Scrap Iron for Japan: UPDATED

R.G. MENZIES FORGOTTEN PEOPLE ESSAY

Featured in Paul Ritchie's The Forgotten People Updated (Connor Court) 2018 

Menzies’ home truth to Australians during our battle for survival in World War II, Scrap Iron for Japan was: Australia will either trade or die. 

The principle is timeless. We must permanently nourish the argument that an open, outward looking, competitive economy delivers opportunity for all Australians. 

Menzies noted on face value, not every single international transaction would appear immediately desirable, but exports were essential for prosperity. 

He said in the broadcast: “the whole economy of this country has rested upon our great exports, and upon the willingness of foreign countries to buy them.” 

Menzies took the opportunity to defend accusations his 1939-1941 government provided scrap iron to Japan which was subsequently used in ammunition against Australian soldiers. 

His simple response was Australia provided Japan an enormous amount of wool and wheat over the same period and there is no difference between feeding, clothing and arming soldiers and being selective about exports would only lead to ruin. 

A timeless principle

To demonstrate the timelessness of the principles, a similar discussion was held in the mid 1980s on the desirability of uranium trade: Australia is now the world’s third largest exporter of uranium. 

Yet this was not assured until the Hawke government won the argument against internal constituents who wanted to lock uranium up and leave it in the ground forever. 

Thirty years on, any reasonable person would agree failing to utilise the world’s biggest deposit of uranium would be scandalous. The almost 5,000 jobs in the Australian uranium industry are found in very remote parts where employment opportunities can be few and far between. 

The principles equally apply henceforth to energy policy. We must not forget Australia is an energy superpower. 

All policy settings applying to energy and resources such as coal and gas must be evaluated through the prism of trade and competitiveness. 

This does not mean we have an excuse to avoid climate change commitments Australia makes through the United Nations and other bodies. 

But it does mean we cannot afford to put ideology before science when we consider the policy settings applying to renewable energy, gas exploration and any other market intrusion such as a carbon tax. As we consider the future of onshore gas exploration, much of which is locked up, we ought to remember the uranium debate was nearly lost. 

No person, and certainly no country, can be granted great endowments and decide not to use them because last year’s profits or efforts can be relied upon. 

It is not a sustainable model. Opportunities are finite and the culture of the lucky country will not do. 

We must turn the endowments into opportunities. We must make the opportunities count.

The truth is, we in Australia, with a large landmass with a small population, now on the doorstep of Asia’s booming middle class, are born to look outwards. 

The mere fact trade opens opportunities and improves lives should be ingrained by the millions of individual experiences of typical Australians. 

It was in my family. For instance, my grandfather James from Stawell in Victoria, fought the Japanese in New Guinea in the 1940s but would only purchase Mitsubishi cars by the 1980s. He did so because they provided the best station wagon to suit his fishing gear. 

We cannot survive without open trade. Yet, this fact will be contested forever. 

Two lessons

Scrap Iron’s framework attains timelessness by doing two things for us today: 

1.    Reasserting the value of trade to Australia and the ever-present opportunities of our geography  

2.    Calling out protectionism in all its guises

The opportunity of trade

Australians exploiting trade opportunities dates to Macarthur and his wool bales at the beginning of the 19th century. Trade is in our DNA. 

We should remember the key statistics. Australia did not become the 12thlargest economy on earth with just the 50thlargest population by accident.  

Exports account for 40 per cent of our gross domestic product and one in five jobs is directly linked to export trade. 

The development of export industries such as iron ore, gas, gold and coal was the result of vision, tenacity and opening frontiers in domestic development, such as Lang Hancock and Peter Wright in Western Australia, but also through opening international trade opportunities. 

Menzies’ capacity to see the benefit of trade with the most brutal of enemies in the middle of WWII was truly remarkable. He followed up with the 1957 Australia Japan Commerce Agreement which opened iron ore exports to Japan. 

But we have not continued to grow for 26 years without being competitive. In most export markets, our customers have other options and we do not enjoy a monopoly.   

Recent prosperity rests upon a combination of industry and political leadership to develop the country combined with a reform dividend from decades past which boosted our national competitiveness. 

By 2030, three billion people will be in the Asian middle class to our north. 

That’s roughly a billion in each of India, China and South East Asia. 

Our largest trading partners are already in North Asia and the emergence of India, Indonesia and South East Asia will only provide more opportunities to export products and services. 

Services are just 17 per cent of our exports yet represent 70 per cent of our gross domestic product. As the middle classes of Asia swell, they will increasingly demand services – think accounting, legal, architecture, education, tourism, finance and professional services. 

With Australia’s population unlikely to exceed 40 million in coming decades, we must do all we can to plug into the extraordinary growth of the Asian middle class. 

With this at stake, realism not dogma must govern our mindset.

Protectionist messages are commonplace in Trump’s America and omnipresent in the European Union, which has failed to be a paragon of free trade beyond its own borders. 

