Michael Emmery
Economics, Commerce and Industrial Relations Group
19 October 1999
Contents
Major Issues
Introduction
Australia's Experience with Trade
Liberalisation
Overseas experience
Conclusion
Endnotes
Glossary
APEC Asia-Pacific Economic
Cooperation
GATT General Agreement on Tariffs and
Trade
(replaced by the World Trade Organisation)
IRS Information and Research
Services (of the Parliamentary Library)
NTB Non-tariff barrier
OECD Organisation for Economic
Cooperation and Development
PMV Passenger Motor
Vehicles
R&D Research and
Development
TCF Textiles, Clothing and
Footwear
WTO World Trade
Organisation
Major Issues
Industry policy in Australia has been subject to
a major transformation over the last 30 years. Barrier protection
to manufacturing industries, mainly via tariffs, has been reduced
from 35 per cent to five per cent in 2000-01, thus moving Australia
a long way towards the Asia-Pacific Economic Cooperation (APEC)
goal of free trade access to developed countries by 2010. At first
glance, the protection debate appears to have been largely won by
trade liberation supporters and to be on the brink of becoming a
non-issue.
However, protection remains a controversial
issue. There are strong arguments for continuing to treat barrier
protection, and the broader aspects of industry policy, as
important and dynamic economic policy issues. The cost of
assistance to manufacturing remains substantial at $3.3 billion in
2000-01 and this assistance is unevenly distributed with about 40
per cent going to the textile, clothing and footwear (TCF) and
passenger motor vehicle (PMV) industries.
Tariffs in Australia, and in most other Western
countries, have declined over a two to three decade period.
Australia lagged behind most of its trading partners in the early
stages of this process but has now caught up and has average tariff
levels comparable to those in the United States, European Union and
Japan.
With the declining importance of tariffs, it is
important that policy makers pay more attention to the alternative
tools for achieving industry policy objectives, namely non-tariff
barriers, anti-dumping measures and assistance through the Budget
(sometimes referred to as State aid or Public Support for
Industry). Compared with other Western countries, Australia is an
almost negligible user of non-tariff barriers but a major user of
anti-dumping measures.
Budgetary assistance to manufacturing in
Australia peaked in 1994-95 and declined significantly in the next
four years. The current level of Budget assistance is equivalent to
2.3 per cent of value added in Australian manufacturing, or $1319
per person employed in manufacturing. In the European Union, there
was also a distinct downward trend in Budget assistance to
manufacturing over recent years. Another feature of European Union
assistance is that over half of it is directed at regional
objectives while this accounts for a very minor component of
Commonwealth Budget assistance in Australia. This may well change
given the renewed interest in rural and regional Australia.
The history of Australia's trade liberalisation
shows that it has been a slow and politically sensitive process. It
is a process that can easily 'run off the rails' as it did with the
massive increase in quota and other protection to the TCF and PMV
industries in the late 1970s and early 1980s at a time when the
average level of assistance to other manufacturing activities was
declining. While protection continues to provide large benefits to
a few industries, these industries, supported by the affected
unions and State governments, will continue to resist further
liberalisation.
The Tariff Board, and its successor bodies, have
played an important role in opening protection issues for public
scrutiny, for providing well-researched background on the costs and
benefits and for persuading the Government to take a more
comprehensive (less ad hoc) approach to industry assistance
measures.
The last period of Labor Government, and in
particular the Button Plans, demonstrated that major structural
change can be facilitated, and supported by the major players,
where sufficient effort is made to spell out the rules of the game
and to establish closer partnerships between Government and
industry. This was also an era when industry policy was
increasingly seen in a broader economic and social context. One
reason why the strong move to trade liberalisation in the late
1980s and 1990s was politically acceptable was that it was part of
a much wider reform movement to open up the Australian economy and
make it internationally competitive. These economic reforms were
supported with a strengthening of the safety net to retrain and
assist displaced labour.
There are several aspects of the current
situation which suggest the need for particular sensitivity in
handling industry protection issues. One is the narrowing time
frame for achieving the APEC goal of free trade by 2010. With the
freezing of PMV and TCF tariffs to 2005, the window of opportunity
for further major adjustments in these industries has been greatly
reduced.
At the same time, there has been a re-emergence
of protectionist pressures both in Australia and overseas. This
forms part of the mounting criticism of the broad approach which
Australians commonly term 'rational economic policies' which
include smaller government, lower taxes, more open economy, greater
domestic competition and a strong emphasis on economic efficiency
and cost cutting. In this climate, the trade liberalisation verses
protection debate remains alive and relevant.
Introduction
This paper complements the recently released IRS
Research Paper Industry Policy in Australia.(1) It relates
the key events in the tariff policy-making process, and in the road
to trade liberalisation, which occurred between the late 1960s and
1996 when the present Government came to office.
The Industry Policy in Australia paper
examines developments since 1996 and speculates as to the future
directions of industry policy. It identifies many uncertainties and
continuing debate about the future of industry policy, for example,
the steps necessary for Australia to achieve its APEC commitment to
free trade by 2010, and to shift the policy focus towards the
stronger-growth, knowledge-intensive industries.
This paper examines how the policy mix has
changed over time with an emphasis on identifying the drivers of
change and providing a better understanding of the macro-economic,
industry, bureaucratic and political forces that led to the major
transformation of industry policy in Australia over the past 30
years. It is hoped that some lessons from the past can help today's
policy makers with the policy challenges facing them. The saying
'those who cannot remember the past are condemned to repeat it'(2)
appears very relevant to industry protection issues.
Three main subjects are covered in the
paper:
-
- the history of the trade liberalisation process in Australia
from the late 1960s through to 1996, and the roles of the key
stakeholders in that process
-
- trends in the cost of assistance to manufacturing industry,
from tariff and other barrier protection measures and through the
Budget, and
-
- a brief review of comparable trends overseas, covering tariff
and non-tariff barriers in Organisation for Economic Cooperation
and Development (OECD) countries.
Australia's Experience
with Trade Liberalisation
History of Tariff
Policy
The Tariff Board, and its successors the
Industries Assistance Commission and the Industry Commission (which
has now been absorbed into the Productivity Commission), has been
the key institutional force behind the evolution of tariff policy
in Australia. The Tariff Board was established in 1921 under the
Tariff Board Act 1921-1966. Its main responsibility was to
advise the Government on questions of assistance to Australian
industries. In particular, it was charged with reporting on 'the
necessity for new, increased, or reduced duties' and on 'the
necessity for granting bounties for the encouragement of any
primary or secondary industry in Australia'.
In the 1930s, tariff barriers were substantially
increased in a series of tariff proposals (the Scullin tariffs)
aimed at protecting Australian industry and employment from the
ravages of the Depression and tackling the balance of payments
difficulties. These tariff barriers were erected without industry
reviews and were not determined on a 'needs' basis. When a
systematic review of industry tariffs was commenced in the 1970s,
it was found that there were significant areas of unused protection
in the existing tariff structure.(3)
The work of the Tariff Board had little effect
on the development of Australian industries between the late 1930s
and the early 1960s. The rigid import controls during the war were
followed by a worldwide shortage of goods and then for most of the
1950s, quantitative controls were imposed on imports for balance of
payments purposes. Import licensing was removed in 1960. The role
of the tariff and its relationship to the Government's national
economic objectives was reviewed by the (Vernon) Committee of
Economic Enquiry (1963-65) but the Government's response gave
little guidance as to what it wanted from tariff policy. The
Government did stress, however, that the Tariff Board was an
independent advisory body; and not a
policy-making body.
Rattigan
Challenges McEwen
Protectionism
The need for change in Australia's tariff system
began to be seriously articulated from within the Tariff Board in
the period 1963-66 with the driving force being the Chairman of the
Board, Mr Alf Rattigan. Rattigan was appointed to the position in
late 1962 by Mr John McEwen, the Leader of the Country Party
and Deputy Prime Minister. Rattigan's previous position had been as
permanent head of the Department of Customs and Excise that formed
part of McEwen's portfolio.
