“The Sinews of Prosperity”

The Cherry-Price Lecture delivered by

The Honourable Joseph B Hockey

Australian Ambassador to the United States of

America

At Westminster College,

Fulton, Missouri

October 24, 2019

Thank you so much for the generous introduction Dr Lamkin. You have a

magnificent College here which has played an extraordinary role in modern

history.

I would like to give a shout out to my good friend Senator Roy Blunt.

I know he has other pressing duties tonight back in Washington DC but he is the

reason that I am here. He is an outstanding advocate for his beloved Missouri

and he is highly respected around the world.

Senator Blunt is a genuine American patriot. I consider him to represent the

very best of public service and I thank him, Abby and the family for all that

they have done for me here in the United States.

You have been as welcoming for me as you must have been for Winston

Churchill on the 5th of March in 1946 when he famously came to this College

and, after a generous introduction by President Truman, delivered a totemic

address titled the “Sinews of Peace”.

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It was a speech that reflected both Winston’s values and the enduring principles

held by many members of his extraordinary generation.

The “Iron Curtain” speech, as it became known, was delivered during a

troubling time for Churchill. He should have been euphoric and optimistic

following the defeat of fascism and his role in saving the world.

Alas, just a few months earlier, that imperfect system of democracy that

Churchill had saved in Britain, had thrown the great war time leader out of

office.

Freedom can be brutal. The British people feared that Mr Churchill could not

deliver the post war prosperity they needed and desired. They wanted a new

world order.

Today I would like to reflect on that new world order.

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Because I am a diplomat I will follow the traditions of this address, and will

speak candidly.

To “speak only for myself” as one famous speaker at this forum once said.

1. Our trading environment

It is self evident we are living in “anxious and baffling times”. It’s the term

Winston Churchill used to describe his world, seventy-three years ago. A world

that was beginning to live an uncertain peace with the darkening clouds of

communism on the horizon.

The West set up the new world economic order and the United States led the

debate.

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It began in 1944 at the Mt Washington Hotel in Bretton Woods, a small town in

New Hampshire. There, 44 countries signed an agreement that mapped out the

destiny of monetary policy, currency exchange and trade in the post war era.

It facilitated new trade architecture like the General Agreement on Tariffs and

Trade (GATT), which over time evolved to become the World Trade

Organization, which over 160 countries have joined. The United States was the

leader in designing the rules of this truly global trading system that all member

countries are expected to comply with.

That Bretton Woods Agreement delivered other game changing global

institutions such as the International Monetary Fund (IMF) and the World Bank,

which are both based in Washington D.C.

By having rules, we gained order and discipline that delivered business

certainty. That facilitated trade and prosperity.

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Combined with its system leadership over the last century, the United States has

been the most powerful trading nation on earth.

Whilst China recently overtook the US as the world’s largest exporter of goods,

the US is still the dominant global trader.

Trade represents close to 30% of the United States economy (GDP) and one in

five American jobs rely on trade.

When Winston Churchill stood here to deliver his speech, trade represented just

10% of the US economy and supported far fewer jobs than it does today.

Whilst global trade continues to grow in goods and services, that growth has

been at lower than forecast rates in recent years.

So now, more than ever, the United States should be leading the debate in

favour of free and fair trade. Tariffs should only be used as a very short term

tool to force a change in the behaviour of recalcitrant WTO members.

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The US of course was leading the charge to deliver the Trans Pacific

Partnership. It walked away from its own leadership but Australia and Japan

stepped up. The TPP11, which was meant to be 12, is in place and delivers

more and better access to markets for the 11 member countries, all US allies, in

the Indo-Pacific.

Similarly, the US should be knocking on the door of the Regional

Comprehensive Economic Partnership (RCEP) which is being negotiated by 16

countries in the Indo-Pacific including China and India, but not the United

States.

And the United States should have joined the Asian Infrastructure and

Investment Bank. Even though it was initiated by China, America and Japan let

themselves down by not joining the initiative that supports new infrastructure

across the Indo-Pacific. 74 countries have joined and 26 others are negotiating

to join. My signature as Treasurer was the first signature in the world on the

founding document.

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If you abdicate leadership you rarely get it back.

