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Import Tariffs and Protectionism (history)

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The Australian Customs Service provides an outline of import regulations (import tariffs, tariff concession orders, anti-dumping legislation etc).

See also anti-dumping legislation.

This section describes the history and influence of these policy measures on Australia's industry.

Australia has a ceiling rate of 5 per cent on all manufactures (except for textile, clothing and footwear and motorvehicles). In May 2000, the Productivity Commission, the government's advisory body, recommended a phase out of all tariffs citing improvement of competitiveness. 


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Status

Australia imposes import duties (taxes) on goods deemed to compete with Australian manufactured goods. The rates (once as high as 60 per cent on chemicals, sometimes with import controls and additional primage duties), have been reduced to a maximum of 5 per cent in 1996. The average is 3.5 per cent.

Products not manufactured in Australia and which do not compete with such goods, enter at a rate of 3 per cent if previously manufactured or duty free if never previously manufactured or so-called "consumption goods" under Schedule 4, Item 50(A).

If it can be shown imports are at values below the country of origin and they cause injury to an Australian based manufacturer, dumping duties may be imposed (typically around 20 per cent). Of course, the link and the proof of injury has to be shown.

As shown, import tariffs have had a significant effect on the shaping of Australia's manufacturing sector. Another section describes the industry's performance.

Australia now has one of the lowest protection regimes in the region and without invisible forms of protection.

The following table applies to tariff rates in 1996.

Hong Kong 0.00%
Singapore 0.40%
Japan 2.00%
Australia 3.50%
Taiwan 4.90%
Indonesia 6.00%
South Korea 7.90%
Thailand 9.30%
Malaysia 15.00%
Philippines 15.88%
China 25.00%
India 33.40%

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History of tariffs

Backgound
In an endeavour to promote investment especially during the early part of this century, federal governments provided measures for raising prices available to manufacturers above open market levels. The measures were aimed at competing imported goods by way of taxes (import tariffs), floor price measures (anti-dumping controls) and restrictions on imports (import licensing and import quotas).

Assistance was justified as it promoted investment, jobs and a skill base from which to develop more industry. It was ideally suited to Australia's federal system of government as there were visible regional benefits and less tangible distributed costs. The policies were seen to help with import replacement seemingly creating jobs. Assistance compensated for penalties then incurred by Australian manufacturing industry including high internal freight costs, expensive utilities and a very inflexible labour force. The reasons for the costs were practically and politically difficult to address and simply accepted without address.

For example, in 1961 the Tariff Board noted that Australian unit costs attributed to overhead and depreciation for the manufacture of PVC were 400 per cent higher than in Japan but did not reject the cost as a basis for providing substantial tariffs. Tariff Board Report Vinyl Chloride Polymers and Copolymers, 1963. Anecdotal evidence suggests a high level of arbitrariness unrelated to production economics.
Though promoting investment, assistance implicitly encouraged fragmentation and dependence on continued assistance compensating for diseconomies of scale (ie. underscale manufacturing). The direct and indirect costs of assistance were simply ignored and there was no review of the realistic prospects for the beneficiaries of assistance.

The assistance regime simply raised the home market price without addressing the need for the measures, made no allowance for promoting the fragmentation of industry and developed without a cohesive strategy. Some costs were even the direct result of government initiatives aimed at promoting another activity including shipping, utility pricing schedules designed for revenue raising, and the price-inflating consequences on material inputs on industries downstream of the assisted industries.

The Navigation Act, which reserves most of the trade for Australian owned and manned ships with consequent higher manning and other costs was identified by ICI in 1985 of adding $5 million to their costs (in the case of caustic soda adding 15 per cent to the selling price). Refer Regulatory impediments to industry adjustment, Industries Assistance Commission, November 1986 (AGPS cat No. 86 1630 6) which details a plethora of regulatory impediments (and hence costs) to industry - many of which are still extant and maintaining costs above unregulated market levels.

These costs were distributed over the wider community and generally ignored being less visible or politically difficult to address. Where the costs where brought to notice, they too were addressed simply by another layer of tariffs. It would not be an exaggeration to suggest that assistance influenced (and distorted) the whole manufacturing sector.

It is important to note that although assistance widened profit margins, that is not necessarily to imply that higher margins lead to abnormally high profits. Assistance simply helped underpin and foster many marginal activities especially those operating at inadequate scales and incurring high operating costs (ie. activities not otherwise viable). As variously shown, assistance promoted a diversification strategy at the expense of large scale focussed manufacturing. It created a high cost industry structure reliant on the continued availability of assistance (and absorbed extensive resources for lobbying, responding to lobbying and addressing its management).

