Chapter 21 from: J.J. Ray (Ed.) "Conservatism as Heresy". Sydney: A.N.Z. Book Co., 1974

PROTECTING AUSTRALIAN INDUSTRY



By John Ray

To INTRODUCE THIS chapter, I want to quote extensively from an article by Peter Samuel which appeared in the Bulletin, 3 October 1970, pp. 24 & 25. The article went under the graphic, but entirely accurate heading: 'Now we know who the big spongers are'. Its figures are now somewhat dated but the message is still clear.

The nation's farmers are by no means Australia's greatest spongers on the public. The annual report of the Tariff Board presented last week estimated the value of tariff protection available to manufacturing industry as being worth some $2,710 million in 1967/68-sixteen per cent of the value of total manufacturing -production.

All told -- with direct subsidies, tax concessions and hidden subsidies -- the farmers are probably helped out to the extent of over $400 million a year. But this shrinks into relatively small proportions when put beside the hidden subsidies given to uneconomic manufacturing industry. On the Tariff Board's figures for 1967/68, this has probably now risen to $3,400 million this financial year, paid by Australians in the higher prices they have to meet due to the tariff barriers set up to control the import of foreign manufactures. (Not all 'available protection' is used, but a lot of industry uses all the protection available to it.)

Of course, Australian manufacturing is far bigger -- production value is $7,500 million compared with agriculture's $2,000 million -- but even so the proportional rates of protection suggest that the manufacturers may be doing even better than the farmers. In the rural sectors some of the biggest industries -- wool and meat, for example -- get relatively little protection, whereas in manufacturing some of the biggest sectors get very high protection indeed. And for the first time some authoritative figures have been produced.

The figures show that some of the really big hunks of tariff protection are in unexpected areas of manufacturing. The controversial industries, such as textiles and chemicals, do not appear to have the relatively huge rates of protection that are generally attributed to them. The yarn and cloth industry has a few high rates, but their average effective rate of protection is forty-two percent, which actually puts them just below average. Chemicals and fertilisers have an average rate of thirty-seven per cent, motor vehicles sixty-seven per cent.

The huge lumps of available protection are in areas that the Tariff Board has never made full inquiries about. Fully $708 million worth of protection (a quarter of the total) is available to the metal manufacturers industry, which has average rates of tariffs of eighty per cent. Machinery has $484 million worth, with an average rate of fifty per cent. Besides these totals of protection the amounts for well-known protected industries such as textiles ($61 million) and chemicals and fertilisers ($71 million) look almost moderate.

The Tariff Board has been saying for three years now that it wants to get down to a review of these large, ultra-high protection areas of industry.

The Tariff Board is quite explicit about its objectives. In the context of the Government's general policy of 'protecting economic and efficient industry' it sees its role as being the support of low-and medium-cost industries and the containment of high-cost industries. As Mr Rattigan put it in an address to the Royal Institute of Public Administration in Canberra recently, the board `should encourage those industries which are more suited to the Australian environment and discourage those which are less suited to this environment.' He sees it as a national tragedy that so much Australian capital is tied up in small, relatively unproductive factories when foreign firms are coming in with most of the action at the immensely profitable big projects like Gove and Gladstone. The Tariff Board wants to encourage rationalisation of industry into fewer units so that capacity can be used more fully and economies of scale attained. It hopes to see more specialisation, too, to get costs down and improve the competitiveness of Australian manufacturing.

How have the Australian public been cheated into paying out (in the form of government sponsored higher prices) such huge amounts to support inefficient industries? They have been duped by an unholy alliance of short-sighted trade unions and self-interested big businessmen. These two normally opposing groups are united in one instance -- contempt for the consumer.

It is a sad thing that the very businessmen who commonly avow support for such traditional conservative economic principles as free competition and laissez faire government are equally commonly the first to abandon such principles when to do so seems to offer selfish economic gain. That, however is not as surprising as the fact that the ordinary Australian who pays the piper continues to tolerate it. The only reason he does so is that he has been bamboozled by fallacious and dishonest arguments. It is hoped that the present chapter will help lay all such arguments for protectionism to rest.

