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Thursday, 11 June 1970

Dr PATTERSON - Before the sitting was suspended I was making the point that after the last depression when tariff protection became an important part of economic policy in Australia, the effect of the tariff was rather small because the manufacturing sector was responsible for a relatively small part of the national income and played a small part in the earning of export income. But the manufacturing sector became more and more important after World War II and it has been growing ever since. It was not until the report of the Committee of Economic Enquiry - the Vernon Committee - that there appeared the theme of analyses made by men like Dr Harris, skilled in the technique of measuring the effects of tariff. Other men, such as members of the Vernon Committee, with the assistance of the Tariff Board, made certain measurements which rather startled the Australian public. They revealed the high cost of tariff compared with that of subsidies to primary industries. Since that time, particularly after a former Prime Minister rubbished the Vernon Committee report, the Government and other people continued this trend of probing more and more into what lies behind the principle of protectionism. The Tariff Board itself has given this impetus.

However, it was not until the last 6 or 7 years, I suppose, that the principles of the tariff making machinery were subject to more and more questioning and scrutiny. One of the most important reasons for this is, as the honourable member for Wakefield said, that the primary industry sector, in relative terms, is stagnating. The rate of growth of the non primary industry sector in the last 5 years has been 40% - 8% per annum. In real terms the rate of growth in primary industry has been static. As costs go up and world prices go down it is only to be expected that important sectors of the economy are starting to look for scapegoats and to question what is happening. Today, with greater freedom and greater abandon, they are picking on the high protection high cost industries. This is a good thing in the sense that there will be more scrutiny of the tariff. The manufacturing industries are starting to question the economics of the tariff and this was unheard of before. Previously their objective was that the more they could get from the tariff the better it was for them. But many secondary industries are becoming surplus industries in the sense that they have to look for export markets. They now realise that they have to pay a high cost for in-puts when compared with the import parity price of some of these in-puts

It is obvious now that there is all round questioning of the tariff. This is good because in the long run we have to achieve proper allocation and utilisation of resources of land labour, capital and management. High tariffs in themselves, unless the industries are inefficient, certainly create employment. The honourable member for Grayndler (Mr Daly) made it very clear that one of the advantages of a high tariff or of tariff protected industries is employment. But looking at the cold facts of economics, it does not necessarily follow that this is the best method of creating employment. An example is the hot water bag industry in respect of which we held a debate here a couple of years ago. It is not necessarily the best policy to provide high tariff protection to that industry when the resources could be used to create a greater degree of employment somewhere else.

It is generally accepted that greater opportunities for a wider range of export commodities exist today. The acceptance of this point is fundamental to any discussion on tariff policy. Whereas previously the Australian economy was greatly dependent on exports of wheat and wool, and today is dependent on mining and meat in addition to wheat, wool and sugar, manufacturing is becoming increasingly important. Under previous conditions of a relatively inelastic supply of export goods in relation to overseas demand for our primary products, the effect of a policy of high tariffs on manufactured goods was not particularly significant because Australia had few production alternatives and exports of manufactured goods were either zero or extremely low.

Two points must be made clear. Firstly, under current and future conditions, as opposed to the past, the factors of production are being used in a significantly greater number of industries. They are diversified over a wider field of secondary industries. The tariff as such is affecting more people and more industries. Secondly, we must consider protectionism and its limitations, because this is important. There can be little real argument about a policy of protectionism being advantageous to a developing country like Australia where economic growth, full employment and a steady increase in population is accepted policy. I believe in protectionism. I am not certain what the honourable member for Wakefield or the honourable member for Corangamite believe in, but I believe in protectionism, provided that the resources are used efficiently. But it needs to be firmly grasped that there is a limit to the degree of protectionism. Any claim that more protection or higher protection - whichever phrase one chooses to use - will result in greater prosperity because there will be increased employment is not necessarily true. High rates of protection for some manufacturing industries can result in a lower level of employment in terms of the total economy.