So the US must not allow itself to walk away from its trade leadership role

otherwise it will inevitably pay a very significant economic price.

And it’s American values that matter.

Western values won the “Cold War”. As time passed, it became obvious that

communism could not pay for itself.

The economic engine of socialism was running out of other people’s money and

disincentivizing innovation, which as we all know, spurs economic

improvement.

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2. Why free trade

Free trade represents the very best of western values.

Most people in our communities want to be in control of their own lives. They

desire a free and open society that facilitates the pursuit of happiness and a

better quality of life for future generations.

The benefits from trade are complex and dispersed. However, no one argues

that it fails to deliver an overall increase in prosperity.

Consumers and businesses get to purchase a wider variety of products at a

higher quality. They obtain more income from selling goods and services into

foreign markets.

From a government standpoint, trade is a gift, particularly for a small, open

economy like Australia. Australian consumers have access to better – and

better valued – goods and services than what we can produce in Australia alone.

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Buyers and sellers, consumers and producers, they all win because they get

what they want… If they didn’t win, they wouldn’t transact.

I have heard suggestions – and perhaps you have heard them too – that to “win”

in trade with another country, you need to sell more to them than you buy from

them – that is, that you should have a trade surplus. I disagree.

The argument put by protectionists in favour of tariffs and quotas is akin to

saying that instead of spending my time working for my employer I should

make my own food and sew my own clothes. Trust me, no one wants that.

It doesn’t make sense.

No one in a free market thinks twice about their personal trade deficit with the

supermarket, or the butcher or the baker – they just need to have more money

than they spend at the end of the day.

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Since Adam Smith and his logic of the baker and the butcher, we have accepted,

in free market economies, that the best allocation of resources is generally

through individuals specialising in their talents and applying their ability.

I don’t have time to get up and milk the cow, bake the bread, till the fields, build

my house, manufacture transport and so on.

Neither do economies. They specialise in what they excel in and trade the

surplus with others that specialise in different things.

I want my doctor to be the best doctor they can be. I don’t expect them to be

able to build my house. The same is true for international trade.

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Australia has a big trade deficit with the United States.

We are not complaining. In fact, we celebrate that your trading surplus has

increased from $10bn a year with Australia to $29bn a year since we signed a

free trade agreement with you 15 years ago.

Under the deal we get access to affordable goods and services that we couldn’t

get without the US, including the world’s best mining equipment and

agricultural equipment.

A great deal of that equipment comes from Missouri by the way – from

companies like Emerson Electric.

Through free trade, we also have deeper and more meaningful relationships

with other countries. It brings our nations, with differing cultures, closer

together. History proves that economic isolationism is a precursor for war.

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Australia has used trade to heal old wounds with Japan. It has used trade as a

way to build economic and people2people partnerships with China. Through

tourism and education services alone, the interactions between China and

Australia are deep and enduring.

We also happen to have a huge trade surplus with China. They currently need

our resources. And we can only extract those resources with the help of

American investment and equipment.

Australia, like the United States, is a rich nation because whatever it doesn’t

consume, it then sells around the world. And both nations are blessed with

plenty.

We both have abundant resources and energy. We produce more food than we

consume, and those sales help us to deliver to our people the health, education

and security services we desire.

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We also have amazing innovation that can facilitate a better quality of life for

billions of people around the world.

Australia, of course is just 26 million people on an island the size of the

continental United States. We haven’t a ready made consumer class of 340

million people to buy everything we make. So we must export.

Of course, free trade can be contentious. In my country it enjoys bi-partisan

support. It doesn’t stop the critics though.

They usually come out to argue for special favours for particular industries that

other hardworking Australians are expected to pay for. The critics trade on

sentimentality and fear, rather than hope and opportunity.

The sensible middle ground of society understands that when we trade freely

with other nations, our nation gets richer.

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Protectionism discourages growth and rewards mediocrity.

Consumers pay more for the average, rather than less for the best.

To be the best in the world you need the best inputs in the world.

A Boeing 787 Dreamliner assembled in the US has around 2.3 million parts.

These 2.3 million parts are supplied by over 20,000 companies – in the US and

across the globe, including firms in Australia. More than 150 countries feed

into Boeing’s massive supply chain. And, because Boeing planes are

manufactured in the US, those globally-sourced inputs support America’s

manufacturing base. Indeed, 80% of current orders with Boeing are for

international customers.

