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article published in ON LINE OPINION September 26 2011

Protectionism and Industry Policy

by Des Moore

September 26, 2011

The decision by steel companies BlueScope and One Steel to lay-off about 1,400 workers (there are about 90,000 employed in the steel industry) has sparked strong reactions, mainly from trade unions and Labor’s left wing seeking increased protection against direct foreign competition. There are also complaints that China is violating the obligations it undertook when, with US support, it joined the World Trade Organisation (it is noted here that late last year, after China had become a member, the US invoked for the first time a special safeguard provision in the agreement to support China’s WTO membership by imposing a tariff of up to 35 per cent on car and light–truck tyres not because of alleged dumping but on the ground that its domestic producers had suffered “market disruption”). Industry leaders have also complained that their steel is experiencing unfair indirect competition arising from preference being given to foreign steel in tenders for large Australian infrastructure investment/resource projects.

Prime Minister Gillard has responded by asserting that “we want to be a nation that produces steel” but has so far resisted increasing tariffs or establishing a formal inquiry. However she has agreed to bring forward $100 million of the $300 million budgetary assistance from “compensation” already planned under the carbon tax arrangements, to discuss at next month’s tax forum options for tax reform that would support industry “decisions to change”, and has also appointed former Queensland Premier Peter Beattie (at $1000 a day) supposedly to in some unrevealed way assist steel manufacturers obtain access to big resource projects. The advance “compensation” is effectively a protectionist measure (and a costly one at that) and is consistent with the commitment made in 2008 to provide the car manufacturing industry with $6.5 billion assistance over 13 years while at same time reducing the tariff from 10 to 5 per cent.

A protectionist approach has also been adopted by Transport Minister Albanese in assisting the now miniscule Australian shipping industry (22 ships) by exempting it from the Fair Work regulatory legislation and from paying any tax. Albanese made the absurd claim that the changes are designed to make Australia a shipping nation - that is, it is a “picking winners” approach but one that has next to no hope of succeeding. Another example of protectionist influences was the Rudd Government’s rejection of the recommendations by the Productivity Commission to allow the purchase of cheaper books from overseas.

On the Opposition side, while expressing support for the role of free markets, Opposition Leader Tony Abbott called for a debate on the steel industry and his Shadow Industry Minister Mirabella and Energy and Resources Minister Macfarlane then announced an in-depth review of “Industries for Australia’s Future”. While this announcement ruled out tariffs and mandatory quotas for local content, and made no mention of any examination of labour market regulation (although separately Abbott claimed the Coalition will have “a strong and effective workplace relations policy”), it is clearly undesirable to imply that some protectionist move might be supported by the Opposition or even contemplated by an Abbott government.

Whichever side of politics considers possible support for protectionist measures must first take account of the downward trend in protectionism that started in the early 1970s under the Whitlam government and has since continued. Thus, between 1970-71 and 2009-10 the effective rate of assistance (from tariffs and other means) to our manufacturing industry was reduced from 35 per cent to 4.4 per cent and to agriculture from 28 to 4.7 per cent. This reflects recognition of the now widely accepted view in Australia that, regardless of what other countries are doing to protect their industries, it is in our interests to have resources invested in the industries that are not protected and which are thus intrinsically the most efficient. In short, while an international level playing field is not obtainable, Australia should have its own internal one. This almost certainly resulted in a higher rate of economic growth since the 1970s than would otherwise have occurred had the high protection levels been retained.

The main immediate cause of the current increase in foreign competitive problems in steel, and the manufacturing industry more generally, is not higher wage or price inflation in Australia but the upward movement in Australia’s exchange rate. On a trade weighted basis the $A has appreciated in real terms and is now close to a new post-float (1983) high and about 20 per cent higher than it was five years ago. This constitutes a major loss of international competitiveness for import competing industries. It largely reflects, of course, the continuing strong growth in exports of iron ore and coal and the expansion in the mining industry generally, as well as the deterioration in economic conditions in the US and Europe. The refusal of the Chinese Government to allow its large current account surplus to be more than marginally reflected in the Renminbi (which has appreciated by only about 10 per cent on a TWI basis over the same period) has contributed to the strengthening of the $A and to competitive pressures for industries such as steel.

There is, however, nothing that can realistically be done by the Australian government or the Reserve Bank to prevent the appreciation of the $A. In theory an attempt could be made to stop or limit commodity exports and investment in the mining industry but that would reduce GDP growth and would clearly be contrary to the national interest unless it was absolutely clear that the high demand for our exports will peter out in the near future. In that event a policy of “temporary” assistance to manufacturers might conceivably be justified.

Some have also suggested intervention by the Reserve Bank to push the $A down but that has rightly been rejected by Governor Stevens. For domestic policy reasons the Chinese are of course able to maintain the Renminbi at too high an exchange rate even though the resultant external surpluses adds to domestic money supply (which can be offset by action in the domestic market). And the Swiss central bank has recently started an interventionist policy. However, it is very doubtful if Australia has the financial resources to continually hold the $A at a level below the market even if that were judged to be desirable (the Reserve Bank has in the past conducted interventionist policies when it judged the market grossly out of line, but such interventions have been for limited periods only).

The current increase in competitive pressures on manufacturing (and other industries such as education) must also be seen from a longer term perspective. Just as the relative contribution of agriculture to GDP has fallen over time (from 20 per cent in 1950 to 2 per cent today), so has the contribution of manufacturing industry (from about 14 per cent in 1982-83 down to less that 9 per cent in 2009-10). Until about 2002-03 the actual level of manufacturing production (measured in real terms) was increasing but it has been virtually stationary since then. Employment in the manufacturing industry has fallen progressively from 1.4 million in 1971-72 to under one million at present, at which level manufacturing jobs constitute less than 9 per cent of total employment and jobs in construction, retail and health care and social assistance now exceed those in manufacturing.

This reduction in manufacturing employment is not simply because of reduced competitiveness. The increase in productivity in manufacturing as a result of technological innovation has reduced the “need” for labour in that industry, just as it has reduced it in agriculture. It is relevant also that the decline in manufacturing employment has not resulted in rising unemployment: to the contrary, the rate of unemployment has been falling even as the proportion of the working age population that is employed has increased. Thus, while the manufacturing industry continues to provide an important source of employment, other industries have grown faster and in a sense have provided jobs for those who would in earlier times have found those jobs in manufacturing. This has occurred even during the recent period when there has been a sharp loss of competitiveness.

Australia’s experience in regard to manufacturing is similar to that in all developed countries. This reflects the accumulation in those countries of many manufactured products and their relative fall in consumption and the faster growth of service industries. The obverse has occurred in developing countries as their increased income levels have allowed their citizens to afford such products and as more automated technology and cheap labour has allowed them to expand their own manufacturing industries.

The increased competitive pressure on Australian manufacturing provides a challenge to respond with improved policies in other areas, particularly in workplace relations. But for the reasons outlined we should avoid responding by increasing protection or deterring expansion in mining. A reduction in government expenditure would help make room for the latter and contribute to reducing possible interest and exchange rate pressures on manufacturers.

Des Moore, a former Deputy Secretary, Treasury, is director of the Institute for Private Enterprise.

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