AUSTRALIA S POLICIES TOWARDS PROTECTION AND FREE TRADE Tim Riley Director Economic Literacy Centre PROTECTION: TARIFFS AND SUBSIDIES Economic Arguments: Protect infant industries Protect employment during a recession Prevent dumping below factor cost Improve the terms of trade through lower import prices Reducing a balance of payments deficit Non Economic Arguments: defence, national sovereignty and cultural identity 1
THE EFFECT OF A TARIFF Figure 1: The Effect of a Tariff on an Imported Good P D S Price effect P redistribution effect E Revenue effect Tariff OWOT OW 0 S a c Q 1 Q 3 Deadweight loss Imports b d Q 4 Q 2 Free Trade Price D Q Protection effect Consumption effect DIRECT EFFECTS OF A TARIFF Price effect Consumption and protection effects Revenue effect Redistribution effect 2
QUESTION 5 2016 HSC A government decides to reduce tariffs on imported goods. Other things being equal, what will be the most likely impact on the domestic economy? (A) (B) (C) (D) Tariff revenue will increase. Tariff revenue will remain unchanged. There will be a redistribution of income from importers to local producers. There will be a redistribution of income from local producers to importers. THE EFFECT OF A SUBSIDY Figure 2: The Effect of a Subsidy on a Domestic Industry P D S S 1 P A increase in supply Subsidy P 1 world price S B S 1 D 0 Q 1 Q Q 2 Q 3
QUESTION 21 2016 HSC EXAM (a) Why might a government prefer to protect an industry with a subsidy rather than a tariff? 2 Marks (b) Explain how removal of a subsidy might promote greater efficiency in an economy. 3 Marks (c) Discuss the likely impacts on government revenue and expenditure of removing a subsidy. 5 Marks AUSTRALIAN GOVERNMENT S POLICIES TOWARDS PROTECTION Figure 3: Effective Rates of Assistance to Manufacturing and Agriculture 1970-71 (f) to 2 Source: Productivity Commission (2015), Trade and Assistance Review 2013-14, Melbourne. 4
BENEFITS AND COSTS OF REDUCING PROTECTION More efficient resource allocation Lower prices and costs Higher rate of economic growth Higher trade volumes Costs of structural change, unemployment and adjustment in industry AUSTRALIA S POLICIES TOWARDS FREE TRADE The Benefits of Free Trade The Costs of Free Trade Developments in Australia s Trade Policy Unilateral reduction in tariffs and quotas Multilateral, Plurilateral, Regional and Bilateral Trade Agreements 5
Figure 4: Recent Developments in Australia s Trade Policy Source: Productivity Commission (2015), Trade and Assistance Review 2013-14, Melbourne. MULTILATERAL AND REGIONAL TRADE AGREEMENTS World Trade Organisation (WTO) multilateral Doha Round 2001-15 Nairobi Meeting 2015 - Abolition of agricultural subsidies by 2018 - Trade Facilitation Agreement - Agreements on IT, Environmental Goods, Government procurement and Services 6
GLOBAL GROWTH AND TRADE 4 3 % Figure 5: IMF Forecasts for Global Growth and Trade World Output World Trade 2 1 0 2016 2017 (f) 2018 (f) Group of 20 Advanced and Emerging Countries Reform of Global Financial Architecture Commitment to Free Trade and Increasing Global Growth Regular Leaders Meetings More Inclusive than the G7 7
Trump and Protectionism Trump and protectionism, isolationism, anti-globalisation, Make America Great Again - Trans Pacific Partnership (TPP) - North American Free Trade Agreement (NAFTA) - Bilateral Agreements e.g. AUSFTA - Against immigration and the free movement of people and capital - Chaotic, uncertain and divisive Presidency Productivity Commission Report (2017) Rise in global protectionist sentiment since GFC Uncertainty over future US trade policy Rise in bilateral and regional trade agreements Stalling of WTO Doha Round Australia should pursue unilateral, bilateral, regional and multilateral policies for free trade More transparency in agreement negotiations Stronger government structural adjustment policies 8
APEC, ASEAN AND FUTURE REGIONAL AGREEMENTS Asia Pacific Economic Co-operation (APEC) - Bogor Declaration goals free trade by 2020 - consistent with WTO rules Association of South East Asian Nations (ASEAN) - ASEAN Free Trade Area (AFTA) - ASEAN-Australia-New Zealand Free Trade Area (AANZFTA) - ASEAN Economic Community (AEC) Regional Comprehensive Economic Partnership (RECEP) Trans Pacific Partnership (TPP) BILATERAL TRADE AGREEMENTS Singapore (2003), Thailand (2005), USA (2005), Chile (2009), ASEAN (2010), New Zealand (1983) Malaysia (2013), Korea (2014), Japan (2015) and China (2015) Negotiations with India, EU, Indonesia and Hong Kong Problem of trade creation versus trade diversion Complex rules of origin Lack of transparency and debate over negotiated outcomes 9
WTO GUIDING PRINCIPLES Most Favoured Nation (MFN) Rule National Treatment Rule Tariffs and other barriers are bound after an agreement Transparency rules apply Dispute resolution and decision making procedures HSC EXTENDED RESPONSE QUESTIONS Question 27 2013 HSC Examination Analyse the effects of domestic AND global free trade and protection policies on the Australian economy. Question 27 2015 HSC Examination Discuss the contributions of international organisations and trade agreements to global economic growth and development. 10