Despite everything we know Australia can't shake protectionist instincts

Australia was built on the foundation of protectionism. In the early years of the colony and Federation large tariffs were placed on imports and Australian producers thrived. The practice continued until the 1980's without serious challenge.

The result of Australian protection was exactly as economic theory predicted. Short-term advantage and long-term harm. By the 1980's Australia was uncompetitive, produced low quality goods and vested interest groups from industry and trade unions demanded more not less protection.

Great progress was made after the Hawke government began to dismantle barriers and the benefits were seen in lower prices and greater variety for consumers. Australian industry competed or died. Short-term pain, but long-term gain.

It is particularly disappointing then that politicians revert to protection whenever it is easier to do so than dealing with the root cause of uncompetitiveness. We saw it when the carbon-tax was repealed in the 'why should we suffer' argument that let the rest of the world disadvantage itself by doing the right thing.  Now we see it with steel and shipbuilding.

The Productivity Commission has described the insistence on building the new Australian submarines in Australia using Australian steel as adding 30% to the costs of the project. The only justification is to keep jobs in Australia. They point out that this isn't the only areas that are getting regular, although often disguised, protection, with agriculture particularly benefiting.

The people paying the extra $15bn cost of the submarines are the taxpayer, (so much for reducing the deficit too), generally the consumer pays the extra price.

The ABC covers the story here

This article is useful for VCE students as it represents examples of current trade and supply side policy. It also represents a significant charge on government expenditure and so influences the Budget. IB students will be able to use this as an example of (shameless) protectionism and an illustration of the pros and cons of undertaking such a policy.

The problem with protection

There has been a surge in the popularity of ''economic nationalism" among politicians recently. Talk of tariffs to 'level the playing field' has become common in Europe, the US and Australia. It's a really dumb idea.

The arguments run something like this. "Imported goods are replacing domestic goods, our industries can't compete and that means they shrink or close leading to unemployment. We should put a tariff on imports to save jobs."

This thinking led to disastrous rounds of tariffs being imposed in the 1930's making the Great Depression much worse than it otherwise would have been.

Today Donald Trump wants a tariff to protect US jobs from China, there is a danger of a steel 'tariff war' and in Australia it's not just steel which raises the protectionist instincts of opportunist politicians.

Tariffs will raise prices and reduce imports. But the implications are much wider than this. While tariffs will be popular with those who might keep their jobs for a little longer they impose costs on the rest of the population, cause inflation and restrict growth, so lowering the long term standard of living.

The New York Times article below goes through the implications of the imposition of a tariff. This is an excellent analysis on the dynamic effects of a tariff and provides multiple evaluative points.

The New York Times article is here

IB students will find this an excellent resource for evaluating tariffs and understanding how the simple tariff diagram is only a static analysis. VCE students will be able to apply this to the idea of placing a tariff on imported steel to protect Australia's unprofitable industry.

Steel tariffs may hurt more than just the steel industry

The world is presently seeing a bout of 'economic nationalism' over steel. The US and China are just two countries who are raising tariffs on steel but this will have wide ranging implications for many.

A tariff is a tax on imports. The aim of raising the price of imports on the domestic market is to reduce demand for them. It is hoped that this will lead to import substitution, domestic consumers switch to domestically produced products. This will raise domestic output and employment and might reduce a current account deficit.

The diagram below shows the effects of the imposition of a tariff on steel by the Chinese on British made steel. (This is referred to in the BBC article linked below.)

Rather than analyse this standard graph today I want to look at the wider implications of the imposition of tariffs. Space will mean much of this article just suggests further investigation.


There are both gains and losses from using tariffs. When evaluating the imposition of a tariff we might look at the long-run and short-run implications, the effect on stakeholders, such as consumers, firms and governments and the advantages and disadvantages of the tariff.

There are no long-run justifications for putting a tariff on trade because it prevents specalization and the exploitation of comparative advantage. We know from economic theory that in the long- run everyone gains from trade. However in the short-run this might not be true. 

The article describes how China may be 'dumping' steel on the world market - that is selling steel below the cost of production. If this is the case then this is unfair and other countries steel industries will contract and jobs are lost. Even if the Chinese are not dumping (because they are able to produce steel more cheaply) another country might not want to see the sudden contraction of its steel industry with the resultant structural unemployment. Therefore in the short-run they protect their industry and manage its decline due to the loss of comparative advantage,

The stakeholders in the protected industry are often consumers. They lose out due to the imposition of tariffs because they pay higher prices and so lose consumer surplus. Another stakeholder is the government on the importing country. They gain tariff revenue and avoid paying greater unemployment benefits, both of which affect the government budget deficit. Notice here that the consumers who pay higher steel prices (by paying more for the goods made with steel) might be saved from higher taxes needed to pay unemployment benefits!