The following graph illustrates how freight and raw materials help advantage local industry. That advantage is rapidly eroded by the operating cost penalties of inadequate scale. The horizontal ellipse shows where the scale penalty is offset by the freight saving of local manufacture. The vertical ellipse shows where tariffs enable operation at below competitive scale. Parts of Australia chemical industry remain in operation only because much of its plant has been written off. Tariffs can be readily justified to enable continued operation.


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Of all assistance measures, the Federal Government has had by far the biggest influence on the chemical industry. It shifted the comparative advantage of Australia's mining and agricultural sector to the manufacturing sector (like Germany's shift from manufacturing, in which it has a comparative advantage, to social activities today).

The major sources of assistance have been tariffs (and even primage duties), import licensing and controls, and anti-dumping measures.

Comment
Primage duties was a revenue raising surcharge of up to 10 per cent on imports but which, like import duties, implicitly provided additional assistance to Australia's manufacturers.
Of these, tariffs have had the greatest effect, although more recently with reductions in their levels, anti-dumping legislation has assumed greater significance to parts of industry.

Tariffs, also known as customs duties or import duties, are taxes applied to imported goods at the FOB (free on board) level.

Comments
The FOB value is the cost of goods delivered to the ship at the country of origin. A CIF (cost including freight) value is used by many countries for calculating tariffs. As a CIF value is greater than an FOB value (by the amount of the freight cost for the goods), a direct comparison of rates requires adjustment. As a rough rule of thumb, a CIF percentage may be converted to a FOB rate by increasing it by one-fifth. (Naturally this apblank understatement of the assistance measures between goods is greatest for expensive to transport goods.) There is therefore support for using a CIF basis by protected industries as the same percentage CIF offers higher assistance (ie. by one-fifth).

By-laws (Commercial Tariff Concessions) allowed for duty free entry of goods otherwise dutiable if they would not (substantially) compete with locally produced goods.

These taxes are only applied to goods that are similar or can substitute for locally manufactured goods (ie. produced by protected industries) and passed onto consumers and users by way of higher prices . Improving business viability, shaping and deferring rationalisation, tariffs have been an important influence on the development of Australian-based manufacturing industries.
Comment
There are still many forms of assistance but of little importance compared to corporate taxation, payroll taxes and fiscal policies.
Chronology

Commonwealth tariffs were first levied in 1902 to replace State customs and excise duties that operated before Federation. Then, tariffs were primarily a source of revenue for State governments.

In 1908, tariffs were increased on woollen goods, agricultural goods and iron and steel to allow industry to pay a fair and reasonable wage. Concerns about Australia's isolationism and dependence on outside sources of supply, led to the Greene Tariff in 1921 as it, will protect industries born during the war, will encourage others that are desirable and extend existing industries. This decision signalled the beginning of tariffs changing from being used primarily for revenue raising to one being primarily for protection, (ie. to promote one activity in favour of another, or in economist terms, to reallocate resources).

Comment
The tariff rates appear arbitrary with wide variations for sometimes similar activities. Anecdotal evidence implies rates could then be negotiated on non-economic terms.
The Depression of 1929, a very negative balance of payments and concerns about high unemployment, led the Scullin Government to introduce import restrictions, primage duties and a substantial increase in import duties. Four years later, and through to 1939, tariffs were for a short time reduced to the pre-Scullin levels that had operated until 1929.
Comment
For example, the Tariff Board of 22 December 1937 reduced the General Tariff on amyl acetate etc. from 65 per cent to 55 per cent.
During World War 2, there was little competition, as imports were dominated by goods required for the war effort Industry Assistance: (The Inside Story, C A Rattigan, Melbourne University Press, 1986, page 4.). Requiring funds to support the war, the government again increased tariffs to raise revenue. Import licensing, introduced in 1936 was strengthened in 1939. Covering 98 per cent by value of all imports, import licensing promoted to to conserve currency reserves, it also conferred a substantial measure of additional protection .

Anticipated and actual shortages reduced competition encouraging several enterprises to invest in Australian-based chemical businesses including the two multinational companies, ICI and Monsanto. These two manufacturers faced little competition (except some goods from North America - and even these were subject to severe quantitative restrictions to protect the sterling currency bloc which extended through to 1950), and in Australia from the two small Australian companies, Timbrol and Commonwealth Fertilizer and Chemicals.