A philosophical gulf rapidly emerged between
McEwen and Rattigan. The Minister represented the protectionist
side of the debate and was opposed to any broadbrush dismantling of
the trade barriers protecting Australian manufacturing. Faced with
the conflicting interests of the less protected rural sector and
the more protected manufacturing sector, the Government was
reluctant to provide the Tariff Board with clear guidelines as to
the criteria that should be applied in setting tariff levels. The
official guideline was that the Government would provide adequate
protection for 'economic and efficient' industries but this just
begged the question as to how economic and efficient should be
defined. McEwen in his memoirs said that he believed 'all-round
protection' of all import competing and export industries was
possible. However as Professor Fred Gruen pointed out there were
enough economically literate people around to expose the
illogicality this entailed. Protecting everybody effectively means
protecting nobody. 'Protection all-round' only makes sense
politically because it means that the different pressure groups are
each beholden to the protecting government.(4)
Rattigan on the other hand has come to be known
as a great proponent of free trade. This may be a true reflection
of his impact on industry policy, but it was not where he started
from in 1963. In his autobiography(5), he outlines the following
aspects of the dilemma that faced him when he took up the Tariff
Board chairmanship. He was head of a statutory authority charged
with the task of undertaking public reviews and providing
independent advice to the Government on adequate protection for
economic and efficient industries. The Government did not wish to
spell out an interpretation of economic and efficient. And the
modus operandi that the Board had followed in the 1930s appeared
increasingly inadequate to cope with the protection issues of the
1960s.
The early inquiries by the Board had three
important characteristics. The inquiries were initiated by the
Government. They usually covered only a few products and not the
whole output of the manufacturers seeking assistance. Finally the
level of assistance recommended was primarily based on the
estimated notional cost disability incurred by the Australian
manufacturer relative to the cost of the imported product. In
practice, the notional cost differential was in most cases based on
differences between Australian and United Kingdom costs using the
guidelines established under the United Kingdom-Australia Trade
Agreement for determining the preference margin for British
imports.
The outcome of this review mechanism was that
recommended tariffs generally provided Australian manufacturers
with a made-to-measure level of protection from British imports
based on the notional cost formula. This provided a substantially
higher level of protection against imports from other countries due
to the preference margin for British goods specified in the above
Trade Agreement.
By the 1960s, a rapidly increasing proportion of
Australia's imports of secondary goods (mainly machinery, equipment
and components) was coming from countries other than the United
Kingdom. These countries were the most likely source of competition
for many Australian secondary industries sheltered from import
competition by very high tariffs. In these circumstances, the
detailed United Kingdom cost information on which the Board's
traditional criteria was based was no longer relevant to the
majority of inquiries; and similar information about costs of
production was generally not available for other
countries.
The friction between McEwen and the Tariff Board
surfaced in a number of areas. One example was in the wording of
references from the Government to the Board. In 1963, McEwen
started sending references to the Board, which although somewhat
ambiguous in their wording, were clearly designed to guide the
Board in framing their recommendations. These references contained
the standard request that assistance should be accorded to economic
and efficient industry in Australia but added the proviso that
assistance be determined in the interests of achieving:
-
- a reasonably profitable development of a soundly based
industry
-
- effective protection from competition from imports at dumped or
disruptive low prices, and
-
- effective and stable protection of employment and investment in
the industry.
Another area of conflict was with respect to the
membership of the Board and the remuneration of its members. In
1964, McEwen did not accept the nominations put forward by Rattigan
to replace two retiring Deputy Chairmen of the Board, and
effectively put a ceiling on their salaries. In his memoirs,
Rattigan laments:
The Minister's handling of the replacement of
(deputy chairmen) Clark and Heyes showed me that I would not have
any real say in appointments to the Tariff Board, and the action
regarding salaries convinced me that the Minister and the
Department wanted to reduce the possibility of very capable people
being appointed to the Board.(6)
Rattigan sums up the deficiencies he saw in the
operation of the Tariff Board after about two years at its helm in
these words:
The Board was not carrying out all the functions
given it under the Tariff Board Act. It was not providing, through
its inquiry procedures, an opportunity for informed public
discussion about the major issues regarding assistance for
particular industries; it was not fulfilling the explicit
requirement in the Act to report annually on the operation of the
Tariff and the development of industries; it was not using its
powers to initiate inquiries to examine and report on matters that
were obviously cause for public concern, for example, the continued
protection of a number of industries by very high levels of Customs
duty imposed in 1929-30 as an emergency measure during the great
depression.(7)
The Tariff
Reform Program
An important start to the tariff reform program
came in August 1967 when the Tariff Board in its Annual Report for
1966-67 put the following proposal to the Government:
The Board proposes a progressive and systematic
review of the Tariff consisting of an internal examination by the
Board of the structure and levels of protection in the Tariff,
together with public inquiries into the main areas of production
where there has been no recent public inquiry and where the levels
of protection are in the medium to high range.
The Board would study the structure and levels
of protection to establish an initial classification of industries
into those that have high, medium and low levels of protection in
relation to the overall level of assistance available to Australian
import competing industries.
The main reason given by the Board for the
proposed review was to enable it to relate the operation of the
Tariff more fully and consistently to the Government's national
economic objectives. It would seek to do this by encouraging the
development of, and the flow of new investment into, economic
activities in the less protected sector.
The Board argued that industries in the highly
protected area should be reviewed first in the sequence of public
inquiries. It stated:
in its recommendations, the Board would aim at
least to contain industries in the high cost area other than those
demonstrating clearly compensating external benefits and those
which can show beyond reasonable doubt prospects of operating with
substantially lower levels of protection within a reasonable time.
Subject to these qualifications, this would involve recommending
against protection for any new products requiring a high level of
protection...and discouraging the commitment of new resources to
increase the rate of production of existing high cost
products.(8)
The Board went on to say that in regard to
industries in the medium protection range, it would adopt a
watchful attitude, having particular regard to their future
prospects and likely influence on other industries.
Industries in the low protection category would
not necessarily be the subject of review inquiries. The Board would
adopt a liberal attitude to low cost industries and aim at
encouraging the maximum expansion in this area. This would include
providing anticipatory protection to cover any new products likely
to be produced economically.
To commence the public review of the tariff, the
Board requested references covering production in Australia of all
machinery and mechanical appliances. It noted that duties in this
area ranged up to75 per cent; and there was provision for
ready-made protection at 55 and 60 per cent ad valorem for a wide
range of products not yet produced in Australia.
The Tariff Board, in its subsequent Annual
Report for 1967-68, presented two classifications which provided a
ranking of manufacturing activity by level of protection. The first
was based on the existing nominal protection applying to final
products as shown in the Australian Tariff. The second ranking was
based on industries rather than products; it showed the proportion
of the output of each industry group subject to different levels of
nominal protection.
The Board took another important step in the
development of Australia's tariff policy when it argued that the
better and more equitable method of measuring cost of protection is
the 'effective rate' rather than the 'nominal rate'. The effective
rate measures the assistance accorded to the value added in a
production activity by taking account of the nominal protection
accorded both to the final product and to the materials used in
that activity. For example, higher protection could be justified
when an industry used inputs made more expensive by tariffs.
Accordingly the Board set its points of
reference for identifying high, medium and low cost production in
effective rate terms as follows:
-
- high cost-effective rates exceeding 50 per cent
-
- medium cost-effective rates between 25 and 50 per cent,
and
-
- low cost-effective rates of 25 per cent or less.
The future course of Australia's tariff policy
was now clearly in the Government's hands. The Tariff Board had put
forward a proposal for a systematic and comprehensive review of
tariffs which contrasted markedly with the past practice of ad hoc
reviews being undertaken in response to manufacturers' requests for
additional assistance. In the following two Annual Reports (for
1968-69 and 1969-70), the Board restated its arguments for the
proposed review program and outlined its research on levels of
effective protection and trends in the competitive position of
Australian industry. The 1969-70 Report provided estimates that the
average rate of effective protection available to individual
Australian manufacturing industries ranged from 0 to 120 per cent,
the average rate for manufacturing industry as a whole was 46 per
cent and this was equivalent to a subsidy of about $2700 million
per annum.
