CHAPTER 6
Protection is interwoven with almost every strand of Australia's democratic nationalism. It is a policy of power; it professes to be a policy of plenty.
WK Hancock, Australia, 1930
The Tariff Board became the Industries Assistance Commission in 1973, the Industry Commission in 1991 and the Productivity Commission in 1998. It developed and defended its own standards of objectivity and independence. Something of these struggles during the 1960s have been told with Bert Kelly's role in Chapter 3.
Richard Snape, Lisa Gropp and Tas Luttrell, writing in Australian Trade Policy 1965-1997, state:
The contrast between trade and industry policy at the beginning and the end of the 30-year period is stark. The change is perhaps most marked with respect to manufacturing industry -- away from policies that sought to insulate Australian industries from foreign competition and towards exposure to that competition. It was not that the turn was sudden -- a national road to Damascus -- nor has the new road been maintained fully consistently. There were at times steps both forward and back, and in recent times (1997) there appears to be some reversion to earlier attitudes to policy and policy formation. But looking back from the 1990s to the 1950s and early 1960s, it is clear that there have been marked changes in attitudes towards industry policy across many sections of Australian society, together with a marked shift in policy. (100)
The progress of dry trade and industry policy to which they refer was influenced by the basic ideal of even¬handedness, by economic theory and increasingly by authoritative information. The Tariff Board and its successors contributed to understanding of the theory and were by far the most important sources of relevant information.
MERCANTILISM
We all trade almost every day but even so the gains made from trading internationally are counter-intuitive to many. The attitudes toward which Snape, Gropp and Luttrell saw us reverting have long born the label "mercantilism".
Adam Smith coined the term "mercantile system" to describe the system that sought to enrich a country by restraining imports and encouraging exports. The goal of these policies was, supposedly, to achieve "favourable" balance of trade that would bring gold and silver into the country.
Most of the mercantilist policies were the outgrowth of the relationship between the Governments of the nation-states and their mercantile classes. In exchange for paying levies and taxes to support the armies of the nation states, the mercantile classes induced Governments to enact policies that protected their business interests against foreign competition.
These policies took many forms. Domestically, Governments would provide capital to new industries, exempt new industries from guild rules and taxes, establish monopolies over local and colonial markets, and grant titles and pensions to successful producers. In trade policy, the Government gave preference to local industry by imposing tariffs, quotas and prohibitions on imports that competed with the local manufacturer. Governments also prohibited the export of tools and capital equipment and the emigration of skilled labour that would allow foreign producers to compete in the production of manufactured goods.
Smith demonstrated that trade, when freely initiated, benefits both parties. He argued that specialisation in production allows economies of scale [and the learning of better techniques and skills] that improve efficiency and growth. He argued that the collusive arrangement between Government and industry was harmful to the general population.
Modern mercantilist practices arise from the same source as the mercantilist policies of the sixteenth to eighteenth centuries. Groups with political power use that power to secure Government intervention to protect their interests while claiming to benefit the nation as a whole. (101)
Nationalism, not religion, is the opiate of today's people. Mercantilists, including the new anti-globalisation lobbies, tend not to see trade as mutually beneficial but as a zero sum relationship with one person's gain being the other's loss. In particular they overlook that trade restrictions harm the advancement of the poor in developing nations.
BEFORE 1965
In Australia Walter Massy-Greene was Minister for Trade and Customs in the Hughes Nationalist Government. The Massy-Greene tariff of 1920 was arguably the beginning of "protection all round," the idea that every Australian industry should be protected from foreign competition. The inherent unfeasibility of such a policy seemed not to have occurred to Massy-Greene or many of his successors. Nevertheless, following its introduction, the Government established the Tariff Board to evaluate the need for industry protection and to inform both the Government and public.
Shaun Kenaelly offers this vignette:
The tariff broke Massy-Greene's political career, although he continued in the Senate until the late 1930s. Massy-Greene, architect of the great tariff increase and Minister responsible for the foundation of the Board, went up, many years later, against his own creation, with interesting results. Defeated in politics, he went into business and soon established a string of successful directorships, principally in manufacturing, working out of Collins House, in Melbourne. He became Chairman of Australian Pulp and Paper Mills. When the Company made its first application for a protective tariff, Massy-Greene decided that it was so important that he should introduce the submission in person.
Once in the witness box, Massy-Greene began to hector the Board, by launching into a full-scale disquisition on the place of the exchange rate in the protective structure. He was interrupted by the Chairman, Hugh McConaghy, who told him to stick to the point. Massy-Greene simply ignored him. McConaghy was a career public servant of many years standing. He chaired the Tariff Board from 1927¬1942. McConaghy tried to stop him again, more sharply:
Sir Walter, thereupon, to the delight of the reporters and indeed everyone present, including his own colleagues from the paper company, did his block. He asked the Chairman whether he (McConaghy) recognised that, as Minister for Trade and Customs, he (Sir Walter) had created the Tariff Board, and further whether he (McConaghy) realised that he (Sir Walter) had become more and more dissatisfied with its performance ever since. Had he realised, asked Sir Walter, that it had never been intended that the Tariff Board should adjudicate upon new or altered tariffs -- which were the sole prerogative of the Minister -- and that the Board's only function was to inquire into the effect and incidence of decisions which the Minister had made. By this time McConaghy's Irish blood was properly up and he firmly ordered Sir Walter to step down from the witness box.
