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Sending profits abroad is a good thing

Ideas@TheCentre – The CIS newsletter (Sydney), 1 July 2011

On Sunday, Senator Bob Brown was interviewed on ABC 1’s Insiders program. The Greens leader admitted that putting a price on carbon would ultimately mean shutting down the coal industry. But never mind, Brown explained. Since the big mining companies were largely ‘foreign-owned, multinational corporations,’ their profits would only ‘line the pockets of millionaires elsewhere in the world.’

Then on Wednesday, the Greens published a new report claiming that 83% of Australia’s mining industry was in fact foreign, and therefore, it should be taxed more heavily for the benefit of all Australians. So as it turns out, Brown wants to squeeze the mining industry financially before finishing it off to save the planet.

Brown’s argument about exporting Australian profits is not new. ‘Buy Australian’ campaigners also claim that purchasing goods only from Australian-owned companies keeps profits in Australia. They claim that every time you buy products of a foreign-owned company, the profits will somehow disappear from Australia and harm Australia’s prosperity.

It is amazing how easily people are convinced by this ‘sending profits abroad’ argument, when it is just a protectionist fallacy.

Let’s say the Australian branch of a US company is very profitable. What happens to these profits?

First, the profits might stay in Australia to expand the business of the US company, creating more jobs and extra economic activity here. Even ardent nationalists would find it hard to argue against this.

If the parent company however decided to transfer the profits from its Australian branch to America, it would soon find out that Australian dollars are pretty useless outside Australia and change them into US dollars.

But what happens to the Australian dollars? Since Australian dollars don’t buy anything abroad, they will return to Australia to buy Australian goods and services. Maybe a US company will use them buy Australian minerals. Perhaps US tourists will come here to spend their holidays. Or the US might import Australian-made cars.

In any case, Australian dollar profits transferred abroad return to Australia sooner rather than later because outside Australia, our dollars are just printed paper that will not get you a cup of coffee.

This is where the ‘Australian-owned’ argument falls to pieces. For Australia’s wealth and prosperity, it does not matter where the profits from Australian businesses end up. All that matters for the Australian economy is that Australia remains a place where business transactions take place – irrespective of who owns the business.

In Bob Brown’s Australia, national ownership matters more than creating domestic prosperity. For a party that on its website proclaims to ‘eliminate racism’ and promote ‘diversity,’ it is odd how these commitments do not extend to trading with foreigners.

Perhaps the Greens only like foreigners when they come as refugees, not as businesspeople.

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