Dale Boccabella

There is currently a review of the way discretionary trusts have become all pervasive in Australia. And yet it is clear they will grow in number.

Discretionary trusts are a category of trusts. A trust involves a relationship whereby a trustee holds property or conducts a business for the benefit of beneficiaries. They are an alternate business or investment vehicle to the company, partnership or fixed trust.

In addition to discretionary trusts being set up by living persons (principals), it has become common practice for many assets passing on death to be housed within a discretionary trust (testamentary trusts/discretionary will trusts). And, wealth that will pass to future generations in Australia over the next 20-years or so will be unprecedented.

So what makes discretionary trusts popular? To answer this we need some understanding of this “entity”. It is a trust. But unlike many other trusts (e.g. listed property trusts, listed share trusts), the potential beneficiaries do not have fixed entitlements to capital or income. Whether a beneficiary gets a distribution of capital or income is at the discretion of the trustee (legal owner of trust property) and/or those behind the trust. Accordingly, a beneficiary does not legally own anything until the trustee decides to make them a distribution.

The trustee is the legal owner of trust property, but trust property does not belong [beneficially] to the trustee. The trustee is often a “$2 company”. A $2 company means that the share capital subscribed by shareholders for shares is only $2. Often, trust property will have been transferred to the trust for no money by the people behind the trust (usually Mum and Dad). These people are likely to be potential beneficiaries along with the children, and a family company.

As well as being the only shareholders in the $2 trustee company, Mum and Dad may also be the appointers of the trust. Appointers have power to remove a trustee if they are not satisfied with the way the trustee is exercising his/her/its discretion.

What flows from all this?

First, assets held within a discretionary trust are generally beyond the reach of creditors of the beneficiaries, and creditors of the principals who set up and transferred assets to the discretionary trust. This also means the trustee in bankruptcy of a beneficiary or the principals usually cannot access those discretionary trust assets. Further, the principle that creditors of a trust (e.g. suppliers of goods to trust) can, in certain circumstances, access the assets of beneficiaries of the trust, does not apply to a discretionary trust.

In terms of “divisible property” for the purpose of a family law proceeding (relationship breakdown), the Family Court can take into account assets held in a discretionary trust, but this is less likely where the discretionary trust assets existed before the failed relationship commenced.

Secondly, the discretionary trust allows the trustee flexibility to make income (and capital) allocations to beneficiaries based on their differing needs and capacities. For example, one of the children might currently be unemployed or sick and therefore a greater income allocation can be made to him/her for the current year. The discretionary trust also allows the trustee to defer or stagger a particular child’s entitlement because there is concern about the child’s big spending habits (spendthrift). It should be said though that it is rare that the flexibility of the discretionary trust is sought to deal with the differing capacities and needs of beneficiaries. Other less sophisticated legal arrangements can more than adequately deal with the differing needs and capacities scenario.

Thirdly, and this is usually the most important advantage sought, the discretionary trust allows for tax minimization; substantial minimisation. The flexibility that has a genuine non-tax basis to it (see above) also provides the means to minimize tax by, for example, allocating a given taxable income across a number of taxpaying units (simple income splitting). In addition, the DT allows income allocations across tax years to take account of beneficiaries’ other tax profile that can change over years. There is also the advantage of streaming different income types to beneficiaries who can make best use of certain items of income, a technique the government has recently re-endorsed.

There are many other tax advantages from a discretionary trust including allowing income allocations to children under 18-years of age to be taxed at the adult tax rate schedule where the discretionary trust arose under a will (testamentary trust). Normally, under-18s are taxed at a penalty rate of tax.

The advantages of discretionary trusts are quite substantial. No other entity comes close to offering all the advantages of the discretionary trust; some offer one or two advantages of the discretionary trust. And of course, one person’s advantage is another person’s disadvantage. For example, suppliers to discretionary trusts may have trouble getting payment for debts, and minimized tax through discretionary trusts, must be made up by other taxpayers or government services must be reduced.

