Australia economics Essay Example

Australia economics: Protectionism

Australia economics: Protectionism

Australia economics: Protectionism

Executive summary

This report is prepared to discuss and analyze protectionism in Australia with regards to automotive industry. The need for protectionism was first realized in Australia in 1889 when first and second prime minister formed Protectionist Party. The two claimed that Australia required tariffs to enable Australian industries to expand and offer employment. One of the industries that have the federal government of Australia has protected for a longer time but it is yet to establish a strong competitor is the automotive industry. The productivity commission claims that this industry is protected and supported, and has been receiving over $30 billion subsidies for the past 15 years. Holden Ltd was the first automaker established in 1984 (IPA 2013). Australia’s automobile market has in the past imported from Europe and Asia. This situation prompted the former Prime Minister Kevin Rudd to announce intentions to protect automobile. Such has prompted Ford and Toyota Companies to craft plans of leaving the industry. Ford plans to leave in 2016 (IPA 2013).

Table of Contents

Australia economics: Protectionism 2

Executive summary 2

1.0 Introduction 4

2.0 Definitions 4

3.0 Impacts of Trade Protectionism in Australian 5

4.0 Policy implications for stakeholders arising from Protectionism 9

5.0 Recommendations 12

7.0 References 15

1.0 Introduction

The Great Depression of the 1930s and the global economic crisis of 2008 marked some of the instances that prompted the emergence of the protectionist trade policies (Erixon & Sally 2010). Governments across the world import quotas, exchange controls and enforced tariffs to restrict purchase of foreign products. These trade restrictions contributed to shrinking in world trade in early 1930s and 2009 away from the economic crumple itself, and to a dull bounce back in trade after those years, in spite of the global economic improvement (Erixon & Sally 2010). The emergence in protectionism is recognized, but majority of accounts in that period, whether gathered from modern reports or past histories, demonstrate that trade policy was turned into chaos all over, with every countries scrambling similarly to enforce a high level of trade barriers. Actually, there is considerable difference in the level to which nations enforced protectionist measures. Whilst some nations increased their tariffs sharply and enforced draconian controls on the transactions regarding foreign exchange, others raised their restricted on trade and exchange marginally (Tcha & Kuriyama 2002, p.2). This was exactly the case with Australian automotive industry. Based on the information, this report identify major impacts resulted by protectionist in Australian automotive industry, associated industries, consumers, communities and the labor force.

2.0 Definitions

According to Fouda (2012, p.351), protectionism is defined as an economic policy of controlling trade between countries by means of modes like tariffs, restrictive quotas, and other government legislation on imported goods. Tariffs are taxes enforced on products imported in a country from the foreign countries, resulting in high prices (Anderson & Neary 2005). An alternative to controlling is to subsidize local producers. In simple terms subsidizing implies paying local producers to produce more products.

3.0 Impacts of Trade Protectionism in Australian

In spite of the international trend moving towards the free trade, a few favored industries in every nation have protected from the import competition (Anderson & Neary 2005). In a country like Australia, since the earliest successful Australia automobile was assembled in 1901, the car sector has been considered as crucial for the country’s economy. As a result, the automobile industry together with clothing and textile has been the strongly protected by the federal administration. Tcha & Kuriyama (2002, p.2) argue that whilst trade barriers for this sector have been lessened, partially because of globalization of the industry from late 1980s, the tariff rates on the car industry has remained relatively higher. While the Australia industry has been strongly protected in the past, the deficit in the sector has been going up over time. According to Tcha & Kuriyama (2002, p.2) the trade deficit went up to $117 billion by 1999, representing 76% increase.

