Graham Lovell, Author at Democratic Capitalism

Global Trade Reform

President Trump has created a catalyst for global trade reform. The USA could use this opportunity to implement reform via WTO that will work for both developed and developing nations.

The Problem with Global Trade

Even though the push towards globalization has done much to reduce poverty in those nations able to exploit the changes for the benefits of their own citizens, it has presented three easily identifiable problems;

Zero tariffs do absolutely nothing to remove the first-mover-advantage of Western nations. Without tariff protections, developing nations are severely limited in their ability to develop diverse economies. Each nation should seek a diversified economy, despite the benefits of specialization. Providing a diversified economy is the only way in which a nation can utilize all the skills of all their people.
Western nations are unable to provide sufficient work for ordinary workers in the face of very low wages that are being offered in developing nations. A skilled worker in the USA on $15 an hour cannot compete with a skilled worker in Mexico on $15 a day. It will never work out well for the ordinary workers of the West, who actually represent the majority of voters. (Elites: watch out, your day of reckoning has come!)
Globalization has failed to deliver the real equalization of incomes between developed and developing nations that has been promised by its advocates. The pressure to keep wages down in developing nations is maintained by global corporations. They are only too willing to move operations from one country to another in search of the lowest possible cost of labor. Of course, they are only operating in the way the situation requires. If it is to be changed, it will have to be changed by changing the situation, not by requiring corporations to act in ways that conflict with their own charters.

Implementing Global Trade Reform

Having defined the problem with global trade, reform of its operation becomes self evident. Here is a simple two-part fix, which Donald Trump could initiate and virtually force the whole world to adopt.

The WTO rules to be changed so that any nation can introduce and maintain a high level of tariff in order to offset an identified first-mover-advantage. It is suggested that a tariff of 25% would be a good starting point for a discussion on this aspect.
The WTO rules to be changed so that any nation can implement a country-by-country tariff on goods coming from another country, where the minimum wage (actual or official) is less than 50% of the minimum wage of the importing country.

Only item 2 of this program for global trade reform really applies to the USA, and pending a WTO agreement, Donald Trump could implement that aspect immediately.

In regard to NAFTA, Mexico could be encouraged to raise the minimum wage in all factories exporting to the USA to 50% of the USA minimum wage.

Under these arrangements for global trade reform, the pressure to move work from nation to nation in the search for the lowest possible wage levels would come to an end. It would also end the waste of national resources that comes from starting a factory in one country and moving it to another.

Global trade reform along these lines would see the incentive for nations (like Bangladesh) to be the work-house of the West coming to an end. Indeed, the wages of ordinary workers throughout the world would be increased.

Super-low prices will end

Yes, it is true that the prices of some very low-priced, but valuable goods, like clothing, would increase significantly over time. This would reflect the fact that the workers of the world were not continuing to be impoverished in order to meet the needs of the developed world.

For those who do not like that prospect. Suck it up! It is coming!

Open Markets – not Free Trade

Free Trade is supposed to enhance Open Markets, but the facts shows that Free Trade kills competition. It makes oligopolies and destroys truly open markets.

Open Markets require many players

It is axiomatic in economics that an open market requires many players, and that competition only works for maximum effect when there are open markets.

The experience of the last 30 years has shown a trend towards agglomeration, with smaller firms being swallowed up. This is done in an attempt to achieve a level of market power and cost efficiency resulting in a firm being of sufficient size that it can compete with all comers, and dominate a market.

If economists were not blinded by their own theories, they would realize that this trend is antithetical to their “ideal world” of perfect competition. Instead of combating this trend, they are prepared to explain it away as a limitation to their micro-economic theories.

Open Markets deliver mixed results

The effect of open markets is clearly seen in the agricultural sectors especially in subsistence economies. Here the farmers deliver their products to the market and receive whatever the customers will pay – they are entirely price-takers.

No-one wants to be a price-taker in an open market. We all want to be price-setters. In the agricultural sector this can only be achieved if the producers gather together in a collective, and only deliver to the market those goods that must be sold, because they will perish, or those goods that will receive the best price that the market is likely to pay (in the medium term).

The ideal situation is where the market sets the price, based on supply and demand, but where both buyers and sellers have equal power. Yet this never can be achieved under Free Trade. This is because the lowest-cost producer has virtual monopoly power.

The end result under Free Trade, is that open markets for many goods and services become a virtual fiction, with a few operators holding an unconscionable level of monopoly power, by virtue of operating in an oligolopolistic space.

Restoring Open Markets in the US via a Cash Destination Tax

The US Republican proposal for a Cash Destination Tax has the potential of restoring a more competitive market situation in the United States. This is because US producers will gain a slight advantage over those producing goods and services overseas. This will arise because only the costs incurred in the United States will be deducted from income when assessing income tax payable by corporations.

The slightly higher prices that United States firms will be able to charge for sales within the United States will encourage additional producers to enter the market. As well as improving the Open Market status of the US economy, wage rates for US workers will rise, bankruptcies will reduce, and the neglected cities of the US will revive again.