The story tells much about attitudes to tariff-making, the function of the Board, the direct and indirect political pressures operating upon it and of the integrity of the Board when attempts were made to bully it. Sometimes the bully was the Minister and from the outset the Tariff Board was subject to an uncertain existence. Kenaelly observes wryly, however, that more than once the politicians overlooked the quality of their own appointments.
Legislation required the Tariff Board to conduct public inquiries at the request of the Government into "assistance" to particular industries and authorised it to conduct its own inquiries into tariff assistance without prior reference by the Government. The Government could not alter existing duties or introduce new ones, without first obtaining a report from the Board but it could ignore or otherwise depart from the Board's report. Since the Board's recommendations were a public document, it was then up to the electors. The procedure accorded well with democratic principles. Wherever complex detail and/or arcane theory are called for, democracy can function only as well as the trusted and authoritative advice that is available, but it also must be sought. The Tariff Board and its successors produced impartial information and related it to goals that most people shared -- rising living standards, employment opportunities and justice. It earned trust by declining to overstate its case and by declining to allow itself to be bullied. It became an effective advocate that infuriated those wishing to escape competition.
This was, however, a gradual development. The 1929 Brigden Report had been highly critical of the ad hoc way that Governments set tariffs. Then, when the 1932 Ottawa Conference made it a condition of the Imperial Preference (102) that Australia adopted a more orderly approach to tariff-making, the Board's hand was strengthened.
The saga from Tariff Board to Productivity Commission is far from a tale of straightforward progress. Indeed at several points the Board and its successors lost ground, but succeeding Members and then Commissioners gained more influence with more people upon more issues. Like the think tanks, they had no power but only influence on opinion leaders and through them with voters, and only as much influence as their opinions commanded respect. Giblin, a leading academic economist and moderate protectionist said this of the Tariff Board in his 1936 Joseph Fisher Lecture:
The Board offers a remarkable instance of the delegation (in effect) of a highly specialised job to experts, with very satisfactory results. In this business of tariff protection in the interests of the community as a whole, there were in fact no experts ready-made. The members of the board had to learn their job by doing it. Naturally enough, the board's earliest efforts were crude, and its authority slight. It applied itself, however, diligently and intelligently to its work, studied, gained experience, broadened its outlook, built up a technique, and as a result has become very competent. The consequence has been that it has to a large extent gained the confidence of all the interests concerned, and established its authority. (103)
Like many with collectivist tendencies then and since, Giblin had not thought through the politics of what heproposed. Wanting the expert Board to determine protection levels free from the influence of Governments, he had given too little consideration to the political consequences of an unelected body dispensing and denyingprivileges. He appreciated that Ministers of the Crown were corruptible but was reluctant to admit that there was no way of escaping the dilemmas created by any decision to favour one class of citizen at the expense of others. So long as there was to be economic favouritism then the best that the public could expect was that the ruling authority was an elected and therefore readily sackable one, and that the advice it received was public, comprehensive and authoritative. Unlike the Arbitration Commission, with its decision-making powers, all that had been delegated to the Board was the responsibility to advise publicly and that was as it should be.
Until the 1980s it was widely believed, in part because the Brigden Report had said so, that manufacturingprotection created employment, enabling Australia to support a larger population than otherwise. The 1932Ottawa Agreement (from which derived the United Kingdom-Australia Trade Agreement) had, however, declared that "protective barriers shall not exceed such a level as will give United Kingdom producers full opportunities of reasonable competition on the basis of relative costs of economic and efficient production". Protection was, therefore, to be afforded only to industries that were "economic and efficient". Why an economic and efficient industry should require protecting was not addressed. The tenor of the language was mostly mercantilist -- as though Adam Smith had never published and Britain had never experienced the debates that led to the repeal of the Corn Laws.
After World War II, when many nations increased their access to world markets, Australia remained inward-looking and lost world-market share. The cost of protecting a growing manufacturing sector, 60% of whichcould not without protection have competed even in the home market, was borne by primary industry withaccess to cheap land and minerals. In the 1960s we were still the lucky country but the traditional source of luckwas running out as agriculture and many mines faced what we termed the "cost-price squeeze". With the raw materials shortages of the 1970s cheaply exploitable minerals replaced agriculture but that sector was dependenton international markets and domestic costs. It was a precarious source of luck in a high-cost economy. (104)
In 1965, the Vernon Committee addressed the "cost disadvantage" of Australian industry, which it thought to be around 30%. It concluded, however, that free trade (with accompanying devaluation and exporters producing a larger share of national income) "would not in practice have produced an economy operating at levels of employment and production comparable with those which have prevailed". (105) It recommended systematic examination of protection on an industry-wide basis. (106) Debate still tended to be mercantilist. Although dismissed by Menzies, it was influential. (107) A practice begun in the following year by Alf Rattigan, then the Chairman of Tariff Board, was in time much more influential. He began using the Board's statutory requirement to report annually to explain with ever-greater sophistication the national consequences of protection in terms that would not have been familiar to Adam Smith but of which he would surely have appreciated.
THE RATTIGAN APPOINTMENT
When Jack McEwen appointed Rattigan in 1962 he misjudged his man. Rattigan was not at the time of his appointment an avowed free trader. He was, however, a principled civil servant who took his statutory duties seriously and, if he did not have the skill already, he quickly learned to recognise disingenuous special pleading. He was not a man who could be bluffed into fudging his duties. And, of course, he knew of Sir Leslie Melville's experience. As was so often to be the case in winning as much of the Good Fight as has been won, Rattigan's essential strength was not technical but moral! He was also politically astute, recognising and seizing the opportunities that permitted Whitlam to form the Industries Assistance Commission. He understood the necessity of attracting first-class staff to the Commission and training it in world-class analysis.
