outset say that Australian wheat marketing rules have been greatly improved. Now that the wheat crop has been divided into five grades, each with a different level of underwriting, growers are getting more accurate market signals. Also, ‘the Wheat Board authority to make differential payments within grades is a great improvement, if the authority is used. Rules which allow wheat to be sold direct to mills for stockfeed are an improvement. Nevertheless, there is a long way to go before individual growers will be able to seek out and fill niches in the market’s varied demand. The dog in the manger opposition of the Flour Mill Owners’ Council, and of State Governments, to a destabilised price for wheat, flour and bread and thereby reward for quality or efficiency, has so far prevented direct sale to flour mills which the Australian Wheat Growers’ Federation sought on behalf of farmers.
Wheat Board discretion about quality and price inevitably is exercised to the benefit of some wheat growers and cost of others. Even if the discretion were to be exercised with perfect impartiality, which a West Australian like myself might tell you, requires substantial penalties for NSW because of last season’s shipping debacle, Even if it were exercised with the wisdom of Solomon it would not be seen to be fair. Administrative discretion is no substitute for the impartiality of the market place.
Not all wheat can be grown in a similar physical environment. Even on our property there is a vast difference between the wheat grown on an ironstone ridge and that grown half a mile away in a red clay gully, yet these are often mixed and command the same price. Seventy percent of Australia’s wheat goes into one big amorphous grade called Australian Standard White (ASW), even though there are big differences in the characteristics such as protein content, millability and baking strength. Despite big differences in their ‘economic value, these different wheats return the same price to growers.. Because we are given no financial incentive to deliver wheat which is superior to the minimum standard, we do not even consider reducing contamination by weed seeds, raising protein with fertiliser, or matching the ‘very different wheats we produce to different end uses. Just as serious are the laws which prevent us from growing varieties to suit the ever-variable seasons, soils and end uses. Our inability to garner all the possible reward of matching our product to the market has to be costly.
Years ago we were allowed to negotiate with mills for a premium for high quality - in our case usually defined by baking strength and protein content (but low baking strength is a virtue to a maker of short cake). I well remember delivering a truck of wheat left over after I had filled my premium contract with the mill, to the Wheat Board - only to be docked because the grain was too small.
The board’s delivery standards have been, and for the main part still are, based on a number of visual characteristics and declaration of variety, and, as many growers are well aware, some of the more promising varieties from the farmers’ point of view have been banned. The combined bureaucratic strength of the Wheat Board and the State Departments of Agriculture have rolled the farmer. However, 1 am most encouraged by those NSW growers who did their homework, tackled the bureaucracy and won the release of the high yielding variety, M2369. Farmers, faced with harsh necessity, are getting smart.
Another step forward is that the objective testing on a load by load basis for grading and segregation pioneered by the Prime Wheat Association has now been taken up for the segregation of hard wheats in South Australia and Western Australia. However, the equipment is far from accurate and if the grain were to be sold by private treaty, so that our reputation stood behind each truck load, it would not be necessary.
The impetus for these changes has not come from the marketing and handling arms of the industry; the changes have’ resulted solely because of the initiative and pressure from growers. Had the market signals been visible to growers, I am confident that the pressure for change would have been much greater.
Growers in central and southern NSW have been calling for an early sowing wheat variety for years, but the network of tired, old committees has so far stifled any progress. Hopefully the recent success with M2369 shows that the Committee can be rolled, but it should not be necessary to roll committees to improve efficiency. Not surprisingly a number of farmers grow “illegal” varieties. Why not let them grow the wheat they choose provided they are paid the market value for those wheats? Elitists in positions of authority in the industry apparently do not think wheat cockies are smart enough 1:0 manage their own businesses. They do not trust the farmers to grow whatever is most profitable. I assure them that every cockie, however unsmart he may be, knows his own farm, plant and skills better than they do.
Last year in NSW we had an example of the cost of over-regulation. Some early sown wheats got frosted and some late sowers got bogged out. The cost of not having later maturing varieties readily available must have been considerable for some people but they cannot successfully sue the varietal licensing authorities for damages.
Since recent improvements to the rules, WA farmers are allowed to cart their own wheat beyond the nearest siding but’, to protect the railway monopoly, people whose livelihood is trucking rather than farming are not. Farmers who tolerate such gross injustices should not be found among those who otherwise rightly criticise Trade Union privileges. The situation is not only unfair, it is ludicrous. In spite of the cost of vehicle transfer fees and stamp duty it is possible to buy trucks from a local carrier who has few opportunities to cart sheep during harvest, pay the carter, sell the trucks back to him after harvest and save on freights to Fremantle.
The BAE has estimated the cost of preserving the bulk handling monopoly at $4.00/tonne and for want of any data I am guessing that the cost of uncompetitive tugs, tug crews, stevedores and ports as a further $2.00 and double that in NSW.
Some ports are more expensive to ship from than others. The best way to encourage the grains industry and individual farmers to sit up, take notice and do something rational about this is to charge actual port costs to the people who elect to use those ports. For instance, the additional cost of only part loading vessels in the shallow Geraldton harbour and consequent need to sail to Kwinana to top u~ is $4.00/tonne. At present every grower in the Australian poo1 shares that, so why would not the farmers near Geraldton use the more expensive port? Similarly NSW growers use more costly, more disrupted, NSW ports and rail in spite of Victorian and Queensland alternatives which in a free situation would be cheaper.
The examples of high costs which I have chosen to highlight affect all exporters or else are selected from those which affect the wheat industry, but such examples are by no means confined to wheat. To greater (sugar) and lesser (red meat) degree, similar self-imposed export barriers can be found in all rural export industries.
1 think an explanation for farmers’ apparent disregard for costs beyond their gates can be found largely in the inadequate information they receive. Where competition is actually illegal the farmer only has illegal prices, where these can be found, to compare his monopoly organisations with. Of course, illegal prices are not well advertised. What is more, the monopolies in question not only have a monopoly of service but they have a monopoly of information. What executive, say the Wool Corporation, is about to disseminate information which properly interpreted says, “Sack me and save yourself a thousand dollars”. The WA Lamb Board refused to disclose data to people trying to formulate submissions to the WA Sheepmeat Inquiry. Cooperative bulk handling will not release individual siding costs to the farmers who own it.
Farmers fondly believe that their interests are protected by elected representatives on some of the Boards. I do not want to suggest that these representatives are not exceptionally fine men of exceptional ability, but I must in truth say they are politicians, most of whom behave as most politicians behave. Namely, they will selectively present facts to their constituencies to present themselves in the best light possible thus, if not ensuring their re-election, at least maximising the likelihood. Not many will put their jobs on the line for a principle, as Trevor Flugge did in the Wheat Growers’ Federation and Bert Kelly did in Parliament. In this, politicians are no better nor worse than the ordinary run of mankind. I hope, because I was myself a politician, that I have been able to say these things without giving too much offence.
Most Australian farmers are dependent on international trade. Some barriers to the free flow of that trade are foreign; some are home-grown. It is only the home-grown variety that is within Australian farmers’ capacity to root out. I suggest that in terms of realising our potential, we have hardly scratched the surface of the Australian barriers. Above all else we need better information about what is actually happening to know where to turn our attention and, where necessary, our wrath.