However, one aspect of the Republican proposal for a Cash Destination Tax is totally unacceptable. This is the proposal not to charge Income Tax on any revenue earned by exporting outside of the United States. Surely, the proponents of this aspect of the tax know that importing countries will be entitled to treat all US firms as if they were dumping their goods. One thing is for certain, the EU will impose countervailing dumping penalties on all imports from the US. It is also the way of such things, for dumping tariffs to include a penalty component.

If the Republicans insist on “no Income Tax on Export revenue”, we can look forward to a full-throated trade war. Good luck with that! It won’t end well.

Too much Competition is Too Much!

Who is too thick not to realize that getting imported goods at a price 20% cheaper is not worth the social dislocation that the current Free Trade ideology is creating?

Apparently, most of the people protesting against the Donald Trump agenda are as thick as bricks.

Yes, the Obama years saw the US economy recover, albeit ever-so-slowly, from the sub-prime induced difficulties. However, the EU and the Obama administration were too thick to realize that the Global Financial Crisis merely exposed the soft under-belly of the economies of the Western world. Radical changes are required to fix this situation, and the world can thank God that the US electoral college decided to elect the radical Donald Trump, rather than Hillary Clinton, who would have continued Obama’s failed policies.

There can be no investment where there is nothing in which to invest. For most industries, this is a problem caused by Free Trade. Who will invest in the developed world when almost everything can be made more cheaply in Asia. Yet the irony is that these cheaper goods have to be exported back to the developed world, with the markets in the developed world drying up because the jobs supporting them have gone.

Undeveloped economies need trade reform

Undeveloped nations should give their utmost efforts to making the farmers more prosperous, with higher prices being achieved for their produce. This will require a modification of their own Open Market theories, such as discussed above, so that their markets work for the good of their own nations, not for the benefit of global capital.

Look after yourselves! Capitalists are required to look after their shareholders, not to look after the nations in which they operate. Oxfam may fulminate, but its pleas will achieve nothing if national governments do not look after their own people.

Elite Capitalism – It is NOT the Future

Elite Capitalism has been running the world’s governments for 30 years, but it has failed to deliver for ordinary voters.

Elite Capitalism and Free Trade

The ideology of Free Trade is built on the premise that each nation should concentrate of those things upon which it has comparative advantage. It is a static theory, which has not changed much in over 200 years. Nor have the advocates been willing to learn from the downsides of the theory that have been experienced over the last 200 years.

The ideology of Free Trade began with the theory that, in 1820 and forever afterwards, Portugal should continue to concentrate on wine, and the UK should continue to concentrate on textiles. It is theory that is based on a static world, and actually one in which entrenched poverty should be endured forevermore. And so it has happened.

Free Trade is also built on the premise that getting goods 20% cheaper is worth whatever disruption is caused by open trade borders, even to the extent that it can cause 10% more unemployment than before. Given the loss of social cohesion of such a policy, it should never have been accepted.

Even though it was not the intention of the original theorists, Free Trade has led to intolerable levels of inequality within nations, and between nations. This is because Free Trade puts too much power in the hands of global corporations, since they are able to move operations to the cheapest place in the world, and to wherever government regulations and taxation are the weakest.

Phony arguments of Elite Capitalism – Trade

In Australia, we have a government that was elected on a mix of the ideologies of Democratic Capitalism and Elite Capitalism. In simple terms, the Nationals support the principles of Democratic Capitalism (the economy must serve the interests of the voters), and the Liberal Prime Minister, Malcolm Turnbull believes the nation is best served by following a model of Elite Capitalism.

Turnbull approach has some appeal, since it can lead to a higher overall national GDP. Yet in defending his theory, it is appalling that he has decided to follow the UK example of “Project Fear” (in opposing BrExit). In the last Weekend Australian he made the claim that “Protectionism leads to Poverty.” This is an absurd claim that has no foundation in history or theory.

Of course, there are sufficient examples from history to show “Isolationism leads to Poverty!” If that were Turnbull’s position, there would be no problem in accepting it, but that was not what he claimed. Turnbull is ideologically committed to Free Trade. He proves to everyone that he does not have a rational argument in favour of unrestrained Free Trade, since he resorted to this pathetic argument in its favour. Don’t stand in the way of an ideologue when he (or she) is in full flight!

Rather than being hurt by protectionism, Australia’s egalitarian society was built on protectionism: it cannot be said that it led Australia into poverty. Australia had unemployment running at around 2% until the Labor government, blinded by ideology, decided to revalue the currency upwards and reduce tariffs over-night. Since then, unemployment has reverted to world’s average of about 5%, and global capitalists have had a freer hand to control Australia’s economic life.

The world-ranking US economy was built on protectionism in the 19th century. If the Free Traders had won the argument in the middle of that century, the US would have remained an economic backwater, mostly growing cotton and other agricultural products, and the UK’s industrial base would have kept on growing and growing. Is that what Free Traders want for the developing nations of the world? Fortunately for China (and to a lesser extent India), it thumbs its noses at the Free Trade rhetoric of the West, while taking advantage of the ideological blindness of its trading partners.