The static gains and loses represented by the diagram miss the dynamic gains and losses that can occur. The most obvious loss is that a trade war can result from placing tariffs on goods. This is evidenced in the article where one country imposing tariffs causes others to retaliate. The net effect is less overseas trade and slower economic growth worldwide. 

There are always more questions to ask in economics and students should look to find the right questions to ask to reach a valid judgement on the effects of any policy measure.

The BBC article is here 

This article is especially relevant to IB students who will find the tariff diagram is virtually always drawn at some point on Paper 2. However VCE and IB students need to practice evaluation - making a judgement based on economic theory and for that they need to ask wider questions about who is affected and how.

Anti-dumping measures, another crude attempt to resist efficiency?

Australia has decided to put an import tax (a tariff) on Italian canned tomatoes. Their argument that the Italians are pricing their product unfairly.

The one producer of canned tomatoes in Australia, SPC Ardmona, owned by Coca-cola Amatil, claim the Italian tomatoes are being 'dumped' on the Australian market.

The test Australia has applied is that Italian producers sell their product for less in Australia than they do at home. While this definition is seen a lot dumping is actually selling a good at less than the cost of production. Dumping is legal under World Trade Organization rules unless the foreign country can reliably show the negative effects of the exporting firm on the domestic producers.

It seems very unlikely that the Italians are making a loss. Italy's economy is in a perilous state and taking a long term loss just isn't an option.

So what might be the motive? A clue might come from one of the supporters of the move, 'The Australian Campaign'. This group argue that we should all buy Australian products in order to keep jobs in Australia. Never mind the quality or price.

In the short term such a strategy may work. However in the long run this policy would allow inefficient and uncompetitive firms to survive. Consumers will be much worse off as they pay higher prices and exports would dwindle as firms, protected from competition, could lose world market share. 

It is much better for jobs and prosperity to buy the most competitive goods, force domestic firms to compete or die and so allocate resources efficiently. It is very sad that protectionism continues to be given any credibility by such 'anti-dumping' actions,

In fact most anti-dumping tariffs last less than two years. They are withdrawn before the WTO can rule them as bogus.

The effect of the measure will raise profits and sales at SPC. The diagram shows this.

At present tomatoes sell for 60c a can. Total sales are 0Q2 with Q2 - Q1 being imported. Australian firms only produce 0Q1.

After the tariff the price rises to $1.40 a can and sales fall to 0Q4. Imports fall and domestic output rises to 0Q3. 

The problem is that the consumers lose out.The whole coloured area is lost consumer surplus. The green area represents inefficient production costs and the red area consumer surplus transferred to domestic producers (SPC).

The Sydney Morning Herald covers the story here

This article is directly relevant to VCE Unit 4 on policy goals and example of trade policy. IB students will study this is Unit 3 on international trade. The diagram shows how to apply theory to a real life example.

Update: Rather good article here,published on 16th Feb.
The Drum article is here

When is free trade not free trade?

Australia has 'concluded a free trade deal with Japan' and will sign another one with South Korea in the next two days. This is an important step forward, but isn't properly free trade.

In the eighteenth century Adam Smith, and in the nineteenth David Ricardo, showed that everybody gains from free trade. Economists have accepted this ever since. It is therefore astounding that any country retains barriers to trade in the twentyfirst century. However some do and so do Australia and Japan after this deal.

There is abolition of tariffs on some goods. Cars from Japan to Australia, for example, will fall from a 5% tariff to zero. But not necessarily all at once. Other tariffs are merely reduced, such as the tariff on beef from Australia to Japan, which was an eyewateringly high 38.5%  will be halved. A 19.5% tax is still huge as a barrier to trade.

Tariffs are not the only barrier to trade. Quota's used to be a popular way to reduce trade and the new deal allows an additional 20,000 tonnes of Australian cheese to be exported to Japan. Another popular barrier to trade is to extol the benefits of local products. Australia is a master of this is their 'Australian owned' or 'Australian made' propaganda.

The simple fact of the matter is that all trade barriers harm the standard of living of countries. What protection (or economic nationalism as it is often called today) does is raise the prices paid by consumers and protects inefficient domestic producers from competition. Competition forces down costs and promotes allocative and technical (productive) efficiency.

Australia suffers more than most developed countries from the protectionist fallacy. People buy into the idea that local jobs are 'saved' by it. All protection can do is delay the inevitable and, usually, when the trade barriers are removed the domestic industry is so hopelessly inefficient it closes. Ask Ford, Holden and Toyota if you need proof of this.