Are there any disadvantages to those using a discretionary trust? The main one is the danger of a “rogue trustee”. That is, the trustee might exercise their discretion in a way contrary to the wishes of the principals who set up the discretionary trust. With careful legal drafting, including wise selection of appointers, safeguards against this can be provided.

It is one of life’s twists that discretionary trust can also breed suspicion and “distrust” amongst “beneficiaries” who would otherwise (in a fixed trust) expect an entitlement. The reason is that entitlements under a discretionary trust are contingent on the trustee’s discretion so that a beneficiary may be at the whim of the trustee, and those controlling the trustee.

The cost of financial planners, tax advisors, lawyers, etc, in setting up a discretionary trust and properly maintaining it can also become expensive as an effective discretionary trust must be kept-up-to date with changes in the circumstances of relevant parties. Indeed, these professionals are doing, and will continue to do, a solid trade in discretionary trusts.

By and large though, the disadvantages to those who can avail themselves of a discretionary trust are not significant and are overwhelmed by the advantages. And, no other entity (e.g. fixed trust, company) comes close to offering the same or similar tax and non-tax advantages.

As far as tax goes, various government inquiries have endorsed the current tax treatment of discretionary trusts. Indeed, the Assistant Treasurer, the Hon Bill Shorten MP told a Tax Institute conference last year: “We don’t believe trusts are any form of tax avoidance. We see trusts as a legitimate feature of how Australians conduct their financial affairs.” The tax advisors listening must have had a quiet chuckle; they need to be quiet because a loud chuckle may prompt the Assistant Treasurer to actually check the basis for that ridiculous statement.

Equally, important are the non-tax advantages. To my knowledge, there has not been a systematic and comprehensive inquiry on the asset protection aspects (code for not paying debts), property division aspects, etc, of discretionary trusts. However, there has been isolated reform in various areas that has reduced the abusive use of the discretionary trust (e.g. pensioners cannot house assets in a discretionary trust and avoid having those assets counted for asset and income testing purposes).

The pervasive use of the discretionary trusts has snuck up on society. The time for a comprehensive review of the advantages and disadvantages of discretionary trust has come. At the moment, many Australians are gorging themselves on the advantages of trusts, and similar advantages are not available to others.

Dale Boccabella is an Associate Professor of Taxation Law at the Australian School of Business

Tim Harcourt

WHEN Australian skipper Michael Clarke raised his bat to celebrate his historic triple century at the SCG it showed a man becoming aware of his stature in the game.

Instead of pointing to a bat sponsor – a deal which can be valued at hundreds of thousands of dollars – he gestured towards the McGrath Foundation sticker placed there earlier that day.

Clarke’s manager James Erskine later explained the skipper had split with Slazenger and he is still mid-negotiation with two or three companies to sign a final deal.

I’d imagine his classic innings has given him invaluable leverage in striking a favourable new deal.
But to me there would be a greater value in abandoning sponsorship all together.

Clarke is already a wealthy man and to make a statement – “I’m not going for the dollars” – would speak volumes.

Don’t get me wrong – if you are a struggling bloke in the Queensland seconds on the fringe of the 2020, I would get my bat sponsored and get what I can. But Michael Clarke is the captain of Australia and he is subtley engaged in changing what he is all about.

His brand is now be about getting away from selling underpants and all that Lara Bingle stuff and sending out a message of `I am a serious guy’.

He has already gone taken steps in that direction. Take his decision to declare despite having the record books at his mercy. If he had decided “bugger it – I’m going to knock off Bradman and Taylor’s scores and then go after Hayden’s and maybe get 400”, we would have thought differently.

But he declared at 329 – short of the records as he wanted to put Australia in the best position possible to win. Putting the team first is another sign of a maturity.

There was also something else about his call. I was watching the game at the SCG and the sentiment around the ground was that “he is showing respect for the game” (instead of personal glory).

Passing prime sport real estate to charity is not unprecedented.The prime example is Barcelona FC, one of the world’s wealthiest soccer clubs, which puts UNICEF across their shirts. Barcelona is a club aware of its larger role in the world.