As the honourable member for Grayndler has said, the Australian Labor Party has always endorsed a policy of protectionism because it is fundamental to growth and fundamental to full employment. It has always endorsed a policy of orderly marketing of primary products and protectionism for efficient primary industries, even if it involves the payment of a subsidy. It seems to me that the theory advanced by the honourable member for Wakefield was that all subsidies are bad. Perhaps I am a little unfair in saying that, but all subsidies are not bad. If an industry is producing efficiently and is producing a product which can be sold, often a subsidy will act as a stimulus for expansion and more efficient production. I mention the superphosphate subsidy as an example.

Mr Street - That is a subsidy on imports.

Dr PATTERSON - Even a subsidy as a compensation can be a stimulus. What docs the honourable member say about wool? The honourable member suggests that there should be a Tariff Board equivalent for the wool industry. Suppose there is a 20% compensation factor. How would he apply that disability allowance to wool, for example? The wool grower is being penalised by not being able to import products. He has to buy his chemicals, fertiliser and spare parts on a highly protected domestic market. How can we apply a disability allowance if we do not do so by paying a subsidy? Of course it has to be a subsidy.

One point about protectionism should be qualified. The indiscriminate backing by the Government of every decision of the Tariff Board is completely wrong. We on this side of the House are opposing the Government's decision this time. I am making it quite clear that I am opposing it because I am not convinced of the soundness of economic analysis. It does not satisfy me. The chemical industry as an example, is a classic example of a high cost industry and a high protection industry. There is a multiplicity of diversification in this industry. It is generally recognised that in an industry such as the chemical industry, unless it has adequate throughput shown by a downward sloping average cost curve, it is most difficult to reduce its average costs.

The more that technology or science advances, particularly in agriculture, the more diversification there seems to be in the manufacture of chemicals. Perhaps I can make an analogy with the railway system. The Government usually makes an ad hoc decision. It may be asked to make some decision on subsidising a section of a railway line, and it makes a decision on that portion. That section may be an economically weak section but yet is vital to the efficiency of the whole railway line. A section of the chemical industry may be weak in the sense that it has to have a high degree of protection in order not to break the chain of processing. The more weak links we get through diversification, fragmentation or whatever one likes to call it, the greater becomes the problem of tariff making in industries like the chemical industry.

One of the statements in support ot tariffs is that Australia needs a high protection policy because of the imbalance of the work force. This is a fallacy. It has been argued that most people work in the rural sector and therefore we need a high degree of protection to attract them into the manufacturing sector. In terms of the work force, we are among the most highly industrialised countries in the world. Something like 27% of our total labour force is employed in manufacturing industries. This is approximately the same as in the United States of America. So the argument that most of our work force, relatively speaking, is in the rural sector is not right.

The tertiary industries have not been touched upon tonight. They are the largest employers of labour in Australia. Sixty per cent of the nation's wage bill is paid to workers in tertiary industry. Because of the major deficiencies in housing, education, transport and health there is no doubt that this percentage will increase at the expense of the rural sector and possibly at the expense of the manufacturing sector. Therefore it follows that the standard of living of the nation is directly correlated to the prosperity in tertiary industry. If the building trade has a slump, we can expect a slump to spread quickly through the whole economy. It is an indicator which must be looked at because tertiary industry employs such a high level of labour.

There is sometimes a tendency, when tariff policy is dominated by Government thinking, to fix abnormally high tariffs for particular commodities in order to be able to bargain with overseas countries such as Japan and the United Kingdom. These are very good tactics to bargain with overseas countries such as Japan and the United Kingdom. In recent years Australian bound tariffs have contained both the substantive rates and the primage duties. Primage duties have always been looked upon as a temporary revenue raising device rather than as an element to be included in tariff policy as such. By this type of device often one is able to bargain with overseas countries on a quid pro quo arrangement. There is nothing wrong with that, but often it is a little unfair.

I think 1 have covered most of the points that I wanted to make about tariffs. I will sum up by saying that in view of the marked changes in the structure of primary, secondary and tertiary industries, which has occurred in recent years, Parliament must take a positive role in tariff making. First and foremost, we must remember the tremendous employment created by effective tariffs. Each policy decision should be set out so that benefits and costs of the policy are fully appreciated. This means that instead of a blanket acceptance of all levels of tariffs for industries we become more moderate in our approach, more modest and selective. In effect, this means giving greater support to potentially viable low cost industries and perhaps less support for uneconomic high cost industries.

Thursday, 11 June 1970 (continuation)

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