The ABC covers the trade deal here

Government refuses a subsidy to Coca-Cola

Yesterday the government decided not to give $25 million to a Coca-Cola subsidiary to help fund restructuring of a factory.

The factory in question is SPC Ardmona, which is Australia's only fruit processing factory (they basically can or package the fruit). The firm claim that they need the money to be able to reorganise and retool their factory so they can compete.

The decision of the government not to support the restructuring with public money has made a lot of people unhappy. This is an important issue and there are arguments on both sides. Amazingly the idiot Abbot has some good points on his side.

Those who want the government to subsidise SPC argue that without it jobs will be lost in the Shepparton area. Not just those who work for SPC, but also farmers who grow fruit locally.

In support of this argument there is the point that those unemployed will claim benefits paid by the very same taxpayers who would have to provide the $25 million investment. In the long-run this could prove to be a higher cost to the taxpayer. Also Shepparton may well decline as a regional centre and the farm land around it fall into disuse.

Another argument, that is sadly used all the time in Australia, is that it is all the fault of cheap imports. The implication being that their cheapness is somehow ‘unfair’.

The government argues that it is not their job to fund private firms, but to create the conditions where firms can operate profitably. (This is a supply-side argument.) They say that if firms can’t operate profitably it is better for them to shut down and the resources will be employed elsewhere where they can.

The argument about cheap imports is spurious. Cheap imports benefit the majority of the population; those who buy the fruit. The only losers are inefficient producers and their employees; a much smaller group.

Overall there is a short-run versus long-run argument here. In the short-run protecting (by subsidy) Australian firms can prevent immediate unemployment. By not protecting Australian firms mean in the long-run the economy will become more efficient as resources are released to new and profitable endeavours.

The Australian reports the story below. Notice how Tony Abbot implies that the working conditions of the workers are contributing to the high operating costs of SPC.

This is a matter we need to debate.

The Australian article is here

The high cost of manufacturing in Australia

The world started globalising five hundred years ago and the writing has been on the wall for high cost producers ever since.

No firm, and no government either, can subsidise a business indefinitely. The resources employed by a firm, must add more value to the process than they cost. The price that the firm must charge to achieve this must be lower than or equal too its competitors.

Of course there are other factors which can help you, quality, design and service all count for something. If that was not true then Apple wouldn't be in business. However you must in the long run be competitive somehow,

The car industry is a global industry. The same models are sold worldwide and there are plenty of manufacturers able to make them at the required quality. Australia simply can't compete in terms of costs or scale with virtually any of them.

Despite calls for government protection the car industry can't survive in Australia. And protection will cost jobs in the long run, not save them. If good government money is thrown after bad it will mean that resources are diverted from profitable, long run investments that will create the jobs of the mid 21st Century.

GM have explained their decision to pull out of Australia. The Age reports it below.

The Age article is here

Massive Holden subsidies harm consumers

It was revealed that Holden had received over $2billion in subsidies in the last 12 years, far more than previously thought.

The Australian government has long argued that subsidising industries is good for jobs in Australia. But most economists would disagree with this as both shortsighted and damaging to the economy.

The argument for subsidy relies on the idea that if it was absent then all the jobs in the industry would be lost, leading to higher unemployment and a lower standard of living in Australia.

The argument against this was first put forward by Adam Smith a then David Ricardo and has been backed up by a further 200 years of economics research. Simon Cowan of The Centre for Independent Studies has argued that if the subsidies were removed then consumers would benefit from lower car prices and the standard of living would rise as resources were redeployed to efficient industries instead.

The argument works like this:

* The car industry in Australia is uncompetitive and inefficient.

* Removing the subsidy means the industry loses money and shuts down.

* Those currently employed in car manufacturing and its supporting industries move to other sectors.

* The resources currently used up by the car industry are released for use by efficient Australian industries.

* All cars sold in Australia are imported from abroad (up from 75%) - these cost less to produce and will become cheaper as firstly the import taxes needed to protect Australian producers are scrapped and foreign producers gain economies of scale.

* Therefore consumers gain by getting their cars more cheaply (approx 1.1 million new cars are sold each year)

* Government can use the money used for subsidies to help reduce taxes or pay for other programmes such as Gonski.

Smith pointed out that competition leads to productive efficiency. Smith and Ricardo showed that with free international trade the most efficient suppliers produce the goods people want with each country specialising in the sectors they are comparatively best at. AS A RESULT EVERYONE IS BETTER OFF.

Australia has never been keen on this argument and despite reforms going back to Hawke/Keating Australia remains the most protectionist country in the G20.

The ABC covers the subsidy story here