Saturday, March 24, 2012

Free Trade

Woke up thinking about the concept of free trade and protectionism.  This is in light of the current debat on subsidies in the Australian car industry.

I guess like any market, there are legal mechanimsm for protectionism, tarifs, additional overt and covert taxes, regulatory mechanisms like "standards" and quality control. My favorite is warranty systems... but thats just not used effectivly. However, my brain was fiddling around with the issues of physical protectionism.  Cost of transport from supplier to market... and all the possible costs that could be imposed via the supply chain.

Think about issues such as cost of shipping, availibiliy of shipping, timely delivery, cost models (limits, ceilings, on costs, discounts etc) then think about congestion in shipping lanes, losses due to weather or poor packaging (think Cocain Cowboys for a case study)... then we get to the landing port.

In Australia we have maratime unions that hold a lot of power on the wharfs, if they are so inclined they can act as a limiting factor on freight in general or specific businesses or specific origins etc.  We also have some basic infrastructure limits... apparently there are just not enough docks and ports to import and export quickly enough.  I think this is primarily a problem for the export resources industry who can't get the volume of cheap raw materials out of the country fast enough... but thats another story.

So my point so far is that emergent protectionism could be seem to be implemented simply by placing physical limits in the way of imports. This would not stop the imports, just slow the flow.

Once you get past the border, there are other mechanisms that could be imposed... but currently are not.  Simply because all the ecconomic elements are so throughly decoupled.  We have vertically integrated business in retail that essentially own their whole supply chain from dock to shop and so are not subject to any choices that a sub-contractor might make.  But for a small business trying to get into a market, it would be possible for contractors ( such as freight haulers) to discriminate based on the origin on the product they are hauling... this is speculation because market forces and competition would simply kill that business.

Anyway, there are various points of protectionism... but the problem is that having a well developed ecconomy without much corruption and very little "Friction", lots of competition means that goods and equipment can get anywhere a customer exists to purchase them.  There are still costs... but it works.

The cost to the whole ecconomy is simply that we are being integrated into the Chinese ecconomy more and more.  However only the Australian component is heavily regulated, policed and "fair" while the rest is still a bit of a free for all as far as manufacturing/copyright/trademark etc, goes.  This is just a temporary (relativly speaking) imbalance between the two ecconomies that market forces will eventually balance out.

The question is how long will this balancing out take?  Will it be slow and gradual or quick and violent?  Its been quite destructive to the Australian ecconomy todate but thats due to the scale of the difference in the ecconomies.  Not only the size of the labour pool but the different in prices and relative cost of living levels of the players. 

I have always beleived that people and social groups can adapt (not always pleasantly) to slow change, but do not deal well with sudden shocks.  The biggest issue that I see is that this change has come within one generation.  The way our parents lived and the rhythms of their lives are significantly different to ours.  But within the Australian ecconomy the ecconomi coupling between the generations is still very stong.

The children need to pay the taxes so the elderly can live.  Houses need to be sold by the elderly and purchased by the young to transfer value for retirement, but at a rate sufficient to pay for the extended periods of retirement and standard of living that their social context dictates.

This was all systematically fine until the perfect storm of longer life spans, self funded superannuation, higher cost of living etc on the elderly end and a loss of manufacturing industry, reduced wages and casualisation across many other industries and a fungal growth in the cost of living for the young.

There are so many things in the ecconomy now that are just not viable.  For me, the cost of living and the cost of housing are just ridiculus.  Trying to look after a family and save some money is just unrealistic.  Both myself and my partner are essentially selling all our time simply to keep our heads above water while we paddle like crazy.  And whats the cost here?  Where have we take all that free time from?  Family, community and recreation.  So now all the community groups and volunteer organisations are dying off simply because they only attract the elderly who have time on their hands.  The last generation had latch-key kids who were the children of parents who worked... I think this generation will take that as far as it can go and still not find enough time to meet the demands of the system.   Looks pretty similar to the stories about manufacturing workers in China doesnt it.... work long hours and still not end up with any time or money left over...

This brings me back to protectionism.  The inequality between China and Australia has lots of geopolitical history and is not anything in particular.  You could equally look at inequality between any developed nation and emerging nation... or developed nation and completly un-developed nation.  The point is that once you join the two together with a trade infrastructure... then trade will happen.   And as that tade becomes more fluid and the "friction" on that tade is systematically reduced through better infrastructure, reduced legislative friction, better transport, labour availibility... etc (lots of little ways) then the trade will flow as fast as it can.

We can take the big picture view and see this as a good thing for humanity... but at the nation, state, region, local, neighbourhood and individual levels it means a massive amount of change and adaptation.  Niches that previously were pleasant and comfortable are drying up and being drained of resources... the value of houses and the infrastructure of life is changing quickly.  People are migrating and trying different things.  Change and uncertainty are in the air.... adapt or die.  State the obvious really.

As in any migration, its the elderly and the young who get picked off by the wolves....

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