So Boeing’s parts imports supports its exports.

The United States is the most innovative nation on earth but, like every market

leader, it will be beaten if it thinks it can do it all on its own.

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Sooner or later the remaining 95% of the world population that lives outside the

United States will catch up!

But as the competition increases we need firm rules for the system. And those

rules must be enforced to protect free and fair trade.

3. Trade as a tool

Isolating an economy from trade and commerce with other countries is a

political tool that should be used very cautiously. If a nation becomes

economically isolated then history proves it can end up accelerating domestic

nationalism fuelling outward facing aggression.

If unilateral tariffs and quotas are used to punish bad behaviour, then you need

to make sure that the message is getting through to the culprits and that a

pathway to rejoin the world economy is crystal clear.

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President Trump is deploying all the tools he can to get a fairer global trading

system for the United States. I understand the reasons for his frustrations.

Australia supports both free and fair trade.

But these types of measures are not a sustainable long term solution. Through

tariffs and quotas, big government becomes bigger. Government controls prices.

Government controls access to goods.

Let’s be really clear. Tariffs are taxes imposed by governments on their own

people. Quotas are access limits placed by governments on their own people.

If citizens of other countries don’t have the same restrictions, they win.

In the 21st century, the consumer demands sovereignty. And consumer

sovereignty is powered by the free flow of goods and services around the world.

The end game must always be a free and fair global trading system.

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Every major credible economic analysis proves that getting more free and fair

trade across the world lifts prosperity and delivers people out of poverty.

The formula for trade-driven prosperity is not complicated.

We believe in the importance of markets in setting prices and in the rule of law

and proper enforcement of those laws. We believe in the free movement of

capital, goods and ideas, as well as rewards based on the effort and ingenuity of

hard-working, creative individuals.

These are the foundations of the free market.

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4. The United States and Free Trade

The United States is a great trading nation. It has to be, given it is home to less

than 5 per cent of the global population but is responsible for 18 per cent of

global manufacturing and over 15 per cent of the world’s economy.

You are still the world’s largest economy.

Your dollar is the world’s reserve currency.

Your capital markets are the engine room for global commerce.

So I find the debate here in the United States on free and fair trade rather

baffling.

Being open to the world made America great in the first place. It will keep you

great.

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It was American exceptionalism that helped make today’s consumer sovereign

in the market place.

Ironically, standing up for free trade can feel unpopular in the United States

when measured against elite commentary. However, opinion polling shows that

general population support for free trade has never been higher. Americans

don’t want to pay more and end up getting inferior goods and services.

And Americans know that free trade is a crucial part of the modern American

success story.

From the internet to pharmaceuticals to entertainment, American innovation has

been shared with the world and, by doing so, it has made Americans richer.

Trade is a big win for America.

That win is reflected in many ways.

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You could go to any country in the world and the people would be able to name

you twenty or thirty US companies that have changed the world – such as

Apple, Facebook, Microsoft, Ford, Pfizer, CNN, YouTube, Cargill, General

Motors, Disney, Morgan Stanley, FedEx and we can go on and on. Even

Missouri locals like Hallmark and H & R Block.

For all other countries, you would fail the same test.

It gives Americans global reach and breadth that others don’t have.

The US is the world’s largest exporter of services, an area which will dominate

future growth of the world economy.

US Services exports were worth USD 830 billion in 2018 - more than double

the exports of the United Kingdom, which is the world’s second largest services

exporter.

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5. How the United States wins on free trade

US service providers have transformed and are transforming the world from the

way we share moments with our friends and family, to the way we use

information to be more efficient; to the drugs we use for new diseases when our

loved ones are sick; to making us laugh and changing the way we shop. This

makes America great.

The US is also the world’s second largest exporter of goods, with exports worth

well over USD 1.6 trillion in 2018. American exports approximately the same

amount of goods as the combined exports of Japan, South Korea and France.

Whilst there are important stories about the decline of manufacturing in the

United States this statistic on the size of US manufacturing is worth dwelling

on. The US manufactures and exports goods that are worth more than the entire

economy of Mexico or Spain or Indonesia.