The Tariff Board under Rattigan's chairmanship tried to give economic content to the words "economic and efficient", to introduce the concept of "effective rates" of protection (see below) to its analysis, to have protected industries reviewed every six years and to assess protection by its effects on the economy as a whole. Needless to say the recipients of protection and their industry bodies were not delighted. Neither was the Rt. Hon. Jack McEwen.
THE THREE PILLARS
The way the Tariff Board viewed itself differed little from the view that the Productivity Commission has of itself today. In 1998 Garry Banks, the Chairman of the Productivity Commission, spoke of "three pillars": (108)
Independence
The Commission operates under the protection and guidelines of its own legislation. It has an arm's length relationship with Government, which can tell it what to do -- through inquiry references and requests for research -- but not what to say. In a fundamental sense, the Commission reports not merely to the Government of the day, but to Parliament and ultimately to the Australian Community.
The corollary to this is that the Commission is only an advisory body -- and only one source of advice at that. Its influence depends on the power of its arguments and the efficacy of its public processes. It makes recommendations to Commonwealth and State Governments, but they are at liberty to accept or reject them.
The Commission's independence is exercised formally through the Commissioners -- who as statutory appointees cannot easily be removed.
Transparency
The Commission's advice, and the information it generates, is all open to public scrutiny. Its inquiries provide for extensive public input and interaction through hearings and other consultative forums, and the release of draft reports. This allows anyone with an interest to have a say, to respond to the views of others, and to comment on the Commission's own preliminary views before it submits its report to Government.
A broad view
The policy guidelines in its legislation require the Commission to have regard to the need to "improve the overall economic performance of the economy. ... to achieve higher standards of living for all members of the Australian community".
The Commission is also required to have regard to a range of more specific considerations, including the facilitation of adjustment to change, the need to promote employment and regional development, and the social and environmental implications of its recommendations.
While there are potential tensions among some of its statutory guidelines, they collectively ensure that the Commission cannot put the interests of any group above those of the Australian community as a whole.
Should any one of Banks' "pillars" be seriously compromised, then the influence of the Commission would be compromised and an effective barrier to grace-and-favour Government would fall.
In the same address Banks worried that his Commission was seen to be ideologically driven with an antipathy to all forms of Government intervention. To illustrate that it has no such antipathy he chose examples that implied that it was not even particularly dry, citing its recommendation for 150% tax deduction for business R&D and rejection of unilateral open-skies deregulation of international air services. He was in this, I think, a mite disingenuous. While the Commission recommends Government intervention as often as it does not, it is rare for it to recommend interventions that favour one form of economic activity -- research or operating aircraft -- at the expense of others. Those were poor examples.
Economic theory instructs the Commission that, within a framework preserving property rights, the best available approximations of competition will most often best supply the goods and services that people most want. However, theory also instructs it about the circumstances where competition is imperfect -- monopoly, externality, want of information and where tradeable property rights cannot be established such as with deep-sea fish stocks -- and in the forms of Government intervention that will best countervail or avoid the imperfection.
The logic that governs the Commission does not compel it to oppose Government interventions but it does compel it to oppose those interventions that create privileges and to advocate those interventions that decrease privileges, such as the rules preventing people from polluting air, water etc. No Government would admit to any other intention. The enmity that the Commission attracts is that of people who do not wish to have their privileges publicised and who do not trust markets.
Despite the fact that the Productivity Commission and it predecessors have worldwide standing, justly-earned over three-quarters of a century, most of the information that they have given Governments, the Governments could have learned from other sources or in the most important cases already knew very well. It is not the advice that the Commission gives Governments but the advice it gives the public about Governments that has caused us to be better governed. Had Tariff Board, IAC, IC and PC reports not been on the public record they would have amounted to little. They changed the political climate and made it more rewarding for political entrepreneurs to follow the free-trade line. Chairman Banks' principal function was thus not to prevent Governments falling into error but into sin.
MEASURING PROTECTION
The immediate purpose of any protection is to allow goods to be sold at higher prices, and thus protection has for the consumer the same price effect as a selective consumption tax. For instance, in the late 1980s the consumer tax equivalent of protecting motor vehicles alone was $1.3 billion each year. Most of this was, however, paid not to the Government but to the motor manufacturers. Until the Tariff Board and its successors publicised these costs, very few people outside the industry and the Government appreciated even their order of magnitude.
While consumer tax equivalents measure the costs to consumers of protecting producers, the best measure of the competitiveness of a particular activity is its "effective rate of protection". Snape, Gropp and Luttrell offer the following explanation:
... if the tariff on a production input (say 20%) exceeds the tariff on the user industry's output (say 10%) the effective rate of protection to the latter activity will be less than the "nominal" 10% rate on the output (the precise effective rate will depend on the importance of the input in the production process). Industries whose outputs are not protected (such as mining) can thus receive negative effective protection (in other words they are "taxed") because they are penalised by tariffs and other forms of protection, which raise their input prices, but they are unable to raise their output prices, which are determined by world markets. On the other hand, the effective rate of protection for some industries can exceed the nominal rate on their outputs because their inputs are protected at a lower rate: some clothing and footwear activities, and even motor vehicles, have received effective assistance well in excess of 100%. (109)
Because producers supply each other's inputs and compete for resources and customers, every economic activity affects every other. Initially the higher price or reduced quality that protection allows is borne by the immediate purchasers but, to the extent that these face competitors that are similarly affected, the immediate purchasers too can raise their prices or wages. Thus the cost of protecting one industry is passed on until it reaches somebody who cannot raise prices, such as a person on a fixed income or an exporter.