Under the heel of the dictator Franco from the 1930s until the late 1970s, Barca was the Catalonian republican team while Real Madrid were Franco’s team.

Barca has always wanted to say `We are republicans. We want to distance ourselves from Franco. We care about the world and we care about the world’s poor.’They are carrying on that traditions with their UNICEF sponsorship.

For Barcelona – and for Clarke – it is all about a traditional long term-short term trade off. Clarke would be eschewing short term gain but building his brand so well it would be worth it. Former skipper Steve Waugh – through his work helping orphanages in India – is another example.

There was once a time when senior Australian players were afraid to tour India and would talk of keeping their mouth shut in the shower avoid getting sick. We used to ask them “where the Bolly hell are you.”

But the Generation X players _ Waugh, Gilchrist and Hayden _ came on the scene and realised what an amazing place the sub-continent is. When I interviewed Gilly in Mumbai he said going to India “wasn’t just a tour, it was a life changing experience.” Steve Waugh famously said “Its gets in your pores, it makes you use all your senses.”

As a result, these players are now worshipped in India not only for their prowess as players about also for how they have engaged the country. The world knows one thing about we Aussies – that we take our sport very, very seriously. But to show that we can engage the world in a mature way is invaluable.

Which is why when the captain walks out on in future tests I would love to see that same old clean skinned bat – perhaps with a nod to his charity of choice.

The man they called ‘Pup’ is becoming wise and worthy of being Australian captain – often described by Prime Ministers as ‘the most important job in Australia.’

Tim Harcourt is the JW Nevile Fellow in Economics, Australian School of Business, UNSW and author of The Airport Economist.

Associate Professor John Evans

There is a vast array of superannuation products on the market nowadays. However I’m not convinced that the large numbers of new products really helps to add value for the majority of investors.

The bulk of members really couldn’t care less about the plethora of peripheral products.

Disengaged members typically make up the vast bulk of industry fund members, and it is estimated nearly 70 percent of not-for-profit fund members have their super invested in the default option.

Indeed, fewer than one in three people are making the effort to choose how they want their super invested.

New investor options are targeted at a small but asset rich minority of members, and not the larger investor base. Directors and fund executives are entangled in the bigger is better race to amass more funds under management.

But does this help the average common-or-garden investor?

No. Not a jot.

Industry funds should go back to the root of their business, and provide low-cost, simple products for members, because as investment choice rises, so do costs. Investors who want the full range of investment products could transfer to DIY funds, where there more flexibility, although I do have to warn that a lot more hands-on involvement could be time consuming.

Industry super funds argue that without an entrepreneurial approach, super funds mandate to grow and protect Australian’s retirement funds would be at risk. OK, fair enough, however although some people like the new options, many members don’t want extra facilities such as cash deposits or direct property investment. They just want to save for old age. Investors just want simple, low cost easily understood investments that do not fluctuate in value too much.

John Evans is an Associate Professor and Head of Risk & Actuarial Studies at the Australian School of Business.

Tim Harcourt

I’ve been thinking about my post last week about immigration.

Now it has been in quite a lot of newspapers: Liberal MP Theresa Gamboro’s claim that immigrants don’t know how to queue and don’t use deodorant. However this ignores the evidence that that the modern Australian economy was built on immigration.

I just have to think of my own family and their experience in Australia. My great-grandparents were immigrants from Transylvania (good bloodlines for an economist!) and Poland. My grandfather who was as an orthodox Jew called Kopel Harkowitz, tried to join the Bondi surf club but when knocked back, changed his name to Ken Harcourt (or in own words “I went from the Goldbergs to the Icebergs!”) and ended up being a successful small businessman providing employment and trade links with his family’s ties to Europe. He ended up making a pretty good life saver too!

What does this story show? A few things.