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Every country goes through a level of pain when its manufacturing base

changes as a result of new technology, new markets and cost adjustments.

Workers naturally want higher wages. Even China, which lost 19 million

manufacturing jobs in the late 1990s, now has a push for higher wages that

requires either new technologies or manufacturing plants to move to near

neighbours like Vietnam.

Governments try and inevitably fail to manipulate an outcome that preserves the

status quo.

Subsidies are often used to bolster inefficient industries for political gain. Of

course, governments have a responsibility to do all they can to help industries

through tough unforeseen events like drought, trade wars and economic

downturn.

But subsidies that become permanent undermine free trade.

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For example China is the biggest steel producer in the world.

In 2016, in response to claims of overcapacity, China closed some of its steel

production. The production it idled was equivalent to the combined production

of all North American steel plants that year.

The dislocation within China has been enormous. And I acknowledge that

dislocation comes with pain – particularly for newly unemployed workers.

But China’s other responses to its own excess production have been

disappointing.

Even though most of China’s steel production is consumed within China, they

have also chosen to sell their heavily discounted steel into other countries. This

has caused global price depression, putting at risk the survival of steel plants –

and livelihoods of their workers – in the US Midwest, in Australia and

elsewhere. Not because our steel plants are less efficient but simply because the

competition – plants in China – are being unfairly subsidized.

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Australia currently has anti-dumping and countervailing duties in place against

imports of 17 products from China. The countervailing duties are specifically

designed to offset the subsidies provided to Chinese producers.

But the current WTO rules on subsidies do not go far enough. New rules are

needed to level the playing field. This is one of the many areas on which

Australia and the United States agree.

Like the President, we want new rules on industrial subsidies and state owned

enterprises. Just last month, speaking to the Chicago Council on Global Affairs,

the Australian Prime Minister said that “global trade rules are no longer fit for

purpose”; that the rules are not comprehensive enough.

Some say it’s too hard to get new rules. But new rules shouldn’t be seen as

impossible. The global trading system has been in a constant state of negotiation

since 1944 and major trade rounds which changed the rules occurred every ten

years or so for the last 60 years.

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As Prime Minister Morrison said in Chicago,

the world has just reached a change point, that’s all. There’s no need to

catastrophise it, there’s a need to understand it to adjust the institutions

and the rules to accommodate it.

There’s no need to engage in a heavily polarised debate on this issue,

there’s a much more practical issue at the heart of all this and we just

have to reset to ensure that we can provide the same peace and stability

and prosperity that will last.

So we need to keep working at improving the system rather than destroying the

legacy. Otherwise the critics will win. And we will all be worse off.

Too often, the critics get away with blaming trade liberalisation for job losses

and plant closures.

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But we know – and much has been written about this – that most of the job

losses are best attributed to the rise of automation in assembly lines.

Technological development.

Competition that comes from trade plays a role, especially where foreign

competitors get a “leg up” from production distorting government subsidies.

But it is not the major cause.

By mischaracterising the problem, we risk being blind to the solution.

Unfortunately, defenders of ‘free trade’ try to justify job losses by pointing to

parallel growth in the services sector. But it ignores the fact that a retrenched

factory worker in Ohio may not be qualified to be a computer programmer in

Austin, Texas.

There is an overdue debate to be had globally about worker reskilling,

particularly in the wake of greater life expectancy.

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In the meantime, we should not give up on particular industries. Nor should we

be rusted on to a static vision of what a particular industry looks like.

Some paint a picture of doom and gloom about US manufacturing and the

trajectory it was on before a range of new duties were imposed on certain

foreign goods.

But, in fact, US manufacturing activity has actually steadily increased since

World War II.

The US now produces more than it ever has before in manufacturing. It has

done this with relatively low levels of tariff protection. And it has done this

despite the rise of China, Latin America and South East Asia as major

manufacturing hubs.

The same is true for farming.

The US is also the world’s largest exporter of agricultural products.

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One in five farmers in the US would be forced off the farm if it wasn’t for trade.

That number is much higher for some products grown here in Missouri such as

soybeans with close to 50% of production being exported.

Other US farmers in cotton, rice and wheat, export up to 70% of their

production.

Farming is iconic in Australia and the United States.