Phony arguments of Elite Capitalism – TPP

The most objectionable part of the TPP is entrenching the power of global corporations via ISDS clauses. These clauses allow global corporations to sue national governments if those national governments pass laws to reduce their ability to make a profit (even at the expense of the interests of ordinary voters). These clauses are the greatest threat to national democracy in the modern world.

Even if the TPP becomes enforceable, it will be a Pyrrhic victory for Elite Capitalism. This attempt to use the rule of law to enhance the interests of corporations over voters will not be tolerated by ordinary voters. In Australia, the first sign of difficulties to come can be seen in the attempt of Philip Morris to use the ISDS clauses of a Free Trade agreement between Australia and Hong Kong to overthrow Australia’s plain-paper cigarette packaging legislation. It was the first sign of problems to come. Success would not have led to the abandonment of the rule of law in international trade, but it would have sown the seeds of that outcome.

TPP is designed to entrench the power of Elite Capitalism forever, putting ISDS clauses into law, so they cannot be overthrown by future governments. It is the enemy of Democratic Capitalism. If the current Australian government cannot see that, they are inviting other parties to take up the ground of democracy that they are abandoning. Already the Liberals are losing ground with the electorate, and it is only the complete unacceptability of the ALP opposition that is keeping the Liberals within reach of re-election to government.

Phony Arguments of Elite Capitalism – Angela Merkel

Angela Merkel has said the economic and political problems can best be solved via global solutions. She opposes Donald Trump’s proposition that nation states should solve their own problems. In this, Merkel is wrong: most problems are local, and are best solved with local solutions. Donald Trump is right.

20 years of the Euro has shown that, even in Europe, region-wide solutions don’t work. Portugal, Spain and Greece are still struggling, while Germany is going very well. It is not surprising that Donald Trump correctly says that the EU gives Germany hegemony (at least in economic matters). At least we can agree with Merkel’s response, namely that the EU can look after itself (implying that it doesn’t need Trump’s gratuitous advice). Exactly, the EU problems don’t need a global solution, they need a EU solution. It is a pity that Merkel won’t consider the obvious solution – abandoning the Euro.

Most developing nations have a dominant agricultural sector. One thing is certain from a study of economic history – global trade in agriculture has mostly led to impoverishment of the agricultural sectors of less developed nations. It has led to the over-development of single crop economies (the so-called banana republics, etc.), which has made those nations vulnerable to global price movements. Yet the agricultural sector is something that national governments could enhance, as has been done in Australia for about 100 years, starting with government funded and run storage and pricing schemes. Now, in Australia, these are often run by individual farmers, who store crops on their own farms. Such is the nature of dynamic local solutions, designed to solve local problems.

Elite Capitalism is the problem – not the solution

It is time we recognized that Elite Capitalism is the source of the world’s problem with increasing inequality. It is inevitable it will lose its hegemony. It is also ironic: Donald Trump is the only one willing to call out, “The Emperor has no clothes!”

Pumped-Hydro – The Climate Change Fix

Widespread implementation of pumped-hydro is the only simple fix for global warming. It will radically cut CO2 emissions without putting up the price of electricity.

Updated 24 February 2017

Energy Storage is needed in Australia

Pumped-Hydro provides a means to store “electricity energy” that is not immediately required. It does this by using this energy to pump water uphill. Later, when this energy is actually required by the users on the electricity grid, it can be quickly converted back into electricity by allowing the water to run down the pipes used to pump it uphill, thereby turning the generators at the bottom of the hill (being the same “devices” used to pump the water uphill in the earlier stage). The losses from this “storage process” are minimal, and actually have a very low cost. Most of the costs arising from this process relate to the need to build water storage, pipes and electricity generators (which also serve as the pumps).

In Australia, there is a great need to be able to store this surplus generated electricity, since electricity generation from wind does not match the demand pattern. This is beautifully illustrated by this set of graphs from a study of Wind generation in South Australia.

Here the demand is shown in the top graph, and supply from wind is shown in the bottom three graph, broken up into three regions of South Australia. As can be seen here, the largest generation region actually generates most electricity during the off-peak period from 2200 to 0600. At present, this large imbalance has had a very bad effect – it has led to the Alinta generators at Pt Augusta being shut down, since they could no longer be run 24 hours a day. They couldn’t compete with electricity supplied at a negative cost from these wind farms – a distortion created by a dysfunctional renewable energy certificate scheme. A better fix would be to utilize the storage capability of pumped hydro.

Why Pumped-Hydro?

Electricity is generated from wind energy for 24 hours a day: the quantum dispatched depends upon the wind and not upon electricity demand. Electricity generated during times of low demand is effectively squandered unless it is stored. The primary storage mechanism currently available is hydro-pumped storage, which is the central plank (with wind power) for Portugal achieving over 50% renewable energy. It is also used in Denmark, where existing hydro facilities in Norway and Sweden are used to recycle otherwise wasted wind-power electricity.