Firstly, immigrants make good exporters. If you look at the Sensis data on small businesses, you find that 50 per cent of all small and medium sized enterprises that export are run by an overseas proprietor. You just have to take a roll call of great Australian business leaders who have were born overseas. The names Abeles, Lowy and Parbo come to mind. Many of these business leaders came to Australia from war torn Europe with no assets (and often with no English) but with a range of business contacts in their home market. Much of Australia’s success as an exporting nation in the late twentieth century was due to the efforts of the post-war immigrant business leaders. It is always important to replenish your stock of entrepreneurial human capital and immigration is part of that process. The influx of migrants also changes consumer tastes in the new country (like new Thai restaurants replacing ‘meat and two veg’ places) and ultimately increases demand for both exports and imports.

Immigration has been good for Australia’s trade ties overall. There are clear links between immigration and trade. New migrants are likely to have strong links to business communities back home, in terms of friends, family and business contacts. There are no language barriers, nor any cultural adjustments to make. And as more ‘home’ countries embrace the market economy (such as former communist countries like China, Vietnam and Eastern Europe) there will be many more opportunities.

There is also economic evidence about the links between cultural diversity and exports. Overall growth in trading partners may be exploited faster as a result of the rapid growth of ethnic groups in Australia. The main effect of cultural diversity is to reduce transaction costs in trade – because of the tacit knowledge held by migrant workers. The attitude to exporting of Australian businesses could be enhanced by the presence of cultural diversity in senior management.

Secondly, immigrants make good employers. According to UNSW research, immigrants typically start exporting businesses and exporters pay 60% higher wages than non-exporters, on average, and provide better occupational health and safety standards, job security. In short, immigration is good for jobs, good for exports and good for the economy; immigrants make great exporters and employers. One in two Australian exporting companies are run by people born overseas. And exporters pay 60% higher wages. It’s win-win.

Thirdly, immigrants make good workers. Immigration numbers from the Bureau of Statistics shows that while immigrants account for less than 30% of the labour force, they have claimed more than half the jobs created since the start of 2010. Immigrants are both employable and self-employable.

Nowadays, I take my Chinese born daughter Yun Shi to Bondi Beach with my Italian-American born wife (We have an Australia-USA-China free trade agreement in our family!) and she loves Bondi just like my Transylvanian grandfather. And by the way, Ms Gamboro, my grandfather did queue at the Bondi Icebergs, and he always used Rexona after a surf!

Tim Harcourt is the JW Nevile Fellow in Economics, Australian School of Business, UNSW and author of The Airport Economist.

Tim Harcourt

There’s no doubt that the modern Australian economy was built on immigration. And this has been good for Australia’s trade ties as well. There are clear links between immigration and trade. New migrants are likely to have strong links to business communities back home, in terms of friends, family and business contacts. There are no language barriers, nor any cultural adjustments to make. And as more ‘home’ countries embrace the market economy (such as former communist countries like China, Vietnam and Eastern Europe) there will be many more opportunities.

As part of the mission to grow the exporter community, my former employer Austrade has developed the ‘new exporter development program’ (NEDP) focused on new exporters – mainly small and medium-sized businesses – who need encouragement and assistance to get overseas. Austrade has put a lot of emphasis on export training in this program – as many businesses have the ‘right stuff’ to be an exporter (productivity, skills, product etc.) but don’t quite know how to go about it.

Why target ethnic communities to look for exporters? According to new research by Austrade and Sensis, 50 per cent of all small and medium sized enterprises that export are run by an overseas proprietor. You just have to take a roll call of great Australian business leaders who have were born overseas. The names Abeles, Lowy and Parbo come to mind. Many of these business leaders came to Australia from war torn Europe with no assets (and often with no English) but with a range of business contacts in their home market. Much of Australia’s success as an exporting nation in the late twentieth century was due to the efforts of the post-war immigrant business leaders. It is always important to replenish your stock of entrepreneurial human capital and immigration is part of that process. The influx of migrants also changes consumer tastes in the new country (like new Thai restaurants replacing ‘meat and two veg’ places) and ultimately increases demand for both exports and imports.

There is also economic evidence about the links between cultural diversity and exports. According to a recent study, whilst overall growth in trading partners was the most important determinant of export growth export opportunities may be exploited faster as a result of the rapid growth of ethnic groups in Australia for these countries. The study found that the main effect of cultural diversity was to reduce transaction costs in trade (through the tacit knowledge held by migrant workers). It was also found that the attitude to exporting of Australian businesses could be enhanced by the presence of cultural diversity in senior management.

