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

22 November, 2005

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.

Michael Emmery, from the Economics, Commerce and Industrial Relations Group.

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 remained substantial at $3.3 billion in 2000-01 and this assistance was 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.

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.

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