In Australia, pumped hydro could be implemented in NSW at the Fitzroy Fall Reservoir. This is a part of the water storage facility on the Shoalhaven River. At present it is mostly used to condition electricity generated by wind farms. Something more is required.

Pumped-hydro - an Australian example — Pumped=hydro at Kangaroo Valley, NSW

It is easily understood that electricity is generated by wind at times when it is not needed, this being an issue especially during the night. On the other hand, wind generators have no capacity to increase output during times of peak demand. Indeed, the extra electricity generated during these off-peak times adds to significant inefficiencies in the total supply system, with other generators having to be shut down to accommodate the additional power being produced from wind. This has happened in South Australia, where the Pt August brown coal generators became uneconomic, simply because they couldn’t be run for 24 hours a day, as they were originally designed to do.

The conventional solution to this “over-supply problem” is to store the electricity generated during the off-peak times using pumped-hydro. For example, Denmark do this with their wind energy, selling it to Norway and Sweden, who store it in their hydro systems, using this system “as a battery,” by pumping water uphill, and then releasing it later. These countries then sell the electricity back into the European grid at a higher cost than they bought it, thus providing themselves with a nice little earner.

Funding Pumped-Hydro

Using pumped-hydro power in this way can be easily accommodated as part of a wider hydro-electric scheme, such as in Norway, Sweden, and in the Australian Snowy Mountains and at Fitzroy Falls. The question remains whether a pumped-hydro electric scheme can be developed that has its sole justification in this kind of storage and release arrangement.

The economics of such a proposal is quite simple:

Electricity is purchased at $A25 MWh at off-peak times. Even with a 25% efficiency loss, this would only equate to $A31 MWh.
Electricity could be sold at $A275 MWh at peak times.
The electricity dispatch could be run for 6 hours every weekday, for 52 weeks a year.
Since the pumping operation could be run for 9 hours every day, also for 52 weeks a year this means that the system could also supply Shoulder tariff electricity (at $A160 MWh)
Cash flow from direct operating costs would be $A244 per MWh for peak electricity sold, and $A129 MWh for Shoulder tariff electricity sold.
If it were to run for one year, 6 hours per day, 52 weeks a year, 5 days a week, 90% of the time, it would return a cash flow of up to $A340,000 per year per MW installed, just for peak-load supply.
If it were to run for one year, 12 hours a week, supply Shoulder tariff electricity, it would return an extra cash flow of $A80,000 per year per MW installed.
Total direct cash flow would be $A420,000 per MW installed.
Installed costs for Hydro have been costed at between $US1m MW to $US7m MW (= $A1.4m and $A10m)
Operating costs could be managed to be around 2.5% of installed cost.
Allowing for operating costs of 2.5%, and a 10 year payback period, it will be economic to install such a facility, provided the cost of such an installation worked out to be up to $A3.5m per MW.

Thus, with proper planning is should be possible to deliver a profitable operation, without actually increasing the cost of electricity as delivered. One should also be able to see the potential to actually reduce the cost of delivered electricity, once sufficient pumped-hydro facilities have been build and commissioned, especially if they began their life as government funded facilities.

Pumped-hydro is a viable option in Australia

For those interested in following up this issue, I draw your attention to a December 2016 Engineers Australia article (p.46-53) which reported that Professor Andrew Blakers, ANU, observed that pumped-hydro has a cost impact that is a fraction of battery backups.

Blakers is reported to say that, in order to be cost competitive, the system should have modern high-quality turbines, 10 MW or greater, with the “top dam” being 400-900m above the “bottom dam”. They should also be “off-river.” He also commented that such facilities would not be difficult to site.

While Australian government funded ARENA seem to be happy to fund projects, such as the Kidson solar + pumped-hydro, there seems to be some problem with wind + pumped-hydro. This points to a fundamental problem with ARENA and other government funding and private advocacy organizations. For them, it seems that it must be solar, nuclear, or nothing. To hell with cost. Surely this cannot continue. Contact your MP and demand that action be taken that will reduce the cost of electricity, not just funding “lovely to have” projects, as seems to be the case at the moment.

Actually, the best option for increased pumped hydro is via the Snowy Mountain scheme, where it is likely that Tumut 3 power station could be upgraded to handle all the surplus electricity generated from wind farms throughout the National Electricity Market.

Useless arguments

Those who think that they know something about this subject are obsessed with establishing a carbon price, via some mechanism. My question for them is, “What will that do to resolve the problems caused by the over-supply of wind-powered electricity in South Australia?” The answer is obvious. “It will do nothing!”

The other “useless argument” is put forward by nuclear energy advocates. They don’t want anything to dampen their advocacy for that lost cause. Unable to really respond constructively to the risks indicated by the failures at Chernobyl and Fukushima, they attack pumped hydro as an improbable solution to the problem of a lack of consistent supply of electricity with non-arguments. We can forget about them until they can properly address voters’ legitimate concern about uranium nuclear.