This is not surprising as most of all export success is about networks. New research shows that 50 per cent of all new exporters are ‘accidental’, that is they get a sale by an accidental or random act. Therefore spreading networks internationally is very important to increasing the opportunities that may come to potential new exporters. Accordingly, Austrade works very closely with Australia’s diverse ethnic communities to seek out trade opportunities and entrepreneurial talent.

So throw another shrimp, satay stick, dim sim or kebab on the barbie and celebrate the benefits that immigration brings to our society and indeed to our balance of payments!

Tim Harcourt is the JW Nevile Fellow in Economics at the Australian School of Business, UNSW and the author of The Airport Economist.

Gina Anderson | CSI Blog

2012 looks to be a defining year for the not-for-profit, social enterprise and philanthropic sector and Gina Anderson outlines why she is looking forward to the next 12 months.

I think it will be a defining year for the sector. I gave my forecast for the next 12 months some consideration over the break.

First: social policy and regulation reform. Slow, grinding and often – but so critical for systemic change. This has been at the forefront of the agenda for the past year and as a result, three big issues will have significant social impact in 2012:

1.    The introduction of National Disability Insurance Scheme (NDIS)

Most Australians assume that if people are born with a disability or acquire one later in life, that some system, somewhere, will take care of them. Nothing could be further from the truth. And, as the population ages, the number of people with a disability will increase. At the same time, the number of unpaid carers – family members and friends – willing and able to provide support will decrease.

The NDIS represents an urgent and fundamental reform to the way disability services are funded and delivered. It is a social reform on the scale of the introduction of Medicare and compulsory superannuation – two safety nets now taken for granted by every Australian.  Prime Minister Gillard has now identified the NDIS as a key Federal Government reform.  Visit the Every Australian Counts website for more information.

 2.  The establishment of a new independent statutory agency: the Australian Charities and Not-for-Profits Commission

The Australian Charities and Not-for-Profits Commission (ACNC) will commence operations from 1 July 2012 and will initially be responsible for determining the legal status of groups seeking charitable, public benevolent institution, and other NFP benefits on behalf of all Commonwealth agencies.

The ACNC will also implement a ‘report-once use-often’ reporting framework for charities. It will provide education and support to the sector on technical matters, and establish a public information portal by 1 July 2013.

3.    The introduction of the Pokies legislation.

‘The Federal Government has proposed gambling reforms which include “pre-commitment” technology that will require pokies players to have a card registered to their name and pre-programmed to prevent them losing more than a set amount in a 24-hour period.’

Other trends

Coupled with policy reform, the rise of engaged philanthropists such as Gates and Buffet and their interest in social investment are changing way we all think about social sector.  Established trends such as the move in expectation and measurement of not-for-profit practice from outputs to outcomes, and the realisation that we need multiple sector partnerships to solve our intractable issues, are being accompanied and supported by other trends. These are:

1.    Crowd funding or Micro-Philanthropy

As conventional fundraising struggles, increasingly charities and social enterprises will look to crowd-funding or micro-philanthropy (using the internet to solicit pledges of small amounts of money from individuals) to source money. This is often referred to as the “Obama effect” referring to the US President Barak Obama’s use of the internet to source small donations to fund his electoral campaign.

Importantly donors see their contribution as a ‘social investment’ rather than a donation and as most of these donations are small, the donors do not seek a tax deduction.  In this way donors at all levels are able to invest in social innovation – funding new ideas and processes that move or cause or organisation to greater sustainability, durability, impact, and scale.

2.    Blended capital

The use of blended capital will grow as social enterprises and charities seek finance and capital from outside the not-for-profit sector.  While many will continue to make grants or donations, others will use their capital for impact investing rather than giving a grant.