The Board's proposal for a systematic review of
the tariff was actively debated in the community throughout the
period 1967 to 1971. Strong opposition came from the manufacturing
lobby groups, in particular, the Australian Industries Development
Association and the Associated Chambers of Manufactures of
Australia. The key argument put by these groups was that the
classification of certain industries as high cost was prejudging
them to be not economic and efficient, without public inquiry, and
hence discouraging investment in them.
The main support for the Tariff Board's proposal
came from the commerce and farm lobby groups, from a number of
academics and from the majority of economics writers in the daily
press.
The Government resisted involvement in this
debate in the public arena with its standard response being that it
was satisfied with the traditional approach to tariff making. But
behind the scenes it was clear that McEwen and his Department
supported the manufacturing lobby and were actively at work seeking
to discredit the Board's approach or find ways to by-pass its
impact. One such avenue was through the administration of the
by-laws in the Customs Tariff. In 1969 and 1970, local content
plans were commenced for a range of machines and equipment which
provided very high levels of protection for the local manufacturers
of components and parts for these machines. The cancellation of
by-law entry on these components gave producers of the final
products little choice but to buy the limited range of locally
produced components or establish their own component
manufacture.
The Government's response to the Tariff Board's
request for a comprehensive review of the tariff was finally made
in January 1971 in the midst of a volatile public debate following
the leaking to the press of a Cabinet Submission prepared by
McEwen. It was, as expected, critical of the Board's new approach
saying that it would put production by all Australian industries
requiring more than 50 per cent protection 'at risk'. This
represented 40 per cent of existing manufacturing industry with an
investment in excess of $3000 million and employment for about 600
000 workers. It also argued that to proceed further with the
Board's new approach would be an acceptance by the Government that
it now wanted the Board to play the role of an economic planning
agency with the task of reallocating resources within the
economy.
McEwen's submission, however, did propose that
the Government announce a progressive review of the tariff but that
the review should be undertaken subject to a set of guidelines
specified by the Government, and not according to the Board's
criteria. It also proposed that no increased resources be made
available to the Board for review work in the immediate future and
that the Board should rely wherever possible on information and
expertise within the relevant departments and not build up its own
fact finding staff.
On 27 January 1971, the Government announced
that there should be a comprehensive review of tariffs as
recommended by McEwen and that the criteria under which the Board
should operate would be examined at a later date, although no
timetable for the comprehensive review was agreed to.
McEwen retired from office on 1 February 1971
bringing to an end one of the most powerful influences on
Australia's trade and industry policy.
The Anthony
Years 1971-72
During the early 1970s, the Tariff Board
undertook a number of initiatives to increase its capacity to
undertake a comprehensive tariff review. The manufacturing lobby,
through the Office of Secondary Industry and the industry Minister
Doug Anthony, countered by seeking to impose a number of barriers
to limit the growing influence of the Board in industry policy
matters. The following examples illustrate this ongoing struggle to
control the industry policy agenda.
The Tariff Board moved to increase its work
capacity by seeking Government agreement to the appointment of a
ninth member to the Board and to the use of single member Boards
for the hearing of non-tariff inquiries covering issues such as
by-laws and dumping. After some delays with arguments as to the
role of the ninth member and the role of single member Boards, the
necessary legislation for these changes was passed in 1971 and a
new member appointed in March 1972. The Chairman of the Board was
granted the discretion to use the new member as he saw
fit.
Other actions which generated controversy
were:
-
- the use of academics as consultants to assist the staff of the
Tariff Board
-
- a proposal to add a research branch to the Board's structure,
and
-
- the use of the Board's Annual Reports to discuss general
protection and development of industry issues.
On the staff issue, opponents of the expansion
of the Tariff Board argued that the necessary research should be
done in the industry department and that the consultants were
'anonymous specialists' who were not accountable to the Board. In
more colourful terms, one manufacturing lobby observed:
The Tariff making process in Australia is off
the rails ... it is headed for a situation in which decisions will
be made by a back-room research unit of public servants assisted by
academics and presented in the guise of unquestionable truth.(9)
This question of the use of university
specialists and the reporting on general protection and industry
issues in the Annual Report also lead to a division amongst members
of the Board with three Members submitting dissenting opinions in
the Annual Report for 1970-71.
This period provided the first real indication
of the assistance the Tariff Board would recommend for the products
of the machinery and metal products industries which had high
levels of protection and had not been subject to recent review. In
1971, the Board recommended major cuts (50 per cent in many cases)
in the protection on a range of machinery items that would bring
the general tariff rate down to levels in the 20-30 per cent range.
After some delay, Anthony announced the Government's acceptance of
these recommendations.
The Tariff Board moved to accelerate the tariff
review process. It submitted a plan to complete the tariff review
by December 1978-a period of six years. The plan set out the
products and processes to be covered by each inquiry, the dates and
procedures to be followed and the Board's intention to provide all
interested parties with the statistical information available about
the industry under review. The Government accepted the Board's
tariff review plan in April 1972.
Anthony sought to counter the concerns of
industry. He referred to the desirability of reducing the role of
the tariff in assisting the development of secondary industry and
called for closer cooperation between industry and government with
an invitation to manufacturing industry to think about ways in
which a more fruitful partnership of this kind could be
developed.(10)
The Whitlam Era
1973-75
The election in December 1972 of the first Labor
government for 23 years, with a strong mandate for social and
economic reforms, gave a boost to the advocates of trade
liberalisation. Prime Minister Whitlam moved quickly:
-
- to send a long delayed reference on television receivers to the
Tariff Board
-
- to transfer responsibility for the Tariff Board from the
industry Minister to the Prime Minister's own portfolio
-
- to establish an interdepartmental committee to examine the
needs for structural adjustment policies covering training,
retraining, relocation of the workforce, adjustment help for the
affected industries and social security and welfare measures to
protect dividual workers and their families from hardship. The
industry Minister Jim Cairns also proposed the establishment of a
Structural Adjustment Board with a capacity to provide financial
assistance to industry but this did not materialise, and
-
- to expand the Tariff Board into the Industries Assistance
Commission to advise the government on all forms of assistance to
all sectors of the economy. This action followed a brief inquiry
and recommendation by Sir John Crawford, previously Vice-Chancellor
of the Australian National University.
The above actions were largely Rattigan's
suggestions which he persuaded Whitlam to implement. But while the
Prime Minister was a firm supporter of Rattigan and his tariff
reform program, his industry Minister, Jim Cairns, showed a great
interest in increasing the economic and industry planning
functions. In particular, Cairns set about expanding the industry
panel system which had been set up by Anthony and increasing panel
membership to include government, industry, union, consumer and
academic representatives.
The movements in trade protection in this period
were strongly influenced by the sharp movements in the economic
cycle. In early 1973, the Australian economy was buoyant. Industry
was operating at close to full capacity, unemployment was falling
and the balance of payments position was strong. But private and
public demand was rising rapidly, retailers were reporting
shortages of a wide range of goods and there was a big risk of a
blow out in inflation. The Whitlam Government had appreciated the
Australian dollar in December 1972 and now looked to reducing the
inflation pressure by cutting tariff levels.
A small Committee chaired by Rattigan was
established to assess this proposal. As requested, it reported
after only three weeks. It recommended a 25 per cent
across-the-board reduction in all tariffs. The Committee estimated
that such a tariff cut would have an impact on imports equivalent
to a currency appreciation of about six per cent but should be
preferred to the latter action in terms of its expected greater
impact on stimulating imports and cutting inflation. In addition, a
tariff cut would have long-term benefits in terms of improving
resource allocation. The Committee estimated that the tariff cuts
would require changes in employment for up to 30 000 people and
recommended that a range of assistance measures be made available
for both the employees and the industries affected.
Rattigan passed the Committee's report to the
Prime Minister on 16 July 1973 and the Government announced
acceptance of its recommendations the following day. The largest
adjustment to Australia's tariff protection had been achieved
without reference to the Tariff Board, without public inquiry and
within a matter of weeks.