More serious is the fact that the installation of a new 500 MW pumped hydro system in Germany because there is insufficient “surplus electricity” in that country. So it is the case, although they were prepared to go ahead with their plans when the ratio between average peak demand and average demand was 1.2 to 1.0. They delayed their plans when the ratio dropped to 1.1 to 1.0, which has been attributed to solar PV, which has taken the edge off peak demand, even though it remains a relatively minor contributor to total electricity supply. However, in South Australia the ratio between average peak demand and average demand is 1.4 to 1.0. If Australia were Germany, the extra capacity would be installed immediately.

It is time we left behind the dead arguments of 2007, and examined propositions more appropriate for 2017 and beyond.

Anyone who is concerned about global warming and climate change could surely not vote for a party that advocates an out-of-date, and ineffective, solution to the problem of too much CO2 in the atmosphere. Here the most vigorous advocates of action on this subject need to look carefully at their own motivation, for surely others will do the same.

Stable Electricity Supply & RECs

The oversupply of wind-power has seen the question of “stable electricity supply” enter into public debate in Australia. It is now very urgent that Renewable Energy Certificates (REC) scheme be modified to make it work for the nation, rather than just for “Green Advocates.”

Excuses are not enough

Update 10 February 2017. Now we discover that the REC scheme is even causing gas fired generators to be turned off. This situation is ridiculous.

RECs undermining a stable electricity supply

Who would seriously contemplate implementing a scheme that encouraged wind-farm operators to produce electricity in the middle of the night, when it is not needed? The Australian government did, via the REC scheme, in 2000. Surely it is the responsibility of governments to implement policies that result in a stable electricity supply, not an unstable one!

Under the current REC scheme, wind-farms can even deliver electricity to the grid at a negative price, since this apparent loss can be offset by approximately $25 per MWh. This is currently the approximate rated proceeds for each certificate produced, whether the electricity generated is really needed for successful grid operation or not. The electricity retailers buy this undifferentiated certificate, since this helps them to meet their “renewable obligations,” and they have no need or way to differentiate such certificates for themselves.

The downside of this is approach is that coal-fired generators (and nuclear for that matter), cannot be affordably run if they have to be shut down every day because there is insufficient demand from the grid for the electricity they would generate during the night. Unlike a wind-farm, coal-fired generated cannot be just “run on idle,” since they need the back-force of generating the electricity to offset the fierce power of their steam-driven turbines. Yet Alinta’s Port Augusta coal fired generators were turned off at night, causing Alinta’s operation to be unprofitable, and therefore to be shut down forever.

Who would support a scheme that caused the former back-bone of the South Australian electricity supply market to be shut down prematurely, causing unemployment in Port Augusta, and for South Australian businesses to consider moving interstate? The South Australian Labor government did and still does.

It is ideological madness to continue with this short-sighted approach, involving undifferentiated “Certificates” that do not distinguish between the “no need” electricity pushed into the grid by wind-power during the night, and the truly “useful” electricity generated by wind-power during the day.

Did the South Australian government know that too much wind-power was already causing disruption to the electricity supply in 2011? Yes. That was when an academic study showed the problems in the supply situation and called for an upgrade to the high voltage inter-connector to Victorian brown-coal backup power, as a way to address the difficulties. (My 2012 comments on this report can be found here.) So the inter-connector was upgraded, which led to even more wind-farms being installed in South Australia. Folly, built upon folly.

Wind-power – a viable Renewable option

The risk to the wind-power project is palpable. Yet wind-farms (and nuclear – but who wants that after Chernobyl & Fukushima?) are the only current viable solution to the need for long-term renewable electricity supply.

Despite the support of the Greens & government funded ARENA, current generation solar is a mickey-mouse solution, only able to supply electricity economically at the household level, not at the grid level, with or without batteries, except during peak periods.

Of the ARENA funded solar projects, only the Genex proposal to use grid-supplied electricity to create pumped-hydro electricity makes sense. This is a Queensland project, a state where there is almost no wind-power, despite the Queensland government dreamland proposal for a rapid uptake of renewable energy.

Grid-supplied electricity, generated overnight and purchased from the grid for about $25 MWh, and sold back to the grid at $275 MWh can make good logical sense, provided the capital cost is not too high. Pumped-hydro will deliver a stable electricity supply. This particularly applies to wind-power, because most wind-power is generated at night, when the wind blows more strongly, but also when it is not needed. By utilizing pumped hydro, “unneeded” electricity can be stored over the whole night and then released during the day. Yet it is not happening. Obviously there needs to be a push to force governments and the wind-farm industry to utilize pumped hydro. This can be achieved just by encouraging the Australian government to tweak the REC scheme.

