Kuta Beach

Kuta Beach

Sunday, 5 August 2007

Increasing Tariffs to Protect the Australian Car Industry

I have just been at Drive Blog where Glen Butler wrote a piece titled Import tariffs: Why Australia needs them to survive. I had a lot to say and I will write it here as well.
Did you know Australia has the lowest tariffs of any country with its own car industry?
This idea that there be some equality in tariffs in one area over another makes no economic sense. Economic progress usually involves specialization, with areas forming hubs where they specialize according to comparative advantage or because of just convention. For example, take the states of America. Finance is concentrated in New York, car manufacturing is concentrated in Detroit. Entertainment is concentrated in LA. It is concentrated in Silicon Valley. People of similar trades congregate in the same place to take advantage of lower transport costs. For some state in America, say, Florida to say, "We want to have our own car industry instead of importing it from Detroit" would be economic suicide. To intervene into the market and impose some kind of centralized planning that sees industries uniformly distributed for not apparent reason other than numerical aesthetics, is nonsense.
Thailand? We do have a free trade agreement there, too, but it's only free trade one way. Guess which way? That's right, our vehicles are taxed going into Thailand, but theirs are not coming to Australia. Honda's sales have gone gangbusters in the last five years, because almost all its models come from Thailand and can be sold at a more competitive price than others.
This is another sneaky example. You say that cars flowing from Thailand to Australia face low tariffs compared to cars flowing from Australia to Thailand and then suggest that "Australia" suffers. The reality is that Australia is made up of not just car manufacturers but also consumers who may want cars from Thailand for whatever reason.

If you think the Australian car industry needs protection, why doesn't the government protect any other industry? If you're a banker who gets fired for some guy in France, would the government help you? If your firm in Victoria gets beaten by another firm in Queensland, should the Victorian government help you? For the sake of fairness, if we apply one set of standards for the carmakers, we will need to apply it to all other people. Everyone will be able to get protection and handouts from the government whenever they fail. When you go to work, there is no need to work hard. Just sit back and do nothing. Even if the business fails the government will bail you out and pay your salary all in the name of protecting the local culture.

Of course, when there's no competition, laziness, and central control by government, Australia will be recognized as Communist, because these are the symptoms that define Communism.
For free trade to work properly, it must work both ways.
Let me explain why this is not true using a simple story.

Suppose I live with my family in my house. I live with Mum and Dad. Suppose mum used to make a sandwich for me for lunch. However, my mum is not a good cook. Suppose she takes five hours making one sandwich. Because she takes so long making a sandwich she decides to charge me $20 for the sandwich. I have no choice but to buy this expensive sandwich because there are trade barriers around the home (imagine there are walls all around the house) and I can't go anywhere else.

Now suppose restaurant opens up across the road and the walls around my house fall, i.e. trade barriers are gone, or there is a tariff reduction. The restaurant across the street can make one sandwich is five minutes. Because they are so fast and efficient, they charge only $1, and I buy the sandwich from the restaurant and save $19, so I win.

My mum would lose because she can no longer make sandwiches for me, yet she was a horribly slow sandwich maker to begin with. Instead, she gets a job as a nurse at the local hospital and earns $20 per hour for five ours. Her skills are transferred to where it is more productive.

This idea of a level-playing field is absurd. Even though I buy sandwiches from the restaurant, the restaurant doesn't buy anything from me or my household. It doesn't matter. I still benefit.

Suppose my mum doesn't know how to be a nurse. She only knows how to be a sandwich maker. Then she simply walks to the restaurant and asks for a job there. If the restaurant rejects her because she is too slow, that is just the way capitalism works. It rewards the best.

In case you didn't realize, all this is analogous to what is happening in Australia.

THE CANDLEMAKERS' PETITION

In the spirit of Frédéric Bastiat I will submit the following argument against protectionism.

Australia has a local candlemaking industry. See http://www.australianwaxco.com.au/

The problem is that candlemakers face competition from cheap sources of light. This competition comes from the sun, which is able to flood the earth with vast amounts of cheap light.

Australian candlemakers then talk to John Howard, begging him to pass a law that states that all Australians must stay indoors, shut their windows, seal all cracks, and live in darkness. This will restrict the entry of imports of light arriving into the hands of Australian consumers. Because Australians can no longer opt for cheap light from outside Australia (outside Earth even) they are forced to buy more candles made in Australia, thereby creating a thriving Australian candlemaking culture.

To see Bastiat's original paper, go to http://en.wikipedia.org/wiki/Candlemakers'_petition

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