Even though, exports have grown overtime, a growing demand for small automobiles and a decrease in tariff rate are thought to lead to a proportional rise in the imports (Eaton et al. 2009). The impacts of protection of automotive industry sector have been evaluated by numerous researchers. Enderwick (2011, p.325) contends that protectionism has both negative and positive impact on a particular industry and even a country in general. One thing for sure is that Australia is not well recognized among the top car makers or assemblers (Tcha & Kuriyama 2002, p.3). However, that does not mean the country has no potential to produce cars. The government has allowed more exports; substandard quality cars or any other goods will make their way into the market. Similarly, the federal government of Australia will be doing no good it its potential local car markers. Hence, the impact of protectionism is to allow local manufactures to market and sell their locally produced products (Tcha & Kuriyama 2002, p.3).

The export has a bigger advantage of improving the economy of the country compared to imports. Even though protectionism impact may not be felt in short term, its long term can be felt in that it can make Australian automobile company to be competitive at the global scene. To impose protectionism, tariffs are enforced on the imported products; in this case, cars from established companies such as Toyota, Honda, Ford, General Motors and Mercedes among others. Tariff rates normally vary based on the type of products being imported (Cletus et al. 2014). The import tariffs will raise the cost of importing, and raise the price of goods imported in the domestic markets, hence reducing the level of products imported, to favor domestic producers (Thomson et al 2011).

Exports are normally raised by the federal government by providing export subsidies. The last means in which the Australian government can restrict imports is by controlling the exchange rate (Fouda 2012, p.352). Protectionists argue that the federal government of Australia has the legal right to safeguard the interests of its citizens including its economy by controlling harmful foreign businesses. They claim that free trade jeopardizes the living standards of the citizens by means of exploitation that may take place because of allowing the imports to take control of the local markets. Feng, Keller, Wang & Wang (2010, p.1574) argue free trade could bad because it enables other countries to “dump” their cheap product to the country which could be harmful to its citizens. For instance, most people now like buying as a source of pride and dignity in the society. There are several companies existing in automobile industry; as situation which has lowered the cost of automobiles (Tcha & Kuriyama 2002, p.5). With the demand of cars, some companies take advantage to make cheap cars which smoke and pollute the environment. Allowing such companies to control the car industry brings risks to the Australian ecosystem and even to the health of its citizens. For that reason, the federal government of Australia enforces Anti-dumping legislation to protect its businesses.

Free trade has negative impacts on young Australian companies. Established companies such as Toyota, Tata and Volkswagen have market advantage because of their financial base and large customer base. When these companies put to compete against young companies, these small companies in Australian will be overshadowed. In those ways, economists greatly supports protectionist since it seeks to protect new or young industries that are not able to scramble for the market with well established foreign companies (Eichengreen & Irwin 2009). Therefore, such firms are facilitated room for development based on protectionism to make them capable of actively competing with established foreign firms.

Eichengreen & Irwin (2009) assert that Protectionism therefore is employed as a tool to enable local firms to get into the level that they can be able to effectively take part in international market. Owing to the squabbles between the two economic practices (protectionism and free trade) there has been implementation of a number of constraints so as to protect the public (Abboushi 2008, p.245). For example, capitalism is perceived as an evil act based on the notion that it does more damage to the citizens it is meant to safeguard than good. In particular, government of Australia has come up with several of legislations to bar companies from employing some evil acts in a bid to get profits. For instance, child labor regulations including the environmental protection laws have been enforced to control firms from applying some crude means in generation of profits (Abboushi 2008, p.246). Another protectionism mechanism countries use is the employment-oriented immigration controls like numerical caps on job visas or labor certification conditions.

As mentioned before, protectionism also has its negative impacts. Abboushi (2008, p.249) argues that protectionism makes the labor market remain stagnant and to some extent create an employment. When foreign companies invest in your country, they create jobs for the locals. However, when entry barriers are set, many locals who would have secured jobs remain jobless (Enderwick 2011, p.332). For instance, when Toyota or any other established automobile company set their assembling plant in Australia, they hire locals in as engineers or sales people to maximize their profit (IPA 2013). On the bigger picture, protectionism concept can be argued to benefit developed countries as opposed to underdeveloped ones. People from poor countries normally look for greener pastures in the developed countries. In a nutshell, they look for jobs in these countries so as to improve their lifestyle.