Employing the concept of the effective rate of protection, the Tariff Board through to the Productivity Commission estimated the protection afforded by tariffs, subsidies and quantitative import restrictions and the consequences of these for other industries. It ranked industries in terms of their burden on the community. It was thus made apparent which industries unambiguously contributed to the Australian economy and which, with profit to the whole nation, might have had their marginal resources better employed elsewhere. Major parts of motor manufacture and textiles, clothing and footwear manufacture were so economically inefficient that the nation could with profit have paid their entire workforces to stay at home. Other industries, most notably in the mining sector, were shown to receive what economists call "negative protection", in effect an underhand tax.
When the losers were identified the information cast doubt upon the long-held belief that protection resulted in net employment gains. One man's protection was, it became apparent, another man's job. Had not a significant minority of the public come to appreciate this fact, it is unlikely that the protection reductions achieved in the Hawke years would have been politically feasible.
The effect of protecting any industry upon other industries was contested vehemently. The effect always applies but it is most obvious when the chain is shortest. It is easier to convince people that the protection of rolled steel affects the production of lawn mowers than to convince them that the protection of bed sheets inhibits the production of coal. Perhaps because it knew this, the Fraser Government at one stage tried to avoid an IAC inquiry into fabricated metal products. When it was conducted, submissions pointed to the high price of rolled steel even though it was protected only moderately. There is said to be honour among thieves but the highly-protected motor industry submitted that cold-rolled steel should not receive higher protection than it already had.
The Industries Assistance Commission employed the general equilibrium (whole-of-the-economy) ORANI model to demonstrate the negative and positive effects of protection upon sectors and the negative effect upon over-all economic growth. The estimates of opportunity foregone were, however, under-estimates because economic models are unable to capture the effect of competition upon the quality of management, deficient innovation and workforce practices. Faced with losing one's market or one's job one does tend to lift one's game, much as a drought year once improved John Hyde's farm management more radically than had a decade of good seasons. The progress of the Australian economy since tariff reduction provides strong circumstantial evidence that these so-called "x" inefficiencies were substantial.
THE ARGUMENT AS IT WAS BY 1970
During the 1960s a battle had raged between, on one side, the heavily-protected industries and their representatives, the Trade Ministry and its Ministers McEwen and Doug Anthony and, on the other, the Tariff Board, most of the financial press, Treasury, most academic economists and Bert Kelly. Most people then accepted industry protection as a fact of life. "Free" as opposed to "freer" trade was mentioned only by protectionists to discredit their opponents. The principle most at issue had not been protection itself but transparency. However, both sides assumed that transparency would result in freer trade.
By the time that Whitlam was elected in 1972, the tariff argument had become fairly predictable. The Board was accused of usurping the Government's role in tariff-making, an argument that was, of course, in any legal sense, nonsense. If protection of anything were reduced or not increased as requested jobs would be lost. This was usually true of particular jobs but no mention was made of the jobs protected by cheaper or better products. Industry associations asserted that they did not accept the "effective rate" concept but the theoretical basis of their objection was not explained. The Tariff Board was alleged to be dominated by wild-eyed theoreticians, etc.
Defence of protection was characterised by rancour and political threat. Much of it was targeted at the Tariff Board and then the IAC; and individual politicians received their measure. Looking back, however, its most striking feature was its lack of integrity. Industry spokesmen cannot even then have believed what they were saying. McEwen, with what seemed like scant regard for his own self-respect, told the Parliament that he had not appointed people of the highest economic eminence to the Tariff Board. It should therefore not attempt to place tariff-setting in a whole-economy setting or to classify industries as enjoying high, medium and low levels of protection, he said. Even if this had been true, the criticism would have been beside the point because the nation's (and the world's) best economists, such as Dr. Max Corden, approved of the techniques by which the Board was proceeding. McEwen did not tell the Parliament, perhaps because he realised it only too late, that he had, however, appointed a Tariff Board Chairman, Rattigan, of the highest integrity. When, following Rattigan's death in 2000, Alan Mitchell, the editor of The Australian Financial Review, described Rattigan as "one of Australia's most remarkable public servants" he did not exaggerate. (110)
TEMPORARY ASSISTANCE (111)
As we have already seen in Chapter 3, Commonwealth Governments enacted various arrangements for the granting of temporary or injunctive protection. Initially, the Deputy Chairman of the Tariff Board, who tended to apply Tariff Board criteria, had been responsible for recommending temporary assistance. In 1962, however, the Government created the Special Advisory Authority (SAA) to do it. Protection was available immediately but the case for it had to face a Tariff Board inquiry within three months. The SAA proved more inclined to accept industry arguments than the Tariff Board had been and there was no restriction upon how soon after a Tariff Board report that further "temporary assistance" could be granted. These circumstances resulted in farcical protection "merry-go-rounds". Manufacturers and processors of polyester yarns received "temporary" protection for more than eight of the fourteen years between 1962 and 1976 and raw polyester yarns received "temporary" protection for six years between 1967 and 1976.
In the report that led to the creation of the Industries Assistance Commission, Sir John Crawford had recommended that evaluation of the need for temporary assistance should be returned to the Commission. The Whitlam Government tried to legislate accordingly but its Bill was amended in the Senate by the Coalition Parties to extend the period for which for which temporary assistance could be granted to two years. The SAA became the Temporary Assistance Authority (TAA). Not having the numbers in the Senate, the Government accepted the amendments. In 1974 and 1975, in a climate of rising unemployment and declining electoral standing, the Whitlam Government itself, after its 25% general tariff cut, turned to temporary assistance measures to assist, in particular, textiles, clothing and footwear, motor vehicles, steel and household appliances.