During and after the War, Australia's manufacturers had been very profitable and with considerable political strength, sought the maintenance of assistance. (This position contrasted to the primary industry group, who as free traders, had become less significant.) Helped by the serious balance of payments crisis of 1951, manufacturers successfully lobbied for the reinstigation of import licensing. Licensing again covered 98 per cent of imports offsetting increasing import competition despite high levels of import tariffs.

By 1960 however, the very high cost of manufactured goods in Australia led government to withdraw import licensing for some 90 per cent of imports (excluding motor vehicles, textiles, clothing and footwear to protect politically sensitive industrial regions). Freeing up trade with the consequent reductions in market prices resulted in the inevitable closure of many high cost uncompetitive enterprises. From one perspective at least, Australia's self sufficiency had been improved during the war period and industry had two decades to establish or recoup their investment. Import licensing had perhaps served its primary aim at this time.

Some thirteen years later, the average effective rate of assistance to manufacturing industry was 37 per cent, inflation was increasing and there was a major surplus of trade.

Comment
The effective rate of assistance was used by the Industries Assistance Commission to assess the practical value of tariffs taking into account the value added by the assisted activity and the higher cost of inputs resulting from assistance provided to upstream industries (which supply the input materials).
To encourage more imports, to reduce prices and reduce the value of the currency, the Whitlam Government in 1973 instigated an once-off one-quarter reduction in the level of tariffs. This tariff reduction appears to have dramatically influenced the industry's more recent performance, shifting it from growth to relative contraction (34).

In 1979, the industry was due for a review of import tariffs by the Industries Assistance Commission. There was then a Conservative government in power (the Liberal Party under Malcolm Fraser) and it was receptive to an offer by ICI to invest in a A$400 million naphtha cracker at Botany, New South Wales if the scheduled review was deferred. In view of the track record of the IAC, it would inevitably result in a reduction of import tariffs. The offer was accepted by Government and the review was deferred. The cracker, located at high cost Botany without competitive feedstocks, was only marginally if at all viable, but the deferred review on a range of ICI activities allowed for internal cross-subsidisation. At Altona Victoria, APC (later to become part of Kemcor) was under-utilising very cheap Bass Strait feedstock and it became very profitable (106 per cent return on shareholders funds was recorded by the IAC at a time when tariffs remained between 30 and 40 per cent). Exports were fundamentally uncompetitive and the two petrochemical centres divided the Australian market.  

Sadly, the Altona complex, though very profitable for many years, would have grown substantially more competitive were it not for negotiated deferral of tariff reviews in 1979 by ICI that led to the building of a high cost naphtha cracker at Botany New South Wales that served to divide the small petrochemical industry. It was no wonder that during the review, one of the companies sent a telex to government saying that it would still invest "regardless" of the tariff review. A tariff reduction, would actually have helped Altona in discouraging that unfortunate investment.

In 1983, Fraser Liberal Coalition Government lost to the Hawke Labor government and the IAC was given the go ahead to commence the review of tariffs in 1984. In 1987, tariffs for the chemicals and plastics industries began to be phased down to a ceiling of 15 per cent. 

This booklet was produced by the Australian Chemical Industry Council (consolidated within PACIA) in 1986). 

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The Managing Director of ICI was recorded in Chemical Engineering in Australia, Vol ChE11 No 3 September 1986, "....if implemented (the tariff reductions) would kill the industry, not cure it, and prevent its part in the economic development of Australia". A 5 per cent concession for all imports from Developing Countries applied.

Comment
Developing Country is a term used to describe countries such as Singapore, Hong Kong, the Philippines etc. which were previously giving preferential status for cottage industry products but which has been extended to include all their manufactured goods, are afforded a 5 per cent concession. The concession is a reduction from the normally applicable rate thereby rendering imports, (without distinction and even sophisticated chemicals), more competitive against other imports from (developed) countries.
In March 1991, the government announced a progressive tariff reduction program (without IAC study) for all goods with a ceiling target of 5 per cent by July 1996 and Developing Country concessions would be phased out for four countries.