There will be loans and guarantees to non-profits and gradually, we will see the use of debt and equity instruments.  While others will directly invest in social enterprises seeking a ‘blended return’ on their investments – a financial return on their investments that may not be as high as other possible returns but will better align their investments and their social aims.

3.    Intermediaries

To support this new world of social investment we will see the growth of intermediary organisations and products for different ‘social investors’.

Social finance intermediaries play a crucial role in bringing together the key sources of capital with social businesses and there is a crying need to develop such intermediaries in Australia.

It is exciting time to be working in the not-for-profit sector and I look forward to 2012 with great enthusiasm.

Gina Anderson is the Philanthropy Fellow at the Centre for Social Impact (CSI) at UNSW. This blog first appeared on the CSI blog.

Michael Sherris

Now that house prices have been on the slide for ten straight months, a major new study from the Australian School of Business is showing where the largest falls are, and how this is impacting on savings in Australia.

The recent international credit crisis has shown the vulnerability to major market collapses in residential property prices of both individuals and financial institutions such as banks who lend to finance residential property. Australia is not immune to global events, and many people may be more exposed than they expect.

Australian house prices are falling at an accelerating rate according to data from RP Data-Rismark, with Sydney’s dwelling values down 1.4 per cent in 2011. For the nation, seasonally adjusted home prices have dropped 4 per cent so far in 2011, and are forecast to fall much further.

Now, it isn’t surprising that this is an area of concern for many homeowners. Residential property is a major component of individual savings in many countries including Australia. Home ownership is high however property values are not as observable as share prices and other financial assets where individuals save. That’s why we need much more data on where and by how much there has been a fall.

After years on a pricing plateau due to a shortage of supply, when many people saw housing as a good way to save for old age and safer than money in the bank, Australian domestic house prices are now steadily falling. That is causing risks for those with a small deposit, and homeowners with large mortgages, or poor loan-to-value ratios.

In effect, some homeowners who thought they were saving are now seeing much of the equity in their home evaporate. It can be even more of a rollercoaster ride than the stock market.

According to data analysed in the study, the highest returns were realised in Sydney’s Central Business District and along the harbour area. If treated as an asset, houses there have an average annual return of over ten percent, beating many other investments. However in other areas, the returns are much lower. It also depends when you ‘realise your assets’ – or sell your house. There are significant above-average sales results in the second and fourth quarter and significant below-average sales in the first quarter.

I always feel when evaluating the risk, a broader assessment than just national house price indices is needed.

Most assessment of risk and growth in property prices is based on market wide indices yet the performance of residential property can be regionalised and it does vary across postcodes and individual houses. The new research shows how applying the latest statistical modelling techniques at a postcode level can indicate how risky it is to just take an overview of house prices. It is important to understand how prices vary with postcodes and the overall market which identify the key factors that drive price growth and risks.

Details of the study are at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1961402.

Michael Sherris is a Professor of Actuarial Studies at the Australian School of Business.

Tim Harcourt

For those of you think economists are not a festive bunch, here’s a thought that will cheer you up for Christmas. Father Christmas, Saint Nick or, as he is better known, Santa Claus himself is a symbol of the global economy. After all, Santa Claus is an exporter. He delivers goods (toys) to consumers (children that are good) across the world in a regular, once a year, seamless service.

For those of you who don’t believe it, (“Ho Ho Ho” we hear you say), look more closely at the Santa Claus (Proprietary Limited) operation. You will find that Santa’s business operation; structure and delivery system have strong support in the academic literature on what makes a thriving export business tick.

First of all, Santa Claus is a born global. Santa realised a long time ago that the North Pole has a limited domestic market for toys. He therefore decided to run his business on an international basis. This is an important lesson for many companies in a small country like Australia. If you have a limited domestic market, you should think about exporting. Austrade research recently highlighted many companies that are ‘born global’. Take Lochard, an airport noise and flight monitoring company based in Melbourne. Lochard knew that its growth in Australia was limited to the small number of airports so it immediately looked overseas to sell its monitoring equipment. As a result it now sells the UK, the USA, Asia, the Middle East and South America. Many Australian companies are born global – particularly in knowledge-based industries. Around a quarter of new exporters are born globals.

