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The Reasons of Tariff Decline in Australia

The Reasons of Tariff Decline in Australia

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Published by: brachycephalic on Apr 28, 2010
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 Through Australia’s history, the country has had a long journey in itsmanufacturing protection. Tariffs are the most common method of protection around the world. Australia has successfully implementedimport tariffs on imported goods. Although tariffs are a form of revenueto the government, this paper will examine that revenue gains fromimports are no different than a beggar-thy neighbour policy. Most of the international trade theories are more or less related to theRicardo’s “comparative advantage” theory. The theory is primarilybased on the rule that countries should produce (export) what they arebest at.So trade can as a result can make both nations more productive andhave a more stable economic situation and gain more revenue, as theywill no longer be trying to produced some goods which they couldotherwise import more cheaply then they could produce themselves.By no longer trying to produce the products they can import cheaper itas a result will increase both country’s GDP’s (Growth DomesticProduct) and lend itself to a higher standard of living.Even though free trade can help develop nations, there are plenty of arguments against tariff cuts and decline in protectionism. The majorconcerns address unemployment caused by tariffs on imported goodsand insufficient protection for the local producers. This paper will aimto find out the reasons why those “groups” are against protectionism.It will also present the reasons for decline in protectionism, specificallyin the manufacturing industry since it has been the backbone of theAustralian economy. Free trade or protectionist policies are both likelyto have pros and cons, therefore liberalization of the economy will alsobe studied in this paper.Australia had its first systematic tariff cut in July 1973 which was 25
per-cent across-the-board. However its purpose was to reduce theinflation rate rather that protecting the industries
.(Llyod, 2007, pg.22)
. The Automobile industry in Australia plays a significance importance.At the moment, Australia has three automobile producers namely Toyota, Holden and Ford. If one takes a look at from that perspective itwill be easier to understand reasons why manufacturing industriestend to lobby. Anderson and Garnaut in
“Protectionism: Extent, Causesand Effects (1987)” 
explains the imposition of TCF and PassengerMotor Vehicle quotas in 1970 era. Based on these authors, it could bemore comprehensible to understand the significance of those groups`pressure on the government. In addition, TCF (textile, clothing, andfootwear) industries has vast share in this industry.Another cut in tariff rates were between the dates 1968-1988. Jayanthakumaran and Neri (2004, pg.3.) states that tariff rates werereduced over all but automobile and TCF industries still benefited fromthe high protection level for those industries. Based on what theseauthors have stated, it can be concluded that effective rate of protection (ERP) might have an important role in investigating the levelof protection for these two industries.Anthony Stokes, a lecturer in Australian Catholic University explains inhis work named
“Impacts of globalisation” (2002)
, that a decline in ERPrates leads to the cutting protection to a reduction in net subsidyequivalent, that this amount would have to be paid to have the sameeffect, as the current level of protection. He also states
“productionrose in real terms by 8.9% and the manufacturing trade balance, whilestill negative, has also improved” 
. According to Stokes, it could be saideven that the second impressive tariff reductions starting in 1989,actually did help on efficient production. “Tariff reductions causeunemployment” is, as mentioned earlier a very general and missing
statement. Referring to
Gaston (1998, pg.125) “…Focusing on the later 1988-92 period, reveals that the industries with the largest job lossestend to have experienced the steepest cuts in their effective rates of assistance.” 
 Yet, in terms of the economy it is a decision making process and it isinconceivable that there will be negatives including the possibility for adecline in employment rates however there is the capability for anincrease in exports (see Table 2.)Furthermore, there has been a continuos decline in nominal tariff ratessince 1988/1989 to
1989/90 to 2002/03
 Jayanthakumaran and Neri (2004)
defines that second period of major tariff cuts as
“one of accelerated reform as all sectors felt the effects of further reductions in levels of  protection
After explaining the reasons of the first major tariff cut, the second andthe most important protection decline is more complicated. Tariff onimported goods leads higher prices, hence domestic consumers paymore for the goods. That situation causes a decline in real incomes of domestic consumers. So, while domestic producers gain, consumersloose.
Ho-Choi and Cumming (1986, pg.490)
are correct when they saythat
“…Thus consumers of imports pay for protection in the form of higher prices. But this is still only an intermediate step in a long process as many consumers are also wage earners. Wage earners will push for higher wages to counter the higher cost of living. In addition,many other types of costs and charges are tied up to the cost-of-livingindex, so that these other costs will be inflated as a result of  protection” 
In relation to the reasons why tariffs could be lowered, it might worthconsidering the exchange rates or more specifically currency

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