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Tariffs are the most common method of protection around the world. Australia has successfully implemented import tariffs on imported goods. Although tariffs are a form of revenue to the government, this paper will examine that revenue gains from imports are no different than a beggar-thy neighbour policy. Most of the international trade theories are more or less related to the Ricardo’s “comparative advantage” theory. The theory is primarily based on the rule that countries should produce (export) what they are best at. So trade can as a result can make both nations more productive and have a more stable economic situation and gain more revenue, as they will no longer be trying to produced some goods which they could otherwise import more cheaply then they could produce themselves. By no longer trying to produce the products they can import cheaper it as a result will increase both country’s GDP’s (Growth Domestic Product) 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 major concerns address unemployment caused by tariffs on imported goods and insufficient protection for the local producers. This paper will aim to find out the reasons why those “groups” are against protectionism. It will also present the reasons for decline in protectionism, specifically in the manufacturing industry since it has been the backbone of the Australian economy. Free trade or protectionist policies are both likely to have pros and cons, therefore liberalization of the economy will also be studied in this paper. Australia had its first systematic tariff cut in July 1973 which was 25 1
per-cent across-the-board. However its purpose was to reduce the inflation 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 it will be easier to understand reasons why manufacturing industries tend to lobby. Anderson and Garnaut in “Protectionism: Extent, Causes and Effects (1987)” explains the imposition of TCF and Passenger Motor Vehicle quotas in 1970 era. Based on these authors, it could be more comprehensible to understand the significance of those groups` pressure on the government. In addition, TCF (textile, clothing, and footwear) 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 were reduced over all but automobile and TCF industries still benefited from the high protection level for those industries. Based on what these authors have stated, it can be concluded that effective rate of protection (ERP) might have an important role in investigating the level of protection for these two industries. Anthony Stokes, a lecturer in Australian Catholic University explains in his work named “Impacts of globalisation” (2002), that a decline in ERP rates leads to the cutting protection to a reduction in net subsidy equivalent, that this amount would have to be paid to have the same effect, as the current level of protection. He also states “production rose in real terms by 8.9% and the manufacturing trade balance, while still negative, has also improved”. According to Stokes, it could be said even that the second impressive tariff reductions starting in 1989, actually did help on efficient production. “Tariff reductions cause unemployment” is, as mentioned earlier a very general and missing 2
statement. Referring to Gaston (1998, pg.125) “…Focusing on the later 1988-92 period, reveals that the industries with the largest job losses tend 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 is inconceivable that there will be negatives including the possibility for a decline in employment rates however there is the capability for an increase in exports (see Table 2.) Furthermore, there has been a continuos decline in nominal tariff rates since 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 and the most important protection decline is more complicated. Tariff on imported goods leads higher prices, hence domestic consumers pay more for the goods. That situation causes a decline in real incomes of domestic consumers. So, while domestic producers gain, consumers loose. Ho-Choi and Cumming (1986, pg.490) are correct when they say that “…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-living index, 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 worth considering the exchange rates or more specifically currency 3
depreciation. Max Corden, (1996) successfully explains the importance of depreciation and devaluation of the currency. He states that May 1988 Economic Statement announced the general program of “phased reductions in nominal tariff rates for most imports” (excluding TCF and PMV). He also highlights the importance of The March 1991 Industry Policy Statement. Similarly, this announcement brought attention to the issue of continued maintenance of tariff reduction “with most tariffs to be phased down to 5 per cent by 1996”. It should be noted that the 1991 Statement came in the midst of a recession. Import quotas for PMV were ended in 1 988 and TCF in 1993.
