Chapter 6

Protection in Australia

Australia traditionally has been one of the worlds most protectionist countries. However in recent years Australia has reduced its protection levels in the pursuit of free trade. The governments main aims in reducing protection are Force domestic goods/services to become more competitive by exposing them to foreign competition To focus on areas of comparative advantage, and focus resources less on uncompetitive businesses Greater interaction with foreign markets To promote structural change in the economy to encourage efficient firms to produce what the global economy demands 6.2 Government initiatives to remove protection Since the 1970s Australia's tariff levels have dropped from 36% to 1.8%. Today about half all imported goods are tariff free When other protectionalist policies are taken into account such as subsidies, Australia is one of the worlds least protected nations Australias has surpassed the requirements of the WTO in terms of moving towards free trade Bilateral trade deals with the USA, Singapore, Chile and Thailand have allowed a significant amount of free trade between these nations and Australia 6.3 Implications of a reduction of Protection on Australian firms Effects on firms In the long terms reduced protection may have positives, but it has winners and losers Some unproductive, uncompetitive elements of the economy will die out to foreign competition (manufactured goods firms) Many businesses competing in marginal industries with strong competition may be forced to restructure their business in order to improve their competitiveness. This may involve downsizing their operations and cutting less profitable product lines. The aim of removing protection is to make businesses more competitive internationally, which will result in higher levels of investment in our industries In addition lower tariff levels may have beneficial impacts on other industries. E.g. Decrease in tariffs on mining machinery reduces costs for mining firms

Effects on individuals Individuals are often made unemployed due to reduced tariff levels as the firms the work for shut down in the face of still foreign competition. This effect is felt more so by those who have been working in an industry for a long period, upon the axing of their jobs their limited skill set will provide with them little job opportunities This is especially evident in the manufactured sector which has suffered significantly from reduced protection. Production line workers with little skill sets have found it difficult to locate alternative work Thus this results in structural unemployment as the skills of these workers do not match those required

However, this unemployment is offset in the long run by increased levels of labour demand, as more internationally competitive elements of the market expand their business Therefore reduced protection creates a win lose situation for individuals in the economy in terms of labour and work As consumers, free trade advantages all individuals as lower trade barriers mean consumers have more product variety and the increased competition between domestic and foreign products results in lower prices. In addition peoples standards of living improve as the quality of g/s is pushed up by the increased competition

Effects on government The cutting of tariffs lowers government revenue; at beginning of 1900 tariffs were biggest government revenue whilst now they account for only 1% of total revenue In addition government expenditure increases as they must assist the structurally unemployed with benefits. In addition they must also help them find work Lowering of protection has political consequences. Despite being beneficial in the long run, the immediate effects such as the closure of business, and structural unemployment are highly visible and are unpopular with the public causing the government to lose face

Other economic effects In the short run standards of living and economic growth will fall as the closure of Australian businesses lead to an increase in the demand for imports. However over time this will correct itself as the domestic economy will rebound as production moves to more efficient areas of the economy Also as imports rise so does the CAD, however the rebounding domestic market will reverse this in the long run

6.4 The impact of protection levels on Australia Australia's is impacted upon by the protectionist policies of other nations, as high levels of foreign protection will lower the demand for our exports Agriculture Since Australia has a high level of agricultural trade, we suffer more as many of the worlds central markets, (USA and the European Union) heavily subsidies their agricultural sectors, leading to Australian goods being put at a disadvantage. The EUs subsidy program, the Common agriculture policy adds up to a third of their budget and provides 25% of European farmers incomes. As such Australian products have their competitiveness greatly reduced on these markets Resource Australias largest export group, the mining and resource sector generally face fewer barriers to trade. As these goods are in high demand worldwide, nations put up few barriers to their trade. This is because many resources (petrol, coal) can only be produced by countries that have their own supply. E.g. If England doesnt have any coal deposits; it will not place tariffs on imports as the country has no industry to protect

 The resource sector is more likely to face export restrictions from the government who are looking to secure energy from Australia Manufactured industries Bilateral and multilateral treaties over the past several decades have meant that there are few barriers to trade in the manufactured goods industry However in recent times, some technical barriers (technical restrictions, licensing) have dampened free trade and have been labelled as disguised forms of protection. As such those are now included in all WTO sanctioned agreements Services Services make up 75% of our domestic economy but only 25% of our exports. That is because several large barriers exist to prevent international trade. Most of these however are natural barriers, caused by geography, transport costs, cultural differences and local tastes and preferences. E.g. Australian restaurants might be the best in the world but are limited to customers living here or tourists Therefore other then tourists, it is impossible for restaurants to the global food market Artificial barriers in the service sector usually involve strict regulations and restrictions including, domestic ownership laws or government monopoly firms (e.g. An Australian postage service wants to move to USA, but the market there is dominated by Federal post a US government owned body) 6.5 The future of Australia in the global economy In the 1980s and 90s many economists believed that the structure of Australian industry would shift from primary goods and basic manufacturing towards ETMs and services. With the growth of China and increasing global resource demand, Australia's resource industry is poised to become the centrepiece of our foreign trade long into the future Resources The resource industry nearly accounts for 50% of our export earnings and is expected to rise in the future. In 2010 our resource exports are set to top $150 billion.

Agriculture With a lack of development in reducing global protectionalist policies combined with unfavourable climate change and water shortages, Australias agricultural exports are set to fall in the future. However some industries that value add such as the wine and processed food industries will experience a growth in the future based on foreign demand trends.

Manufacturing In the last 20 years manufactured exports grown at a slow pace from $5 billion to over $30 billion. This growth is expected to continue at a slower pace, as specialised manufacturers expand their markets by producing high quality goods aimed at specific market niches.

However manufacturers may face difficulty in competing in global markets if high commodity prices result in an overvalued exchange rate.

Services Service industries, which comprise around three quarters of economic activity, are likely to continue growing as a proportion of the economy, in line with global trends. Australia is likely to experience growth in such sectors as health care, education, financial services, business services and tourism. Environmentally-focused businesses in the economy are also sure to experience high levels of growth over the longer term. As countries try to reduce their emissions of greenhouse gases, to reduce the impact of climate change, there will be greater business opportunities to supply renewable energy, energy-saving devices, and related services. Australia has the potential to benefit from the growth of environmental services given the number of such businesses in Australia, and the potential growth of renewable energy industries able to exploit the abundance of renewable energy services in Australia.