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Protectionism and industry policy

By Des Moore - posted Monday, 26 September 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. 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.

There are also complaints that China is violating the obligations it undertook when, with US support, it joined the World Trade Organisation. It is important to note 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. This was not because of alleged dumping, but rather on the ground that its domestic producers had suffered “market disruption.”

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.”


Gillard 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.

Transport Minister Albanese has also adopted a protectionist approach in his assistance to 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 other 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, 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 supporting protectionist measures, they must first take account of the downward trend in protectionism that started in the early 1970s under the Whitlam government and has since continued.  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 Australian dollar 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 Australian dollar 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 Australian dollar. 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. It would clearly be contrary to the national interest unless it was absolutely clear that the high demand for our exports would 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 Australian dollar 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 Australian dollar 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.          

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About the Author

Des Moore is Director, Institute for Private Enterprise and a former Deputy Secretary, Treasury. He authored Schooling Victorians, 1992, Institute of Public Affairs as part of the Project Victoria series which contributed to the educational and other reforms instituted by the Kennett Government. The views are his own.

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