Tariff Concession Scheme abolished

In 1996, the Government abolished the Tariff Concession Order scheme that allowed for goods subject to import tariffs, but no longer manufactured in Australia, to be imported without incurring an import duty. The Government now imposes a duty on such goods at the rate of 3 per cent. The anomaly is that if the goods have never been manufactured in Australia, (ie. no scheduled tariff) they may continue to be imported with incurring this tax.

Historical Consequences Tariffs were designed to help foster an infant industry but in 1961 it was predicted that the Australian chemical industry would remain in a state of permanent infancy (W.P. Hogan, Economic Aspects of the Chemical Industry, Proceedings, Royal Australian Chemical Institute, November 1961, page 431.). The now thirty year old prediction appears to have had some substance.

Import tariffs could easily be defended as compensation for Australia's unattractiveness for manufacturing. Any potential investor would then have seen a region with high construction costs, labour and transport costs, few raw materials and high energy prices. Tariffs, by raising the local market price, presented a politically cheap tool for government to offset Australia's uncompetitive investment climate.

Comment
An extreme example of costs can be made from offshore shipping. Although international freight costs provide a substantial measure of protection from import competition, shipping between Australian ports added to costs. In 1960 it was cheaper to ship salt from South Australia across the equator via Japan to Sydney, New South Wales than to ship it direct around the coast. It was a result of the Navigation Act of 1904 aimed at promoting a local shipping industry. D.W. Findley, The Chemical Industry in the Australian Economy: Problems and Prospects, Proceedings, Royal Australian Chemical Institute, Vol 33, No. 2, Feb. 1966, page 25.
Import tariffs and restrictions widened the margin between the cost of raw materials and the finished products. By that they compensated for the then high cost basis to Australia, enabling small scale manufacture or of otherwise nonviable products. However, the widening of margins to promote investment, came at a cost, both direct and indirect, immediate and later.

High prices
The inflation of market prices is illustrated that in 1960 the Australian price of key organic chemicals such as acetone, acetic acid, aniline, and phenol ranged from 60 to 120 per cent above the price of major chemical manufacturing countries. Inorganic chemicals such as soda ash and caustic soda were about 100 per cent and 50 per cent respectively more expensive than in the United Kingdom. On the other hand, the prices of the raw materials such as benzene, ethanol and toluene were comparable, even cheaper than competitor countries.

High local costs, reduced the competitiveness of downstream businesses and tariffs simply promoted the diversification and fragmentation to local market-oriented high cost industry. That pattern of development created an industry incapable of substantial exports and dependent on the continued application of assistance measures (including anti-dumping legislation).

The more recent reductions in the level of assistance, have been eroding margins, for chemical manufacturers. The margin between the value of the raw materials and the finished products has typically been reduced to one-sixth the level of the 1950s and 1960s. That wide margin had promoted Australia's investment boom, but now rapidly narrowing, is leading to closures. Although Australia's competitiveness has substantially improved since then, by a demonstration of the relative dearth of investment, manufacturers could claim that it has not been enough to offset the reduced margin. As variously shown, the fragmentation of industry consequent to the use of tariffs has also induced a a high cost structure in industry for which tariffs and anti-dumping measures are sought as compensation.

Comment
Tariff rates in other countries have been cited to justify their on going use in Australia. However generally oversighted is that tariffs predominantly influenced the relative competitiveness of manufacturing compared with other activities in the country. International competitiveness for a protected industry is (ceterus parabus) decided by the combined effect of assistance and the relevant exchange rate. Even then, given the volatility of the exchange rate against many currencies (and not just the US Dollar), the importance attributed to relative rates of tariffs is overstated if not almost irrelevant. Furthermore and whatever comparison, the warping of the economy induced by tariff policies in other countries has no relevance to Australia.

Distortion of industry

As shown for the petrochemical industry (but not unique to that sector of Australia's manufacturing sector), assistance stimulated a broad range of activities but with many consequences, including disturbing competitive positions
Comment
The Botany petrochemical complex is a good example. Assistance measures enabled the 1983 commissioned cracker without which the complex would have declined along with its chloralkali business. Instead, it has become a polyolefin producer using shipped feedstocks. Its initiative has impeded the development of the better located Altona complex and ICI could justify a 1 380 kilometre pipeline from South Australia. To cost an estimated $300 million, the justification of the pipeline is questionable on a national perspective given the facilities available elsewhere including at Altona, Victoria which has access to more feedstocks than it uses. It represents a long term cost to Australia of past policies catching up with today.
Tariffs raise the price of goods so that exports can only occur at a price below the Australian price (ie. on marginal - one could almost say on, dumped terms only that no injury was, or could be sustained). Obviously the higher the tariff, the greater is the disincentive for the Australian manufacturer to export into markets where prices are below those of the home country.