However, when there are restrictions or protectionism, they cannot access such jobs, hence they remain poor. Protectionism also eliminates the concept of choice, in that it restricts public from having variety to choose from (Enderwick 2011, p.331). Some people just have the great taste and preference away from locally produced. In other words, they prefer strong global brands that when restricted to local brands, their freedom of choice is violated. In such a situation, the citizens are likely to think that the tariffs are enforced to serve the interest of the government and not them (Cletus et al. 2014). It must be noted that trade protection more so in the in the Australian automotive industry, safeguard the security of the country. Most foreign companies import vehicle parts from their parent country to come and assemble them in Australia and in that process some may get the opportunity to import crude weapons. This can lead to an increase in insecurity in Australia.

4.0 Policy implications for stakeholders arising from Protectionism

Recessions nurtures protectionism. Eaton et al. (2009) posit that the economic decline which shrouded part of developed countries in 2008 initiated protectionist idea across the world, as well as activists on streets of numerous European nations and powerful political debates concerning the wisdom of permitting foreign consumers to complete purchases if loss of domestic employment was an essential or predictable result. According to Eaton et al. (2009), trade protectionism continues to be channeled towards two major investor’s categories; state-owned businesses and private sector firms both in European countries and the rest of the world. Across the globe the last many years have seen growing politicalization of government interventions in, or appraisals of, at least some types of foreign businesses, whether in line with legislation particularly directed towards foreign investment evaluation, national security authority, factors considered in competition or industry specific appraisals, competing interests by domestic state-owned businesses, or just general statement of opposition with indeterminate consequences (Enderwick 2011, p.329).

Protectionism concept can be used to make policies for an organization or for a country in general. Some of the implications that a country can draw from is the intervention of its currency, protecting its companies, protection of patents, export subsidies, direct subsidies, anti-dumping legislation, administrative barriers and Employment-based immigration restriction to name but a few (Erixon & Sally 2010). The federal government of Australia could intervene within a foreign exchange market so as to lower its currency’s value by trading its currency in the forex market. In so doing, it will increase the import costs and reduce the exports cost resulting to a perfection in the trade balance. Nevertheless, this form of a policy is simply effective over a short term, since it will most probably result to inflation in a nation that will as a result increase the exports costs, and decrease the relative import prices (Erixon & Sally 2010). The federal government can also use protectionist policies to protect its local investors. The investors referred here are the local young company owners who have the potential to expend them but are outshined by the established foreign companies.

The government can impose high tariffs on imported cars to lower the levels of cars imported so as to protect its automobile industry (Thomson et al 2011). In this manner, it can go ahead to provide direct subsidies to these potential automobile companies. The subsidies are implied to «guard» local employment, and to assist local companies transform to the world class. Davis, Alistair, Ewan (2007) state that one of the automobile companies that have the potential to grow is Holden Ltd. In the past this company has not been competitive enough and has been forced to partner with General Motors and Ford Australia (Davis, Alistair, Ewan 2007). It should be noted that with no protection, this infant company cannot survive competition from the foreign players, and will not always partner with them. Hence, if Australia does not adopt the policy of protecting the company it may facilitate the creation of foreign-based monopolies the future; transforming comparative advantages and the stiffness of the markets (Carbaugh & Prante 2010, p.62).

Bown (2009, p.13) claims that it could be potential that the local company has the capability of manufacturing products at a low cost compared to foreign ones, when given some strong protection – the ‘latent’ comparative edge could remain. There are several goals to these concepts. Governments ought to arrive at correct decisions concerning which companies to protect, whilst protection itself wanes incentives for firms to become innovative and efficient. Also, firm like Holden Ltd will probably get involved in uncreative ‘rent seeking’ actions, with the federal government of Australia at risk of capturing and patronage. Even in existence of the market failures, other federal government interventions could well be capable of addressing low cost as opposed to protection. Even when their decide partner with, the management can set up laws that ensure General Motors and Ford do not take full control of the company. One such laws the set protection is antitrust laws. For example, China barred intended acquisition of Huiyuan Juice Group by Coca-Cola Company in 2009 under a recently enforced antitrust law, in which some analysts implied could have been prompted more by the need to protect domestic ownership rather than to protect competition (Baldwin & Evenett 2009). In some event, the government of China has recently stated plans to set up its national security evaluation process.

