The Case for Protectionism and the Subsequent Revolution

Welcome to the third and final installment of my series on the history of protectionist policies in Australia! My first article sketched out the political economy theories that can be used to analyse the rationales of protectionist policies, whilst the second outlined the key events in trade protection over the 20th century. This article takes us back to the first principles of economics as we explore the economic arguments for protectionism that were presented during that era. We also consider the primary causes of tariff reform in the 1980s and the potential reasons for their lasting impact. When thinking of rationales for protectionism, the “infant industry” argument immediately comes to mind.  Protection is deemed to be necessary for incumbent firms in emerging industries because these industries do not have the economies of scale to compete successfully with established enterprises in other countries.  As such, we see countries adopting high tariffs to protect domestic manufacturers against international competition. The fundamental qualification of this argument is that protection is only required during the early years – a temporary cost in the present to gain a strong domestic industry in the future. However this very assumption elicits the most criticism, as industries may remain protected even after they have passed their stage of “infancy”.  Here I draw your attention to a quote from John Kenneth Galbraith[i], one of the economic elites of the 20th century:

Friedrich List, were he to return to the United States today, would observe with interest the modern manifestation of his case for protection. The evolutionary process that he described does not end, as he held, with an equilibrium of mature industry and agriculture for which tariffs are irrelevant. There comes at that point an aging process in the more mature countries, and from this comes pressure for protection against newer and more vigorous arrivals on the industrial scene…The former infant-industries exception has become the aged- and senile-industries exception. In tactful modern terminology, it is called not protection but an industrial policy. 

– John Kenneth Galbraith (A history of economics: The past as the present).

What an ingenious (and accurate) observation!

Several other arguments for protection were put forward on economic grounds during the 20th century. As I discussed in my last article, it was believed that protection would shift the distribution of income towards wage earners. This was partly based on the belief that protection could maintain output and employment during troughs in the business cycle. The need for a more balanced economy was another central argument for manufacturing protection in Australia[ii]. Primary production had dominated Australian industry since the turn of the century. Given that the world’s leading economies were also the most industrially advanced, there was much public support for building and sustaining a domestic manufacturing sector.

Thus throughout much of the 20th century, protectionism ideologies were rooted deep within the political doctrines of governments. The strength of these principles was such that policy reform would occur only in response to international and domestic pressure or fundamental shifts in party creeds – both of which incidentally came to manifest in the 1980s.

Coming into the latter decades of the 20th century, there was growing dissatisfaction with the poor outcomes invoked by protectionist policies. Australian manufacturing firms had become uninterested in research and development, content to produce only for the domestic market. This complacency inadvertently implied that protectionist policies had failed to develop an internationally competitive manufacturing industry, and a viable export trade.

Domestically, private interest groups began lobbying for tariff reform during the 1970s, including the National Farmers’ Federation, some mining companies and a few manufacturers involved in exporting[iii]. Furthermore, international developments meant that Australia could not maintain protectionist policies for its manufacturing industry whilst simultaneously pursuing freer world trade in agricultural products. International pressure arose as a result of Australia’s greater reliance on Asian trading partners. The transition of these countries into construction-intensive stages of development opened up markets for Australian exports of commodities. However this also created a need to accommodate their manufactured exports.

Finally, the state of politics during that time was also remarkable. The Labor party had historically been an unequivocal supporter of protection for the manufacturing industry. The Party abruptly changed its stance towards protectionism during the 1970s and 1980s. This change of attitude was accompanied by a noteworthy and atypical advantage for a government inclined towards reform – the support of the Opposition. The Coalition agreed with the microeconomic reform direction of the Labor government and even attacked it for not pursuing these reforms more rapidly.

Accordingly, the industry and trade policy revolution arrived, initially led by the Hawke Labor government, and continued by Keating in the 1990s. The rest of the story is relatively easy to infer. From March 1983, the government pursued an industry and trade policy mix that attempted to restructure the Australian industry. Improving efficiency and international competitiveness were the primary aims of microeconomic reform. In a sharp contrast to the preceding seven decades, trade liberalisation initiatives during the 1980s targeted the most heavily protected industries. The culmination was that by the 1990s, average nominal rates of industry protection had fallen by 8 per cent[iv].

Where does that leave us today? Obviously we are not going to expect a sudden change in policy towards greater protectionism, but why exactly have these reform principles endured? After mulling over this for some time, I can only surmise that the protectionist policies were triggered by a unique set of factors that are no longer relevant. In the post-war era, governments thought it crucial to engage in nation-building by developing a strong and self-sufficient domestic industry. As such, tariffs represented a plausible policy response to generate the demand for labour needed to sustain rapid population growth. In recent decades however, the services sector has overtaken the manufacturing sector in relative importance for employment and output. This is an inevitable consequence of our transition to a knowledge, and services-based economy. Thus although manufacturing protection may have had merits on economic and political grounds during the 20th century, a case for protectionism simply no longer exists.

 



[i] John K. Galbraith, A History of Economics: The Past as the Present (London: H. Hamilton, 1987).

[ii] Albert G. Kenwood, Australian Economic Institutions Since Federation (Melbourne: Oxford University Press, 1995), 67.

[iii] ibid, 80.

[iv] D. Clark, “Microeconomic Reform,” in The Australian Economy: The Essential Guide, ed. Peter Kriesler (NSW, Australia: Allen & Unwin, 1995), 151.