The economy was allowed little time for the
adjustment process triggered by the 25 per cent tariff cut to work.
By mid-1974, the economy was slowing and some affected industries
were quick to blame the tariff cuts for their woes. In particular,
Leyland closed its Sydney motor vehicle plant with the loss of 2600
jobs and the Chairman of Philips claimed 12 000 electronics
industry workers would lose their jobs over the next 18 months. In
October, the South Australian Government argued that implementation
of the Industries Assistance Comission recommendations on the car
industry threatened 15 000 jobs.
A major public inquiry by a large committee
chaired by Gordon Jackson, chief general manager of CSR Ltd was
announced in July 1974. Its Report in May 1995
recommended:
-
- tariffs should be reduced to selected benchmark levels 'by
small, gradual and predetermined instalments over five to fifteen
years. The reduction instalments should be inexorable, except for
suspension during any period of significant
unemployment'(11)
-
- positive assistance measures should be introduced to promote
new investment in efficient, internationally competitive and
export-oriented industries, and
-
- establishment of both Commonwealth and State Industry Councils
to involve the key stakeholders in the design of the adjustment
process.
Rattigan was a member of the Jackson Committee
but did not support the majority approach to industry assistance
and presented a dissenting view. The Committee reported just prior
to the demise of the Whitlam Government but the broad thrust of its
assessment of a desirable industry policy framework was
incorporated in the Fraser Government's subsequent White Paper on
Manufacturing Industry.
The Fraser
Years
1975-82
The trade liberalisation process was partially
derailed in this period. While Fraser with his rural background was
a strong advocate of freer trade in the long run and preached its
merits in international fora, his Government succumbed to enormous
pressures from selected industries and state governments to
maintain or strengthen the protective mantle.
The 1975 recession led to increasing pressures
from manufacturers, supported by the unions, for protection to be
by quantitative restriction, rather than by the tariff and for
temporary protection by way of import quotas. As can be seen in
Table 1 below, the following six years witnessed a massive increase
in assistance to the clothing and footwear and the motor vehicle
and parts industries. This was largely offset by lower tariffs for
a range of other manufacturing activities which flowed from the
progressive review of the high cost industries by the Industry
Commission.
A commitment made by the Whitlam Government to
continue the local content plan for passenger motor vehicles formed
the basis for the explosion in protection to this industry. The
Industries Assistance Commission, in July 1974, had recommended the
immediate abolition of the local content plans, a temporary
increase in the tariff, and then its phasing down over seven years
to 25 per cent. In November that year, the Government first
increased nominal tariffs on motor vehicles and subsequently
detailed a ten year plan to introduce a new local content plan, to
use import quotas to restrict imports to 20 per cent of the local
market and to provide for new manufacturers to enter the plan. The
strong protection policy, together with the switch in demand to
smaller, four cylinder cars encouraged the entry of two new
manufacturers, Nissan and Toyota, and contributed to the already
substantial problems of this fragmented industry with too many
makes and models and an operating efficiency far below world best
practice levels. The outcome was a further decline in the
competitiveness of the Australian motor vehicle industry and an
increase in the level of assistance provided.
The protection regime for TCF was equally
complex, cumbersome and inefficient. The industry was protected by
a web of tariffs, bounties on intermediate products and import
quotas which set the level of imports and hid from view the
deteriorating competitive position of the local industry. The
Industry Commission notes TCF quotas were constantly being
'fine-tuned'. Temporary restrictions were imposed, would lapse,
only to be re-imposed or superseded by a general measure. Between
1968 and 1986, over 40 separate announcements relating to changes
in TCF quotas were made.(12) In addition to the economic costs of
high protection were the costs to industry of lobbying and
compliance, the administrative costs to government and the climate
of uncertainty which stifled forward planning.
Labor and the
Button Plans-1983-95
In the early 1980s, large parts of Australian
manufacturing were recognised as seriously lacking in international
competitiveness and in urgent need of restructuring to promote
innovation, modernisation and efficiency. John Button recalls that
at the beginning of his long term as industry Minister, there was a
prevailing atmosphere of gloom. He notes:
Australian manufacturing industry was still
focused on the domestic market. Factories were closing. People were
not prepared to think much about longer term solutions. There was
no export culture.(13)
The next five years witnessed major changes to
macroeconomic policy and industry policy. A series of initiatives
were taken to open up the Australian economy to greater
international competition with the main steps in the early years
being on the macro-economic front with the floating of the exchange
rate and deregulation of the banking sector and controls on capital
movements. The floating of the Australian dollar allowed trade
liberalisation to be pursued more as a microeconomic (efficiency)
objective rather than as a macroeconomic objective as had been the
case with the earlier 25 per cent tariff cut.
The new approach to industry policy was based on
the implementation of a series of industry restructuring plans for
the main industries facing difficulties with foreign competition,
namely the PMV, TCF, heavy engineering, steel and shipbuilding
industries. The plans were designed to be temporary and to inject
generous positive assistance to help these industries to modernise,
innovate and find new markets and at the same time to firmly wind
down the high levels of protection afforded to most of their
products.
The changing emphasis of industry policy in the
mid-1980s is reflected in the following quotes from the Annual
Reports of the Department of Industry Technology and
Commerce:
In approaching the task of restructuring
manufacturing industry the Government has adopted two complementary
strategies. The first is to deal with the structural problem of
mature industries which developed under the highly protective
regime of previous decades. The purpose of this strategy is to
provide these industries with assistance measures to adjust to
increased international competitive pressure, with the ultimate
objective of seeing them stand on their own feet in the
international market place.
The second strategy, which is important to
manufacturing industries generally, is the development of industry
policies of general application designed to improve export
orientation, technology capacity and growth in new
areas.(14)
In recent years the focus on industry policy has
shifted from an essentially defensive orientation based on barrier
protection to a forward-looking approach based on facilitating the
development of industries which are more internationally
competitive, export oriented and innovative. Industry policy is now
concerned with transforming rather than preserving existing
structures.(15)
The late 1980s saw a shift from
industry-by-industry reviews, and downward adjustments to tariff
assistance for those industries, to a general program to phase down
most tariffs. In 1988, the Government introduced an
across-the-board program to phase down all tariffs (except for PMV
and for TCF which had their own tariff reduction programs) to
either 10 per cent or 15 per cent by 1992.
This general tariff reduction program was
extended in 1991 as the key plank in a new initiative entitled
Building a Competitive Australia. This announced the phase
down of general tariff rates over four years from 1992 to 1996 from
15 and 10 per cent to a single rate of five per cent. In addition,
tariffs on PMV would be reduced to 15 per cent by the year 2000 and
for TCF, quotas would be terminated in 1993 and tariffs phased down
to a maximum of 25 per cent by the year 2000. These tariff cuts
were to be accompanied by measures to enhance labour market and
training programs and to exempt inputs to goods production from
wholesale sales tax.
The above announcements in 1991 were accompanied
by some of the strongest statements made by Australian politicians
in favour of trade liberalisation. Interestingly they were made at
a time of economic recession and high unemployment. Prime Minister
Hawke stated:
Mr Speaker, the most powerful spur to greater
competitiveness is further tariff reduction.
Tariffs have been one of the abiding features of
the Australian economy since Federation. Tariffs protected
Australian industry by making foreign goods more expensive here;
and the supposed virtues of this protection became deeply embedded
in the psyche of the nation.
But what in fact was the result?
Inefficient industries that could not compete
overseas; and
Higher prices for consumers and higher costs for
our efficient primary producers. Worse still, tariffs are a
regressive burden-the poorest Australians are hurt more than the
richest.(16)
Treasurer Keating was equally damning of the
tariff:
The package of measures announced today ends
forever Australia's sorry association with the tariff as a device
for industrial development.
By turning its back on tariffs, Australia will
be further propelled in its quest for international trade and
efficiency, a search begun with the opening up of the economy in
1983 when we floated the dollar and abolished exchange
controls.
