Free trade: offering the best value to consumers and producers

 Developments in Australian Trade Policy

The Productivity Commission (PC) annually undertakes comprehensive estimates of industry protection, which combine tariffs and other forms of support. The following diagram illustrates the changes in Australia's "effective rate of protection." This measures the assistance on the local value-added (that is, if the tariff is 10 per cent and local value-added is 75 per cent, the effective rate is 10/75 or 13.3 per cent).

The PC's measure of assistance does not cover all forms of subsidy. However, many of the measures it excludes have also been reduced over the past three decades. This is true of government purchasing preferences, local content arrangements, air travel, anti-dumping and countervailing measures, agricultural marketing arrangements, rural support programs and resource access arrangements relating to mining, forestry and fisheries.

The two stand out areas of protection are textiles clothing and footwear, with support at 13 per cent (down from 20 per cent in 2003) and motor vehicles and parts at 11 per cent (down from 17 per cent in 2003).

Pressures for Trade Protection

There are always pressures to provide greater support for a local industry. These come either as a means of offering it a platform on which it might develop economies of scale, often referred to as 'pic king winners,' or as a means of preventing it from being out-competed by imports.

In Australia the former approach has never lacked sponsors. Indeed, even protection for clothing, footwear and motor vehicles started life as industry development plans. Later schemes favoured IT industry areas.

More recently, industry development plans have focussed on green power (where state and federal support has been extended to areas like turbine blade factories that politicians and lobbyists claim to be promising). The Government's carbon tax package includes a $1.2 billion program in subsidies to these developments.

Pressures for protection in the home market occur throughout manufacturing and the intensive agricultural areas and are particularly strong when exchange rates make imports cheaper. Steel, motor vehicles, clothing and horticultural products (where quarantine is used as a non-tariff barrier) are presently receiving or seeking political favours. While government support for activities that are failing as a result of competitive pressures could reverse their fortunes, successful cases are hard to identify.

There is no example of a developed country increasing its relative success while de-liberalising its import markets.

Protection through tariffs and other barriers has however been present during the industrial growth periods of most major countries from the US onwards (where tariff increases sparked off the Civil War). Protection of local production from imports was a significant policy measure in the rapid growth phases of Japan, Korea, and Taiwan though less important for Singapore and totally absent for Hong Kong.

Tariffs were also prominent (and, though they have been reduced, remain so) for China. In the case of India, although tariff levels are double those of Australia, the nation's recent growth was triggered by deregulation, including declining levels of external protection.

Eastern European EU members have also seen rapid growth and have attracted manufacturing investment, while eliminating import protection vis-à-vis their EU partners.

It is therefore possible for a country to embark on a growth momentum in spite of protectionist restraint on imports. But in all such cases the protection has co-existed with privatisation, deregulation and increased levels of domestic savings to fuel productive investment. Those efficiency improvements have more than compensated for the adverse effects of protectionist policies.

And the respective outcomes in Singapore and Hong Kong indicate that the latter's free trade policy has achieved similar stellar growth while seeing less income allocated to savings. In other words, it would appear that a more liberal trade policy allowed Hong Kong both to have and to eat more of its cake.

The point about free trade is that it provides the cheapest goods and services to the consumer. This may entail importing from countries that follow practices that we ourselves reject. Thus some countries have more relaxed laws than us on matters like child labour. We can urge those countries to change such laws but the appropriate standards are matters of judgement. After all, child labour is common on farms in Australia, some kids sell lemonade at charity stands and 30 years ago there were plenty of 14 year olds in the Australian workforce.

Similarly, some countries' workplace safety standards are sometimes cited as a reason why we should reject their imports. Safety standards tend to be highest in the more affluent countries and in the end reflect the willingness of the worker to accept greater risk as a consequence.

Importantly, it is not up to us to pick and choose which imports we might allow on grounds of labour laws and so on, since to do so would require us to develop a vast new apparatus to determine what countries goods and services will be allowed.

It may well make sense to refuse some imports on quarantine grounds but, as already noted, quarantine provisions are often an excuse to protect domestic producers, thereby preventing domestic consumers from benefitting from the cheapest suppliers. At the same time the protectionist policy means maintaining land, labour and capital in activities that produce less value than if they were to be shifted to areas of greater competitiveness.

Keeping Australian and World Markets Open

World trade negotiations have focussed on offering and accepting concessions in reducing domestic barriers to entry. Although such mechanisms may have been useful in bringing political acceptance for trade liberalisation (and a general global reduction in barriers to trade, offers gains in excess of a unilateral reduction), we don't actually need reciprocity to make gains.

If some countries place barriers to getting the cheapest goods they are willingly accepting a diminution of their real income levels. That can rarely be in their interests.

The liberalisation of trade over the past sixty years has been crucial to higher living standards in Australia and elsewhere. Reversing that trend would see a relative and perhaps absolute fall in living standards.

A major frontier left behind in trade liberalisation is agriculture. Australia could gain considerably from the rapid income growth in China and India, which is likely to see a considerable expansion in demand for higher protein and fat foods.

Though geographically well placed to benefit from this, Australian policy directions in recent years detract from this potential. Disallowing water storages (and reducing existing water rights held by farmers), locking up vast tracts of land in northern Australia and arbitrary decisions like that on live cattle exports have reduced the attraction of farm investment.

A deregulatory approach is necessary as well as continued resistance to backsliding on protectionism to allow labour and capital to be used more remuneratively is essential if the prospects are to be realised.