EDITORIAL: by Peter WestmoreNews Weekly
Australia-US trade deal and the debt crisis
, August 23, 2003
In an interesting coincidence, the Federal Government resumed its efforts to secure a free trade agreement with Washington at almost exactly the same time that Australia recorded its largest ever quarterly trade deficit: $6.9 billion for the June quarter, compared to the previous record of $5.3 billion last December.
The Keating Government's largest quarterly debt figure peaked at $2.6 billion in 1995, prompting John Howard, then in opposition, to make the foreign debt an issue at the 1996 election.
Since then, Australia's net foreign debt has doubled to over $360 billion. The Government has apparently decided that by letting the money markets suck in as much money as they like, the good times can go on forever. Much of the imported capital is finding its way into the housing market, where it has largely financed the massive boom in house and apartment prices.Reserve Bank
It was left to the Reserve Bank, in its Statement on Monetary Policy
, to draw attention to the dangers which arise from excessive debt levels. It pointed to the rapid growth in credit (i.e., debt) in the housing sector:
"Credit to the household sector is growing at an annual rate of about 20 per cent, well in excess of what could be considered sustainable in the medium to longer term ... Much of this is flowing into the housing sector and is fuelling a rate of housing price increases of the order of 20–25 per cent around the country."
The Reserve Bank added:
"The risk presented by these developments is that, the longer they go on, the larger will be the contractionary effect on the economy when they inevitably turn ... This is not untypical of a prolonged bull market, and could cause a good deal of distress to the economy when the housing price cycle turns."
While the Reserve Bank was specifically talking about the impact of debt on the domestic economy, the same general argument applies to excessive national debt levels.
Peter Brain, of the National Institute of Economic and Industry Research, told the ABC current affairs program, PM
, last week:
"My interpretation of what the Reserve Bank is saying is that unless something happens to stop this reliance on debt and engineer a soft landing - and this doesn't seem to be on the cards - then it seems inevitable the economy will be plunged into a deep contraction."
What makes the picture even worse is that there is no single factor, such as aircraft purchases, which have caused the foreign debt blow-out. Rather, it seems to be a combination of lower farm income and lower manufactured exports.
In the meantime, the Federal Government is apparently pinning its economic fortune on the proposed free trade agreement with the United States, apparently believing that such an agreement will make Australia the 51st state in the growing US economy, making concerns about Australia's foreign debt irrelevant.
Yet this is almost certainly wrong. For one thing, the United States accounts for only a small proportion of Australia's overall trade, most of which is with the nations of Asia - principally Japan, South Korea, Taiwan, Hong Kong and China.
Secondly, negotiations over a US free trade agreement face a number of major hurdles, including the fact that removal of tariff barriers - the principal objective of any free trade agreement - is only a small part of the massive distortions created by the Americans' heavy subsidies for both agriculture and manufacturing industries.
These are most clearly seen in the direct subsidies for US farm producers, including sugar, grain and beef, which effectively prevent access by Australian primary producers to US markets.
Even low-wage Mexican farmers cannot compete against subsidised US farmers. Cultivated land has shrunk by 10 million hectares with US-subsidised food imports flooding into Mexico as trade barriers - but not subsidies - have come down under the North America Free Trade Agreement.
In regard to manufacturing industry, apart from a domestic market which is around 14 times larger than Australia's, the US has a range of export incentives, defence contracts, and restrictive "rules of origin" which will ensure that the promised gains will be largely illusory.
The main benefits to Australia, according to the computer models which are used to estimate these things, will be for the Australian sugar and dairy industries. Yet these are the industries where American farmers, who control key votes in Congress, are fighting hardest to limit Australian access.
On the other hand, they predict that the US will substantially increase its exports of motor vehicles and components, slashing one of the few parts of manufacturing in Australia which has been protected from the slash-and-burn policies of successive governments.
Little wonder both Ford and Toyota have indicated that a free trade agreement with the US could substantially curtail their manufacturing operations in Australia. They would simply export from the US.
In the meantime, the clock on Australia's debt crisis is ticking down. The only uncertainty is when the foreign lenders will tire of putting money into an economy which is clearly living beyond its means.
- Peter Westmore is President of the National Civic Council