As in all nations before it, the pursuit of
trade and competition has instilled in Australia a thirst for
greater efficiency at home and a larger dominion
abroad.(17)
The recession continued through 1992 and Prime
Minister Keating introduced a range of measures to facilitate
business growth and generate employment. These were outlined in his
One Nation statement on 26 February 1992 and the
Investing in the Nation statement on 9 February 1993.
Measures announced in these packages included accelerated
depreciation for plant and equipment, reduction in the company tax
rate, measures to facilitate major projects and a number of
incentives to encourage exports and innovation, as well as a range
of initiatives to assist training and job creation. These positive
measures no doubt helped to detract attention from the critics of
trade liberalisation and the across-the-board progam to reduce
tariffs announced in 1991 continued to operate as
scheduled.
By the end of the Keating Government in 1996,
most tariffs had been reduced to five per cent and the scheduled
reductions in tariffs for PMV and for TCF up to the year 2000 are
continuing as planned. The Howard Government's commitments
concerning tariff assistance for these two industries beyond 2000
and also Australia's long term commitment to free trade under APEC
are discussed in Industry Policy in Australia, September
1999.(18)
Assistance via the
Budget
The main categories of Commonwealth assistance
through the Budget have been, and continue to be:
-
- output bounties (which currently apply to books and
shipbuilding, and previously to computers, machine tools, textile
yarns and steel mill products)
-
- export incentives to specific industries, namely PMV, TCF and
pharmaceutical industries and also general grants for Export Market
Development, and
-
- incentives and other support for R&D, innovation, small and
medium sized enterprises and world best practice programs.
There is an important distinction between the
assistance provided to specific industries and the general
assistance measures to support R&D, innovation and exports. The
latter measures can be targeted at externalities and other market
failures where there is evidence of a gap between public and
private benefit in the absence of government intervention. These do
not discriminate between different industries. On the other hand,
the provision of bounties to selected industries provides the same
protective benefits to recipient industries as the tariff, and
involves the same distortions and disincentives. The difference is
that industry bounties are paid for by the taxpayer and tariffs are
mainly paid for by the consumer.
The assistance package provided has varied
significantly from year to year. Some assistance programs have been
established with a specific sunset clause of say five years while
other programs have come and gone reflecting trade-offs between
various industry policy priorities and the on-going search for
candidates to contribute to government expenditure restraint.
Some of the key developments in Budget
assistance to manufacturing have been the growth in industry
specific assistance under the Hawke Government from 1983-84 to
1989-90 with the introduction of bounty assistance for a number of
new industries. Subsequent trends are shown in Table 1. The data in
this Table was compiled by the Productivity Commission who include
in assistance to manufacturing a number of programs, including
assistance to exporters, which are not allocated to specific
sectors in the Treasury Budget papers. For example, the
Productivity Commission put budgetary outlays to manufacturing in
1998-99 at $635 million while the corresponding Budget figure is
$552 million.
Table 1 indicates assistance doubled between
1991-92 and 1994-95 reflecting expanded programs for industry
specific assistance and in general assistance for R&D and
enterprise development measures.
Table
1: Commonwealth Budgetary Assistance to Manufacturing
Sector
|
1991-92
$m
|
1992-93
$m
|
1993-94
$m
|
1994-95
$m
|
1995-96
$m
|
1996-97
$m
|
1997-98
$m
|
1998-99
$m
|
Budgetary outlays
|
658
|
756
|
786
|
810
|
673
|
614
|
614
|
635
|
Tax expenditure measures
|
522
|
1021
|
1137
|
1572
|
1007
|
1058
|
837
|
807
|
Total budgetary assistance
|
1180
|
1777
|
1923
|
2382
|
1680
|
1672
|
1451
|
1442
|
Data for 1998-99 are budget appropriations. Data
for earlier years are government expenditures.
Source: Productivity Commission, Trade &
Assistance Review 1997-98 and personal communication.
Since 1994-95 total budgetary assistance has
declined; the main reductions being in the tax concessions area
with the phasing out of the general investment allowance on plant
and equipment and the reduction in the R&D tax concession from
150 to 125 per cent in 1996. With respect to budgetary outlays,
expenditure savings have been made through the phase down (and in
most cases, abolition) of bounty assistance to specific industries
and also the abolition of the Development Import Finance Facility.
On the other side of the ledger, there have been significantly
increased outlays for the Industry Innovation Program and for the
pharmaceutical industry Factor f Program. The successor to Factor
f, which commenced in July 1999, involves a lower level of
assistance to this industry.
To provide some relativity to Budget assistance
to the manufacturing sector, it can be expressed as a percentage of
value added in manufacturing or in terms of assistance per person
employed in manufacturing. Hence in 1997-98, Budget assistance to
manufacturing in Australia was $1451 million which represents 2.3
per cent of the $62 billion value added in manufacturing.
Later in this paper, it is shown that the corresponding ratio of
State aid to manufacturing as a percentage of value added in the
European Community is marginally higher at 2.6 per cent. It is
noted, however, that over half of State aid to manufacturing in the
European Community goes to regional assistance which is a very
minor component of Commonwealth Budget assistance in Australia.
Employment in Australian manufacturing in
1997-98 was 1.12 million and Budget assistance per person employed
was $1319. The corresponding figure for the European Community was
higher at about $2000.
Trends in Rates of Assistance to
Industry
The Industry Commission publishes two key
measures of total Commonwealth Government assistance to
industry:
-
- the nominal rate of assistance which is the
percentage change in gross returns per unit of output relative to
the (hypothetical) situation of no assistance. The nominal rate
measures the extent to which consumers pay higher prices and
taxpayers pay subsidies to support local output, and
-
- the effective rate of assistance is the
percentage change in returns per unit of output to an activity's
value-adding factors due to the assistance structure. It measures
net assistance, by taking into account not only output assistance
and direct assistance to value-adding factors, but also the costs
and benefits of government intervention on inputs.
The effective rate of assistance is the
preferred measure of the impact of government assistance on the
allocation of resources. It provides a basis for assessing the
extent to which assistance may alter the incentives to undertake
particular economic activities.
The estimates relate to Commonwealth assistance
only. The coverage of forms of assistance has improved over time
and the most recent series includes assistance via tariffs,
quantitative import restrictions, production bounties, certain
export incentives, marketing support arrangements, input subsidies,
By-law (or Commercial Tariff Concession Orders), duty-drawback and
excise. Several measures including anti-dumping procedures,
government procurement and offsets and partnerships for development
programs are excluded because they are difficult to
quantify.
While a wide range of non-tariff measures have
been employed from time to time, tariffs have dominated, providing
over 80 per cent of measured assistance to manufacturing outputs in
1983-84. With the subsequent removal of quotas and some bounties,
tariffs accounted for over 90 per cent of assistance by 1989-90 and
this trend is expected to continue to 2000-01.(19)
The trend in the average effective rate of
assistance for the manufacturing sector is provided in Figure
1. The average nominal and effective rates of assistance for
the total manufacturing sector, and for three of the more highly
protected industries (textiles, clothing and footwear and motor
vehicles and parts), are shown in Table 2.

