australian manufacturing: a brief history of industry

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Published by the Department of the Parliamentary Library, 2010

I N F O R M A T I O N A N D R E S E A R C H S E R V I C E S

Research Paper No. 7 1999–2000

Australian Manufacturing: A Brief History of Industry Policy and Trade Liberalisation

Michael Emmery Economics, Commerce and Industrial Relations Group 19 October 1999

Acknowledgments

The author wishes to acknowledge the constructive comments on an earlier draft of this paper provided by an outside referee, Malcolm Aldons, and his colleagues in the Parliamentary Information and Research Service, in particular June Verrier, John Kain, Dave Richardson, Derek Woolner and Greg Baker.

Inquiries

Information and Research Services publications are available on the ParlInfo database. On the Internet the Department of the Parliamentary Library can be found at: http://www.aph.gov.au/library/

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Contents

Major Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Australia's Experience with Trade Liberalisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

History of Tariff Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Rattigan Challenges McEwen Protectionism . . . . . . . . . . . . . . . . . . . . . . . . . . 2

The Tariff Reform Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

The Anthony Years 1971–72 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

The Whitlam Era 1973–75 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

The Fraser Years 1975–82 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Labor and the Button Plans—1983–95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Assistance via the Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Trends in Rates of Assistance to Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Anti-Dumping and Countervailing Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Estimated costs of protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Estimated benefits from trade liberalisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Overseas experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Industrial Tariffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Non-tariff barriers (NTBs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Budgetary assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

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

Australian Manufacturing: A Brief History

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.

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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.

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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

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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 autobiography5, 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.

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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,

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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.

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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

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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.

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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.

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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.

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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.

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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.

11


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

12


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

13


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.

14


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 635Tax 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

15


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

16


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.

Figure 1. Average effective rates of assistance to manufacturing

5

10

15

20

25

30

35

40

1968

-69

1970

-71

1972

-73

1974

-75

1976

-77

1978

-79

1980

-81

1982

-83

1984

-85

1986

-87

1988

-89

1990

-91

1992

-93

1994

-95

1996

-97

Year

Per

cent

Early series 1977-78 series

1983-84 series 1989-90 series

Source: Industry Commission, Assistance to agriculture and manufacturing industry, Information Paper, March 1995

17


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.

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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

19


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 Review22, the legislation was amended and a new scheme became effective on 24 July 1998. The key changes to the policy were:

20


• 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.

21


• 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 na1989-90 15 620 10 230 8 6491996-97 6570 4001 na2000-01 5553 3322 3967Textiles 1971-72 803 531 na1989-90 808 608 3481996-97 379 292 na2000-01 262 196 161Clothing and Footwear 1971-72 1641 1209 na1989-90 1750 1410 20321996-97 801 649 na2000-01 531 428 964Passenger motor vehicles 1996 1140 na 17502000 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.

22


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.

23


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

24


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

a) 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.

b) 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.

25


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

26


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.

27


28

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 Australia32.

Endnotes

1. Michael Emmery, 'Industry Policy in Australia', Research Paper No. 3, 1999–2000.

2. George Santayana, The Life of Reason, 1905.

3. 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.

4. Fred Gruen, Australian National University, Foreword to Industry Assistance The Inside Story by Alf Rattigan, Melbourne University Press, 1986.

5. Alf Rattigan, Industry Assistance: The Inside Story, Melbourne University Press, 1986.

6. ibid., p. 21.

7. ibid., pp. 22–23.

8. Tariff Board, Annual Report for Year 1966–67, p. 9.

9. Australian Industry Development Association Bulletin, October 1970.

10. Doug Anthony speech to West Australian Chamber of Manufactures, 25 July 1972.

11. Policies for Development of Manufacturing Industry. A Green Paper, p. 9.

12. Industry Commission, The Textiles, Clothing and Footwear Industries, Report no. 59, 1997, vol. 2 appendices p. I7.

13. John Button, As It Happened, The Text Publishing Company, 1998, p. 254.

14. Department of Industry, Technology and Commerce, Annual Report 1984–85, p. 10.

15. Department of Industry, Technology and Commerce, Annual Report 1986–87, p. 20.

16. Commonwealth of Australia, Building a Competitive Australia, 12 March 1991, 1.5.

17. ibid., 2.1.


29

18. Michael Emmery, op. cit.

19. Industry Commission, Assistance to agricultural and manufacturing industries, Information Paper, March 1995, p. 37.

20. Productivity Commission, Trade & Assistance Review 1997–98, p. 67.

21. Fred Gruen, Review of the Customs Tariff (Anti-Dumping) Act 1975, March 1986.

22. Lawrie Willett, Review of Australia's Anti-Dumping and Countervailing Administration, September 1996.

23. Guy de Jonquieres, 'Poorer nations starting more dumping cases', Financial Times, 6 May 1999.

24. Industry Commission, 'Assistance to agricultural and manufacturing industries', Information Paper, March 1995, p. 212.

25. Industry Commission, Trade & Assistance Review 1996–97, Annual Report Series 1996–97, p. 55.

26. 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.

27. Economic Planning Advisory Commission, 'Tariff reform and economic growth', Commission paper no.10, February 1996.

28. Martin Wolf, 'Why liberalisation won', Financial Times, 18 May 1998

29. OECD, Economic Outlook, June 1999, p. 210.

30. OECD, Spotlight on Public Support to Industry, 1998.

31. Commission of the European Communities, Seventh Survey of State Aid in the European Union in the Manufacturing and Certain Other Sectors, 30 March 1999.

32. Michael Emmery, op. cit., pp. 34–38.

australian manufacturing: a brief history of industry

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