The New Protectionism

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

Trade liberation has been the single most important factor in the unprecedented rate of economic growth experienced over much of the world over the last sixty years.

Australia is no exception.  While we pursued protectionist policies for much of our history, we began reducing trader barriers in the 1980s.  This change in policy has contributed greatly to our recent "miracle economy".

Nonetheless, protectionist tendencies run deep;  deeper than logic and the national interest.  This was illustrated last week by the reaction to a report that Telstra IT jobs were going to India.

IBM Australia has for six years had a contract with Telstra to provide a range of IT services.  It recently informed Telstra of a plan to contract-out about 500 software development jobs to India -- where its parent company has close ties and major investments.  Telstra readily agreed as it was a win--win arrangement.

IBM Australia benefits from the decision by the renewal of its contract.  Telstra shareholders, including taxpayers, benefit from lower costs and better services.  Likewise, telecommunication consumers benefit from lower costs and higher quality services.  Even Australian IT contractors at least do not lose, as the savings are such that IBM Australia plans use a portion to redeploy all 500 contractors to other tasks.

Telstra also faced a competitive imperative.  Its main competitor, Optus, contracted-out similar IT services years ago (in its case to China) and is reaping the benefits.

One would have expected a positive response from politicians.  After all, Australia is a large net beneficiary of offshore contracting of services.  McKinsey & Co estimates these gains at around US$400 million per year.  Offshore contracts play a critical role not only to the local IT industry but the pharmaceutical, education, engineering, hospitality, accounting and legal industries.  Our comparative advantage in trade in services has long been recognised by successive Australian governments and this has led them to push for further liberalisation.  More perversely, successive Australian Governments have identified India -- the country to which the jobs in question are going -- as a key potential market for Australian service exports.

There are other less tangible benefits flowing from the decision.  It will generate wealth and jobs for Indians in a far more effective manner than the $20 million in foreign aid Australia provides per year.  It will help develop a powerful constituency within India to free up its markets for services as well agricultural products.  It will also help develop links between Australian and Indian firms.  And one thing is clear:  the Indian IT industry will become a world force with or without Australian involvement.

Instead of support and leadership, our politicians criticised the decisions.  The Treasurer, Mr Costello, warned Telstra to ensure that jobs went to Australian first;  the Opposition Leader condemned the decision and blamed it on the lack of training and the Democrats demanded that government use their purchasing power to punish companies which out source jobs off-shore.

The fact is that trade in service will increase as a share of world trade and will become increasingly important to the success of Australian firms and the economy.

As such, it is the new frontier of trade debate and needs to be better addressed.

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