Home > Aus Economy, Globalisation > The Resources Super Profits Tax and Decoupling: Is Australia Still Coupled to America?

The Resources Super Profits Tax and Decoupling: Is Australia Still Coupled to America?

The proposed Resources Super Profits Tax has consumed the nation. Most of the focus has been directed toward the affects, real or imagined, that the proposed tax would have on resource corporations.

Less critical attention has been devoted to the government’s proposals for how the proceeds of the tax are to be spent, critical to any moral arguments that invoke “mutual obligation,” and the underlying economic idea behind the whole thing. That idea is that we are about to have another commodity price driven resources boom, Boom Mark II, to match or even surpass the boom that we experienced in the noughties.

It’s assumed that Australia will benefit from a sustained boost to the terms of trade on the back of industrial production in China and India out to 2050, according to Ken Henry. The deputy head of the Reserve Bank, Phillip Lowe, argues that Australia is now “decoupled” from the United States. The old saying, when Wall Street sneezes Australia catches a cold, no longer applies. If America experiences a Japan style “lost decade” this won’t matter much. We’ll have China and India to save us. Lowe even is of the view that the Chinese and Indian booms have “decades to run.”

Decoupling is the critical idea underpinning the government’s economic strategy.

The RSPT is needed because we need to avoid all the problems associated with the “two speed” economy that we had during Resources Boom Mark I. For example, our resources were being exported to industry in China that was crowding out Australian manufactures in global markets.

Geelong and Elizabeth were losing because Tom Price and Broken Hill were winning.

Canberra, sensibly enough, wants to avoid such distorting effects during Resources Boom Mark II. The RSPT is a part of the government’s strategy to ease our way through the inevitable big boom.

Australia, however, has not decoupled from the United States. Despite the growing economies of China and India, what happens in America is still far more important for Australia. China and India are just transmission belts. The real game is still played in America.

I myself have been guilty of falling for the decoupling argument, but I see now that the case for decoupling was always pretty weak. Let me explain why.

Industrial production in Asia has depended upon exports to the United States and Europe, but especially to America. What has allowed this to happen is globalisation. Because of the globalisation of production industrial corporations have increasingly shifted factories, and even call centres, to low wage countries such as China and India. But, crucially, this is done with the objective of selling goods and services back to the US.

The strategy of export led industrialisation that the Asian based economies have pursued has thereby relied on demand from the US consumer.

The first resources boom, so the party line goes, happened because of the booming Chinese economy. On the face of it that’s true. But China was going gang busters because of the asset price bubble fuelled economic growth in the United States. Australia’s terms of trade was boosted, during Boom Mark I, by the US consumer purchasing cheap Chinese products. To export goods to the US market Chinese factories needed our raw materials. Even the construction boom in China, ultimately, owed its origins to America.

Our mining boom was therefore based in the United States, not China. But, one might well say, look at what has happened since. China has stayed up while the US went down. Commodity prices had picked up following big falls in 2008-2009. Australia has been riding on Red China’s back and thereby avoided recession.

It is true that China has been growing at an impressive click while the US has been stuck in the doldrums following the bust up on Wall Street and the collapse of the property bubble. However, when the crisis erupted on Wall Street in 2008 growth in China declined sharply. Since then the Chinese economy has picked up on the back of a massive fiscal stimulus, the ability of Chinese authorities to stimulate the economy by command rather than through indirect incentives and an asset price bubble, especially in the property sector, fuelled by cheap money.

In many respects this is similar to what has happened in Australia. We have avoided a recession because of the Rudd government’s stimulus spending and a deliberate strategy to prop up our own property market bubble.

However, the Chinese cannot stimulate their economy forever. In Australia we hope to keep the economy going by government stimulus until private demand picks up again. If it doesn’t then we are in trouble.

The same applies in China, except in this case Beijing is hoping that private demand from the US kick starts export led industrialisation again. If it doesn’t then China is in trouble. Likewise the property bubble in China has been stoking inflation. Beijing has moved to dampen the economy and global commodity prices have fallen in recent months as a result. Many analysts even go so far as to say that Resources Boom Mark II has now come to a close, well before 2050 it might be added.

The measures that Beijing has put in place since 2008 are temporary band aids. So long as China, and the rest of Asia, rely upon export led industrialisation then a stagnating US economy will prevent a long run resources boom in Australia. The debt crisis in the Euro zone does not help matters.

Should the US consumer continue to rely upon debt to fuel consumption, and the US financial system is not reformed to prevent further financial crises, then continued global economic instability will be difficult to avoid. This would prevent something akin to a multi decade long resources boom of the type commonly forecast to come about. We might add that US consumers now have little option but to deleverage. Cheap labour in China will dampen wages growth in America. There is something fundamentally amiss in the current makeup of the global economic order.

Australia would be truly decoupled from the US only if Asia proceeds to engage in regional integration, which is occurring to a limited extent, of the type gradually being implemented in Latin America and Beijing rejigs its economy towards domestic consumption. In the absence of these two changes Australia’s prospects will continue to be ultimately coupled to the economy of the United States.

The Rudd government’s economic strategy seems to be based on a complete misreading of the global economy and Australia’s role within it. Of course, this has no bearing on moral arguments for the resources tax which appear sound. When it comes to the poor “moral obligation” is accepted without demur. The rich insist, naturally enough given Adam Smith’s “vile maxim”, that they be exempt from mutual obligation.

Categories: Aus Economy, Globalisation
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