World Scientific Reference on Asia-Pacific Trade Policies

The following sections are included:

• Preface
• About the Editor
• Acknowledgements
• Contents

In the early 1980s, Ross Garnaut and I undertook to provide the Australian case study within a multi-country research project aimed at exploring the extent to which trade policies of high-income countries were restricting manufacturers in developing countries from accessing those rich-country markets (Anderson and Garnaut, 1980, 1985, 1986, 1987). That World Bank-sponsored research project was a pioneering empirical effort in an era when more developing countries were beginning to export unskilled labour-intensive products such as textiles, clothing and footwear, most notably from East Asia and especially from the densely populated newly industrializing economies (NEIs) of Hong Kong, Singapore, South Korea and Taiwan — following the earlier example of Japan. Among other things, the project generated a new database that matched trade and industrial output data so trends in import penetration ratios could be estimated for goods whose capital intensity of production was categorized as low, medium or high. Those ratios were matched against trends in estimates of protection to domestic producers of those goods—in an era before the creation of detailed economy-wide global bilateral trade and protection models such as SALTER (Jomini et al., 1991) and then GTAP (Hertel, 1997)…

The following sections are included:

• Glossary
• Preface
• Introduction and Summary
• Protection and Trade in Comparative Perspective
  • The Evolution of Protection in Australia
  • Effects on the Australian Economy
  • Australia’s Trade with Developing Countries
  • Summary
• Theories on the Reasons for Protection
  • Public Interest Theories
  • Private Interest Theories
  • Summary
• Protection to the 1970s
  • The 19th Century Pre-Federation Period
  • From 1901 to 1970
  • Why Protection Grew
  • Conclusions
• Changes in the Level of Protection in the 1970s
  • The Nature of the Changes
  • Reasons for the Changes
  • Summary
• Changes in the Dispersion of Protection in the 1970s
  • The Pressures on Industries to Contract
  • Electoral Considerations
  • Overseas Influences to Contain Protection
• Growth in Australia’s Trade with Developing Countries
  • Sources of Growth in Trade with East Asia
  • Underlying Explanations
  • Future Trade with Developing Countries
• Lessons and Prospects
  • Some Lessons
  • Prospects for Trade Liberalisation
  • Improving the Prospects for Liberalisation
  • Conclusions
• Appendix
• Bibliography

The free trade controversy has had many vicissitudes in Australia. It has nearly always divided political parties. We used to think of England as the inviolable stronghold of free trade. That thought on the one side and the growing call of nationalism on the other made a clear-cut decision difficult. For many years the Labor Party was in a serious dilemma with the tradition of passionate free trade inherited from British democracy to be balanced against the obvious advantage of a growing industrial electorate; and the official attitude was one of indifference. The safe answer to a heckler was that the difference between protection and free trade was precisely the difference between Tweedledum and Tweedledee: they were equally capitalistic devices for exploiting the worker…

The main argument of this paper is that (a) import restrictions should be replaced by tariffs, and (b) tariff rates should (with limited exceptions) be the same on all imports, as there are few good reasons for the tariff rate to be higher on one product than another. In addition, alternations in the exchange rate should be considered for long-term balance of payments difficulties. Some simple and well-known principles are applied to the analysis of the instruments of Australia trade policy. The aim is to stimulate discussion, and any tendency to dogmatism is for the sake of brevity only.

There is a general belief among Australian agricultural economists that home consumption price schemes and various other forms of subsidies of Australian farming industries lead to certain social costs. In other words, that real national income would be higher if the particular price support in question were abolished. This type of argument has been applied to the subsidies and other protection granted to dairy farmers, wheat producers and consumers of superphosphate. In this paper I want to argue that some protection (or, preferably, a subsidy) is economically justified by the existence of protection in the rest of the economy; that this argument is not merely formally valid but one which has some quantitative importance…

This paper discusses in greater detail the case for tariff compensation set out in the Green Paper on Rural Policy. It considers a number of theoretical and practical arguments levelled against the principle, including those put forward in the Annual Report for 1973–74 of the Industries Assistance Commission. It concludes that despite the various counter arguments, the second best argument for tariff compensation applicable to low cost manufacturing as well as rural industries, remains valid in principle; in practice the extent to which any such partial compensation would be warranted needs to be assessed in the light of the appropriate substitution and complementarity relationships.

Should lightly protected industries be given tariff compensation? Reasonable people can and do differ on this issue; neither the case supporting tariff compensation nor that opposing it is fully conclusive. Nevertheless, it is the purpose of this paper to argue that, on balance, the stronger argument is on the negative side. It is argued that economists in particular should focus their limited influence on recommending tariff reductions rather than tariff compensation, but that even if this fails they should be most reluctant to recommend tariff compensation. The potential benefits from tariff compensation are small relative to the gains from tariff reduction but the informational problems of tariff compensation are such as to make even these small potential benefits unlikely in practice.