In 1978 the Fraser Government enacted law to let it make greater use of the TAA for protective measures of not longer than two years duration. In 1983 it extended the two years to three.
Following the 1984 Uhrig Report, an ALP Government abolished the TAA, bringing temporary assistance within the purview of the Commission alone. With a falling Australian dollar and faced with scrutiny, requests for temporary assistance simply dried up. A huge and long-standing rort -- preferment on demand -- ended with barely a whimper.
THE 25% TARIFF CUT
Faced with the necessity of doing something to reduce inflationary pressure quickly at a time when the exchange rate was determined by Government fiat, Whitlam opted for an across-the-board tariff cut of 25% instead of a further up-valuation of the Australian dollar. The decision, like much that Whitlam did, was radical. However, it made long-run economic sense to require those industries that contributed least to the standard of living to release resources to those that contributed most. It was radical not just for the size and direction of the change and the fact that it affected all tariff-protected industries but also because it was done primarily for macro¬economic reasons and that Treasury, whose nose was put seriously out of joint, was not involved. Because the cut could not have been anticipated, it in inflicted unnecessarily high adjustment costs.
The situation was ripe for misrepresentation that was well beyond the Government's ability (even if it had been united on the point) or the Tariff Board's ability to counter. The effect of the usual industry lies and threats upon those whom Whitlam described as "Nervous Nellies" was to see the gains substantially undone. These lies and threats lacked nothing in encouragement from the Opposition. The Country Party opposed the 25% tariff cut despite its constituency, that is exporting farmers, gaining the biggest single benefit that it had ever received, dwarfing concessions such as the superphosphate bounty.
Representatives of the textile industry in particular did not then abide by any equivalent of Queensbury's rules and Whitlam's Cabinet was not of either the intellectual quality or resilience of Hawke's. Coming under pressure from a relentless campaign from manufacturers to reverse the 1973 tariff cut, (112) the divided Government introduced non-tariff barriers for several industries. These included measures for passenger motor vehicles, textiles, clothing and footwear that lasted for 13 years. (113) These considerably (perhaps wholly) undid the 25% cut in the average level of assistance and more seriously, by increasing protection for the least efficient industries, increased protections' distortive impact. Industries making claims upon the same or readily substitutable resources now received even more widely differing levels of Government preferment. The diversion of resources away from their most economic use was even greater and the economic cost even higher.
The IAC began to stress the economic cost of dispersion and the case for "tops-down" tariff reduction. The highly protected industries are, unfortunately but no doubt as one might expect, those with most political muscle and the Commission was never entirely to win this one.
TARIFF BOARD TO I.A.C.
Against the background of the chicanery of the 1960s, Kelly's exposure of it and Melville's and Rattigan's stands on principle, the Whitlam Government commissioned Sir John Crawford to report on a Commission to make "a special contribution towards improving the allocation of resources". (114) Crawford recommended revamping the Tariff Board to form the Industries Assistance Commission, widening the brief from manufacturing industries to include agricultural industries and the traded tertiary industries.
The wealthier producers and the marketing co-operatives had been the principal influences upon politically inspired regulation of and assistance to the rural industries. Assistance, therefore, concentrated on the commodities rather than the people and often resulted in ridiculous waste. In the mid-1970s Tasmanian apple orchardists received average annual subsidies of between $10,000 and $11,000, but by selling into loss markets overseas their net returns were reduced to less than $3,000 each. (115) Perhaps just as unwisely, shipping cartels were permitted to handle nearly all of the carriage of meat, wool and dairy produce at a cost then of about 16% of their export value. (116) The case for open inquiry into the rural sector ought to have been unassailable.
The Liberals supported Whitlam -- a singular triumph for Bert Kelly. The Country Party, however, bitterly opposed the IAC Bill. Doug Anthony, I am sure without blushing, had this to say to the parliament:
What this legislation means, of course, is the end of the long-established and successful system under which industry policy was devised -- the system of discussion, consultation and negotiation between industry and Government.
I wonder how he would have reacted to a statement that was in every respect the same except that in both places "union" was substituted for "industry". I suspect that he did not approve two decades later when the ACTU entered discussion, consultation and negotiation with the Hawke Government to devise industrial relations policy.
The Government also promised a deliberate, systematic, comprehensive and long-term program of inquiries. Ministerial responsibility was shifted from Trade to Prime Minister -- that is, away from the Jack McEwens, Doug Anthonys, Jim Cairns and their ilk to a minister who had to take a whole-of-Government approach.
In 1972 Labor had come to power after 23 years in Opposition. Believing too much of the rhetoric it had used to gain office, it governed badly and could not last. When the Australian economy was hit by the oil shock the Government stuck to the program that had prevailed in the 1960s rather than addressing the supply-side problems. The Coalition, which was by 1975 led by Malcolm Fraser, came back to office too soon and was not fully purged of the bad habits acquired while too long in office.
