The New Protectionism

One of the largest threats confronting the world today is the rise of protectionism.

This threat is real and its new face highlighted last week by reaction to Telstra's (or rather its contractor, IBM Australia), decisions to contract-out IT jobs to India.

While reports of rising protectionism in Australia have focused on such things as steel import quotas and agricultural subsidies, the focus in the US has actually been more on the loss of IT and other service jobs to off-shore operations -- known as "offshoring".

Indeed fear of off-shoring has led to five US states proposing legislation to prohibit or severely restrict the state governments from contracting with firms that contract-out services to low-wage developing countries.  The US union movement has also been actively lobbying Congress against off-shoring.

There is no doubt that off-shoring is a significant and growing phenomenon in the US.  Forrester, a leading IT consultancy firm, predicts that nearly 500,000 IT jobs will be moved offshore from the US over the next twelve years.  While this represents a small number of total US jobs, it represents 8 per cent of current IT jobs.

That similar concerns exist in Australia is much harder to understand.  While the US is a net exporter of off-shoring jobs, Australia is a large net beneficiary of off-shoring.  McKinsey & Co estimates that Australia benefits from off-shoring to the tune of US$400 million per year.  Moreover, our comparative advantage in trade in services has long been recognised by successive Australian Governments and this has led them to push for the liberation to trade in services.  More perversely, successive Australian Governments have identified India -- the country to which the Telstra IT jobs are going -- as a prime potential market for Australian service exports.

While the debate about trade in services is in many ways identical to that of trade in goods, it has some different aspects which make it both more difficult and important to advance.

Protectionism is based fundamentally on the notion that trade is a zero-sum game.  Of course, in reality, trade is win--win, at least when viewed from an economy-wide perspective.  This is illustrated nicely by Telstra's off-shoring decisions.  The facts are that Telstra's contractor of many years, IBM Australia, has decided to shift 500 software development jobs to India.  It did so to save costs, to access higher skills and to provide a greater range of services to it client.  IBM Australia benefits from the transaction by the renewal of its contract.  Telstra shareholders, including taxpayers, benefit from the ability of the Telstra to match it major competitor, Optus, which has off-shored similar services, and to generate profit.  Telecommunication consumers benefit from lower costs and higher quality services.  Australian IT contractors benefit from use of some of the saving to create new domestic jobs.

There are benefits from this decision.  First, it generates wealth and jobs for Indians, in a far more effective manner than the $20 million in foreign aid that Australia provides to that country annually.  Second it will help develop a powerful constituency within India to free up its markets for services as wells as goods.  Finally, it helps develop links between Australian firms and Indian firms.  And one thing is clear:  the Indian IT industry will become a world force, with or without Australian involvement.

Trade in services, however, has characteristics which make trade liberation more difficult (though there are major exceptions).  First, many service sectors have until now not been subject to foreign competition -- at least not directly.  Thus the idea is new and the new is often threatening.  Second, the service sector accounts for most existing and virtually all new jobs in Australian.  Thus the number of people affected by trade in services will potentially be much larger than for trade in goods.  Third, service providers are generally more affluent and articulate than farmers and manufacturers.  Fourth, the union movement has identified trade in services, particularly IT services, as fertile ground for its own renewal.  Little wonder that the union movement was the chief propagator of the recent Telstra off-shoring scare.

Finally, politicians are, with few exceptions, latently protectionist, seeking to use the power of the state to provide special favours and protection from the "outside".  This is particularly the case when it affects them and their own constituency, which in turn largely comprises service providers.  Hence we were subject to the absurd spectacle of all major parties chastising Telstra for doing what all governments have long advocated -- competing on a world stage and creating value for shareholders and the economy.

All is not gloomy, many parts of the service sector, most importantly the IT industry, have a global, competitive culture.  More importantly still, technology is likely to thwart any efforts to stop trade in IT services.  The culture of the contractor in the service sector will also limit the influence of unions.

Nonetheless, services are likely to be the next battle ground for free trade.

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