Protectionism and its merits have long been debated in the arenas of Economics and politics. While countries across the globe have implemented these policies to different extents, the overall benefit of such policies to the economy and the wider society of a nation still remains divisive.
Protectionist trade policies allow a country’s government to promote domestic producers and therefore boost the domestic production of goods and services by imposing certain measures. Over the last few years, global trade has been disrupted by a significant rise in protectionist measures that have had direct implications on the nature of trade agreements. In Australia, the current protectionist measures include campaigns such as the ‘Buy Australia’ movement , subsidies to domestic producers and other important tariffs. These measures all tend to have socio-economic benefits and costs that will be explored in detail in order to analyze the overall impact they create in the economy. Additionally, the article will also look into the non-economic aspects of protectionism, aiming to view the topic in a philosophical lens.
Protectionism in Australia
Since the Global Financial Crisis, the trend towards the use of tariffs and other protectionist measures have lifted in G20 countries, and there are clear signs that the protectionist trend could accelerate. The theory is that tariffs would raise the cost of imports, making them relatively more expensive compared to domestically sourced goods. This would in turn reduce the competitiveness of imported products, raising the demand for domestic products and thus higher domestic production and employment outcomes. Significant worldwide increases in protectionism would cause a local recession and lower living standards. However, higher tariffs lift the cost of import and disrupt global trade; harming consumers, producers and workers.
Perhaps one of the most recognizable protectionist measures implemented in Australia is the “Buy Australian’’ campaigns. While many groups advocate “Buy Australian”, economists believe that these campaigns do not help Australians; rather, they harm them and affect disadvantaged groups disproportionately. As with other countries, Australia has scarce resources with which it can produce goods and services— for example, workers, capital, energy and materials. Without trade, anything we want to consume, we must produce ourselves. Trade allows Australia to focus its resources on making goods which helps the country flourish and earn billions of revenue each year on international markets in the process— more than a fifth of the country’s GDP. However, the Buy Australian campaign has also supported local jobs, producers and manufacturers. Australian Made Campaign CEO Ben Lazzaro states the communication benefits of the logo, has helped thousands of brands advocate their credentials for more than 30 years. Roy Morgan Research found that around 99% of Australians are aware of the Australian made logo, 92% trusting it as a genuine identifier and 97% associating the logo with the support of local jobs and employment opportunities.
Economic Benefits of Protectionism
The aforesaid measures have created an increase in economic growth opportunities, lower imports, more jobs and a higher GDP. Protectionism provides local industries with growth opportunities until they can compete against more experienced companies in the international market. Policies also assist in the reduction of import levels and allow the country to increase its trade balance. Higher employment rates can be seen when domestic firms boost their workforce. Protectionist policies may also boost the economy’s GDP due to a rise in domestic production.
The latest figures from the Australian Bureau of Statistics show Australia’s unemployment rate in August was at 6.8% with around 921,800 Australians unemployed and a further 11.2% without work. Now, manufacturing employs roughly 843,900 people in Australia, a decline of around 50,000 upon the beginning of the COVID-19 pandemic. Ben Lazzaro also claims the importance of a “thriving manufacturing sector” to Australia’s economic future and prosperity. The global pandemic has negatively impacted some Australian manufacturers and growers, so supporting these businesses is one of the most beneficial ways of increasing the livelihoods of Australian growers, manufacturers and the wider community. With buying Australian, you are ensured products which are locally grown and made to the highest of manufacturing standards, while contributing back to the economy, creating jobs and strengthening local industries.
Additionally, varying labor standards across the world means that certain imported products may have been produced in foreign companies with dire working conditions. For example, in some developing countries, there have been increasing concerns about the exploitation of wages and poor working conditions. Fast fashion brands are especially known for these assertions. Therefore, purchasing locally or Australian made goods may provide relatively better pay and working conditions towards their employees.
Economic Costs of Protectionism
After over 30 years of mostly uninterrupted trade liberalization within Australia, the COVID-19 pandemic and its disruptive impact on global production reignited the debate around which trade policy setting will maximize Australian welfare; localized supply chains or interconnected global value chains (GVCs). In simpler terms, protectionist policies vs. free-trade policies.
Recent research conducted by the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) sought to model the effects of negative global supply shocks such as a pandemic-like event on the Australian economy and involved the modeling of two baseline scenarios; the first being interconnected global value chains which reflect current trade policies in Australia, and the second being an inward-looking economy supported by “protectionist trade policies”. The results of the model suggest that Australia achieves better economic outcomes when it adopts policies that favor interconnected GVCs over protectionist policies. The main reason this occurs can be explained by the concept of ‘comparative advantage’ created by David Ricardo in his book titled ‘On the Principles of Political Economy and Taxation’. In particular, under the interconnected GVC scenario, Australia is able to devote more of its labor and capital to industries where it has a comparative advantage such as mining and agriculture, and import from countries that have comparative advantages in other industries at lower costs than what could be locally produced. An inward-looking economy would not take full advantage of comparative advantages and resources would be allocated away from productive industries within the country to unproductive ones. Ultimately, protectionist measures “raise costs to consumers and reduce competitive pressures, leading to less efficient resource use in the country levying the protection”, according to the Productivity Commission.
The ABARES study argues that protectionist policies have the potential to insure against global supply chain shocks, such as the COVID-19 pandemic, and lead to more ‘stable economic outcomes’. However, the results of the model show that while an inward-looking Australian economy experiences a less severe percentage drop in GDP as compared to an interconnected GVC economy in the event of a global supply shock, the latter experiences higher levels of real GDP in the first place. In summary, the country pays a high premium (the difference between the real GDPs for both scenarios) for some insurance against a potential global supply shock. While Australia’s vulnerability to negative global events is of genuine concern, protectionist measures are not the only way to address this. Namely, supply chain diversification can reduce Australia’s over-reliance on a particular region or country which will be beneficial in the event of some negative supply impact in that country. Additionally, the stockpiling of critical goods such as medical materials, as is being done with the National Medical Stockpile, will improve Australia’s self-sufficiency in the event of medical emergencies such as the COVID-19 pandemic.