When, during 1976, Fraser told Howard that the IAC must be instructed to take into consideration the consequences of its recommendations for employment. He no doubt expected IAC reports to show net employment losses. This instruction caused some anxiety among low protectionists in the Liberal Party who knew Fraser's predilections and feared another episode like the persecution of Sir Henry Melville. John Hyde, on the other hand, argued that it provided the Commission with an opportunity to debunk a widespread misapprehension. At least one of the permanent commissioners, Dick Boyer, worried that the necessarily wild estimates of employment opportunities created by tariff reduction would damage the organisation's rigour and ultimate credibility. I don't think he was impressed by Hyde's assertion that all the Commission had to do was to run the data through an economic model and hand the necessarily unreliable results to Fraser with all the appropriate qualifications and a lecture on the underlying theory.
From this time forth the Commission was required to produce draft reports for public comment. John Hyde was concerned that when the vested interests applied pressure to it to change draft recommendations the Commission might buckle. Hyde did not see what could be done about this without sounding dog-in-the-manger so he said nothing. Hyde need not have worried, the procedure has functioned well.
The IAC, like the Tariff Board, having no executive function, had no clients to "capture" it. Of course hindsight sometimes revealed error, but the IAC did not, like the Government, feel obliged to justify past mistakes. Every new inquiry looked again at the evidence. It was given the resources approximately to match the special pleading of protected industries. Combining rigour and flair it educated the public to an extent that the Tariff Board had not been able to. Armed with data from a disinterested and therefore credible source, advocates of the open economy could now mount far more convincing cases than those that had depended on theory alone. By quantifying protection the Commission had shown that its economic cost was sufficient to account for a considerable reduction in living standards from what they might have been. Influenced by this evidence of a cause of Australians' declining relative living standards, eventually, in the mid-1980s, a braver-than-usual Government was to do what every post-war Government knew that it ought to have done, namely, reduce protection.
IRON AND STEEL
The textile, clothing and footwear industries alone have been the subject of about 500 reports since 1921 (117) and it is not possible to explain here the labyrinthine workings of Australian border protection as it was. That would require another account and another author. Tariffs; tariff quotas; other quantitative import restrictions; "drawback" of taxes upon imports later exported; by-law entries, later called commercial tariff concessions; subsidies; voluntary restraints; export facilitations; export market development grants; export payments insurance; offsets; local content requirements; home price schemes for agricultural produce; import restrictions in the names of quarantine or domestic standards; extended patents; tax concessions; and State and Commonwealth Government purchasing preferences produce mind-boggling complexity. They also offer eminently corruptible processes to politicians and mendicants alike.
The production of iron and steel was not by far the most highly protected industrial process, nor was the steel industry the most active in threatening political reprisal or in making donations to political campaign funds. Chosen for its relative simplicity, it will, however, serve to illustrate the most common tendencies.
Australia has abundant iron ore and coal of exceptional quality close to sea transport and should be suited to iron and steel production for world markets. Instead, prejudiced by the protection of other industries, especially coastal shipping, it developed to supply the domestic market, exporting only when domestic demand fell below expectation. When worldwide iron and steel capacity increased the Australian industry came under pressure in the domestic market especially during the recessions of 1974-75 and 1982.
In 1974 the average effective rate of protection of basic steel products was only 15%, about half that of the manufacturing sector as a whole. Following a Temporary Assistance Authority hearing, import quotas for sheets and plate were imposed in 1975. A year later, these were removed following an IAC report. Tariff quotas were imposed three months after that following another TAA report and some of those were removed later that same year. The industry received further protection in a variety of forms until 1983 and lagged far behind overseas competitors in modernisation. BHP made woeful rates of return on the capital used in its Steel Division.
In 1983 a tripartite -- Federal Government, BHP and the unions -- steel plan was devised. It provided for investment by the company, wage agreements and taxpayer-funded subsidies intended to provide the industry, essentially BHP, with 80% to 90% of the Australian market. The plan was terminated, as intended, in 1988. (118) It had delayed the inevitable closure of the out-of-date Newcastle steelworks but, despite the plan, the industry has become gradually more competitive. Despite some improvement, it still suffers from uncompetitive coastal transport.
THE ARGUMENT AS IT BECAME IN THE 1980
Keeping an electoral commitment, the new Hawke Government commissioned John Uhrig to report on the operations of the IAC. Uhrig recommended that the Commission lose its ability to initiate an inquiry. Except as a threat, the Commission had never used this power but at the time John Hyde felt it was important that Governments were threatened by the possibility that their worst decisions might face public evaluation. On the positive side, the Commission's charter was expanded to include tertiary industry specifically and, as we have already seen, temporary assistance was returned to it, an important step toward public accountability. The inclusion of tertiary industry expanded the Commission's brief enormously; it was another step in the evolving appreciation that barriers to internal as well as border trade needed to be removed.
By the mid-1980s the debate had moved from whether Australians should reduce protection to how they should do it. Manufacturers who had been prone to ask plaintively how they could compete with the low wages of Third-World countries had been forced to concede that they were competing because, with machinery and education, their workforce was immensely more productive than that of poor nations. More people now appreciated that if Australia did not import it could not export. Some businessmen could explain the principle of "comparative advantage", always an elusive concept, to anyone who asked. Those who could not at least knew that it implied concentrating upon what was done best. More people understood that one man's protection is another man's job. Nearly everybody realised that trade barriers reduced living standards below what they might be. More people accepted that this reduction was not trivial. It was not just old soldiers who disliked having to concede that Japan had won the peace and now had living standards to match our own. The disingenuous nonsense of, for instance, the textile lobby was no longer passing unchallenged.
In contrast, in 1987, when Australia was reducing tariffs, some American lobbies had seemed as Hell-bent on blocking imports as they had been in 1930 when the United States Congress responded to Japanese imports with the infamous Smoot-Hawley tariff. In April 1987 the US House of Representatives had carried HR3, intended to compel the President to erect protectionist barriers against countries with "excessive" trade surpluses with the US -- unadulterated mercantilism!