The Australian Foreign Investment Review Board (FIRB) has sometimes blocked planed purchases of Australian resource companies like China Nonferrous Metal Mining 2009 intended purchase of Lynas Corporation, an unusual earth miner (Baldwin & Evenett 2009). This was done on the reasons that the plan was in contradiction of Australia’s public interest. When government provides the direct subsidies to Holden Company, it expands and create job to the locals. Similarly, the protectionist policy can be imposed in order to protect local jobs to the locals (Thomson et al 2011). This is done by restricting migration to a certain limit which ensures that the foreigners to not take the jobs that are meant for the locals. According to Thomson et al (2011), acquisition of the local companies sometimes leads to loss of the management jobs to foreigners. To stop this situation, the government can block the acquisition to protect the jobs of its citizens.

Any country must protect its creativity and innovation so as to have market advantage. In doing this it ought to protect its patents (Fouda 2012, p.353). It is not the work of the country but also the individual local companies. Eichengreen & Irwin (2009) postulate that patenting policy ensures that the country or the company remains unique in terms of business they are conducting. Patent regulations ensure that no established company is in position to take unmerited advantage of the ideas or work of other Holden Ltd. Without this form of protection, it cannot be valuable for Holden to invest larger sum of money in the new inventions because they may not be capable of preventing their rivals from using their invention, devoid of having to put in their money, hard work and time.

Abboushi (2008, p.347), believes that it is the work of the government to make sure that it citizens consumes quality and healthy goods. To protect the citizens the government uses protection policy such as creating anti-dumping laws as to prosecute countries or companies that export or import substandard goods and sell them to the citizens. World Trade Organization (WTO) Agreement just condemns dumping but is not prohibits it when it threatens to result to material injury to the local industry in an importing nation (Baldwin & Evenett 2009). It is therefore, the individual country to develop anti-dumping policy to curb the situation.

Dumping does not just apply to products, but also the prices. In the perspective of price, a foreign company will manufacture substandard goods to come and sell the in another country, let say Australia for a cheap price to outdo the local manufacturer in the market. According to Bown (2009) the World Bank’s Global Anti-dumping Database shows more than 19% of new preventive activities manifested itself in 2009 than in 2008. Baldwin & Evenett (2009) argue that this did not beat the fact that in 2008, 17 of G20 member states had implemented 47 protectionist steps to control other nations’ trade. Another policy that can be drawn from protectionism is the export subsidies.

5.0 Recommendations

The current markets are marred with global competition leading to unfair practices among firms. This situation has led has led some countries like Australia to protect its citizens and industries from substandard products and unfair competition.

  • Even though, Australia practices protectionism in its Automobile industry, it the federal government must understand that Australian Automotive industry has not establish a competitive company since its inception. As such, extreme protection of this company can be suicidal because it cannot supply the entire industry.

  • In past Australian leaders, in particular former Prime Minster Kevin Rudd proposed protection of Holden Ltd; it should be done some degree because other government may also propose such practices in some of the Australian exports, especially in dairy industry.

  • Australia like any other developed is still struggling with unemployment issues; though protection protects local jobs, but that is not enough. Therefore, the federal government should practice protectionism while considering the interest and welfare of both the citizen and government. For instance, should Ford leave the industry as they plan in 2016, Australian citizens will lose jobs.