In addition, In Australia, they include the effect of persistent analysis and commentary by the independent statutory authority (first the Tariff Board and then its successors, the Industries Assistance Commission, the Industry Commission and the current Productivity Commission), better measures of average tariffs and non-tariff measures and last and most fundamentally the influence of economic theorist who have finally persuaded more and more people and groups that trade liberalisation is in the national interest. During 1977-1988, Corden (1996) states that the government received only two commission report whereas it received 32 reports on what should be done for tariff rates and international trade. Therefore this is highly relevant and it needs to be taken into consideration among the other economical related issues on why the protection has fluctuated but mostly declined over the years. It is known that currency depreciations cause imported good to be more expensive for domestic buyers. Depreciation also leads growth in exports. According to Corden (1986. pg.148), due to the decline in the terms of trade, during 1985-1986 the dollar significantly depreciated 4
and as a result, domestic manufacturers and export industries became to a great extent competitive, and “thus made possible and politically acceptable the phased tariff reductions initiated in 1988 and later”. However, TCF and PMV industries came back into the scene again. Automotive and TCF industries were protected against the March 1991 program under the Labor government (Conlon, R. 1999, pg.145). Plenty of scholars are correct when they claim that those two industries will still be successful on their pressure on the governments. According to Conybeare of Politicians and protection: Tariffs and elections in Australia (1984), there is a relationship between the tariff rates and the Labor vote, and the voter. Interestingly, former prime minister Howard and John Moore (former minister for industry, science and tourism) announced a similar program 10th September, 1997 (some time before Howard’s government election in 1998). The plan was to support job security and compatible TCF industries in Australia. Again, the most important component of this package was tariff reductions. (HSC online, Australian Textile, Clothing, Footwear and Allied Industries) Besides all those employment related protectionism argument, it is important to also take into consideration the infant-industry argument. To sum up Salvatore (2007), he indicates the argument, that if a country has a comparative advantage in an article of trade but because of technological deficiency or inadequate level of production it will be hard for the country to set up its advantage properly. Thus, a short term protection should be given to the industry to help it established, and then the protection is to be removed gradually. Nevertheless, under the shelter of a form of protection, it would be hard to persuade the infant industry to eliminate the protection. TCF and PMV examples are to be referred above… 5
Competition has a significant role in improving the market structure. As Corden (1986) states reducing protection can even decrease domestic monopoly by increasing import competition on the market. It can be said that more imported goods into a country means more competition between the domestic producers and importers. That will surely increase efficiency. For example, automobile producers will not in fact, able to produce low-quality cars due to fear of becoming less competitive against imports. To support this argument, Conlon (1999. pg.161) claims in his highly critical article “Industry policy in Australia” that, since a high level of competition established by reducing the tariff rates, it is virtually noticeable that Australian manufacturer has become utmost “comparable with all but the best of Japanese producers” He is therefore stating that Australia is able to compete on a global scale for quality and are only surpassed by the best of the Japanese producers. Which we can say is an excellent achievement based on the population of Australia and its influence overseas. It can be concluded from what the author has stated that tariff reductions contribute the production efficiency thus innovation. For that reason, one of the erroneous blame on protection causing unemployment is not valid since greater competition will lead a “better” production as mentioned above. Which just means that people who do not improve their own work efficient will lose there jobs as they are causing Australia’s productivity to reduce and hence the economic stability and wellbeing. The correct way of reducing unemployment lies under a proper implement of monetary and political strategies that governments are supposed to employ. In relation to the Australian manufacturer, Tim Harcourt, Chief Economist of Australian Trade Commission (17 October, 2002) declare that Australian manufacturers were not main exporters under ‘McEwenism’ they mainly supplied to the domestic market and 6
reached overseas when trade was dawdling in Australia. It seems that tariff reductions, removals of import quotas for both PMV and TCF industries (in 1988 and 1991 respectively) helped Australian manufacturing develop. IS TRADE LIBERALISATION A FRIEND OR FOE OF AUSTRALIA ? To understand the liberation of the Australian economy, it will be useful to consider exports and import of a country. Trade liberalization is based on comparative advantage. Free trade is intended to promote exports and productivity by exploiting comparative advantages that can be well gained through a competitive domestic market. Free trade will help countries develop, while they also compete on technical developments in order to increase productivity, capital insensitivity and even economies of scales. Australia is a developed country. It is very rare for developed counties to apply high tariff barriers during their welfare. Such action is preferred by developing countries (Salvatore, 2007). Australia `s protectionist actions did harm the country in the past. It is very likely that if a country implements trade barriers on other countries they will also be subjected trade barriers by other nations. As a result of this action in the end both countries will loose. In the course current depreciation of Australian dollars due to the world economical crisis, it would be beneficial for Australia to liberalise its economy more than it has ever attempted. The reason why Australia should liberalise more is simply, the depreciation of the Australian dollar will attract foreigners. Hence, Australia can export its goods that have comparative advantage; however, it will be hard to conclude that it also will attract importers due to Australian dollar devaluation. Once again in terms of the economy, it is about a decision making process where pros and cons must always be considered. However, this gain is likely to help Australian economy more than its loss on imports. In relation to imported goods, the Australian domestic economy will be less competitive against imports because lack of competition. On the other hand, this export-orientated situation will lead to decrease unemployment by
employing more people within the local industry.
