Thoughts on the Australian (and Canadian) election

It’s rather a strange coincidence that both Canada and Australia had elections in the last week. It provides a nice excuse to talk about the numerous parallels between the two countries, which apparently led to almost identical election results, with unexpected wins to the left-leaning parties. (The victory to Labor in Australia was not unexpected, although the magnitude of it certainly was).

Canada and Australia appear to be in some kind of competition to see who can blow the most insane real estate bubble. Those bubbles are in turn fuelled by unsustainable immigration, and yet the elites of both countries have zero intention of reducing the intake, with the entire subject of immigration rendered verboten in the public discourse. Both countries have hollowed-out manufacturing sectors and a heavy reliance on commodity exports to fund a decreasing standard of living. In short, both countries are on a road to nowhere and just had an election where neither party offered anything except more of the same.

To understand the current situation that Australia and Canada find themselves in, we need to zoom out. Let’s zoom all the way out to the 16th century, and let’s talk about the country that would eventually give rise to both Canada and Australia: England. At the start of the 16th century, England was a backwater whose economy was predicated on the commodity export of wool, which it traded primarily with the Benelux countries, whose wealth came from turning that wool into clothing.

The ruling class of England wanted a piece of the action and set about a long-term plan to develop their own clothing industry. This is what is known in the business world as vertical integration. Since the English owned the raw materials, they could cut out the middleman by developing the ability to manufacture the final product. That’s exactly what they eventually did. Once their domestic clothing industry was up and running, the English cut exports of wool to the Benelux countries.

This was an early example of using protectionism and other trade and economic measures to grow domestic industry. Since the technological improvements that came with the manufacturing of clothing led directly to the industrial revolution, it’s hard to understate how important this was to the later success of Britain and its evolution into an imperial power. Britain’s initial imperial success came from being an exporting powerhouse predicated on the innovations that came with a vibrant domestic manufacturing industry that had been deliberately nurtured into existence.

Fast forward to the 19th century, and there was a big policy shift in Britain towards what some historians have called the “imperialism of free trade”. Britain threw off its protectionism and ran an imperial policy based on control of trade and financial markets. At the same time that Britain decided to pursue free trade, there were two primary rivals emerging: the USA and Germany. Both of the latter countries had learned from Britain’s example and were using protectionist measures to provide a safe haven in which domestic industry could grow. In some sense, Britain was the beneficiary of that since its consumers received cheaper goods. But the tradeoff was the loss of domestic industry.

If all this is sounding very familiar, well, yes, it’s the same pattern the US has gone through in recent decades. But there’s one more parallel which is directly relevant to our time. Once the deleterious effects of free trade on domestic industry became impossible to ignore, some elites in Britain started to realise that a reversion back to the old paradigm was needed. Thus, by the early 1930s, Britain was once again pursuing protectionist policies alongside its two rivals, Germany and the USA.

However, the key point to understand is that the protectionism was not carried out at the national level but within three primary trading blocs. There was the British Empire. There was the German-dominated trading zone of central Europe. And there was the American zone that included South America and also Japan, the Philippines, etc.

Although Australia and Canada were nominally independent nations at that time, the reality is that we were very much a part of the British Empire, and trade and foreign policy were set in London for the most part. Thus, despite its proximity to the USA, Canada’s main trading partner at the start of WW2 was still Britain.

Heading into the war, the GDP of each of the three trading blocs was almost identical. If we think about it purely in terms of economics, let’s pretend Britain and the US stayed out of the fight. Germany would have united continental Europe into a trading bloc that very closely resembles the current EU. Setting aside the moral and political issues, that might have been a somewhat stable equilibrium, but there was a wild card in the pack.

Russia had made significant advances in industrial production in the 1930s. By the end of the decade it was, at least in terms of raw industrial output, comparable to the other three trading blocs. Germany’s breaking of the Molotov-Ribbentrop Pact was a game changer for a number of reasons, not the least of which is that it opened the possibility that not only would Europe be unified but that it would also incorporate Russia. That would have easily been the largest trading bloc in the world.