Australia cannot afford to follow the leader on talk or actions which reflect protectionism. This would be the worst time to succumb to protectionism. 

The trouble is, we often suffer collective amnesia on sometimes dry policy areas like trade and look to ideas we dismissed just a generation ago. 

On the domestic side of the coin, we see suggestions of reimposing Australian tariffs or local content requirements floated on a regular basis. 

The highly protected, rigid and uncompetitive “Australian settlement” featured high tariffs, subsidies, centralised wage fixing and Canberra-controlled banking arrangements. It was established in the years following federation in 1901 and became an article of faith for all political parties. 

The Settlement was finally despatched to the dustbin in the 1980s and 1990s after decades of work from Bill Carmichael, Bert Kelly and others. Australia’s economy responded with 26 years of growth (so far) after being opened to the world.

One risk of Trump’s new nationalism (America First) is we feel compelled to exhume some of these discredited policy settings. 

It provides an opportunity to pursue competitiveness at all costs. Long may we remember the great lesson of the “Australian Settlement”: it did not work. 

We should not seek “rinky dink” solutions such as tariffs, prescriptive local content requirements, new taxes or indiscriminate cuts to immigration. 

The Productivity Commission estimate a trade war which adopts a cascading “America First” approach would cost Australia 100,000 jobs and reduce $1,500 from average incomes.

If it was impossible to coset Australia away from 1901 to 1980, it would be futile to try it in an age of increasing capital mobility, technology and rapid communication. 

As President Trump looks to renegotiate the highly successful North American Trade Agreement and pull back on international collaboration, we should thrust forward to pursue all available trade agreements. 

If we keep all our irons in the fire, we will maximise our chances of getting deals done. Bilateral, multilateral or pluilateral should all be in the mix. All irons in the fire should be our credo for trade policy.

Regional agreements such as the Trans Pacific Partnership and the Regional Comprehensive Economic Partnership bear the makings of an Asian region free trade zone. 

As it is likely to take decades to assemble the regional architecture, a programme for bilateral agreements with all major Asian economies should be completed by 2025. 

The trouble with trade agreements is once they are inked by the Trade Minister, there is a perception it is the end of the work. The truth is that a trade agreement is just the beginning.  

Two outcomes must be top of mind for Australian trade policy development in the coming decades.

One: a programme for implementation of trade commitments should be rolled out to every industry and regulator to reflect a trade agreement is the “end of the beginning” of an export, not the “beginning of the end”.

Two: every trade agreement must have a schedule for review and continuous improvement above and beyond conventional trade agreement mechanisms such as “most favoured nation” clauses.  

Spotting protectionism

Protectionists always use red herrings to make their case. 

Prejudice or dogma typically drive the protectionists. This must be unpacked and destroyed with reason and argument. 

Menzies was no shrinking violet. His quips in response to critics “on the stump” were legendary. But perhaps more important is his reputation as a fighter and an advocate for his cause which is displayed throughout his many works. 

The 2018 equivalent of hysteria on 1940s Scrap Iron for Japan is surely Investor State Dispute Settlement (ISDS).

At a functional level, ISDS provides a mechanism for resolving cross border investment disputes between business and nations which is embedded in trade and investment treaties. Typically, disputes are addressed through global tribunals established by the World Bank or Hague Convention.

ISDS therefore reinforces the rule of law and strengthens investment into developing countries as Asian Development Bank studies have shown. 

No nation has ever lost an ISDS case which has impinged a social, health or environmental law.

Australian companies are starting to make the most of the opportunities of the Asian middle class by investing in the region. In South East Asia, the legal systems are less certain and Australian companies have used ISDS to resolve investment disputes.

Most of the discussion in Australia’s media over the past decade on ISDS has focused on a negative idea that “foreign companies shouldn’t sue governments”. It may sound good but it smacks of provincialism and ignores key democratic principles.

This very unscientific argument neglects to remember we accept in a democracy that no person, lawmaker or government is above the law and that we can test laws in the courts. 

Such is the misguided hype on ISDS that it took a decade to resolve trade deals with China and Japan which only occurred after ISDS was put back on the table by former Trade Minister Andrew Robb to seal a North Asian trifecta in 2014.

The often-cited ISDS case is Philip Morris’ action against the Australian Government on plain packaging cigarettes. This case is held out as a reason to never again agree to ISDS clauses or worse, to reopen every single trade agreement Australia has struck and renegotiate it to remove ISDS.

Talk about flagging your strategy to your competitors before commencing negotiations!

The fly in the ointment on cigarettes is Australia won the Philip Morris case. So did Uruguay in a similar case brought under an ISDS clause.

With entire protest movements now established to fight ISDS, we must ask why? It must be the latest iteration of the protectionists’ tools.     

Arguing against ISDS is akin to arguing directly against trade. We must not succumb to the simplicity of the arguments and look behind to see it for what it is: dogma-driven protectionism. 

Whether we keep the gates open to trade and investment will heavily determine the ultimate length of Australia’s world-beating run of economic growth.