In my next series of articles, I’ll be examining the evolution of protectionist policies in Australia throughout the 20th century. This first article presents a snapshot of the key features of import protection during that period, and explores some political economy theories that we can use to analyse the reasoning behind such policies.
Having recently studied this topic in greater detail, I find myself intrigued with the way protectionist policies have evolved over time and along with them, the philosophies and value systems that underpin decision making. You would be hard pressed to find many genuine proponents of trade protection today, as we are very much fixed in our free-market, open-economy ideologies. Yet it’s fascinating to consider that as recently as one hundred years ago, the dominant ideology was on the other end of the spectrum.
Political economics assumes that governments choose policies which are in their own best interests, as opposed to policies that maximise society’s welfare. As such, it maintains the standard “rational agent” paradigm, where all actors are rational agents that maximise their own utility. Political decisions are analysed using standard tools found in economists’ toolboxes – optimisation, game theory, and econometrics. This article adopts a political economy approach to analyse why governments implement protectionist policies despite the distortions generated by tariffs and import quotas.
As utility maximisers, politicians implement the policies that provide the best prospects for re-election. If for instance, we envisage a scale from extreme left-wing to far right-wing, policy stances are adjusted to suit the median voter. Therefore, special interest groups who would otherwise have little impact on policy outcomes may seek to directly influence decisions through lobbying or by providing ‘favours’ to governments.
In the case of import protection, organised groups of manufacturers may optimally choose to lobby heavily for protectionist policies against import competition as they stand to lose from reductions in tariffs and quotas. On the other hand, each consumer benefits only slightly from tariff reductions through lower prices and greater choice of products. Therefore, each consumer optimally chooses not to lobby against protectionist policies, as the costs of lobbying outweigh the potential benefits. Considered another way, the benefits of protectionism are concentrated very heavily within particular industries and groups of people, whilst the costs to consumers are dispersed throughout the population. As such, lobbying will likely occur only from those industries and groups which desire protectionist policies. The supply of protectionist policies is contingent upon the expected impact of the policy on votes.
An overview of import protection policies throughout the 20th century
During the 20th century, Australia moved through stages of periodic increases in manufacturing protection until momentous tariff reform began in the 1970s. Shortly after the Commonwealth of Australia was formed in 1901, governments assumed a solid protectionist stance towards manufacturing. The Lyne Tariff of 1908 was the first genuine protectionist tariff introduced by the Federal Government, and included more than 440 articles with duties nearly double those of the preceding tariff. Tariffs on imported manufactured goods then proceeded to rise for the next seven decades. The culmination was that by 1970, Australia was matched only by New Zealand in having the highest manufacturing tariffs among industrialised countries.
In 1973, the Whitlam Labor government began the process of tariff reform by implementing a 25 per cent cut in tariffs. After taking office in 1983, the Hawke Labor government undertook an aggressive bout of microeconomic reform designed to make Australian industries more efficient and internationally competitive. Tariff reductions constituted a key element in this agenda.
In retrospect, it is clear that the latter decades of the 20th century saw a distinct reversal of policy – the protectionist policies which had existed since the turn of the century were effectively dismantled. In forthcoming articles, I will delve deeper into these issues by examining the causes and characteristics of the policy reversal. For now however, it is fascinating to note that these reforms, and more importantly, the principles they represent, have lasted. As a country, we have largely retained the competitiveness-enhancing, trade-liberalising, and market-deregulating ideologies that were pervasive during that monumental period of microeconomic reform.
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