RECs & a stable electricity supply

(Updated 10 February 2017)

My proposal is that RECs should NOT be counted if the electricity is generated in off-peak periods (10 pm to 7 am). This will allow the market-distorting effect of undifferentiated RECs to be eliminated.

Excluding electricity generated during off-peak periods means that wind-power will not soak up all the available demand during the night. Therefore there will be sufficient demand for base-load generators to keep working all night, and that unnecessary, costly, inefficient, and high carbon-emitting shut-downs and start-ups will be avoided. While it may be too late for Alinta’s Pt Augusta plants to be re-instated, it could allow the remaining Victorian Latrobe Valley generators to keep working until there is sufficient wind + pumped hydro capacity to permit them to be finally and rationally phased out. It could also mean that Engie’s Pelikan Point facility could be kept running.

While the concept outlined here may be a challenge for Greens voters and politicians, they should get on board. It is the only currently viable approach to achieving the higher level of renewable energy generation that they would prefer. At least, if the current REC scheme is continued, they are likely to see the de-industrialization of South Australia, so perhaps they will rejoice over that!

Changes to the REC Targets

(Added 10 February, 2017)

In the Australian system, given the highly politicized nature of the debate on this subject, changes to the REC target are likely to be too difficult to implement. This applies even though such changes would be needed to effectively keep the current arrangements in place. Therefore, it is proposed that no change be made to the REC Targets, but rather that, after this scheme is implemented, renewable energy providers be allow to issue a REC for each 0.625 MWh generated (rather the current arrangement of 1 REC per 1 MWh).

Food Security: PNG Leader

Papua New Guinea’s Prime Minister, Peter O’Neill, welcomed the commitment of fellow APEC Leaders to strengthen food security around the region, that he said will benefit both the people and food producers of Papua New Guinea.

PNG leader on Food Security

The following is an extract from Papua New Guinea News Today.

After APEC Leaders delivered their Lima Declaration this week, the Prime Minister said APEC’s focus on regional food security will not only strengthen economies, but will open up skills training and technical support for Papua New Guinea.

He said food security is a further area of significant concern for APEC Leaders and they are encouraging greater action around the region and in individual countries.

The Prime Minister said, “APEC can address challenges to food security and this has implications for all people in the food supply chain, from farmer to consumer. As part of this, APEC Leaders have instructed our officials to place more emphasis on enhancing food markets, and this includes integrating food producers into domestic and global food supply and value chains. We further agreed that our Governments must do more to reduce food loss and waste, and for Papua New Guinea this is important in the post harvest-phase of production. This is the period after the crop is harvested and before it gets to market, and where food loses can have a serious impact in the incomes of our farmers and food producers.”

The Prime Minister went on to say that climate change and extreme weather pose a major challenge for food production and food security, noting that APEC Leaders have instructed officials in their respective countries to be proactive in dealing with this threat.

He concluded, “Papua New Guinea will participate in projects and technical capacity building programs that will help farmers better protect against climate change.”

Globalisation not a benefit to all: PNG leader

Papua New Guinea’s Prime Minister, Peter O’Neill, said APEC will recognise that not all elements of globalisation are beneficial for all people. Let us hope so.

PNG leader on Globalisation

The following is an extract from Papua New Guinea News Today.

Mr O’Neill went on to say, “Sentiments being expressed by people all around the world today are that globalisation is not necessarily beneficial for everyone. As a result of that, many of the most vulnerable people have been affected by some of the arrangements and agreements that we have put in place over the years. Yes, there has been growth, but there have also been people affected by the loss of jobs and income, and many small businesses and micro businesses have not been able to be competitive when larger multi-nationals come into their markets.”

Mr. O’Neill said this is particularly the case in emerging economies, as well as for some of the developed economies.

Continuing his argument, he said, “Despite some structural reforms that have been underway in our respective economies, and how we manage our state owned enterprises, these issues continue to linger. APEC has a responsibility in ensuring that we work together in enhancing how we move capital, goods and services, and skilled labour right across our economies, so that we can enhance value chains and continue to enable growth within our economies.”

Interesting isn’t it that it takes the leader of a very poor developing nation to bell the cat, as Donald Trump has done, on the false ideology that unbounded free trade will be the saviour of the world. They both know that trade needs to be managed according to the particular needs of each nation.

One thing we know for certain: economists and the left/elite have let the world down on this issue, instead of using their energies to help resolve the distortions that they have helped to create.

APEC 2016 in Peru discusses Protectionism

While the national leaders at the APEC 2016 conference in Peru are willing to acknowledge that “some people have been left behind,” there is little agreement on the action required to fix this.

Peru points the way

In an interview translated on SBS TV (in Australia), Peru’s Finance Minister, Mercedes Araoz said, “What they [the discontented voters] are taking issue with is valid in all societies in the face of globalisation, and perhaps a bit of rejection of it. The request is to apply some mechanism to make it more inclusive.”