Australia had not reduced manufacturing tariffs in successive GATT rounds or unilaterally when others had done so in the 1950s and 1960s. In the early 1980s we had one of the most highly protected manufacturing sectors in the developed world. Our trade patterns and interests, however, resembled those of our colonial past or many developing nations of the time. (119) Despite this background, in 1986 Australia's was a well-informed voice at the Uruguay Round of the GATT. At this we initially eschewed mercantilist negotiations of the sort that says, "We will reduce our trade barriers if you reduce your trade barriers." Instead, our negotiators accepted that we benefited from imports. It is not conceivable that without the IAC's years of painstaking public explanation an Australian Government would have, even could have, however temporarily, (120) abandoned mercantilism. We were to reduce our own trade barriers in our own interest and benefit again to the extent that others reduced their barriers.
Although many fired the bullets in the war of words that brought about this change, more bullets had been manufactured at the IAC than anywhere else. It had provided the data and much of the argument for the speeches and the op-ed pieces. The time had come when these reasoned efforts at last prevailed over the thirty-second television grabs of closed factory gates. It had, however, never seemed axiomatic that the day would ever come. How can one present in camera-friendly form the jobs that less costly motor cars make possible; the better health of a family that need spend less on clothing; the fact that one day we would weather an "Asian crisis"; or that in the unknown future we might be strong enough to repel armed invasion? Like the dispersed interest that is hard to organise, the dispersed benefit is hard to demonstrate and impossible to capture on film.
Mercantilism, however, dies hard. After its brief eclipse in the late 1980s, it returned to Government rhetoric. Even while our own trade barriers were coming down the Government again began defending its policies in mercantilist terms. For instance, Trade Minister Dr Blewett writing in the trade magazine World Link, employed mercantilist arguments to attack European Agriculture Protection. He wrote of the advantages to Europe of trade in intellectual property, services and industrial produce, should Europe have agreed to the quid pro quo of freer agricultural trade but omitted to mention the advantage to Europeans of access to our cheaper food. He wrote of the "substantial sacrifices" that would be made by the Cairns Group (of agricultural nations) if the Uruguay Round were successful as though access to competitively priced cars was not an advantage to Australians. In the same publication his silliness was, however, more than matched by Raymond MacSharry, European Community Agricultural and Rural Development Commissioner and farmer from County Sligo, Ireland.
THE INDUSTRY COMMISSION
In 1991 the Industries Assistance Commission absorbed the Business Regulation Review Unit and the Interstate Commission to be renamed simply the Industry Commission. With border protection increasingly attended to, attention was turning to the barriers to internal exchange. The Commission was moved from Canberra to Melbourne to bring it more in contact with the "real world". Some good staff were lost by the shift but the remainder seem to have been able to remain uncorrupted by their exposure to it.
In 1986 the Business Regulation Review Unit had estimated that the total cost of regulation was between 15% and 30% of Australia's GDP. This huge cost was, of course, not all dead weight. It was partly offset by justifiable or outrageous "transfers" to deserving or undeserving beneficiaries. John Hyde estimated from data in a CIS publication that about 28% of the total costs were dead weight --that is, 4% to 8% of GDP. Hyde's assumptions were heroic but no changes to them would change the conclusion that wasteful regulations were a considerable economic incubus. Many of these were now to be addressed by the IC.
THE PRODUCTIVITY COMMISSION
In 1998 the Howard Government formed the Productivity Commission to replace the Industry Commission, Bureau of Industry Economics and the Economic Planning Advisory Commission. In the intellectual climate of other times this change might have been interpreted as a step in the direction of the Vernon Report's National Economic Advisory Council, rejected so firmly by Menzies. It was not so interpreted because the cherished principle of economic neutrality had become so firmly associated with the Tariff Board's successors that it was accepted that it would be maintained, even against instruction from a poor Minister, should it suffer one.
In 2001 Labor and the Democrats promised to abolish the Productivity Commission replacing it with a National Development Authority. If the term "authority" means anything, then a huge step towards Vernon-type planning, towards corporatism, is intended. It may not do so. Incoming Governments are fortunately talked out of some of the less responsible ideas that they have had in Opposition. What is more, to scrap the Productivity Commission would be to reverse one of Gough Whitlam's lasting and greatest achievements, not to mention those of that lesser icon, Paul Keating. The changes that a Labor Government makes will probably be largely cosmetic.
Howard was right to widen the Commission's brief to include scrutiny of the favours allotted to producers of non-traded goods and services such as the waterfront, legal services, welfare services and health insurance. Following the Hawke Governments' considerable progress in removing the Government-imposed inequities from international trade, barriers to domestic trade in, for instance, transport, legal and medical services are now of greater economic significance and cause greater injustices than tariffs. It does not follow that the barriers to domestic trade could have been addressed first or at the same time. It was only as barriers to international trade were lowered that Australians were forced to recognise the injustices and inefficiencies that Parliament inflicted elsewhere in the economy. As each brick was removed from the tariff wall a little more light entered the room to reveal an economy clogged with the detritus of three-quarters of a century of ad hoc favouritism.
INFLUENCE
The influences of the Industries Assistance Commission, the Industry Commission and the Productivity Commission have extended beyond Australia. Australia was well equipped to lead the commodity-selling nations at the Uruguay Round of the General Agreement on Tariffs and Trade, now the World Trade Organisation (WTO). Noting that anti-protectionist leaders, such as Ronald Reagan, knew what should be done but could not convince their constituencies, trade theorists at the WTO commended the Australian Productivity Commission to other nations.