However, the most currently relevant cost of protectionist measures is inflation. For example, the steel tariffs imposed by the Trump administration in 2018 to revive the American steel industry cost American steel consumers 900,000 USD a year for every steel job created. On the other hand, globalization and interconnected GVCs allow access to the cheapest production inputs as well as operation of the just-in-time inventory system, keeping the costs of many consumer goods down. In addition, the pursuit of international competitiveness by local producers involves maintaining high quality goods and low prices. This all works to limit inflationary pressures.
Non Economic Benefits and Costs
The economic benefits and drawbacks of protectionist measures provide a quantifiable and logical basis from which the policies can be assessed. However, the intangible satisfaction from ‘buying Australian’ and supporting one’s own community provides a key non-economic justification for protectionist trade strategies which merits consideration. Purchasing goods at the local supermarket, certification of Australian made is proudly displayed on packaging on a variety of different products. This logo was meticulously designed and this design cost $10 million indicating a level of consideration and analysis many might not realise. It serves a purpose beyond simply identifying which products were produced domestically, it was carefully created to be noticed and elicit a prideful emotive response, however subtle. The cohesion and curation of a national Australian identity can be reinforced and inspired through this marketing and promotion of Australian made goods. A push to buy Australian forces consumers to consider the impact which their spending has and where they would like the proceeds of their consumption to go. In a sense, protectionist policies provide an accessible means through which individuals can express an appreciation for their national identity whilst also meaningfully contributing to Australian communities.
However, is a government mandated trade policy a healthy method of evoking this national pride? The non-economic downsides of trade protection raise broader questions concerning how desirable this national pride is, and whether trade protection measures such as packaging, tariffs, subsidies and ad campaigns instead encourage an erosive nationalism. Ad campaigns such as ‘buy Australian’, which place an emphasis on domestically produced goods tend to provide a sense of elevation of domestic goods above those produced internationally. Two comparable products on a shelf, one with an Australia made logo and one without, could lead to an inherent consideration of cultural supremacy. If the reasons behind an Australian made product appearing more desirable extend beyond supporting the community, it results in an enforcement of the notion that Australia is in some respects ‘better’ than other countries. While this is a deeply nuanced argument, difficult to explore in its entirety, studies have found that this kind of ‘banal nationalism’ can have significant impacts on national identity and culture.
The other key non-economic benefit of trade protection is in the support for local communities, driven by a motivation to give back to the communities that you benefit from. However, when this is critically analyzed, it’s difficult to pinpoint exactly where the line of ‘your’ community begins. Is supporting a product produced in Western Australia really ‘giving back’ to your local community if you live in Sydney? If the argument of community support is extended, then by this same justification there should be incentives to purchase goods from within your state or even city. While this may appeal to some, the community support aspect of trade protection could also be perceived as inherently flawed based on the vast differences between communities within Australia, both culturally and geographically. This leaves the validity of trade protectionism in a non-economic sense open to interpretation and individual belief rather than with concrete evidence in favor or against.
Diving Deeper- A comparison with the European Union
To contextualize trade protectionism in Australia, the measures which the European Union has in place, specifically the Common Agricultural Policy (CAP), provide a useful comparison. The Common Agricultural Policy is one of the largest trade protectionist measures globally, providing 57.98 billion euros to EU farmers in 2019. The CAP protects farmers in the European Union from competition on a global scale through income support (direct payments and subsidies), market measures in case of difficult market conditions and funding national and regional programs to support agricultural production, addressing specific issues faced by farmers in rural areas. The economic justification for this comprehensive trade protectionism measure primarily concerns the employment benefits (22 million regular workers in the agricultural sector) and the increased scale of production, with the EU maintaining its status as a leading producer and exporter of agricultural goods. Through specific programs and protection policies, the EU also utilizes trade protection to stimulate and develop rural communities, with directed support and subsidization that seeks to provide economic revitalisation in remote areas. As well as this, the CAP has several deliberate policies in place to encourage environmental sustainability and biodiversity which although not offering immediate economic benefit, allows for the long term sustainability of the agricultural industry in Europe.
The most significant criticism which the EU faces in regard to its trade protection policies and the CAP are the levels of waste and overproduction which can then be ‘dumped’ in less economically developed nations and cripple local industry. This overproduction stems from the intervention in the free market which has in the past, led to incredible surpluses of stock being stored by the EU rather than distributed on the market. These concerns bear some similarity to the economic costs and benefits of trade protection in Australia, to an even more significant extent. However, unlike the non-economic concerns surrounding economic nationalism for Australian protection measures, the EU represents a wide variety of countries with different cultures and as such nationalism is an irrelevant issue for the EU’s trade protectionist policies. As globalization has become the new norm, calls for protectionist economic reforms and localization of trade are facing increasing criticism both within Australia and abroad.
Conclusion
The recent China lockdowns and Russia-Ukraine war may have made the argument for deglobalisation, and hence raising trade barriers, more compelling. However, while protectionist measures such as import taxes and quotas may serve to protect local industries and jobs from more efficient international competition, they also impose an opportunity cost from forgoing the benefits of comparative advantages. Additionally, “buying Australian” to support one’s community and as an expression of national pride is admirable, but may also promote nationalism and a collective national superiority complex. And although protectionist policies do have the potential to shield Australia from global supply shocks such as the COVID-19 pandemic, there may be other more efficient means of achieving this outcome such as diversifying the supply chain and stockpiling critical goods.
References
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