Australia is resilient enough to weather the weakening of the Chinese economy, the Nobel prize-winning economist Paul Krugman has said, but he poured cold water on the benefits of the free trade agreement between the two countries.

Speaking to Guardian Australia ahead of the Festival of Dangerous Ideas in Sydney, Krugman, a renowned columnist at the New York Times, predicted the slowing Chinese economy would hurt Australia, but said the country should not get “too hysterical” about it.

“It’s not helpful to have the price of commodities that Australia exports go down … that said, Australia is a big, very diverse economy, it has other exports and it has a flexible exchange rate. So if you look at what’s happened in the past couple of years – certainly Australia has taken a hit from weakness in its exports but it has also had a major depreciation of the Australian dollar and that offset a lot of it.

“These kind of adverse shocks of exports always hurt, but its only catastrophic if either you have no recourse – so if [for example] you’ve give up your own currency then you’re in trouble, and if you’re very vulnerable financially – if you’re very heavily indebted in foreign currency then you’re vulnerable. But last I looked Australia has neither of those characteristics.”

Krugman added: “I think in the end you’re likely to see what is going on now in China is something like what happened with the Asian financial crisis. And Australia was extremely successful at riding out that storm and maybe you’re not as good this time, but I think that you don’t want to get hysterical about this.

“Australia, like Canada, is a country that has the wrong exports and is kind of in the wrong place in the world right now, but has a lot of other strengths.”

Krugman supports free trade, but was sceptical of the benefits of bilateral agreements such as the one between China and Australia.

They were often misleadingly pitched as something that must be done “for the national good”, he said. “It isn’t really – it’s not going to have any major impact on GDP per capita.”

He suggested the Australia-China deal could well be, like the Trans Pacific Partnership, mostly about entrenching the power of monopolies. “Free trade –which on the whole I’m a supporter of – is being used to cover fields that really are not about that at all.”

Krugman also opposed the TPP currently being negotiated, of which Australia’s trade minister, Andrew Robb, is an ardent advocate. It was “not really a trade agreement”, Krugman said, as trade in the Pacific area was “already pretty free in most things”.

Rather, he argued the TPP was mostly about “intellectual property rights and dispute settlements procedures”, for which there were “very clear negative argument that it hurts consumers”.

“If Australia is having problems with selling stuff to the rest of the world it has a pretty straightforward answer, namely it’s got a floating currency. The Aussie dollar goes down and pretty much takes care of itself, so Australia really doesn’t need to worry about that.

“And maybe Australia should be doing better in some industries than it is maybe there should be some policy [on that] but the idea that the economy is likely to suffer from some generalised problem with competitiveness is just wrong.”

He did not go as far as his fellow Nobel winner Joseph Stiglitz, who wrote in the Guardian this year that the TPP was an attempt by corporate interests to bypass democratic institutions to dictate terms on matters largely unconcerned with trade.

Krugman, who won the Nobel prize in economics in 2008, will speak on Saturday at the Sydney Opera House about bad ideas that won’t go away. Such ideas, he said, were “easily demonstrated to be wrong” and “refuted by experience”, but “like zombies, they refuse to die no matter how many times you think they should have been killed”.

One such idea was the belief that in the face of “mass unemployment, severe economic distress and record low interest rates, public debt was the biggest problem we faced”.

Krugman acknowledged many politicians like to talk about the national debt as if it were a household budget. But he said: “It would be a very foolish business leader who never accept a debt, because it might sometimes be a good idea to borrow at time when funds are cheap and there are good uses for the money. So how come we don’t use that analogy rather than the household analogy?”

The recent solid growth of the US and UK economies was achieved despite rather than because of the austerity programs they pursued to cut debt, Krugman said. The upturn largely came when the programs were halted.

“If you repeatedly and gratuitously hit yourself in the head and then stop, you’ll start to feel better again,” he said. “That sounds silly, but that’s really the story of the UK.”

The desire for austerity and to reduce government debt, he argued, came about when people treated the economy like “some sort of morality play” in which they believed that if “there is a depression it must be because someone is doing something wrong, and trying to bail them out with government deficits must somehow just make things worse”.



Krugman was also sceptical of the need for Australia to cut income taxes and shift towards greater reliance on consumption taxes such as the GST, as proposed by the federal treasurer, Joe Hockey.

“There is essentially zero evidence that this is an important concern in practice,” he said. Nor was there evidence to suggest that “tax rates on personal incomes cause major incentive problems”.

Talk of “economic reform” was often “code for comforting the comfortable and afflicting the afflicted”, he said. “Structural reform” in particular was a phrase used to justify “some political points of view that actually aren’t at all grounded in evidence or logic”, he said.

Asked about suggestions that prospective Democratic presidential candidate Bernie Sanders might ask him to be secretary of the Treasury should he be elected, Krugman laughed, saying: “If you had ever seen one of my work offices you’d know why I should never be running any organisation.”