Is Trade Liberalisation a Friend or Foe of Australia ?
Through Australia’s history, the country has had a long journey in its manufacturing protection. 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 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 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 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.