Nowhere is the need more obvious to make national economies stronger & fairer than in the developing world. Apart from their own entrenched income inequalities, they are also faced with a most daunting prospect: the first-mover-advantage over them of developed nations. Indeed, it was the intention of the TPP to entrench that advantage well into the foreseeable future. For the sake of Peru, and other vulnerable nations, it is fortunate that this treaty has been put on hold. May it be buried forever, and along with it an attempt to game the system in favor of the largest corporations in the world.

Ms Araoz’s plea

Responding to Ms Araoz’s plea, I argue that the required first step is to convince national governments that they can manage their own affairs. Once that concept begins to be reconsidered, then each national government can look at the way in which it can increase the prosperity of its people.

We can look at the USA as an example. Prior to the current obsession with globalization, which started about 30 years ago, the USA domestic sales of goods and service was about 94% of GDP. They made stuff and consumed it themselves. It was a happy and prosperous period, when people served each other and shared a national vision. Now domestic sales are about 84% of GDP, and there is considerable angst throughout large sections of the nation.

Higher exports and imports in the USA have had three results:

Many goods are much cheaper now than before, thus making the consumer (who has a job) better off.
Businesses are more able to compete in the export market because they have access to cheaper labor, such as from Mexico.
Whole cities have been devastated by loss of entire industries, and in many once large and prosperous regions of America the people are desperately looking just to survive. The cheap goods are not much use to them.

So one could ask, “Has the move towards free trade been worth the cost?” The answer has to be both yes and no, depending upon who you ask. Winners have won even more, losers have lost most of what they had before.

A new Economic Mechanism from APEC 2016

When it comes to finding a new economic mechanism at APEC 2016, one doesn’t need to be too concerned about developed nations. They have mature democracies, and the voice of the people will guide their leaders to work through the issues that I have discussed. The role of the leaders of APEC 2016 should be to find a new mechanism that will be useful for developing and emerging nations.

Thinking people must know that, while developing nations have improved their national GDP by exporting to the developed world, this is not a very good long-term strategy. If developing nations look forward to a future as just being a source of cheap imports for the West they are condemning themselves to a future of relative poverty. While there is any nation in the world that doesn’t take control of its own destiny, there will always be a cheaper source of labor upon which the West can depend.

Ms Araoz’s plea at APEC 2016 implies the need to create a mechanism that will enable each developing nation to develop a diverse economy, in which all its people can prosper. Such a mechanism would enable the full talents of its own people to be exercised within that nation, with the more skilled and talented being able to raise the (economic) boat for the entire nation.

Yet the question is, “How can this be done when the West owns almost all of the intellectual property, both that which is patented, and that which is inbuilt into their entire economic, government and educational system?”

A 20% Tariff would Level the Playing Field

The APEC and WTO objective of lowering all tariffs to zero rating is entirely misconceived. Such a strategy will not “lift all boats.” Rather, it will trap developing nations in a permanent dependency on the West. If APEC 2016 doesn’t change direction, the meeting can be considered to be a failure.

One of the strategies that could be adopted by APEC 2016 is to support the introduction of an extra 20% tariff across the board. This would give emerging industries in developing countries a chance to find a modest level of support so that they can find their feet. It never needs to be reduced below 20%, unless there really is a compelling case for goods to be 20% cheaper. What would be argument for that? The wealthy getting luxury goods cheaper?

A Hypothetical Example

Let us assume that there is a country with a population of 10 million people. In this country, the top 10% of the population earn 90% of the nation’s income. Most of the rest are either subsistence farmers or poorly paid factory workers. Let us assume that the national GDP is $40 billion, with the top 10% earning $36,000 each per year and the rest earning $450 each per year. In this country 40% of the national income is from exports, and it spends this on imports.

Now let us assume that a 20% tariff is applied across the board in addition to any current tariff. After this, innovative entrepreneurs are likely to see the opportunity to make many of the goods consumed by the top 10%, which were previously imported. As a result, demand for labor increases and whole new class of more highly skilled workers develops. As a result, a number of those previously in the bottom 90% now find themselves in a new echelon of society. Now the society’s division is 20% who command 80% of the nation’s GDP. While some of the relatively very rich will have lost some of their income along the way, following the disruption brought about by this reform, let us say that the nation’s GDP has now grown to $50 billion. All of this extra goes to the new top 20% of the population, so that their average income is now $23,000. This is lower than the previous average of $36,000, but it is spread over more people. The nation is already better off, but nothing has been done from the remaining 80% of the population.

Because there are now more relatively wealthy people, the service sector in the nation can grow as well, thus pushing up both wages and paid activity. The extra $10 million is now spent in the service sector, increasing the nation’s GDP to $60 billion. Most of this will go to the 80% poorer part of the population. This sector previously earned $450 per year; now these 8 million people share in the extra $10 billion, pushing up their average income by $1,250 per year.

Any reasonable and competent government would work towards ensuring that this virtuous circle continues to lift the income of these lower paid workers, through education, and improved skills at work.