Table 2: Nominal and
Effective Rates of Assistance to the Manufacturing Sector and
Selected Industries, 1968-69 to 2000-01 (per cent)
Average Nominal Rate of Assistance on
Outputs
|
Average Effective Rate of Assistance
|
|
Total Manufact-uring
|
Textiles
|
Clothing & Footwear
|
Motor Vehicles & parts
|
Total Manufact-uring
|
Textiles
|
Clothing & Footwear
|
Motor Vehicles & parts
|
|
1968-69
|
24
|
25
|
53
|
35
|
36
|
43
|
97
|
50
|
1971-72 Series
|
1969-70
|
23
|
24
|
51
|
35
|
36
|
42
|
94
|
49
|
1970-71
|
23
|
24
|
50
|
35
|
36
|
42
|
91
|
50
|
1971-72
|
22
|
25
|
49
|
34
|
35
|
45
|
86
|
49
|
1972-73
|
22
|
25
|
50
|
34
|
35
|
45
|
88
|
49
|
1973-74
|
17
|
19
|
36
|
26
|
27
|
35
|
64
|
38
|
1974-75
|
15
|
20
|
42
|
29
|
27
|
39
|
87
|
54
|
1974-75 Series
|
1975-76
|
16
|
23
|
47
|
34
|
28
|
50
|
99
|
73
|
1976-77
|
15
|
24
|
62
|
32
|
27
|
51
|
141
|
67
|
1977-78
|
15
|
26
|
64
|
34
|
26
|
57
|
149
|
79
|
1977-78
|
15
|
24
|
64
|
38
|
23
|
47
|
141
|
73
|
1977-78 Series
|
1978-79
|
15
|
24
|
65
|
42
|
24
|
47
|
143
|
81
|
1979-80
|
15
|
27
|
63
|
46
|
23
|
51
|
135
|
89
|
1980-81
|
15
|
28
|
63
|
50
|
23
|
55
|
140
|
96
|
1981-82
|
16
|
26
|
82
|
53
|
25
|
54
|
204
|
108
|
1982-83
|
16
|
25
|
85
|
54
|
25
|
54
|
220
|
110
|
1982-83
|
13
|
23
|
69
|
50
|
21
|
68
|
192
|
126
|
1983-84 Series
|
1983-84
|
13
|
23
|
78
|
51
|
22
|
69
|
227
|
135
|
1984-85
|
13
|
25
|
78
|
49
|
22
|
75
|
250
|
143
|
1985-86
|
12
|
23
|
88
|
40
|
20
|
72
|
148
|
125
|
1986-87
|
12
|
23
|
64
|
28
|
19
|
68
|
176
|
92
|
1987-88
|
11
|
22
|
64
|
27
|
19
|
65
|
174
|
88
|
1988-89
|
10
|
24
|
65
|
26
|
17
|
72
|
171
|
72
|
1989-90
|
9
|
23
|
65
|
27
|
16
|
72
|
173
|
65
|
1990-91
|
9
|
21
|
65
|
25
|
15
|
68
|
176
|
60
|
1990-91
|
8
|
18
|
63
|
26
|
14
|
51
|
113
|
48
|
1989-90 Series
|
1991-92
|
8
|
16
|
52
|
24
|
13
|
46
|
92
|
45
|
1992-93
|
7
|
14
|
42
|
22
|
12
|
41
|
73
|
41
|
1993-94
|
6
|
12
|
37
|
20
|
10
|
37
|
65
|
38
|
1994-95
|
5
|
11
|
34
|
19
|
9
|
33
|
60
|
35
|
1995-96
|
5
|
10
|
31
|
17
|
8
|
27
|
56
|
31
|
1996-97
|
4
|
9
|
29
|
15
|
6
|
25
|
52
|
28
|
2000-01
|
3
|
6
|
19
|
10
|
5
|
17
|
34
|
19
|
Source: Industry Commission, 'Assistance to agricultural and
manufacturing industries', Information Paper, March
1995.
|
The time series data indicate the following
trends in the level of assistance afforded to the Australian
manufacturing sector over the past 30 years:
-
- The trade liberalisation process in Australia started with the
25 per cent across-the-board tariff cut in July 1973. This reduced
the average nominal rate of assistance for manufacturing from 22 to
17 per cent and the average effective rate from 35 to 27 per
cent.
-
- The next decade from 1974-75 to 1984-85 witnessed a stable
average level of protection for the manufacturing sector as a whole
but some marked changes in the assistance afforded different
industries within the sector.
-
- Assistance to the textiles, clothing and footwear and passenger
motor vehicle industries blew out over this period under a regime
of tariff and quota arrangements and the local content plans for
passenger motor vehicles. The average effective rate for textiles
increased from 39 per cent in 1974-75 to 75 per cent in 1984-85;
the corresponding rate for clothing and footwear rose from 87 per
cent to 250 per cent over this period; and for passenger motor
vehicles and parts, from 54 per cent to 143 per cent.
-
- The large increases in assistance to the above three industries
were offset by declining assistance to a wide range of other
manufacturing industries as part of the Tariff Review
Program.
-
- The subsequent period from 1984-85 to the present and
continuing to 2000-01 has seen a continuous, almost linear, decline
in the level of assistance to the manufacturing sector and in this
period, textiles, clothing and footwear and motor vehicles have
been key elements of the trade liberalisation process.
Figure 2: Average effective rates of assistance
to manufacturing PMV and TCF, 1990-91 to 2000-01

Source: Productivity Commission, Trade and
Assistance Review 1997-98
By the year
2000-01, it is expected that the average protection afforded the
manufacturing sector will be reduced to a three per cent nominal
rate and a five per cent effective rate. This level would probably
be of little concern if it was uniform across industries but it
remains far from uniform with clothing and footwear, and to a
lesser extent, motor vehicles and textiles, receiving well above
average assistance. As noted above the tariff debate with respect
to these three industries continues to be hotly debated.
Anti-Dumping and Countervailing Measures
The General Agreement on Tariffs and Trade
allows Member countries to apply anti-dumping measures on imports
of a good with an export price below its normal value in the
supplier's home market, if such imports cause or threaten to cause
material injury to the domestic industry. In addition, the WTO
Agreement on Subsidies and Countervailing Measures (1995) allows
Members to apply countervailing duties where exports benefiting
from certain forms of subsidies cause or threaten to cause material
injury or serious prejudice to a domestic industry.
Like tariffs and other measures which raise the
price of imports, anti-dumping and countervailing measures may
restrict competition, protect domestic industry and impose higher
costs on domestic consumers.
Anti-dumping and countervailing activity in
Australia has shown considerable fluctuation since the mid 1980s.
Four phases are evident in the number of new cases initiated. New
cases fell from 56 in 1985-86 to 21 in 1988-89, rose to a peak of
88 cases in the 1991-92 recession and then declined sharply to a
mere six cases in 1994-95. The number of new cases has increased
since then to 36 cases in 1997-98.(20)
A major cause of these fluctuations is the
business cycle. In the past, requests from industry for
anti-dumping measures increased significantly in periods of low
manufacturing company profits and fell in periods of greater
prosperity. Hence the Asian crisis, and the expected slowdown in
domestic demand, may add to pressures for anti-dumping measures in
the year ahead.
There have been important changes to
anti-dumping policy and administration over the past ten years.
Following a review by Professor Gruen,(21) a number of changes
including the introduction of sunset periods for anti-dumping
action and establishment of the Anti-Dumping Authority were
introduced in 1988. The overall impact of these measures was to
reduce the scope for providing assistance to local industry via the
anti-dumping arrangements.
The Howard Government came to office with a
commitment to improve existing countervailing and anti-dumping
procedures to ensure Australian producers are not disadvantaged.
Following the Willett Review(22), the legislation was amended and a
new scheme became effective on 24 July 1998. The key changes to the
policy were:
-
- a significantly shorter (155 day) single stage anti-dumping and
countervailing investigation conducted by the Australian Customs
Service
-
- abolition of the Anti-Dumping Authority
-
- provision for the payment of interim duties after 60 days of
the investigation period, and
-
- a new appeal and review mechanism which provides for reviews to
be conducted by a statutory officer known as the Trade Measures
Review Officer.
The move to a single stage investigation by
Customs-compared with the previous preliminary review by Customs
and a separate review of the positive preliminary findings by the
Anti-Dumping Authority-will streamline the administration of
anti-dumping and countervailing actions. Such actions will continue
to be subject to a five year sunset clause. The Government's
scheduled review of anti-dumping and countervailing regulation
under the Competition Principles Agreement has been postponed to
allow for full implementation of the new arrangements.
On the international scene, new anti-dumping and
countervailing actions stood at 225 cases in 1998 and this number
appears to have stabilised in recent years. However the traditional
anti-dumping users, notably the United States, European Union,
Australia and Canada, remain major users, but there has been a
surge in use by developing countries with South Africa, Mexico,
Argentina, Brazil, India and Korea being increasingly active
users.(23)
Australia appears to have accounted for six to
eight per cent of the anti-dumping cases initiated internationally
in recent years. Relative to its share of world trade (less than
one per cent), Australia continues to be one of the more frequent
users of anti-dumping measures. The recent streamlining of the
administrative process for anti-dumping action in Australia may
encourage Australian industry to pursue this course of action.