Secondly, like most successful global businesses, Santa Claus is a well-known brand and he has built a sustainable export business around the brand whilst keeping his corporate headquarters in the North Pole. In this way, he maintains a worldwide brand whilst maintaining the company’s roots and strong local identity (which is part of his brand’s strength and reputation). This is a good lesson for potential exporters. As Austrade research shows, global brands can be built from small local economies – especially in rural and regional Australia.

Thirdly, Santa Claus has maintained a high standard of human resource management. He has a stable, loyal workforce and good industrial relations. In fact, there’s never been a strike or lockout at the North Pole as Workchoices never made it that far north! Santa’s Little Helpers have been with the company all their careers and have hence built up strong networks and knowledge about the company and its operations. The academic knowledge management literature shows that long-serving employees are the best knowledge workers as their experience and social networks make them far more effective to the company than younger workers. Furthermore, good wages and conditions help too. Austrade research shows that exporting companies, on average pay higher wages and provide better conditions and job security than do non-exporters. This helps the company too in terms of skill development and productivity.

Fourthly, Santa overcomes logistical problems by using intermediaries. He cannot gain all the market knowledge he needs so he uses proxies (such as parents, grandparents, aunties and uncles) to ascertain the ultimate needs of consumers. He then franchises to reliable local parties to ensure that he goes the “last quarter mile” in satisfying the customer (and therefore avoids the pitfalls that have beset many dot.com companies).

Fifthly, Santa, like all successful exporters, visits the market on a regular basis and undertakes market research in the lead up to Christmas. He seeks advice about the market (where required) through strategic positioning at shopping centres and by making selective appearances at Christmas parties. This has enabled him to adapt his product to different cultures in countries all over the world. On the big night itself, he uses simple market entry strategies – via the chimney – and responds well to clear market signals (such as Christmas stockings hung over mantle pieces).

Finally, like all successful exporters, Santa Claus is flexible and innovative. Like all good exporters, he leads the market in terms of consumer tastes and trends. For instance, Santa knew when wooden toys were making way for plastics and electrical goods. He’s always up with all the latest technology. Furthermore, Austrade research shows that exporters are very innovative in terms of production methods and business practices. Santa is no exception. When faced with an unusual natural resource (a red nosed reindeer named Rudolph) Santa demonstrated his ability to think outside the box and had Rudolph lead the other reindeers in pulling the sleigh in bad weather.

So there you have it, Santa is a long-term, sustainable exporter operating a global business in many different markets. He knows his customer (through direct and indirect mechanisms), knows the importance of his brand and treats his workers and his reindeers well. So enjoy the Christmas break and let’s hope Santa delivers for you too.

Tim Harcourt is the JW Nevile Fellow in Economics at the Australian School of Business, UNSW and the author of The Airport Economist: www.theairporteconomist.com

Nina Mistilis

Qantas is facing a further drawn-out battle with the unions, and that may cause yet more long-lasting damage to its brand. The Qantas dispute is settling in for the long haul, now that it has been taken into binding arbitration – a move that could take months to resolve.

This confrontation with the unions has been building for years and seem and has now culminated in arbitration. All of this has taken place in full view of the travelling public. Qantas – in going to arbitration – has won what it was seeking – which is a stay on industrial action – but in the long term it seems to have lost the war.

I believe it has alienated passengers, the industry and the government, and that’s not a good position to be in. The Qantas brand is tarnished.

Negotiations between the airline and the Transport Workers Union, the Australian and International Pilots Association and the Australian Licensed Aircraft Engineers’ Association collapsed just before a deadline set by Fair Work Australia (FWA).

I believe the longer this dispute rumbles on, the more the Qantas brand image will be badly impacted.

That’s a global perception, because passengers all over the world who want to get to Australia for a holiday, or back home for work, are wondering if it is safe to book a Qantas plane, or whether it will be cancelled again. Many are saying they will never trust Qantas again, particularly in business class, because business wants reliability above everything else. Certainly, in the immediate future, the brand is tainted and they’re really behind the eight ball.