Graph 1: Effective Rates of Protection in Australia Source : Productivity Commission, Protectionism Review2001-02
40 35 30 25 20 15 10 5 0 1968 1973 1978 1983 1988 1993 1998 2001
Table 2: ERP Rates Compared 1989-90 to 1996-97 Source : ABS (Australian Bureau of
Ef c eRte o f e tiv a s f Po c n r te tio Nt S b id e u a n e u s y q iv le t (m $ ) Ra Mn f c r gGo s e l a ua tuin r s Po u t in e r d c dx Mn f c r gtr d a ua tuin a e b la c a a% f G P a ne s o D
18/ 99 9 0 1 5 120 03 10 0 -6 .3
19/ 96 9 7 6 40 01 18 0 .9 -5 .0
Table 3: Annual Growth in Exports, by Sector, 1985-86 to 1995-96 Source : ABS – 2007 Compared Growth
Sector M anufacturing Services M inerals and Fuels Rural Total
% 12.9 8.4 5.5 2.7 7.3
Graph 2: Average effective rates of assistance to PMV and TCF, 1990-91 to 2000-01 Source: Productivity Commission, Trade and Assistance Review 20002001
Anderson, K. & Garnaut, R. ( 1 987). Australian Protectionism: Extent, and Effects , Allen & Unwin, Sydney Causes
Australian Textile, Clothing, Footwear and Allied Industries. Retrieved on 23 May, 2009.from http://www.hsc.csu.edu.au/textiles_design/industries/3_1_3/tariffs.htm Conlon, R. (1999). Industy Policy in Australia. In The Australian Economy. 3rd edn. P. Kriesler ed. Allen & Unvin, Sydney. pp.145, 161 11
Conybeare, J. (1984). Politicians and protection: Tariffs and elections in Australia. Martinus Nijhoff Publishers, The Hague, Netherlands. Public Choice 43. pp 203. Corden, V., M. (1996). Protection and Liberalisation in Australia and Abroad. The Australian Economic Review, pp.146, 148. Harcourt, T. (17 October 2002). Australian Trade Commission Sydney Retrieved from firstname.lastname@example.org on 17 May, 2009 Ho-Choi K. & Cumming, T.A. (December 1986). Who Pays For Protection in Australia ?. University of Western Australia, Nedlands WA 6009, pp 490 .Jayanthakumaran, K. & Neri,F. (June 2004). Trade Reforms and Changes in Australian Manufactured Exports. University of Wollongong Economics Working Paper Series 2004. pp 3-4. Lloyd, P. (2007). 100 Years of Tariff Protection in Australia. The University of Melbourne, Department of Economics. Research Paper Numer1023. pp 3, 22-25. Salvatore, D. (2007). International Economics. Australia, John& Wiley Stokes, A. (2001). The Impact of Globalisation on the Australian Economy.Retrieved from http://homepages.ihug.com.au/~gep/The%20Impact%20of%20Globalisation%20on %20the%20Australian%20Economy.doc on17 May, 2009. Gaston, N. (1998). The Impact Of International Trade and Protection on Australian Manufacturing Employment. Bond University. pp.125