Estimated costs of protection
The Industry Commission provides the following
measures of the subsidy, and consumer tax, equivalents of the
tariffs and other protective measures applied to manufactures.
-
- The 'gross subsidy equivalent' is the estimated change in
producers' gross returns from assistance. It is the notional amount
of money necessary to provide an industry with a level of
assistance equivalent to the nominal rate of assistance on its
output.
-
- The 'net subsidy equivalent' is the estimated change in returns
to an activity's value added due to assistance. It is equivalent to
the effective rate of assistance.
-
- The 'consumer tax equivalent' is the transfer from final
consumers paying higher prices due to assistance for their
purchases of manufactures.(24)
The continuing importance of the more highly
assisted sectors is evident in Table 3. In terms of 'net subsidy
equivalent', TCF and PMV together accounted for half of the
manufacturing sector total in 1996-97. By 2000, the share of these
industries is estimated to fall to 40 per cent.(25) The level of
assistance paid by the consumer is particularly evident in the
figures on 'consumer tax equivalent' per passenger motor vehicle of
$3400 in 1996 and dropping to $2100 by 2000. This reduction in the
consumer tax equivalent of $1300 per vehicle should be translated
into a corresponding drop in average Australian motor vehicle
prices.
Table 3: Subsidy and
Consumer Tax Equivalents of Assistance to Manufacturing and Key
Sectors
|
Gross subsidy equivalent $m
|
Net subsidy equivalent $m
|
Consumer tax equivalent $m
|
Manufacturing sector
|
|
|
|
1971-72
|
21 273
|
14 182
|
na
|
1989-90
|
15 620
|
10 230
|
8 649
|
1996-97
|
6570
|
4001
|
na
|
2000-01
|
5553
|
3322
|
3967
|
Textiles
|
|
|
|
1971-72
|
803
|
531
|
na
|
1989-90
|
808
|
608
|
348
|
1996-97
|
379
|
292
|
na
|
2000-01
|
262
|
196
|
161
|
Clothing and Footwear
|
|
|
|
1971-72
|
1641
|
1209
|
na
|
1989-90
|
1750
|
1410
|
2032
|
1996-97
|
801
|
649
|
na
|
2000-01
|
531
|
428
|
964
|
Passenger motor vehicles
|
|
|
|
1996
|
|
1140
|
na
|
1750
|
2000
|
|
na
|
na
|
1081
|
na = not available
Sources: Industry Commission, 'Assistance to
Agricultural and Manufacturing Industries', Information
Paper March 1995, p. 211 and Industry Commission, 'The
Automotive Industry', Report No. 58, 26 May 1997, volume
1, pp. 252-253.
The cost of assistance estimates can be used to
illustrate the very high cost involved in maintaining assistance in
the most highly protected industries in order to support employment
in them. In clothing and footwear, for example, employment in 1991
was about 55 000 and the net subsidy equivalent of assistance was
$1200 million or more than $22 000 per employee. This exceeded the
average wage in the industry of $21 000.(26)
Estimated benefits from trade
liberalisation
The reduction in the subsidy, and consumer tax,
equivalents of industry assistance shown above provides one
indicator of the benefits of trade liberalisation. In the past 30
years, the subsidy equivalent of assistance to the manufacturing
sector has declined by about 75 per cent. This reflects a
corresponding reduction in the transfer of resources from the
unprotected sectors of the economy to the protected manufacturing
sector.
The above measures, however, do not indicate the
full net benefits from trade liberalisation. They do not
incorporate the indirect or second round effects which flow from
the behavioural responses of producers and consumers to the
assistance induced changes in relative prices. The measures do not
include general equilibrium effects such as the possible impact on
the exchange rate, and most importantly, the impact of trade
liberalisation on intra-firm efficiency. Conversely, they do not
include adjustment costs such as structural unemployment,
retraining costs and unused capacity.
The Economic Planning Advisory Commission in
1996 undertook a quite different approach to measuring the gains
from tariff reform and other micro-economic reforms. The approach
compares Australia's economic performance with that of 13 other
OECD countries and seeks to incorporate the 'dynamic' gains to
firms arising from greater exposure of the economy to international
competition. The results suggest that the longer-term dynamic gains
from policies such as tariff reductions may be as much as ten times
the static gains from better resource allocation.(27)
Overseas
experience
This section provides a few facts on the use of
tariffs, non-tariff barriers and budgetary assistance in other
countries. These are provided mainly for purposes of comparison
with Australia's experience. Only selected material is presented
and this does not convey the history of industry policy in these
countries.
Industrial Tariffs
Trade liberalisation in manufactured products
has been achieved in most industrialised countries over the
post-war period. The main driving force behind this remarkable
achievement has been the multinational trade negotiations under the
auspices of the General agreement on Tariffs and Trade (GATT),
which celebrated its 50th birthday in 1998. It started
as a club of 23 countries committed to cutting tariffs on trade
between member countries. Today it has a membership of 134
countries and with more than 30 countries, including China and
Russia, seeking to join. GATT has implemented eight rounds of
global trade talks, each involving more countries and taking trade
liberalisation further than the last.
Figure 3: Industrial Tariffs and Volume of Trade in GATT Member
Economies

Source: World Trade Organisation, Trading
into the Future, 1995 and Annual Report 1997.
The results in terms of tariff cuts and trade
growth have been spectacular (Figure 3). The average level of
tariffs in industrialised countries is now less than four per cent,
one tenth of their level in 1948. This has been associated with a
strong growth in specialisation and in the share of output traded.
Over the 1950-96 period, world output of manufactures grew 9-fold,
while world trade in manufactures rose 31-fold.(28)
Non-tariff barriers (NTBs)
NTBs include countervailing and anti-dumping
duties, voluntary export restraints, subsidies which sustain loss
making enterprises in operation, technical barriers to trade and
obstacles to the establishment and provision of services. NTBs are
less transparent than tariffs and there is no general measure of
the restrictiveness of such barriers. The OECD, however, does
monitor the frequency and coverage of NTBs and these measures
indicate a significant reduction in their usage in developed
countries since 1988 (Table 4).
Table 4: Non-Tariff Barriers in OECD
Countries
Frequency ratioa
|
|
Import coverage ratiob
|
|
1988
|
1993
|
1996
|
|
1988
|
1993
|
1996
|
United States
|
25.5
|
22.9
|
16.8
|
|
16.7
|
17.0
|
7.7
|
European Union
|
26.6
|
23.7
|
19.1
|
|
13.2
|
11.1
|
6.7
|
Japan
|
13.1
|
12.2
|
10.7
|
|
8.6
|
8.1
|
7.4
|
Canada
|
11.1
|
11.0
|
10.4
|
|
5.7
|
4.5
|
4.0
|
Australia
|
3.4
|
0.7
|
0.7
|
|
8.9
|
0.4
|
0.6
|
New Zealand
|
14.1
|
0.4
|
0.8
|
|
11.5
|
0.2
|
0.2
|
-
- The frequency ratio is the proportion of national tariff lines
that are affected by a particular NTB, or by a specified group of
NTBs, irrespective of whether the products affected are actually
imported.
- The import coverage ratio is the share of a country's own
imports that is subject to a particular NTB or any one of a group
of NTBs.
Source: OECD, Indicators of Tariff &
Non-tariff Trade Barriers, Update 1997, pp. 53 and 56.
The OECD in June 1999 noted:
While the level of tariffs and certain
quantitative import controls have declined and are programmed to
fall further, there are concerns that non-tariff barriers to trade
in general (NTBs) may be gaining greater importance as a means of
protecting domestic producers of goods and services and impeding
access to international markets.(29)
The OECD makes particular reference to two forms
of NTB which appear to be on the increase. It notes that a rising
proportion of trade disputes concern technical barriers to trade in
the human health and safety area such as bans on imports into
Europe of hormone-fed beef and genetically modified organisms. The
other area of concern is anti-dumping actions which have been
referred to above.