I don’t see how they’re going to catch up easily. Even if the arbitration settles on the side of Qantas, it may still hurt Qantas in the medium to long term, although I think it’s really hard to say what the long term damage will be. It partly depends on how events unfold. If it is solved quickly, which seems very unlikely, then the brand will be restored. But if it continues, and if there’s a perception – as the unions are saying – that service will drop due to the “asianisation” of the airline, then the brand will be completely damaged. Will that mean that less passengers book on Qantas? I don’t know the answer to that. Time will tell.

Qantas chief executive Alan Joyce yesterday said while his preferred option had been to resolve the dispute through negotiation, it was now time to let FWA bring the matter to a close.

But it is reliability is an important factor in terms of the branding of an airline. When it comes to the crunch, we need to get to the destination on a certain date and we cannot afford to be stranded at home, or somewhere in Australia, or abroad. So when it comes to the choice, will we choose Qantas or will we choose another airline?

Nina Mistilis is a senior lecturer in Tourism at the Australian School of Business.

Tim Harcourt

Born in Honolulu and with a childhood spent partly in Indonesia, it is only natural that US President Barack Obama should have a strong affinity with the Asia Pacific and have an internationalist outlook.

His speech to the joint houses of Parliament was a ringing endorsement for America’s economic orientation to the Pacific, the region which holds the most promise of economic growth for the next decades. America, he said, had made a “deliberate and strategic” decision to engage more with the Asia Pacific, which was “critical” to the highest priority of creating jobs in the US.

In making this choice, Obama is following the tradition of other recent Democratic presidents who, contrary to some popular opinion, are anything but isolationist in their world view. And at the same time, he is debunking another old myth: that a free trade agenda is bad for jobs growth and social equality in the US.

The conventional wisdom has been that Democrats are always trade protectionists and the Republicans firm free traders. For example, in his Boyer lectures several years ago, Rupert Murdoch claimed that the Democrats are always protectionist and Obama’s trade policies would hurt Australia. His views were echoed at the time by Australian Industry Group’s Heather Ridout.

But this is a misreading of history. Both parties have moved on both sides of the trade issue depending on the times. In fact, the Republican Party was traditionally the party of the northern states and had a large manufacturing base of support and supported protection whilst the Democrats had a strong southern base too (the so-called ‘Dixiecrats’) and supported free trade.

A glance through 20th century history shows a strong internationalist spirit running through the Democratic Presidents; Franklin Roosevelt, John F Kennedy, and Bill Clinton, under whose administration the North American Free Trade Agreement was negotiated.

Fast forward to today, and Obama’s motivation is plain to see. The US economy has stalled and is proving hard to kick start. Looking across the Atlantic, home of the more traditional economic and financial alliance, and all is chaos and uncertainty.

With Chinese savings funding US debt and economic growth in the region moving along nicely, in spite of the turmoil elsewhere, where else is the US economy going to receive a boost?
US unemployment is hovering stubbornly at just under 10 percent and Obama’s political future, and more importantly the economic welfare of millions of Americans, is dependent on the economy showing even some signs of recovery.

The reality is that inequality and rocketing executive salaries with declining real wages for American workers have bred protectionist sentiments whilst a fairer America may actually benefit from freer trade.

Real wage growth in the US stagnated under the two Republican decade of George W Bush, while the richest 1 percent of the US population control around 40 percent of the financial wealth. Republican protectionism did little to protect the people it was supposed to help: American workers.

Right now, more than ever, America needs economic engagement with the rest of the world – particularly a region, like the Asia Pacific, which is performing well. Free trade can be a part of the formula to restore growth, reduce unemployment and help make some gains on social equality. Barack Obama the liberal internationalist understands this very well. And the Trade Pacific Partnership agreement recently announced at Obama’s birthplace in Hawaii at APEC is symbolic of the President’s internationalist instincts.
Tim Harcourt is the J.W. Nevile Fellow in Economics with the Australian School of Business, University of New South Wales: www.theairporteconomist.com.