Protecting industries and living standards

Bookmark and Share Trade & IP Unit | Alan Moran
Herald Sun 16th September, 2011

Free trade provides the cheapest goods and services for the consumer and increases real living standards.

But pressures for increased industry protection from overseas suppliers are re-emerging in Australia.

In broad terms, the average Australian tariff, and its subsidy equivalent, has been reduced from about 35 per cent to 5 per cent over the past 40 years.

Other specific assistance measures like government purchasing preferences, local content arrangements, air travel, and agricultural marketing arrangements have also been substantially dismantled.

The two most protected industries are textiles clothing and footwear with support at 13 per cent (down from 20 per cent in 2003) and motor vehicles at 11 per cent (down from 17 per cent in 2003).

Tariff or subsidy protection is justified on two grounds.

The first is as a platform on which an industry might develop economies of scale, a policy often mockingly referred to as "winner picking".

Many developing countries have seen rapid growth and specific areas of industry protection taking place simultaneously.

But the key features of those successes were privatisation, deregulation and increased levels of domestic savings to fuel productive investment.

The second rationale for protection is defensive -- a means of allowing firms to survive in the face of lower-cost imports.

All Australian industry protection, even for clothing, footwear and motor vehicles, started life as industry development plans.

More recently, industry development plans have focused on green power (where state and federal support has been wasted on areas like solar farms and turbine blade factories). The Government's carbon tax package includes a $1.2 billion program in subsidies to such developments.

Increased recent pressures for protection stem from the strong Aussie dollar making imports cheaper.

Steel, motor vehicles, clothing and horticultural products (which have quarantine restraints as trade barrier) are presently receiving or seeking protection from imports.

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 like Australia increasing its relative success while de-liberalising its import markets.

In fact, Argentina provided a salutary lesson of the results of this.

A century ago Argentina was richer than Australia but it adopted highly protectionist trade policies and sank into relative poverty from which it is only recently emerging.

THE liberalisation of trade over the past 60 years has been crucial to Australia's higher living standards. 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. However Australian policy directions in recent years detract from this potential.

Farm investment is discouraged by reducing farmers' access to water, locking up vast tracts of land in northern Australia and arbitrary decisions like that on live cattle exports.

A deregulatory approach is necessary as well as continued resistance to backsliding on protectionism to shift jobs and investments to areas that offer us the highest living standards.

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