Combined our farmers are not only the best and most productive in the world,

they are also great innovators.

A good farmer is also the very best environmentalist in our community.

So making a go of the land is part of the make up of our countries.

Nothing better illustrates the benefits of free trade than modern agriculture.

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The US and the European Union used to be the largest consumer markets for

many agricultural products. That is no longer the case.

21% of all wheat consumed in the world is eaten in China. Similarly 30% of all

rice and half of all pork in the world is consumed within China.

Farmers here in the United States and in Australia have prospered as China’s

middle class has grown and its demand for food has increased. This will

similarly be the case as economies improve in India, Indonesia, Vietnam and

other parts of Asia.

Over the next century the emergence of a massive middle class in Africa will

further increase demand for our agricultural goods.

And today prices for basic agricultural commodities in China are much higher

than most global benchmarks.

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This is due in part to demand but also because of the market price support

programs China runs for certain agricultural commodities, which inflate prices,

spurring production and sucking in imports from global markets.

As I have said before, these subsidies don’t work over the long term. These

programs depress international prices for these commodities.

Global prices for wheat, rice and corn are now set by Beijing and New Delhi.

The Chicago Futures Exchange used to be the benchmark price for most

agricultural commodities traded on global markets, but now prices for wheat

and rice usually include the reference prices set by the Chinese or Indian

Governments.

The Chinese Government also distorts trade in key agricultural commodities

through its subsidy programs. China spends more on trade distorting subsidies

for wheat alone than what the United States spends on trade distorting subsidies

for all agricultural products combined.

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The US Farm Bill, once the biggest ire of agricultural exporters such as

Australia for its trade distorting subsidies has increasingly become a

compensatory measure for policy decisions taken by Beijing and New Delhi.

Don’t get me wrong, Australia is no fan of some parts of the US Farm Bill. The

sugar program (and a few others) are still incredibly trade distorting. And we

aren’t going to stop calling those programs out - just don’t tell my South Florida

sugarcane or Minnesota sugar beet friends. However, US trade distorting

subsidies for agricultural products pale in comparison to the policies being

enacted in Beijing, New Delhi and historically across the European Union.

There are just two countries in the world that have taken a stand against these

new challenges. They are the United States, which took a WTO case against

China for its subsidies on wheat, rice and corn; and Australia, which has

brought a WTO case against India’s sugar subsidies.

Some have suggested we should go as far as stopping trade with those countries

that break the rules by unfairly subsidising, but to stop trading with China or

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India is actually the worst possible policy response we can have to the question

of subsidies.

Trade is actually the most logical response to the issue of subsidies in

agriculture in China.

Chinese subsidies keep prices high within China, which means that every

American and Australian bushel of wheat sold within China is being subsidized

by the Chinese Government.

If we don’t trade with China, those subsidies go to Chinese farmers alone. If we

do trade, our farmers benefit from higher margins.

While our farmers benefit from much higher prices within China, China’s

subsidies are distorting global prices and creating uncertainty in global markets.

We need to encourage China to move to more sustainable programs that have a

less distortionary effect.

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This is a well-worn path: Europe and the US for a long time pursued similar

market price programs before moving to more efficient, less trade distorting

forms of subsidies that didn’t have the impact of subsidising imports from other

countries.

6. Conclusion

When Winston Churchill declared in this place that “From Stettin in the Baltic

to Trieste in the Adriatic, an Iron Curtain has descended across the continent”

he used powerful symbolism to convey his message.

In many ways, free trade has failed to paint the picture of prosperity. How can

you compete with Billy Joel who in 1982 wrote Allentown, a song about a steel

mill closing in Pennsylvania.

And how do you address the visual of an out of work mining family or a farmer

burying their worthless crop?

There are great personal costs associated with all change.

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It certainly doesn’t help when new age billionaires flaunt the wealth they have

created from new industries that have cost other people their jobs.

But to win the hearts and minds of our communities we must never hide the

truth.

The facts are that we have a better quality of life today then that of our parents.

We live longer and we have better quality medicine, education, transportation

and communications.

We live in a safer world and more prosperous world.

There is still much work to be done to improve our environment and provide

more equality of opportunity.

But without prosperity nothing is achievable.

And to achieve prosperity we need free and fair global trade.

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