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The Forum > Article Comments > Yes, tariffs can be too low > Comments

Yes, tariffs can be too low : Comments

By Nicholas Gruen, published 12/8/2008

Research indicates that reducing automotive tariffs to 5 per cent does more harm than good.

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NO. Every time you purchase a car, be it an import (83%) or a local one, you pay the tax or the indirect impact of the tax. While a tariff may be applied only to imports, they inflate the local price of ALL cars (ie, their reason to improve profit margins). That is why our cars are so expensive thanks to this beggar-thy-neighbour invisible impost.

As to welfare, when tariffs were 40-60 per cent plus there were less exports than now and it COST. Tariffs impede trade, impede flexibility and impede competitiveness FACT. They demonstrably reduce your well being (eg. read any of the then Industries Assistance Commission studies).

Australians work the longest hours and yet despite our resource endowment, we languish slipping to no.30 in the world. Ask the so-called “working family” how they feel about paying another $2k and working longer hours for this tax? Something wrong!

Countries like Denmark point to what is possible with little more than sand and wind. Meanwhile some want to hold onto a glorious past and ignore those struggling to pay off the family car. You can do multiplier studies, but in the end, the tax is something best dispensed off over cups of tea by politicians at Bilateral Free Trade pow wows. Like communism, protectionism was an experiment based on patently flawed logic and idealism. Politicians are the beneficiaries of this legacy today.

Lets instead of waffling over this tax create a vision for an Australia building up its skills instead of importing them even from 50 year old countries like Israel. Let the car industry die NOW while we can still afford it and create a tax regime conducive to creating comparative advantage. It is only a living dead producing cars bought by just 4 per cent of individuals (yes 4%) out of 17 per cent of sales. Tired made competitive (inc. exports) only by furphies. Amen.
Sorry chaps but hundred and hundreds of thousands have already lost their jobs in Australia. This is but a drop in the bucket. It is time!
Posted by Remco, Sunday, 17 August 2008 12:30:58 PM
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You seem quite the little Freidmanite (the best service that mongrel ever did for the world was to croak).

I think you are overstating the value of trade, appearing to regard it not merely as an important economic activity (which it is) but as the panacea for everything (which it is not). You are arguing a simple dichotomy - unfettered markets = good, any industry protection = bad. No wonder you seem unconcerned with collateral damage such as jobs, livelyhoods and industries lost and ever-increasing reliance on imports.

Everything in it's proper place at the proper time. When correctly used, protective measures (which include tariffs among other things) do not exist to completely block any and all imports but to allow local producers to compete, thus preventing the economic and social mayhem arising from the broadscale destruction of industries and livelyhoods.

Competition is going to struggle to exist if some people can simply dump very cheap goods on a market with the intention of destroying local structures and replacing them with their own. In which case I ask again: how can you be certain prices will not creep back towards parity with the old price once local production is only a memory?

So, presumably you would remove tariffs and other assistence from the auto industry and anywhere else say, the TCF industry - to hell with the jobs, consumers demand ever cheaper cars, jeans and running shoes. Problem is, these two industries alone account for around 130 000 jobs - you would risk throwing large swathes of the population out of a job (the unemployed have trouble affording even cheap cars and designer jeans) so that the rest could buy certain commodities a bit cheaper. Something wrong!

Incidently, you might want to tell booming economies like China and Brazil that their 30%+ car tariffs are damaging their economies - but I don't think they'll believe you.

cont later
Posted by Fozz, Sunday, 17 August 2008 8:33:11 PM
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I heard Nicholas on Counterpoint and now know how he comes to the conclusion that a 5% tariff is optimal. It comes from the assumption that the money redirected from the tariff to additional production won't realise its full price on the international market because you will have to discount to gain market share.

I think there are some problems with that, but I'd be interested to hear from Nicholas. For example, price might be lower, but if your productivity is higher, return on capital could also be higher, negating the price discount, because return on capital is what it is all about.

And in the real world, discounts tend to last only as long as it takes to get established, so a discount should disappear over time, whereas a tariff wouldn't. Which assumes that you would have to discount in the first place. May well be that you can charge a premium.

For example, if the additional money went into opening up an iron ore mine, you could probably just piggy back off BHP Billiton and Rio and realise much the same price as everyone else.
Posted by GrahamY, Monday, 18 August 2008 10:34:45 AM
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May I suggest instead of looking at countries behind us (like Brazil) look at countries AHEAD of us; there are now 30 and growing fast. And they do NOT use tariffs to preserve.

Instead of focussing on numbers of jobs in our living dead car industry, look at the bulk of our country that is now operating without tariffs.

Instead of talking about preserving, talk about how we can unlock this country to engage the world economies.

Instead of creating the conditions for maintaining a public service administering taxes, consider how we can gain comparative advantage - to be smart like the streaking ahead of us.

Australia's future lies with vigorous competition. Read success stories in say M.E. Porter, The Competitive Advantage of Nations.

There is only one place for such predatory taxes - for the cups of tea events called Free Trade Agreements. And that is no doubt why when we reduced our tariffs under Hawke/Keating, they werent reduced to zero but 5, leaving a little succour for those cups of tea events.

Some still hold on desperately while the world moves on.
Posted by Remco, Monday, 18 August 2008 10:46:01 AM
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Nick. Industry protection is costly to both consumers and the broader economy. Not only does protection artificially inflate the cost of goods and increase the general level of taxation, it also encourages bad management, poor working practices and a general climate of complacency, while diverting scarce labour and capital from efficient industries. The fact that all of the available workers recently retrenched from Mitsubishi were quickly redeployed to other more productive jobs is evidence of my last point.

If the Rudd Government truly wants to increase the level of innovation and boost productivity, it should remove barriers to import competition not increase them.

As an aside, your 'optimal tariff' argument also fails to acknowledge the risk of retaliation from our trading partners. For a small open economy like Australia, liberalised trade is essential to our prosperity. Maintaining our trade barriers is a retrograde step.
Posted by Leith, Monday, 18 August 2008 11:48:46 AM
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And as for economists, they are the ones who will know tomorrow, what they projected for today, was wrong.

Yes an economist like Nick might conclude 5 per cent is about right. But it is "about right" for the CURRENT profile of Australia. As Professor ME Porter found (Competitive Advantage of Nations" see eg. http://tinyurl.com/5c6pv7) you cannot pick winners. You cannot say what is appropriate. Simply taxing some (reducing their disposable income) to favour others does not work to promote competitiveness. FACT (ask me for references and studies).

It is time Australia practiced what it preaches - that fair go. That means a level playing ground. A level playing ground that does not discriminate you in favour of jobs at Fisherman's Bend (and farmers who try to convince us that droughts, famine, fires are something we non farmers must insure them against).

I have a vision for Australia. Smart and flexible like the Israelis and the Danes.

Our Olympians are successful as they do not look at who is behind - they look ahead.

We are now no. 30 in the world. How far do we have to sag in the country stakes before we shake out the parasites? Those that rob others, you and me, to subsidise and insure them against failure.

Those ahead of us don't practice tariffs. Tariffs remain cup of tea opportunities without adding value to Australia.
Posted by Remco, Monday, 18 August 2008 8:02:06 PM
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