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Protectionism and “free-market absolutism”
Gerard Jackson
Protectionism is the beast that will not die. No matter what the prevailing economic conditions are protectionists will always argue that it is not the right time to cut tariffs. Terry McCrann, finance writer for the Herald Sun, is such a protectionist. McCrann’s grasp of economics is so deep and all embracing that he was able to say that further tariff cuts on cars would be “just a meaningless, mindless clinging to free-market absolutism” (Car industry can get a push, 30 October 2007).
Back in 1997 Howard caved in to protectionists on the issue of car tariffs. McCrann’s response was to praise Howard and ridicule free traders by resorting to the cheap rhetorical trick of grossly exaggerating their claims (The Australian 13 September 1997). Irrespective of what McCrann asserted, no competent free-trader ever claimed that eliminating tariffs automatically ensures growth and full employment.
What economics has demonstrated beyond a shadow of a doubt is that tariffs cause malinvestments by distorting the pattern of production. They do this by misallocating capital and labour which in turn damages productivity thus keeping national welfare lower than it would otherwise be. That McCrann seems unable to grasp the damaging consequences of even, in his opinion, ‘low’ tariffs was amply demonstrated by the example he gave in defence of Howard’s surrender on tariffs.
McCrann argued that a 25 per cent tariff on, for example, a $4 T-shirt really amounts to nothing when its final price might be $12 to $15. (Note that he is using the same argument to defend car tariffs). He argued that even if the tariff was removed the retailer “might just well pocket” the dollar instead of passing the reduction on to the consumer.
However, he then admitted that retaining the tariffs is unlikely “to save a single domestic producer” and that the prices of these imported goods might even fall as Asian producers become more efficient while “able to maintain low wages”. Moreover, he asserted that producers have only been able to survive with the present level of tariffs by using ‘sweated’ Asian immigrants. This was followed by the argument that when effective tariffs were 200 per cent they made a real difference in cost to the consumer and allowed the protected “industries to pay workers dinkum wages”, a clear allusion to ‘sweated’ labour.
This is pretty dreadful stuff and displays an awful ignorance of how damaging even ‘low’ tariffs can be. Now it is necessary to distinguish between nominal and effective tariffs. When a government slaps, for example, a tariff of 25 per cent on a good, that is the nominal rate. But when the imported inputs used by domestic producers to manufacture the same product are exempted from tariffs this creates a higher but hidden rate called the effective tariff which is measured by the value added.
A very simple example would be the case of good that cost $30 to make, sold for $40 and whose imported inputs were tariff free. Even though the 10 per cent tariff allows the manufacturer to raise the price to $44 the effective rate is really 40 per cent: the difference between value added before the tariff and value added after the tariff.
McCrann’s assertion, despite his misleading example, that tariffs for the textile, clothing and footwear industries were inconsequential does not hold water. The respective effective rates for those industries were 25 per cent, 47 per cent and 46 per cent (an average rate of 39 per cent). These were very heavy and regressive rates to bear, especially for struggling low-income families. What was really surprising from this co-called economics commentator was his complete ignorance of free-trade arguments and market processes.
Tariffs cause malinvestments and lower general wages by attracting capital and labour into less efficient lines of production. The more capital protected industries attract the more damage they do to productivity. Now the Herald Sun (McCrann's employer) crowed at the time that the tariff freeze guaranteed an additional investment in the TCF (textiles, clothing and footwear) industries of $1,500 million by 2000. This amounted to $500 million dollars a year. But what this really meant is that there would be $1,500 million less for investment in more efficient industries. Some companies would have to shelve investment plans, others would simply curb theirs while some projects might not come into existence.
The total value of the output this foregone investment would have exceeded the value of the output the TCF industries new investment would generate. If it were otherwise, these industries would not have demanded tariffs. But this is only part of the opportunity costs of a politically motivated decision that McCrann publicly applauded as “right”. The additional money that consumers must continue to pay for overpriced textiles, clothing and footwear now means there is less to spend on other goods.