The basic point to be understood is that no Australian industry would need protection if it operated at world standards of efficiency. Only inefficient industries need protection. The protection usually consists of a customs tariff charged by the government to anyone who imports goods from overseas suppliers. The government makes overseas goods artificially dear so that the inefficient local manufacturer will still be able to find some customers. Instead of paying $1,300 or thereabouts for a Japanese motor car, the government forces us to pay $2,000. We are so much the poorer, and the only beneficiary is the local big businessman who, perhaps for reasons beyond his control (small markets etc. ), is too inefficient to be able to supply a car for $1,300.

'But imported goods are often made with cheap Asian labour. No local supplier could hope to keep up when he has to pay our workers so much more!' This is almost entirely untrue. The average standard of living in Japan is for all intents and purposes the same as our own. In any case, it does not matter. The Indian rice farmer's labour is infinitely cheaper than the labour of one of our farm workers and yet we sell rice to India rather than the other way around. The only reason our labour is so dear is that it is also very productive and hence more valuable. If the Indian farmer had our education, skills, capital and land to work with, his labour would be expensive too. The price of labour reflects its average value. If a man is paid less, his labour is on average worth less (is less productive). If this seems hard to believe, any elementary economics textbook will spell the argument (and the proof) out more fully.

**The big bugbear in the public mind about imports, however, seems to centre around the fear that buying imported goods will take jobs away from Australian workers. The trouble about this fear is that it was once a realistic and perfectly accurate one. In the modern post-Keynesian world, however, where governments know how to control employment to any level they desire, the problem is generally one of a shortage of workers and inflation, rather than unemployment and depression. Since Keynes made his discoveries about economic management in the late 1930s, we have never had another depression -- nor need we ever have one. Economists now realise that the key to full employment is an appropriate level of government spending. Tariffs or any other means of preventing unemployment are completely unnecessary. Even in the days when tariffs were used for this purpose they were almost totally ineffective because other nations tended to retaliate by levying tariffs on our exports too.

What does happen, however, is that once you have got tariffs, it does create unemployment if you remove them. Tariffs are not necessary to create employment but if you have them there are changeover pains that deter you from removing them. Tariffs are to an economy like drugs are to a drug addict: it hurts to give them up, but it is worthwhile in the long run. However, abolition or steady reduction of tariffs would lead to not permanent unemployment, but simply the necessity for people who are working in inefficient industries to change jobs. Such industries would have to close once protection was removed. All such transitional problems could be ameliorated by appropriate government action on the welfare front. People who were thrown out of work could, until they acquired a new job, be given an unemployment benefit equal to that amount which they had been earning. Shareholders of companies that were forced to close could also be compensated appropriately. In the long run, it would all be very much worthwhile in terms of the increased efficiency with which the resources of the country were deployed. The transition costs would be infinitesimal compared to the long term gains. If anyone is in any doubt of this, let them look again at the figures given above for how much protection costs us now and do not forget that such a cost occurs every year. It is not just a 'once and for all' cost. Eliminating such costs would be an incomparable gain.

The other main argument for tariffs is that they help Australia be self-sufficient for defence and strategic purposes. This is true up to a point. One of the first things Adolf Hitler did when he came to power was to make sure that Germany was as self-sufficient economically as it could possibly be. For us, however, self-sufficiency might be less important. This is particularly so when we realise that the next world war is unlikely to take more than half an hour. There is scarcely likely to be any advantage in being able to make one's own tanks or planes then. Self-sufficiency would have helped us in the first and second world wars, but it is 'too late to shut the barn door now that the horse has escaped'. The likely nature of world wars has changed and it is about time that we woke up to the fact and stopped preparing for the second world war all over again.

Realistically, the only wars we are likely to have are limited wars such as the Korean and Vietnam wars. In such wars we know from experience that there is no difficulty in getting supplies from overseas, therefore there is no point in paying the huge costs that self-sufficiency would require. Even with our present high levels of protection, we have nothing like self-sufficiency. Our front line aircraft, the F 111, is fully imported, as indeed are our front-line destroyers, submarines and tanks. Talk of military self-sufficiency as a justification for tariffs is the most blatant lie and sham. Perhaps the greatest illustration of the fraud involved in appealing to defence as a justification for tariffs is the case of the Victa Airtourer. If any industry is defence-relevant then it is surely our own aircraft industry. And yet our government refused the Victa company a protective tariff to help its light aircraft project to survive. As it happened, the patents, machines and rights to the aircraft were bought out by a New Zealand firm and we now import an improved version of the Airtourer from New Zealand for use by our armed forces. By contrast, the industries that do enjoy tariff protection in Australia include our own plastic Christmas tree industry. Which are more important to defence: plastic Christmas trees or aircraft?

