Category: Experience
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Big retailers have started a campaign against the five-year-old $1000 personal import allowance. The model for the campaign is the mining industry's campaign against the resource tax proposal of the Rudd cabinet. The miners convinced Australians that a tax increase would harm jobs and investments. The retailers are now trying to convince us of the opposite: that the only way to save jobs is a tax increase. This is an economic fallacy simply wrong.

There are so many ways to show why the incumbent retailers' argument is false. I'm almost paralysed by choice. Firstly, we can appeal to common sense. Imagine that the domestic travel industry complained that the strong Australian dollar was hurting tourism, and lobbied the government to impose GST on every dollar spent on a foreign holiday.

Or we can try some logic. If the retailers are worried about jobs, all they need to do is make sure they don't sack anyone as they lose sales to cheaper competition. But it's not jobs they are worried about, it's profits. Their profits. First, let's take this campaign as an attack on consumers importing from overseas (because the savings to consumers are much more than 10%, so if the big retailers win round one, they will presumably keep going).

This is a market economy and companies should make profits. We could make sure the retailers have big fat profits by putting tariffs on overseas imports. After all, if we can save jobs by putting a 10% tax on imports below $1000, imagine how many jobs we could create if we went further, and put a 50% tax on imports. This is protectionism, and it makes us overall poorer (although some shareholders benefit a lot). For example, we could rebuild an Australian car industry by reimposing tariffs on foreign cars. In such a scenario, Australian car makers don't have much incentive to make their cars cheaper. As foreign cars continue to improve, we keep increasing tariffs until we get to the point where we have to impose a 100% tariff on foreign cars to force enough Australians to buy the local product (and since overseas countries don't apply a 100% tax to non-Australian cars, there is no chance of exporting locally made cars). Younger readers may not realise that this fantastic story actually happened.

The management of the large retailers have shareholders, and they have a duty to act in the interest of the shareholders. Online retail is a threat to the value of traditional retailers, so management has a responsibility to do whatever it can to minimise the threat. I think it is legitimate to lobby for your own interests.

In fact, it reminds me of an earlier campaign by anther group of retailers: the campaign by small retailers against weekend trading all those years ago (unless you live in Perth, where there is still no extended-hours trading). The small retailers said that extended hours would hurt them badly, because they would lose business to the large retailers, and that therefore jobs would be lost. Bad for them became bad for the economy. They wanted a continuation of traditional Monday to Friday 9am to 5pm hours. Logically, if allowing shops to trade on Saturday and Sunday kills jobs, then obviously more trading hours is bad for the economy. If more hours are bad, then fewer hours must be better. So the small retailers should have campaigned for even more restricted hours. They should have campaigned that shops could only open at Monday lunchtime. What a boost to the economy that would be! In fact, extended hours makes shopping cheaper because it allows more efficient use of fixed costs like rent, which are the same regardless of how many hours the doors are open.

Now, for a slightly more serious treatment of online retail. I want to buy a computer for my small business. Imagine that I have $1000 to spend. I earned this by selling coal overseas. I can go to a retailer called HN, and give my $1000 to Gerry, the man who owns the shop. He pays $500 for the computer to be sent from the Chinese supplier to his shop, $100 GST, $300 for one day's wages of the person who works in his shop, and keeps $100 of my money as his profit. He's pretty happy about this.

But now I can buy the same computer overseas and have it shipped to me for $600 (I pay more since I don't have the buying power of HN, which buys a lot of computers). Everyone does the same. so the employee is sacked, he doesn't get his $300, Gerry doesn't get his $100, and the government doesn't get the $100 GST. But I still have $400 in my pocket.

Clearly, there are winners and losers. But this doesn't mean that overall Australia is better off. I'm going to ignore Gerry's profit; I don't think there is any good argument that says he should have my money instead of me. I'm also going to ignore the lost tax, because I'm going to assume that that the government compensates by increasing my income tax, or by raising the GST rate for the products I buy in Australia (like my haircuts, which I can't import). It doesn't make any difference to me; I still pay the same amount of tax. The employee needs consideration, though. This is a lost job, and that hurts a real person.

To run some numbers: Firstly, this is a very simple exercise, which exaggerates. However, the exaggeration was started by the large retailers (up to 30000 jobs lost). Think of this as the worst case scenario.

I earned $1000 in real money by exporting something. Buying online, my $1000 shipment of coal translates into one computer and $400 left over. This must be a better outcome than buying from HN; paying $400 more to get the computer via Gerry adds no value; there is nothing to show for it. Of course, I'm not the only consumer buying computers. Gerry and his employee can sell one computer every ten minutes for eight hours a day (between them), so they were selling 48 computers a day (in reality they sell a mix of things, not just computers). They completely lose this business, but that means overall Australians who earn real money have 48* $400 extra in their pockets. That's $19,200. All of a sudden, the lost wages of $300 looks like a small deal. With $19,200 of new money to spend, many more jobs will be created. This is the story of economic progress. Competition and progress means we pay less today than the same thing cost yesterday because someone worked out a way to make it cheaper, and we spend the left-over money on new things. Our houses get bigger, we have smoked salmon in our salad, there's ten types of lettuce in the supermarket, and so on. This means that the blacksmiths, typists and people who clean the stables lose their jobs, yet we have 5% unemployment and higher wages than ever (some people get new jobs, others we should invest in retraining). This system really works, as long as we don't break it by stopping competition.

Another thing to consider is that in other countries which are ahead of us in moving to online retail, people are already getting these savings. If putting computers into small businesses improves productivity, then we definitely don't want to be forcing our small businesses to be buying fewer computers because they cost more. Or for our schools to be buying fewer pieces of equipment for science experiments, our children to be buying fewer books, etc etc.

I also note one more point. In 2009, the Rudd government partly excused its disgraceful decision to keep local books very expensive (see 1 ) because people could import much cheaper books from overseas (too bad for the book retailers, who are stuck selling over-priced books to those who haven't discovered the internet). This is an odd argument: we're going to keep restrictive rules in place, despite years of consistent advice from the Productivity Commission to remove the restrictions, because online retail is making our restrictions irrelevant.

“In the circumstances of intense competition from online books and e-books, the Government judged that changing the regulations governing book imports is unlikely to have any material effect on the availability of books in Australia,” Dr Emerson said. (2)