Australias Protection Policy - Example

Student Name> Australia’s Protection Policy Introduction International trade is the exchange of goods and services between countries. By trading internationally, countries are able to use their resources more efficiently, since every country is endowed with different assets and natural resources. Another advantage of international trade is that when a country cannot efficiently produce an item, then it can obtain it by trading with a country that has it (Reem). To better understand the benefits of international trade, let’s take a simple example. Suppose there are two countries X and Y. Country X produces ten apples and six oranges a year, while country Y produces six apples and ten oranges in a year. Both can produce sixteen units in total. Suppose country X produced the ten apples in three hours and the six oranges in two hours. Country Y, on the other hand, takes one hour to produce ten apples and three hours to produce six oranges. Now both the countries realize that they can be more efficient if they only produce in which they have a comparative advantage. Country X will produce only apples and country Y will produce only oranges. There are two contrasting views on the level of control placed on trade international trade: free trade and protectionism. Free trade advocates the fact that there should be no regulations or tariffs when trading between countries. It assumes that demand and supply factors will ensure that the market keeps on functioning smoothly. In contrast, protectionists argue that some sort of regulation is necessary. Protectionism refers to the policies that are designed to protect the business inside the country from foreign competition (Reem). Those who advocate free trade highlight the comparative and absolute advantage as the benefits that lead to efficiency and a rise in productivity. They argue that by protecting industries the government is breeding inefficient businesses. In contrast, the protectionist argue that ‘infant’ industries, those industries that are newly established, need some sort of protection from the big international businesses so that they can grow and compete at a similar level. They argue that these newly established industries are being protected till they are big enough to compete in the international areana. According to the Index of Economic Freedom, Australia is one of the most open economies of the world. It has got the fifteenth largest economy and is known as a global trader. Its main export destination are the US, Korea, Japan and Indonesia. Its main export products are agricultural based like wheat, wool, iron ore, gold and coal. Although geographically it is located at a distance, Australia still manages to handle its export through increasingly affordable and reliable communication networks. (Christopher) Brief Economic History During the colonial years, Australia’s agriculture was developed as the main driver of the economy. From the start only the economic growth was based on the production of wool and other rural commodities that were exported to Britain and other industrializing economies of Europe. Then in 1850s gold was discovered, along with other minerals. The gold rush in the 1850s led to an increase in population, which resulted in more and more fertile land became less available to the population. The primary and the secondary sector expanded accordingly with the population. The population was highly concentrated in the urban areas, and therefore most of the development took place there. The mining sector, because of the gold, attracted large investment from the Britain, which naturally developed the communication, transportation and urban infrastructure (Richard H. Snape). In the early 20th century, Australia remained the centre of economic activity. It had increased its portfolio of exporting agricultural goods and now also exported wheat, and dairy. By the late 1920s, the return if investment had declined so much because of the excess supply that those cutbacks led to a decrease in government and private spending which eventually led to a recession. The depression of 1930 led to a lower demand for Australian exports, and a decrease in investment activity. However, the recession didn’t affect Australia much because of the increase in productivity in the manufacturing sector (Richard H. Snape). After the Second World War, Australia experienced the highest growth in the manufacturing sector. The protectionist policies of that time led to increased profits, while protecting a large variety of industries like automobiles, TCF (textile, clothing and footwear), processing metal, and chemicals. The driving force was the investment coming in from US. In the 1950s and 60s, foreign investors noticed the lack of productivity in Australians because of the protectionist policies. The investment therefore declined in the secondary sector (Richard H. Snape). Current Scenario It was only after 1983, that Australia opened its economy to the world. The idea was to subject the private sector to more competition from both domestic and international sources. The cut in protection level increased unemployment as many businesses closed. However, the cut in protection also increased the efficiency and productivity of the economy and led to a significant rise in exports. The value of exports plus imports of goods and services has risen from thirty two percent in 1975 to around fifty percent in the present (Christopher). From 1986, the Labor government, which played a key role in ‘opening’ the economy, increased privatization of industries, deregulation, and Aboriginal reconciliation. Australia became a leading proponent of multi-lateral reduction of protection in the agriculture in the GATT (WHO) negotiations. Previously in the 60s and 70s, it was a non-participating country. The levels of protection in the agricultural sector have been reduced to 10% unilaterally. Protection for the manufacturing sector has been reduced to 5%, except for special high levels for TCF (textile, clothing and footwear) and automobile sectors. Since 1996, the government is pursuing a microeconomic reform in which there has been concrete efforts have been taken to abolish the centralized industrial arbitration system, and introduce some level of deregulation and privatization in state universities. (Christopher) A lot of factors influenced the decision as to why should Australia open its economy. Firstly, the boom in the 60s and 70s in exports of minerals from 10% to 40% of exports led Australia in a complex position. The protectionist consensus began to disintegrate in the face of booming profits (Christopher). With its reluctance to open up the economy, Australia experienced stagflation. In response to the stagflation, many intellectual economists shifted away from their traditional Keynesian ways and focused on to a more monetarist policy. Secondly major social movements like the anti-social and feminist movements also had an impact. For example, the questioning of the White Australia policy at a national level led to a flood of migrants, especially after the Indo-China war. This was the beginning of the rapid breakdown of the social, cultural and racial exclusion and led towards multiculturalism and openness as an official policy. (Christopher) It should be, however, be noted that not every industry was privatized or deregulated. For example, it maintained a high level of regulation in the labour market until 1993. Many economists and researchers even say that the key and profitable industries weren’t privatized. The industries not privatized that time included railways, banks, postal services, telegraph and airlines (Richard H. Snape). Future Outlook The major export destinations of Australia are the US, and Japan. However, while the US, EU and Japan may still be the major political and economic forces, the real change will be the emerging markets and superpowers like China, India, and possibly Brazil and Russia. The importance of these nations means that the foreign trade policy will have to be managed carefully with them. The implication of this is that Australia might perhaps increase its trade with these countries. This has already started as nearly 5% of the exports of Australia go to India (Paterson). If we talk about the immediate future, many economists predict that the recent financial crisis will force many countries to increase the protection level of their countries as most of them will aim to protect their industries from the wave of the global crisis. But economists warn that these protectionist policies will further prolong the global recession. Indeed, many believe that it was the rise in protectionism in the 1930 is the main reason that led a recession into the greatest economic depression of the twentieth century. According to a poll by James Paterson, sixty percent of the Aussies now are more willing to support protectionist policies, especially after the financial crisis. Although this might be true, but according to Paterson, the politicians in Australia might not implement protectionist policies because of various reasons like reflecting the elitist recognition of the benefits of trade (Paterson). Conclusion Australia advocated protectionist policies before the 1980s. However, it was the gold rush and the increase in its exports that compelled it to open its economy. Australia’s trade policies, since the middle of the 1980s, have been geared to opening domestic industries to the global market. It has encouraged privatization, and deregulation. However, with the recent financial crisis many economists believe that Australia might follow the path of other countries and introduce some protectionist policies. Works Cited Christopher, Lloyd. "From Labourist-Protectionism to Globalisation in Australia:." 2006. Paterson, James. "The Politics of Protection: America and Australia Compared." Policy Magazine (2008): 26-30. Reem, Heakal. Investopedia. 30 01 2009 . Richard H. Snape, Lisa Gropp, Tas Luttrell. Australian Trade Policy, 1965-1997. Allen & Unwin, 2005. Read More