Self-sufficiency in defence is an impossible objective for us. Defence equipment designed and manufactured here could not possibly be as advanced as imports from the U.S.A. and Europe and it would be infinitely more costly. All the research and development expense would fall upon us instead of just part of it. Accordingly, we must simply tailor our national policies with this reality in mind. Protecting our plastic Christmas tree industry or even our motor vehicle or electronics industry will not help at all.

One argument that economists do generally concede has some force as a justification for tariffs is that 'infant industries' should be protected. This argument is based on the fact that some industries do become more efficient with experience. The difficulty is in saying why this is a good thing. Why do we need an industry that is inefficient -- even if it is only for a short time? Why should our people subsidise the setting up expenses of some businessman by being forced to pay higher prices? If there is a need for the industry concerned and the country does benefit from having it, then a more appropriate way of giving it support would be by way of subsidy. That way the total cost would be on public display and would have to be examined and justified afresh in parliament every year. As it happens, however, most of the industries that the government protects are not so much infant industries as senile industries. The motor vehicle industry, for instance goes back to 1919 and yet it still needs huge protection. Even the manufacture of complete cars goes back to just after the second world war. When are the infants going to grow up?

There are other arguments for protection that occur from time to time but, whatever grain of truth they may contain, they could never be sufficient to justify the ramshackle edifice of tariffs that successive Australian governments have built up. In fact almost any rational or fully thought out policy towards tariffs would be better than what we have now. The only possible explanation for our present pattern of tariffs is the relative strengths of the pressure groups and special interests that secured them -- that secured them, almost invariably, against the public interest.

Under a system of complete free trade Australia would of course be a much more specialised country. We would do fewer things, but do them better. We would, however, not necessarily become merely a quarry or a farm for the world's more industrialised nations. Australia exports now many industrial products -- including steel. Most of these industrial exports would continue. They already comprise roughly a quarter of what we export and should in fact become even more competitive if tariffs were abolished. This is because tariffs are a devaluation substitute and tariff abolition would necessitate a devaluation. A devaluation, however, would mean that our manufacturers would get more Australian money in exchange for overseas currency, so they could afford to cut their overseas price. Even if our exports of manufactured goods did not expand what is wrong with being a big supplier of primary goods? Expanding world populations and rising living standards ensure that food-producing industries have a great future. To be a primary producing country may in fact be a great advantage and the highroad to wealth.

We now know also that tariff cuts are politically practicable. The twenty-five per cent tariff cuts ordered by the ALP government are a great departure from traditional trade-union protectionist policies, but they do set a precedent which others could follow. Any government that has the interests of the Australian consumer -- and that means all of us -- at heart will continue the program of gradual tariff cuts until the Department of Customs and Excise has been completely abolished.

POST-PUBLICATION ADDENDUM

** Events have since overtaken this comment. In the early 1970's Keynesian anticyclic policies did seem to be working in the Australian economy. Very soon after that they stopped working, however, and it is now clear that the principal government policies needed to secure low rates of unemployment are continuing pressure on labour-market rigidities and maintenance of a stable money-supply.

Most unemployment is in fact caused by government meddling -- usually but not entirely under Leftist influence. Official disincentives to employment such as payroll tax, generous welfare payments to the unemployed and the unrealistically high minimum hourly rates of pay enacted under strong union pressure are the biggest influences preventing full employment in Australia in the early 21st century.

It may also be noted that in the 30 years since the chapter above was written, Australia did greatly reduce its level of tariff and other protection to industry but -- thanks largely to labour market reform -- still had a level of unemployment that was lower than many if not most other affluent countries. The most instructive comparison was with the heavily protected European Union. Did the high EU levels of protection mean that EU countries had low levels of unemployment? Far from it. The level of unemployment in most EU countries was in fact roughly DOUBLE the Australian level. So much for protection!