In his recent paper, Peter Warr makes a number of points that are useful developments of various arguments in the ‘tariff compensation’ discussion (Warr 1978). His critical comments, however, regarding the political judgments made by those raising the ‘tariff compensation’ issue impel me to attempt to put the question in a more appropriate perspective. My comment deals first with a substantive technical issue and then covers some aspects of broader question of political judgments in economics…

Professor Harris has played a prominent role in arguing the case for tariff compensation and I welcome his response to my paper. Many substantive arguments were presented in my paper with which reasonable people could take issue, but if my arguments are valid they must surely constitute an overwhelming case against tariff compensation. Some of these arguments are discussed in Harris’s comments but although his tone suggests discomfort with the implications of my arguments, his comments deal primarily with the imperfect language in which they were expressed, rather than their intellectual substance. A concerted attack on the analytical basis of my conclusions is almost entirely absent. Where substantive issues are discussed, however, Harris has not represented my arguments accurately. Much of his commentary is devoted to attacking extreme and relatively foolish views peripheral to the main issues, but in any case not held by me and certainly not advanced in my paper. Some reply is necessary but, even if Harris’s points against my paper were granted in full, the case for tariff compensation would not have been rehabilitated from its present dismembered state in any essential way. I will discuss first the ‘devaluation equivalent of the tariff’ argument, then the role of political judgments in economic analysis, and finally the informational requirements of tariff compensation.

The Commission has estimated effective rates of assistance to the manufacturing and agricultural sectors since the early 1970s. The estimates have been derived in several ‘series’, each spanning a number of consecutive years, with each series retaining a common methodology, coverage of measures and data sources across those years. While methodologies and data sources have changed between series, taken together, the series provide a broad indication of directions and trends in assistance at the sectoral level…

Australia’s lacklustre economic growth performance in the first four decades following World War II was in part due to an antitrade, antiprimary sector bias in government assistance policies. This paper provides new annual estimates of the extent of those biases since 1946 and their gradual phase-out during the past two decades. In doing so it reveals that the timing of the sectoral assistance cuts was such as sometimes to improve but sometimes to worsen the distortions to incentives faced by farmers. Also, the changes increased the variation of assistance rates within agriculture during the 1950s and 1960s, reducing the welfare contribution of those programmes in that period. While the assistance pattern within agriculture appears not to have been strongly biased against exporters, its reform has coincided with a substantial increase in export orientation of many farm industries. The overall pattern for Australia is contrasted with that revealed by comparable new estimates for other high-income countries.

This paper quantifies the levels of assistance received by producers of the major agricultural crops and animal products in Australia since Federation and compares this with the level of assistance provided to manufacturing producers. First, we construct a series of the production-weighted average nominal rate of assistance for the whole sector. Then, we compute a measure of the level of assistance received by the Agriculture sector relative to that received by the Manufacturing sector, the Relative Rate of Assistance. Our results show that, from the time of Federation until the 1990s, the economy-wide pattern of industry assistance discriminated persistently and heavily against the Agriculture sector. The policy of ‘protection all round’ pursued by the Country/National Party did not prevent this discrimination. In particular, producers of exportables, such as wool and wheat, were heavily discriminated against. Both the intersectoral bias and the differences in assistance among agricultural producers lowered the incomes of the Agriculture sector and the national income.

This paper reviews the history of tariffs imposed by the six Australian colonies during the nineteenth century. In each of the colonies, we identify the starting dates for the first tariffs, first preferences, and other features, and the turning points in the levels of tariffs. We then construct a time series of the average tariff levels in the individual colonies and an average for all six colonies combined. The conclusion notes general features of the pattern of tariffs and how the main features of colonial tariffs, such as the favourable treatment of intermediate inputs, the complex differentiation of tariff rates within industries, and the protection implicit in the excise tax system all carried over to the Commonwealth Customs Tariff in the twentieth century.

The following sections are included:

• Introduction
• Trade and Industry Policy Reform in Australia: The Stylized Facts
• Establishing Credibility
• Survey of CGE Applications Influential in Policy Reform
• The Interface Between Model Builder and Policy Adviser
• Concluding Remarks
• References

This paper discusses the early establishment in Australia of CGE modeling as a major policy tool. As background, it provides a short history of CGE modeling and describes the impetus to the field from: (a) the failure of less theoretically formal approaches; and (b) the recognition that this type of modeling can handle policy-relevant detail. The paper then argues that the CGE approach flourished in Australia because Australia had the right issue, the right institutions and the right model. The final section looks to the future of CGE modeling and the challenge of demonstrating that it really works.