Fragmentation

From a manufacturer's perspective, tariffs compensate for operating cost penalties supporting what are otherwise uncompetitive activities. Tariffs also encouraged the diversification of activities.
bulletA 1959 Tariff Board review of the PVC industry noted the small scale of ICI's Botany plant with consequent high production costs. Two years later, BFGoodrich also established a plant at Altona to divide the comparatively small Australia market (and of course without prospects of exports) and it was soon followed by a third at Laverton, Victoria operated by ICI. Manufacturers in Japan were then already producing PVC in plants twice the size of the whole of Australia's PVC industry.
bulletIn 1990, ICI had reserve ethylene production capacity. Instead of decommissioning its thirty-three years old LDPE polyethylene unit and building one substantial internationally competitive plant, ICI elected to have it refurbished and built a second ethylene-using LLDPE polyethylene unit. Tariffs promoted two plants that are below world scale, that could become de facto hostages to the maintenance of anti-dumping legislation.
bulletSuch diversified competition was not confined to finished products as it also involved feedstocks. To take an example in 1972, Hoechst established at the Altona complex to manufacture high density polyethylene using ethylene as also used by Union Carbide for low density polyethylene. Without a tariff of 60 per cent on high density polyethylene, Hoechst may not have commenced its manufacture.
Comment
Of course those in the industry might argue that neither use of ethylene would be viable without tariffs. It would be fair to suggest, that the profile of Australia's chemical manufacturing industry (and users of chemicals - including the plastics industry) would be very different today if tariffs were not available. It is unlikely that the Botany complex would have developed in opposition to Altona given its better access to feedstocks. That is not to suggest that the trade balance would be worse or better for some products only that the composition of traded goods would also be very different.
Tariffs fostered two plants competing for the small home market instead of a single large and more robust export-oriented polyethylene plant.
Comment
An argument could be made to suggest the reverse, ie. to manufacture the high density form in favour of imports of the low density form. The relative size of the Australian market would favour the former scenario.
All this means lost economies of scale that are so important for the chemical industry. For example, the now abandoned increase of ethylene production in 1989 at Altona was to increase production by 70 per cent without needing extra personnel!

Regional benefits with distributed national costs

Import tariffs inflate prices to users and consumers reducing disposable incomes (ie. reducing living standards) and the competitiveness of user industries. They have persisted as they visibly stimulate a region or an investment at the less visible (and political) expense to the wider community. In that sense they are easily defended within Australia's system of over-government where regional minorities (jobs) can assume political significance over national interests. Tariffs are easily defended by one sided multiplier-based calculations and jobs in a region with the distributed national cost almost invisible to the individual voter and ignored.
Comments
Multipliers show the flow on effect of an activity to other sectors of the economy. They must be used with caution, as just as there are multipliers for existing activities, there are also multiplier effects for lost or reduced activities consequent to that activity. Multipliers are supported by select industry to justify their stimulation to the local economy but normally omit to calculate the wider (and often negative impact) of their higher cost products and presence to the nation (what we have called the other side of the equation).

The plastics processing industry is a major user of chemicals as synthetic resins, and although its growth has been high compared to other sectors, it has largely occurred by displacing traditional materials, simply reflecting a world-wide trend. On average, Australia's plastics industry has been paying at least 20 per cent more for Australian made plastics resins than competing countries. (For example, Kelvin Fahey "An Island of Plastics" Published by Plastic New International 1989 page 87. Plastic resins are identified as being 20-35 per cent above USA prices. The more recent reduction in tariffs is reducing this margin.)

Not surprisingly helped by the high costs of raw materials, the value of exported plastic goods is very small (about 2 per cent of industry turnover). The political argument is the balance of the consequence of price inflating assistance for the petrochemical sector employing about five thousand, against the impact on the thirty thousand employees in the plastics sector using higher priced petrochemical products.

The consequences of lost (crowded out) investment may represent an even greater national cost not brought to account.

Tariffs (and other politically sensitive favours such as rural assistance schemes, diesel excise rebates, gold production exempt from tax etc) are fostered by Australia's form of government with some 13 layers of government. Only in January 1997 did Victoria reverse its three decade policy of not selling gas from Bass Strait to the neighbouring state of NSW.


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