Barriers to international trade are subject to domestic politics. Tariffs and import quotas are imposed solely to allow producers to charge higher prices within their own country. If Governments are to cease protecting their most clamorous industries at the expense of their own consumers and other industries, then the consumers and people in the other industries must be told of the cost of protection that they bear. Since public choice theory tells us that concentrated producer interests have the advantage in the struggle for the attention of politicians, the dispersed losers require the assistance of an organisation that will publicise the facts.
The 1977 TCF Report had shown the cost of protecting the sector. Eighteen years later, Peter Walsh wrote that the Report drove into the Labor Party psyche the fact that protection at the same rate and on the same products had the same effect on income distribution as would a sales tax. Since textiles, clothing and footwear absorb a three times higher proportion of the expenditure of the poorest 10% of households than of the average, TCF protection was a highly regressive consumer tax. He gleefully noted: "After this material was circulated in Caucus, the Left did not know how to deal with the dilemma -- how to oppose consumption taxes which may or may not be regressive, but simultaneously support protective measures which were demonstrably regressive. It still does not know because there is no answer." (121) If it was driven into the Left's psyche, then the opportunity for political advantage later drove it out again. Genuine egalitarians, like Walsh, however, remained impressed by the inescapable logic.
The hard data and tight logic also affected businessmen. Their antics during the 1970s had brought to mind a storybook character from my youth. The author said it was great gift to be able to lie to convince other people and an even greater gift to be able to convince oneself. William, she wrote, possessed the latter gift. Again and yet again I heard respected men repeat nonsense that not only would not be accepted today but also should not have been accepted then. Many times John Hyde asked were they simply lying or did they believe what they said? If the latter, did they avoid exposing themselves to the arguments that might refute their prejudices. One businessman did admit to Hyde that he was familiar with the arguments he was using. If they understood but rejected the arguments why did they not formally refute them, even if that meant employing somebody to write the rebuttal? Was wilful ignorance less immoral than lying? The IAC would in time have worn down even William.
Academics such as John Carroll, (122) Michael Pusey (123) and Peter Brain who denied fundamental tenets of 200 years of economic learning but who would not explain in published form their rejection of the principle of comparative advantage earned John Hyde's special contempt. They did no more than some businessmen and politicians did, but Hyde felt that their refusal to publish and thereby facilitate refutation was contrary to the ideals of scholarship they professed.
The prime function of the Productivity Commission is, as the Democrat Party once put it, to "keep the bastards honest". With that goes the opportunity to educate. When the brief of the Tariff Board's successors was extended to the whole economy rather than just manufacturing, the highly protected import-competing industries appreciated that they had something to gain from removing all protection. When in May 1988 a Government with the courage to act came along, their bunker mentality gave place to a reasonably good-natured acceptance of reform. One can but wonder if all the anger had been genuine or if it had been an act to impress weak Governments. On the other hand it is but to give our opponents the benefit of reasonable doubt to assume that they were honest men and women in need of instruction. Either way, the Tariff Board after 1967, the IAC, the IC and the PC were crucial.
ENDNOTES
100. Snape, Gropp and Luttrell, Australian Trade Policy 1965-1997, Allen & Unwin, 1998, p 1
101. Laura LaHaye, Fortune Encyclopedia of Economics, Warner Books, 1993, p 534
102. The Preference gave Commonwealth nations preferred access to the British market
103. L.F. Giblin: Some Economic Effects of the Australian Tariff, The Joseph Fisher Lecture in Commerce,1936. (Adelaide, 1936), pp.23-24 quoted by me from Sean Kenelly unpublished.
104. Tariff Board Commissioner, Dick Boyer, address to the Economic Society of Australia and New Zealand, May 7, 1969.
105. Snape, Gropp and Luttrell, Australian Trade Policy 1965-1997, Allen & Unwin, 1998, p 34
106. ibid, p 23
107. ibid, p. 1
108. Garry Banks, Chairman of the Productivity Commission, Address to CEDA, 26th Aug 1998
109. Snape, Gropp and Luttrell, Australian Trade Policy 1965-1997, Allen & Unwin, 1998, p. 8
110. Alan Mitchell, Australian Financial Review, 17 March 2000
111. Snape, Gropp and Luttrell, Australian Trade Policy 1965-1997, Allen & Unwin, 1998, Chapter 3
112. Snape, Gropp and Luttrell, Australian Trade Policy 1965-1997, Allen & Unwin, 1998, p. 25
113. ibid, p. 121
114. The Crawford Report
115. Tariff Board Commissioner, Dick Boyer, address, 21 November 1974
116. ibid, 12 February 1980
117. Snape, Gropp and Luttrell, Australian Trade Policy 1965-1997, Allen & Unwin, 1998, p. 125
118. Snape, Gropp and Luttrell, Australian Trade Policy 1965-1997, Allen & Unwin, 1998, p. 124
119. Kym Anderson and Ross Garnaut, Australian Protectionism: Extent Causes and Effects, Allen and Unwin, 1987.
120. There were still in 2000 elements of the Department of Foreign Affairs and Trade who seemed to believe in one way trade.
121. Peter Walsh, Confessions of a Failed Finance Minister, Random House, 1995, p35
122. The Australian, 8 November 1990
123. Michael Pusey, Economic Rationalism in Canberra: A Nation Building State Changes Its Mind, 1991, Cambridge University Press
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