Fifty-six years ago Norwegian economist, Leif Johansen, gave us the first CGE model. While Johansen was first, he is not the father of the whole field. CGE modelling in different styles sprang largely independently from several sources. This paper describes Johansen’s model and how his style of CGE modelling took root in Australia in the 1970s and from there spread to the rest of the world. Today, thousands of economists from nearly every country are undertaking Johansen-style CGE modelling to elucidate policy questions in trade, taxation, environment, labour markets, immigration, income distribution, technology, resources, micro-economic reform and macro stabilization.

It has been almost 30 years since Australians woke up to discover that their government had initiated a 25 per cent cut in manufacturers’ tariffs. This dramatic event was the opening volley in the reversal of protectionism in Australia. The path of trade liberalisation since then has been neither smooth, rapid, nor consistently downhill. However, we have ended up a long way from where we started, with limited tariffs and other import restrictions in most of our traded goods sector (and low barriers to most services trade)…

Quarantine policy reviews are becoming more sophisticated yet they still focus primarily on the effects of restrictions solely on import-competing producers. A fuller analysis that includes the consumers demonstrates that even if imported diseases were to wipe out a local industry, the gains to consumers might outweigh the losses to import-competing producers from removing a ban on imports. This article provides the simplest partial equilibrium framework for thinking more about the economics of quarantine policy measures using an empirical analysis of Australia’s ban on imports of bananas.

This paper examines the extent to which sectoral trends and fluctuations in the Australian economy can be understood using international trade theory and knowledge of key policy developments. It suggests they are consistent with theory, but it also reveals several features that make Australia’s economy unusual. The most striking are the facts that (i) the agricultural sector’s share of GDP remained fairly constant rather than falling during 1860–1960 and even during the latest mining boom; and (ii) the farm sector continued to enjoy a strong comparative advantage despite periodic spurts of growth in mining exports.

This paper applies the emerging neoclassical economic theory of politics to the question of why some industries receive more government assistance than others. Various determinants of the incentives for interest groups to demand assistance and for governments to supply assistance are suggested on a priori grounds. An attempt is then made to see how well these factors can explain (1) the differences between rates of assistance to Australia’s manufacturing industries at various points in time between 1968–69 and 1977–78, and (2) the different changes in those rates during the mid-1970s. The evidence generally supports the theory, and prompts some suggestions as to how to reduce existing government distortions.

An economic theory of politics is applied to the question of why there are large differences in effective rates of assistance to Australia’s rural industries. It is suggested that a major part of the explanation is the different incentives faced by industry lobby groups to demand assistance and by the government to supply assistance. Various determinants of the incentives to demand and supply assistance are hypothesized, and these hypotheses are tested against the existing pattern of rural assistance. The evidence generally supports the hypotheses, and suggests some policy changes to reduce existing government distortions.

The following sections are included:

• The Author
• Acknowledgements
• List of Abbreviations
• Preface
• Theories of Regulation
• Import Protection
• Production Subsidies
• Export Subsidies
• Export Controls
• Pooling
• Home-Price Schemes
• Quotas
• Appendix 1. Allocation of a Subsidy Among End-Uses
• Appendix 2. Discrimination Among Export Markets
• Appendix 3. Paterson Plan
• References

Australia is almost one decade into a historic transformation, from an inward-looking, inflexible economy heavily specialized in exports of primary products to an open, market-responsive economy with a much more diverse pattern of exports. Australia has moved from having the most protected manufacturing sector of any OECD country to a set of policies that, if implemented as announced, will give it the most open trade policies among the advanced economies. It has been a slow and gradual transition, within an old and conservative democracy. But it has been consistent and inexorable, although since 1992 political cross-currents have become more important in the aftermath of recession…

This article reviews changes in Australian protection policy between 1967 and 1995, particularly the political economy aspects. The story is quite complex, and until 1974 was unusual by international standards, with a sophisticated Australian tariff debate and the remarkable transparency role of the Industry Assistance Commission (IAC), and its predecessor, the Tariff Board. The role of Alf Rarttigan, Chairman of the Tariff Board and later the IAC, is stressed. Liberalisation since 1988 has been drastic, so that most tariffs will be brought down to 5 per cent by the year 2000. All quotas were ended by 1993. This can be contrasted with very high protection levels in 1967 and quite high levels even in 1987. Substantial unilateral trade liberalisation normally requires exchange rate depreciation, and the floating of the Australian dollar made the tariff reductions possible. The motives for Australian trade liberalisation in the 1980s are compared with those for similar liberalisations in many developing countries.

The American humorist, P.J. O’Rourke once said, ‘the mystery of Government is not how it works, but how to make it stop’. In an earlier century, Otto von Bismarck is famously reported to have said ‘Laws are like sausages: it’s better not to see them being made’…