Total demand shrinks. By restricting imports, the tariff decision has also reduced the demand for the products of our exporting industries and that in turn curbs their demand for labour and other inputs. (Or has McCrann forgotten that exports are the price of imports?) In short, McCrann’s tariff decision misdirects demand. Rather than add to the sum of employment it merely, at best, changes its disposition. At worst, it may even add to it. It should have become clear at this stage that tariffs are a particularly insidious tax on consumers and exporters because they convey the totally false impression that they promote investment and protect jobs.
In another article in which he defended Howard’s cave-in and sneeringly referred to free marketeers as “Captain Zeros” (abusing them beats having to debate them) and stated that changes in the exchange rate can quickly wipe out our tariffs (Herald Sun 11 September 1997). Agreed, so why did he defend the tariff decision? Nevertheless, the fact that the tariffs would still cause malinvestments by misdirecting capital, exchange rates or no exchange rates, still escaped him. No country is so rich — including Australia — that it can wilfully waste any part of its very limited supply of capital to protect inefficient businessmen.
One of McCrann’s ‘points’ is that Howard could not “slash tariffs” with unemployment approaching 9 per cent. The implication being that cutting tariffs would add to unemployment, despite the fact that he admitted in the same article that tariffs destroy jobs in other industries. It follows from this statement, though he obviously did not see it, that tariff cuts could mop up much of the resulting transitional unemployment, even with our destructive wage-fixing arrangements, by expanding demand elsewhere.
By asking why our unemployment was so high McCrann made it clear that he had not grasped the economic fact that our unemployed had been priced out of work.. If any government really wants to eliminate widespread persistent unemployment it must allow labour markets to clear. In addition, it should never be forgotten that we do not need economic growth to create employment — but we do need it to raise living standards and real wages for everyone.
McCrann’s comments on economic growth left me wondering just how much economics he really knows. It was certainly true that our severely hampered economy was operating far below its potential. (I should stress that capital accumulation can still proceed even when labour markets are badly hampered). Nevertheless, deregulating the economy was necessary but not sufficient to generate growth, especially McCrann’s vaunted 4 per cent rate. Savings fuel economic growth and entrepreneurship drives it. Yet McCrann made the patently ridiculous statement.
That what drives growth is investment — rather than an ideological belief we need savings, then they will (might?) be invested, then we will (might?) get growth. (The Australian 26/7/7).
This is incredible nonsense and revealed an inexcusable ignorance of the role of savings and the nature of economic growth. His comments on Asia’s “low wages” and Asian labour in Australia made it clear he still has a lot to learn about economics. Asian producers do not and cannot maintain so-called low wages, any more than medieval monarchs could. Moreover, McCrann should have known that Asian wage rates are frequently quite high in the only sense in which they have any economic meaning and that is in relation to the value of their product.
He should also have known that our job-destroying wage-fixing system is responsible for the ‘low-wage’ piece rate system that our destructive unioncrats, along with their media mouthpieces, have labelled as “sweated labour”. By pricing this labour out of the market place they have driven it into suboptimal “underground” employment, i.e., forced it into lower paying alternative employment. Of course, the more people who are driven into this activity the lower real wages will be.
Naturally, the solution of our bullying unioncrats and their political allies is to outlaw “sweated labour” thus creating even more unemployment. Unfortunately, anyone who draws the public’s attention to all of the above facts is in danger of being scornfully dismissed by the brilliant Mr McCrann as a “nit-picking purist” in pursuit of “free-market absolutism”
Note: The issue of protectionism, free trade and exchange rates is a complex one.
Does Australia’s manufacturing decline hold a lesson for the US economy
The US dollar v. the Chinese yuan: there’s more than meets the eye
The Australian economy, the trade deficit and the lessons of gold
The falling dollar: why commentators are getting it wrong
Gerard Jackson is Brookesnews’ economics editor
BrookesNews.Com
Monday 26 November 2007