6.0 Conclusions

Even though, protectionism benefits exporting industries over a short run, it enforces costs on producers and consumers that utilize imported products, whilst eliciting retaliation from the trading partners or countries. In the long-term, competitiveness can be affected. An emergence in protectionism may overturn the global integration which has strengthened the Australian growth and development over recent past. The lessening of tariffs in the past few years mean that non-tariff mechanism are now frequently more important barriers to trade. The global economic crisis of 2008 has triggered an increase in these kinds of measures. Free trade is still considered the most significant mode of growing economic opportunity in international economy and lifting individuals from poverty. However, that does not mean Australia gives free entry to every trading partner since not all of them would conduct a fair business. As such policies that are balanced and take into consideration the government and the citizens must be established. However, tackling protectionism needs cooperation and collective bargaining amongst all Australian trading partners as opposed to individual policy reactions. Certainly, protectionism is regarded as one of the main challenges facing policymakers in the 21st century.

7.0 References

Abboushi, S 2008, Trade Protectionism Revisited — Background, Outcomes, and Analysis,

Competition Forum, Vol. 6 No.2, pp.243-251.

Anderson, J & Neary, J.P 2005, Measuring the Restrictiveness of International Trade Policy,

Cambridge, MA, MIT Press.

Baldwin, R & Evenett, S. J 2009, Introduction and recommendations for G20, In R. Baldwin &

S. J. Evenett (Eds.), The collapse of global trade, murky protectionism, and the crisis:

Recommendations for the G20 (pp. 5), London, A VoxEU.org Publication.

Bown, C. P 2009, Protectionism Exposed, Wall Street Journal (Eastern Edition), p.13

Carbaugh, R & Prante, T 2010, The Temptation for Protectionism and American Trade Policy.

World Economics, Vol. 11 No.13, pp.61-77.

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May 2014 http://online.sfsu.edu/jgmoss/PDF/635_pdf/No_15_Coughlin.pdf

Davis, T., Alistair, K & Ewan, K 2007, The Holden Heritage – 13th Edition, Port Melbourne,

Victoria, GM Holden.

Enderwick, P 2011, Understanding the Rise of Global Protectionism, Thunderbird International

Business Review, vol. 53 No.3, p. 325-336.

Eaton et al. 2009, Trade and the Global Recession, Mimeo.

Eichengreen, B & Irwin, D 2009, The Slide to Protectionism in the Great Depression: Who

Succumbed and Why? NBER Working Paper 15142, Cambridge, U.K.

Erixon, F & Sally, R 2010, Trade, Globalization and Emerging Protectionism Since the Crisis,

ECIPE Working Paper No. 2/2010, pp.1-20 viewed on 2nd May 2014 http://www.ecipe.org/media/publication_pdfs/trade-globalisation-and-emerging-protectionism-since-the-crisis.pdf

Feng, T., Keller, L. R., Wang, L & Wang, Y 2010, Product Quality Risk Perceptions and

Decisions: Contaminated Pet Food and Lead-Painted Toys, Risk Analysis, Vol. 30, No. 10,

pp. 1572-1589.

Fouda, R 2012, Protectionism and Free Trade: A Country‘s Glory or Doom? International

Journal of Trade, Economics and Finance, Vol. 5 No. 3, p.351-355.

IPA 2013, Insane Obsession: Australia’s Auto Industry Waste, viewed on 2nd May 2014

http://ipa.org.au/news/2902/insane-obsession-australia’s-auto-industry-waste

Tcha, M & Kuriyama, T 2002, Welfare Effects of Protection and Economies of Scale-The Case

of the Australian Automotive Industry, Discussion Paper 02.11, The University of Western

Australia, pp. 1-25 viewed on 2nd May 2014

http://ecompapers.biz.uwa.edu.au/paper/PDF%20of%20Discussion%20Papers/2002/02-11.pdf

Thomson, et al 2011, Protectionism: Implications for Hostile and Friendly Change of Control

Transactions, Lexpert, viewed on 2nd May 2014 https://www.dwpv.com/~/media/Files/PDF/Article_Protectionism_Implications_for_Hostile_and_Friendly_Change_of_Control_Transactions.ashx