A tariff or duty tax is a tax placed on imports, usually calculated as a percent of the price charged for the goods by the foreign suppliers. Tariffs can therefore be used as a source of revenue for the governments, but are mainly used as a form of protection against foreign competition.
By raising prices of imported goods relative to those of the domestically produced goods, it is encouraging domestic consumers to buy domestic products rather than foreign products. The main effects of protection of industry are:
- Because the tariffs are placed on cheaper foreign goods, consumers are forced to pay higher prices for products, which results in a lower standard of living in the community;
- Incomes are redistributed away from consumers to entrepreneurs in the protected industries; and,
- Government protection will mean a higher level of domestic production and a higher level of employment.
The main arguments for protection of industry are:
- "Infant Industry", defense or national self-sufficiency;
- Protection of home industry;
- Favorable balance of trade; and,
- Protection of employment.
The "Infant Industry" argument:
This argument assumes that a domestic industry could gain a competitive advantage if it could only get started without the pressure of foreign competition. Once the industry becomes established the government would than phase out the protection.
This line of debate is only valid if the resources are more productive in their new use than they would be if the industry had not been started. From this, eventually the industry must be able to supply its products to the market at a price lower than that of the imported product. The problem is to quickly identify those so called infant industries that are going to grow, with the help of temporary protection, into productive enterprises that will have a competitive advantage.
In practice this argument is destroyed, as those "infant industries" that are protected usually fail to grow out of the infant stage, and are not able to face foreign competition.
Defense of National Self-Sufficiency:
This is where a government chooses to protect those industries it believes will be crucial in time of warfare. The problem that results from this form of protection is that it stops the standard of living of the rising country and therefore is not often supported by citizens.
Protection of Home Industry:
This argument is most prevalent at the moment, and it involves government and entrepreneurs appealing to the public patriotism to buy "Australian made" products, no matter the price the public has to pay or the quality of the product purchased. As the consumer is usually paying a higher price for the domestic goods, buying "Australian made' increases their standard of living. If the home industry needs protection from lower cost overseas industries, the question asked is how efficient the home industries are. In many cases the answer is that they are not very efficient, and it must be considered if the protection resources could be used more productively. If they could, then there is no basis for Protection of Employment:
The argument provided by those who follow this line of thought is that importing goods amounts to the exporting of jobs. Originally there is a loss of jobs for some of the workers in the less protected industry as there is no longer a market for their skills. These workers may then need retraining to gain employment in the work force. Australia sometime provides adjustment assistance to the workers in firms that suffer from increased imports resulting from government actions that lower trade barriers. The reason behind this support is that the removal of trade barriers leads to increased trade, and since the whole nation realizes gains from the increased trade, some of the gains can be used to compensate those workers who suffer loss during the transitional period.
As long as the economy is operating at capacity, unemployment resulting from increased foreign competition should only be transitional. Any long term unemployment problems should be blamed on fiscal and monetary polices and other domestic polices for dealing with unemployment.
Is the situation resulting from a country having a competitive advantage in only one or two products. The international trade of this country may be subject to wide fluctuation in the prices it receives because of the changes in world supply and demand. They are considered as having " all their eggs in one basket" as they are extremely vulnerable to changing economic conditions and future trends and technological discoveries.
Favorable Balance of Trade:
There are two main lines of analysis against this argument:
1. All countries cannot have a favorable balance of trade, because if some have a favorable balance some must have a unfavorable balance. It is then a selfish policy which seeks protection at the expense of other countries and which will reduce total international trade.
2. A favorable balance of trade causes the country to accumulate foreign exchange balances which reduce the standard of living as they are only useful when they can provide us with goods and services that can satisfy more and more wants.
Over the last few decades there has been a general consensus of opinion that the reduction of tariffs is a good idea. This change of attitude and action against protection has come about because of: the gradual change in the belief that high protection was in the national interest and that it protected manufacturing industries.
No matter what the result of the forthcoming election, there will be a reduction in governments protection of industry because both parties tariff policies involve the gradual fading out of Australia's over-protection of industries. Labor's exact plans are to reduce tariffs for most industries to 5% by 1996, clothing, textiles and footwear at 25% and automotive rates at !5% by the year 2000, with no possible changes to legislated program until 1996. The liberal goal is for all industries by the year 2000 to be between 0 and 5% tariffs, with no review in 1996.
With these policies in mind, if the protection industries are to survive when tariffs are dropped, they must become more efficient and gain a competitive advantage so as to successfully meet foreign industries head on in free international trade.