Conclusion

It is cringe-worthy of the Australian Prime Minister, Malcolm Turnbull, to cite 1930s protectionism as if it provides the evidence for embracing free trade. Doesn’t he know that the 1930s were a very difficult period because of the crash of the world economies from over-active speculative activites in the 1920s?

Doesn’t Malcolm Turnbull know that America’s economic powerhouse was built in the 19th century, building its strength behind tariff walls?

Even less excusable, doesn’t Malcolm Turnbull know that the world became a much more prosperous place at the same time as protectionist regimes were in place in most of the nations of the world, namely, in the 1950s, 1960s and 1970s?

Rather than protectionism being ridiculous, as Obama and Turnbull seem to think, the arguments presented here are just standard economics. Unfortunately, free trade advocates, many of whom are gathered at APEC 2016 seem to have stopped thinking from first principles, and have adopted a convenient, if bogus, theory.

A “protectionist scenario” has been replayed in every developed nation: it is now being played out in China. Why shouldn’t the rest of the developing world be encouraged to follow the same pattern?

Muslim Integration into Australia

In Australia, a recent poll found that 49% of Australian want Muslim immigration to be stopped, citing lack of integration as the key issue.

Muslim Leaders

There is little ordinary Australians can do to overcome their fellow countrymen’s fears about the lack of integration of Muslim immigrants into Australia. There is much that Muslim leaders can do to address the perception.

They could speak out about the following obvious sore points:

Argue that the full face covering of the burka is not appropriate in a multi-cultural country like Australia.
Argue that polygamous marriages are not allowed under Australian law, and should not be practiced in this country.
Argue that payment of taxes is a good way to demonstrate that Muslims can be good citizens.
Argue that work, not welfare, is the way to be a useful member of the Australian community.

Muslim integration failures = reduced immigration.

There will be no overt “anti-Muslim” rhetoric from the Australian government, but there are many actions that a democratic government will take to address the perceived fears surrounding a lack of Muslim integration.

One of the leading ways for Muslim immigration to be restricted is to cut back on the “family reunion” programmes. This can be done just be restricting the number of visa allocated for this purpose in any one year.

The government could adopt a non-Muslim bias in accepting refugees. Since there are many worthy refugees seeking asylum in Australia, even from the Middle East, there is no reason for Australia to take any more Muslim refugees.

Muslim Integration

If Muslim leaders want to overcome the perceived “bias” in Australia against Muslim immigration, it is entirely in their hands. Open days in mosques will not cut it. It really requires Muslims to act as if they really want to live in a multi-cultural country like Australia. If they don’t, they will hurt those they love the most.

Protectionism – A Rational Economic Framework

A rational re-adoption of protectionism is the key to returning economic strength to every nation and to the world as a whole.

Radical Protectionism

In an ideal world, every country would impose a 20% tariff on all imported goods and services, across the board. This would require no policy decision making on individual industries, and every sector would share in the same level of protection from cheap imports. This would allow every nation to develop new industries, with at least a modicum of protection, to help them get started. This would be the help that developing nations to succeed in the face of hot competition from the developed nations, who are presently living off the “wealth” of their first-mover-advantage. Such an approach would certainly not lead to a trade war.

However, this idea is far too radical for most politicians and economists, and would require a Trump-like revolution to bring it about.

Rational Protectionism

Rational protectionism would be much easier to sell, being targeted at the difficult spots in each economy, leaving the current arrangements in place for all other sectors.

In the USA, Donald Trump’s proposal to put a higher tariff on US companies re-importing goods into the USA is a case in point. His proposal impacts on companies that have moved their plants off US soil to utilize low labor costs elsewhere.

Actually it is a more reasonable way to protect US intellectual property, rather than trying to bully other nations via a TPP. Ideas that are developed in the USA, using all the resources and experience of the USA, in a way actually “belong to the USA”. Thus there is a rationality to imposing the kind of tariff that Donald Trump has proposed. It could be extended to cover any products made in foreign countries, and imported into the USA, which substantially incorporate expertise developed in the USA, whether patented or not.

The concept would also make sense in Australia, which has developed many great ideas, but for which the market here is too small to properly exploit. The Cochlear implants are an obvious case in point.

Another rational use of tariffs in Australia would include horticultural products. Here we have a natural advantage in our developed agricultural methods, but this is offset by an actual disadvantage in labor in Australia being much more expensive per hour than elsewhere. Since Australia has a emotional and rational attachment to producing its own food, it would be a good first case for the doctrine of “rational protectionism” to be adopted.

A similar case applies to the foreign outsourcing of labor services. The current outsourcing framework is far from rational. In Australia, we have payroll tax (also crazy) and a superannuation levy (rational), but suppliers of outsourced labor in India do not have to face such cost hurdles. Also India’s labor cost per hour is a simple fraction of Australia’s cost per hour. Unless something is done, more and more jobs will be outsourced to foreign countries, leaving even high skilled Australians with no jobs that they can fill.

Conclusion

Protectionism is not a “danger” to the world, but if adopted rationally it will restore economic health to every nation, and actually help to build up developing nations.