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Trade can be made free, but

By Alan Moran - posted Friday, 15 November 2002


Gains from lower trade barriers

Reduced trade barriers have been key elements in the increased prosperity the world has seen in the post-1945 era. These lower barriers have allowed greater specialisation of production with consequent gains in cheaper goods enjoyed by all parties.

At the present time, the average tariff on imports into Australia is 3.8 per cent. In 1983/84 the tariff equivalent averaged 21 per cent for agricultural products and 13 per cent for manufactures.

The rapid reduction in Australian tariffs did not cause high levels of unemployment. Present levels of unemployment are lower now than they were during the mid-1980s.

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Drivers for liberalisation

Multilateral agreements under the GATT and WTO have been the leading arrangements bringing greater liberalisation but narrower agreements, like the European Union and Canada-US bilateral free trade, have also been significant. For Australia, the bilateral NAFTA and CER agreements with New Zealand have made important contributions in allowing Australia and New Zealand to become, in substance, a single economy.

Unilateral, non-reciprocated trade reform also offers benefits – indeed, Australia’s liberalisation has in the main been of this nature, with tariff and other barriers being reduced following reports of the Productivity Commission or its predecessors. These unilateral reductions have then been used as bargaining coin to seek concessions from other countries in trade negotiations.

Although trade liberalisation works best if all parties participate, gains are also made with unilateral liberalisations where others do not reciprocate. Unilateral liberalisations result in a relative contraction or improved efficiency of the tariff-reducing country’s less competitive businesses. These outcomes allow more to be produced with the same labour, capital and other resources.

Benefits of liberalisation

Traditionally, trade benefits have been seen most clearly where countries have vastly different economic structures. Comparative advantage in different areas of production has allowed both countries to gain as a result of specialisation. (The so-called Heckscher-Ohlin model).

This view of trade gains has been at the heart of the process over a long period; England sent manufactures to Australia and received primary products in return.

More recently, the increased income levels stemming from the European Union (EU) have highlighted different forms of gains or, perhaps more accurately, a different view of the same gains. The EU gains were realized by countries with structurally similar economies.

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The gains came from intra-industry trade – the trading partners appeared to be buying and selling goods that they already made in their home countries. The gains from this intra-industry trade following liberalisations between countries that have similar economic profiles have come from two directions:

  • increased competitive pressures on suppliers that previously went less heavily challenged in their home markets - businesses facing increased competition usually lift their performance to the benefit of consumers in all participating countries; and
  • a variation of the traditional comparative advantage gains but one that takes advantage of the increased specialisation of modern production and the increased number of stages through which materials are put prior to reaching the final consumer.

Fair Trade

Over the years there have always been calls for trade liberalisation conditional on some measure of "fairness". After all, it could be said that those countries that pay very low wages are at a trade advantage with high-wage countries like Australia.

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About the Author

Alan Moran is the principle of Regulatory Economics.

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