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Australia, free trade and consumers’ well being
Dr. Frank Shostak
A favoured criticism of some Australian commentators is the issue of free trade. It is argued that it is a naďve and dangerous policy since other economies do not practice it. This puts the Australian economy at a disadvantage, according to the critics. Consequently, it is held, this policy leads to a flood of cheap imports which destroys our industrial base and leads to unemployment and economic misery.
This way of thinking confuses economics with politics. While in the realm of politics it is convenient to demarcate various geographical areas as countries, it makes very little sense to do the same from a business point of view.
The purpose of establishing a business is to make as much profit as possible through supplying goods and services required by various individuals who reside locally or elsewhere on the globe. The case of international trade is no different from that of the local trade. Thus, in the case of domestic trade we hardly hear any one complaining about a particular producer who undercuts other producers.
No one considers introducing tariffs between various areas of the city or regions of a country. Yet we adopt a totally different approach when we hear that foreigners are flooding our market with cheap products thereby allegedly destroying local industry. The flood of cheap imports, which is seen as a disaster, provides however, benefits to Australian consumers.
Now they can afford a greater variety of goods and services. The critics however, argue that some foreign exporters are subsidised by their governments and this results in unfair competition. Once local industry is severely weakened, it is argued, the subsidised exporters will raise their prices to more realistic levels.
It is however, irrelevant how the foreign exporters manage to underbid local producers. What matters is that local consumers can now afford a greater variety of goods. Those local producers who cannot compete with the foreigners would have to move to some other activities where their products will be better appreciated by consumers.
Also, if for instance the Japanese raise their prices, once local industry has been weakened, as the critics suggest, then there will be other foreign competitors who will step in to take the opportunity to make profits. Consequently, competition will prevent price increases.
Now, even if other countries do not want to reduce their tariffs it would be unwise policy to "retaliate" by not lowering our tariffs. All that the policy of "retaliation" will attain is a misleading boost of “our national pride”.
This policy however, will deny Australian consumers access to a greater variety of goods. Regardless of the extent of foreign economies protectionist policies it will make little sense for us to embark upon the same policies. If somebody offers us goods at low prices, instead of complaining we should be thankful since this allows us to use our resources elsewhere, thereby enlarging the overall stock of wealth.
Dr Frank Shostak is a former professor of economics who now works in the private sector
BrookesNews.Com
Monday 29 August 2005