Passage of the farm bill elicited little public attention in the United States. Not so in Australia, where I was a guest of the Australian government when President Bush signed it on May 13. There, the commentary and public reaction were extensive. One would have thought that the legislation was directed solely at destroying Australian agriculture.
Australians viewed the farm bill harshly because the United States is both the world's largest producer of agricultural products and the largest market for them. Hence, what happens here affects farmers everywhere. When we subsidize ours, we allow them to sell their produce at prices lower than those in unsubsidized markets. This drives down the world market price for subsidized commodities and thereby hurts farmers in places like Australia.
Australians may be taking the farm bill's impact on them a bit too personally, but they have a point: Subsidizing agriculture (or any industry) is a bad idea. It is an indirect form of trade protection, since foreign producers cannot match the subsidized price. Ultimately, it hurts domestic producers the same way that direct protection, such as tariffs and quotas, does.
Australia knows this lesson well because for 70 years it had one of the most protected markets on earth. From independence at the turn of the century, it had very high tariffs and stringent quotas on almost all manufactured goods. Australia shifted in 1973 not due to external pressure, but because virtually all segments of society came to see protection as impoverishing the nation. It allowed Australian manufacturers to avoid international competition, and bred high production costs, inferior quality and low productivity, which ultimately led to lower living standards.
In 1913, Australia was one of the wealthiest countries on earth, with real per capita GDP of $5,715. This was higher than every country in Europe and well above the United States, which had a per capita GDP of $5,301, according to economist Angus Maddison. By 1973, however, as the result of trade protection, Australia's per capita GDP had fallen relatively sharply. Although it had risen to $12,759, other countries did far better. Per capita GDP in the United States rose to $16,689, and many European countries also now had higher incomes than Australians.
In the 1960s, a bipartisan consensus began to develop in Australia that protection had to go. Beginning in 1973 and carried forward during the 1980s and 1990s by both the left-wing Labor Party and right-wing Liberal Party, Australia embarked on one of the most significant unilateral trade liberalization programs in history. Tariffs were slashed, quotas abolished and other restrictions on imports scaled back.
Opening of the trade sector was accompanied by the elimination of exchange controls, easing of investment barriers, privatization of industry, deregulation and floating of the Australian dollar. This last move is sometimes objected to by free market economists, but it was important to opening the Australian economy. Previously, the Australian dollar had been deliberately overvalued, which acted as a de facto tariff.
Because of these reforms, Australian industry underwent massive restructuring. Fat and waste were ruthlessly purged, leading to increased productivity and economic growth. In recent years, Australia has had one of the highest productivity growth rates on earth.
Now, having endured the pain of restructuring, which caused many businesses to close and many jobs to be lost, Australia feels betrayed. It made its industry, including agriculture, world-class just so it could compete in a world of free trade. But its biggest customer -- the United States -- wants to go back to the old protectionist ways. It slapped tariffs on foreign steel and reinstated massive farm subsidies just when world trade talks were supposed to lead to their elimination.
There are many reasons why the farm bill stinks. But its impact on trade policy may be its worst consequence. Without the support of free traders like Australia, the United States cannot hope to accomplish any significant breakdown of trade barriers in the upcoming Doha Round of trade talks. But Australia now feels that the U.S. trade policy is being driven entirely by short-term domestic political considerations.
The United States still has a long way to go before it gets to where the Australians were before 1973, but it is moving in the wrong direction. The farm bill, steel tariffs and other protectionist policies of the Bush administration now virtually guarantee that no meaningful reduction in world trade barriers will come from the World Trade Organization conference in Doha, Qatar. That's a heavy price to pay for a few Republican congressional seats.