In summary, by the start of WW2, there were four primary economic blocs: the British Empire, the German Empire, the USSR, and the USA. Britain and Germany went to war, followed shortly thereafter by the USSR. The USA got to stay out of the fray. That was its first big advantage. Its second big advantage was that the British Empire was not what it used to be. All that free trade and hollowing out of domestic industry had left the British with reduced capacity to compete with the Germans in war production. The Americans agreed to supply the British firstly via the Cash and Carry mechanism and then, when all British gold had been transferred to Washington, via the Lend Lease program.

The result was that the British Empire was bankrupt by the end of the war. The German Empire was also finished. That just left the USSR, which had also accumulated large debts to the USA via Lend Lease but which decided simply to default on those and gobble up land in Eastern Europe, thereby ushering in the Cold War.

The upshot of all this is that both the British and German economic blocs were merged with the US bloc after the war, with the USSR creating its own bloc in eastern Europe while also attempting to expand into Asia. Since Canada and Australia were both members of the British Empire, our allegiance was transferred to the US by default. It’s important to understand that, even though this period was nominally a “decolonising” and “anti-imperial” time, in actual fact the USA had inherited the mechanism of imperialism that Britain had created, which is to say, domination through control of trade, financial networks and military alliances. For Australia and Canada, the transfer of power from Britain to the US was so subtle that few even noticed, although the arrival of Coca-Cola billboards and Hollywood films should have provided a clue.

In the decades immediately after WW2, most nations in the now US-led western trading bloc were allowed to run relatively protectionist economic policies, and these facilitated domestic industrial production during the post-war boom. That was all thrown away, however, with the collapse of the USSR and the neoliberal reforms of the 1980s and 90s, with markets opened up and manufacturing exported to China.

The whole thing looks a hell of a lot like the same blunder that Britain made back in the 19th century with its “imperialism of free trade”. Manufacturing in every western nation has been hollowed out in exchange for a “services-based economy”. The US Empire now runs almost exclusively on control of financial networks rather than on the production of goods and services. For its part, China has pursued exactly the same strategy that Britain, Germany, and the US once followed of nurturing domestic manufacturing through protectionist measures.

From the point of view of Australia and Canada, we’ve been through all this before. In the 1890s, there were enormous asset bubbles caused by British free trade and monetary policy. In the 1980s, the same thing happened under a similar set of policies pursued by the US. Logic says that the same thing should be about to happen, and Australia and Canada are in their familiar position of being pawns in a game over which we have little real control.

And that brings us back to the recent elections. On the surface of it, it’s quite incredible that the general public of Canada and Australia should so eagerly vote for more of the same given how fast our standard of living has slipped in recent years. But the reality is that the governments in our countries are not in control of the levers that could actually change the economic situation. The big decisions are now made in Washington D.C and Beijing.

Despite these similarities, there are several interesting differences between the status of Canada and Australia. Firstly, Canada’s economy is now completely dominated by the US. About 3/4 of Canadian trade is with its southern neighbour. By contrast, Australia trades little with the US, and we are relatively diversified compared to Canada, with China, Japan, and South Korea being large trading partners.

A second big difference is that Canada is being weaponised by China in its trade fight against the US, not to mention being used as a trading post for fentanyl distribution. Canada is kind of like that character who wanders in between the hero and the villain in a movie shoot-out.

Australia certainly benefits from our geographic distance. But we’ve been given much the same role as Canada in the imperial arrangements. Our job is to supply commodities and raw materials. The result is a hollowed-out economy that is apparently now entirely predicated on immigration, for which we simply cannot produce the housing stock, leading to a truly insane housing bubble that, if it were to crash, would make the 1890s look like a picnic.

Against this background, I suppose the recent election results in both countries make some sense. Neither party was promising any change to the status quo because neither country is in a position to make such a change. Both Canada and Australia are pawns in the larger power game going on between the US and China. In that sense, voting for the fluffy-cuddly leftist parties is the best bet since they are the ones who promise to keep you “safe” and “protected”, which in this case is code for protected against the economic machinations of global powers.