Budgetary assistance
The OECD has started to monitor what it terms
'public support to industry' for its member countries. However the
latest (1998) report provides information for the OECD group of
countries only for the years 1989 to 1993, although information for
later years is provided for a number of countries.(30)
More recent information is available for the
European Union countries for what is termed 'State aid to industry'
in a report published by the Commission of the European
Communities.(31) The report notes that the competition provisions
of the EC Treaty include Community rules on State aid. It is
recognised that State aid may be used for common interest purposes
such as to redress the effects of market failures but that it can
also be used to frustrate free competition and provide the same
effect as tariff barriers. The aim of the report is to provide
transparency and reinforce an open policy on the control and use of
State aid.
Table 5: State Aid to the Manufacturing Sector
in the European Community.
Annual values in constant (1996) prices
|
1993
|
1994
|
1995
|
1996
|
1997
|
Value of State aid (million euro)
|
44766
|
41332
|
39328
|
35367
|
34400
|
In per cent of value added
|
3.8
|
3.5
|
3.2
|
2.9
|
2.6
|
In euro per person employed
|
1540
|
1457
|
1385
|
1269
|
1236
|
$A equivalent (assuming 1 euro =$A1.7)
|
2678
|
2477
|
2355
|
2157
|
2101
|
The European Community comprises the 12 Member
Countries as at 1993.
Source: Commission of the European Communities,
Seventh Survey on State Aid in the European Union in the
Manufacturing and Certain Other Sectors, 30 March 1999, pp. 5
and 6.
The main types of State aid included in Table 5
are grants and tax exemptions but it also covers equity
participation, soft loans, tax deferrals and guarantees. The clear
message from the Table is that State aid to the manufacturing
sector in the European Union has declined steadily over the 1993-97
period. It declined by 23 per cent in terms of total value, and by
20 per cent in terms of value per person employed, over this
period.
Other features of State aid to manufacturing in
the European Union were that it was highest (relative to value
added) in Italy and Greece and lowest in the United Kingdom, Sweden
and the Netherlands. In terms of function, over 50 per cent of
State aid was directed at regional objectives and 31 per cent at
horizontal objectives such as R&D, environment, small and
medium enterprises, trade and energy savings. Only 12 per cent of
State aid was directed at particular industries. For shipbuilding
and steel, the granting of aid was subject to European Commission
regulations, namely the Shipbuilding Directive and the Steel Aid
Codes.
Conclusion
Australia has moved a long way towards trade
liberalisation, with average tariff levels now close to five per
cent. While Australia lagged behind the tariff reform process in
many developed countries in the 1960s and 1970s, it has now caught
up and has average tariff levels comparable to those in our main
OECD trading partners and a significantly lower usage of non-tariff
barriers.
The start of the trade liberalisation process in
the late 1960s and early 1970s was a slow and hard fought battle to
persuade governments, industry and unions that the move to a more
open trading economy was in Australia's best interests. The process
almost ran off the rails in the late 1970s and early 1980s with the
massive increase in protection for the PMV and TCF industries. The
Hawke/Keating Governments, with the Button Plans for structural
adjustment in the key mature industries, made major steps in
government-industry cooperation and in creating support for, or at
least acceptance of, trade liberalisation. The strongest progress
towards trade liberalisation occurred in the latter part of the
1980s and through the 1990s up to the year 2000.
This historical review suggests that if
Australia is to achieve the APEC goal of free trade by 2010, the
end of the trade liberalisation process may also be a hard fought
battle. It will centre on the PMV and TCF, and possibly several
other smaller industries. Significant policy adjustments will be
required in these industries in the latter half of the next decade,
following the lifting of tariff freezes for PMV and TCF. The recent
re-emergence of protectionist pressures both in Australia and
overseas, and the failure of APEC countries to reach agreement on
key trade liberalisation proposals, will contribute to an uncertain
future.
With the decline in tariffs, assistance to
industry via the Budget is likely to become increasingly important.
This is consistent with the role of government becoming more that
of a facilitator of change in the private sector rather than a
controller or regulator of change in its own right.
Assistance to industry via the Budget needs to
be an integrated package of measures with a clear set of
objectives. It needs to move away from the image of being an ad hoc
group of incentives which is constantly changing to meet the needs
of sectional industry interests on the one hand and Budget cost
cutters on the other. One way of achieving a greater objectivity,
and a greater constancy, in Budgetary assistance to industry is to
reduce the assistance for industry selective measures and increase
the assistance for general measures to facilitate education,
innovation and best practice.
The brief comparison in the Paper of Budgetary
assistance to industry in the European Union compared with
Australia indicates a similar ratio of assistance to value added in
manufacturing in the two regions. However Australia continues to
direct a much larger share of its Budgetary assistance to selected
industries while in the European Union countries, regional
objectives are the largest single basis for funding. With rural and
regional issues attracting renewed interest in Australia, there may
be increased calls for industry assistance to meet regional
objectives.
Some suggested priorities for government
assistance to industry in the areas of innovation, education and
training and encouragement of the high technology industries are
discussed in Industry Policy in Australia(32).
Endnotes
-
- Michael Emmery, 'Industry Policy in Australia', Research
Paper No. 3, 1999-2000.
- George Santayana, The Life of Reason, 1905.
- Unused protection occurred where the domestic manufacturers'
price was below the notional price, including tariff, of the
corresponding imported product. It indicated the availability of
more protection than was necessary to make domestic production
competitive with imports.
- Fred Gruen, Australian National University, Foreword to
Industry Assistance The Inside Story by Alf Rattigan,
Melbourne University Press, 1986.
- Alf Rattigan, Industry Assistance: The Inside Story,
Melbourne University Press, 1986.
- ibid., p. 21.
- ibid., pp. 22-23.
- Tariff Board, Annual Report for Year 1966-67, p. 9.
- Australian Industry Development Association Bulletin, October
1970.
- Doug Anthony speech to West Australian Chamber of Manufactures,
25 July 1972.
- Policies for Development of Manufacturing Industry. A Green
Paper, p. 9.
- Industry Commission, The Textiles, Clothing and Footwear
Industries, Report no. 59, 1997, vol. 2 appendices p. I7.
- John Button, As It Happened, The Text Publishing
Company, 1998, p. 254.
- Department of Industry, Technology and Commerce, Annual
Report 1984-85, p. 10.
- Department of Industry, Technology and Commerce, Annual
Report 1986-87, p. 20.
- Commonwealth of Australia, Building a Competitive
Australia, 12 March 1991, 1.5.
- ibid., 2.1.
- Michael Emmery, op. cit.
- Industry Commission, Assistance to agricultural and
manufacturing industries, Information Paper, March 1995,
p. 37.
- Productivity Commission, Trade & Assistance Review
1997-98, p. 67.
- Fred Gruen, Review of the Customs Tariff (Anti-Dumping) Act
1975, March 1986.
- Lawrie Willett, Review of Australia's Anti-Dumping and
Countervailing Administration, September 1996.
- Guy de Jonquieres, 'Poorer nations starting more dumping
cases', Financial Times, 6 May 1999.
- Industry Commission, 'Assistance to agricultural and
manufacturing industries', Information Paper, March 1995,
p. 212.
- Industry Commission, Trade & Assistance Review
1996-97, Annual Report Series 1996-97, p. 55.
- R. M. Conlon, 'Protection of Australian manufacturing: past,
present and future', in Satya Paul (editor), Trade and Growth
New Theory and the Australian Experience, Allen & Unwin,
Sydney, 1998, p. 226.
- Economic Planning Advisory Commission, 'Tariff reform and
economic growth', Commission paper no.10, February 1996.
- Martin Wolf, 'Why liberalisation won', Financial
Times, 18 May 1998
- OECD, Economic Outlook, June 1999, p. 210.
- OECD, Spotlight on Public Support to Industry, 1998.
- Commission of the European Communities, Seventh Survey of
State Aid in the European Union in the Manufacturing and Certain
Other Sectors, 30 March 1999.
- Michael Emmery, op. cit., pp. 34-38.