THERE is a famous saying attributed to the nineteenth century French economist Frederic Bastiat, “When goods don't cross borders, armies will.” What it means is that the best way to avoid conflict is through trade. Trade leads to prosperity and, as war is profoundly disruptive of trade, nations are rarely keen to harm their own interests.
A good illustration of the truth of this is Japan’s invasion of south-east Asia in 1941, which was largely prompted by a shortage of oil due to an embargo imposed in response to its invasion of China and Indo-China. While the embargo may have been justified on other grounds, it meant there was no trade to be harmed.
The saying came to mind in the context of a recent report from the Economic Intelligence Unit of the Economist, entitled Feeding Asia Pacific: Australia’s role in regional food security, sponsored by Du Pont. It makes the point that Asian countries seeking food security will not pursue self-sufficiency as their first choice. Food security through trade is what they prefer. But if that proves difficult, they will attempt to achieve it through self-sufficiency. And even if they fail, trade will be substantially reduced by their efforts.
A good illustration of this in practice can be seen in Indonesia’s response to Australia’s ban on the export of live cattle by the previous government. Up until the ban, Indonesia had regarded Australia as a close, reliable supplier of beef and therefore integral to its food security. The ban undermined that confidence and prompted the Indonesian government to limit imports and support local producers in an effort to achieve self-sufficiency. These efforts continued even after our government had allowed exports to recommence.
Indonesia has a population of 250 million people, overwhelmingly Muslim. On simple fundamentals, it is very much in our national interest to trade with it. Not only does it contribute to prosperity in both countries, but goods need to cross borders.
But this is also true of China, India and a host of other countries in our region, most of which are either not currently self-sufficient in food or are facing a loss of self-sufficiency. They are therefore considering how to guarantee their people have enough to eat, asking themselves whether they need to produce it ourselves or rely on countries, like Australia, that have a surplus.
The report suggests that food self-sufficiency is forecast to fall considerably by 2030 in China (from 97 per cent to 87pc) and South Asia (from 100pc to 95pc). Contributing to that, real per capita food consumption is forecast to increase by 79pc between 2007 and 2030 for developing countries as a group, and to more than double in China and South Asia.
Thus the priority for Australia must be to ensure we are seen as such a reliable supplier of food that there is no need for their governments to engage in protection of domestic producers and subsidies to stimulate local output.
Signs to date are not encouraging. Nominal rates of government assistance to farmers via trade barriers and input subsidies in China, India and Indonesia have risen from around zero in the later 1990s to more than the average for high-income countries currently, the report notes.
Such measures cause various problems. Apart from their price-distorting impact, they reduce national income and hence the capacity to import food.
A far more positive outcome would be seen if these countries invested the same funds in research and development aimed at lifting agricultural productivity. With the exception of Thailand and Malaysia, all of them are investing at well below international standards.
Increases in productivity offer the opportunity to not only increase agricultural self-sufficiency, but to also raise overall levels of both farm production and national economic welfare. That is, increases in import restrictions reduce real GDP, but an increase in agricultural productivity would raise it.
Australia’s capacity to respond to growing demand in Asia is considerable, but there is no guarantee we will benefit even if Asian countries opt for trade. In addition to droughts and floods, we are subject to variables such as a currency driven by other sectors of the economy (especially minerals) and the diversion of food into biofuels.
We are also subject to a declining rate of growth in agricultural productivity, which some attribute to a lack of R&D of our own. Consistent with that, for various reasons our agriculture sector has been slow to embrace productivity-enhancing technology, preferring to focus more on issues affecting “sustainability”.
Governments can be of assistance, the report argues, by helping gain access to export markets, if necessary by opening our markets to foreign manufactures, by encouraging foreign investment in Australian farms and agribusinesses so food-importing countries feel it is unnecessary to pursue food self-sufficiency policies, by encouraging infrastructure investment (eg storage and transport) to lower trade costs along the food-value chain, and of course by encouraging more investment in agricultural and food processing R&D.
The opportunity to contribute to a peaceful future based by trade, at the same time boosting prosperity for ourselves and our neighbours, should not be underestimated. Let’s hope we don’t miss it.