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The Protective Tariff


A tariff or duty tax is a tax placed on imports, usually
calculated as a percent of the price charged for the goods
by the foreign suppliers. Tariffs can therefore be used as
a source of revenue for the governments, but are mainly
used as a form of protection against foreign competition.
By raising prices of imported goods relative to those of
the domestically produced goods, it is encouraging domestic
consumers to buy domestic products rather than foreign
products. The main effects of protection of industry are: 
 1. Because the tariffs are placed on cheaper foreign
goods, consumers are forced to pay higher prices for
products, which results in a lower standard of living in
 2. Incomes are redistributed away from consumers to
entrepreneurs in the protected industries; and,
 3. Government protection will mean a higher level of
domestic production and a higher level of employment. 
The main arguments for protection of industry are: 
 1. "Infant Industry", defense or national
 2. Protection of home industry;
 3. Diversification; 
 4. Favorable balance of trade; and,
 5. Protection of employment. 
The "Infant Industry" argument: 
 This argument assumes that a domestic industry could gain
a competitive advantage if it could only get started
without the pressure of foreign competition. Once the
industry becomes established the government would than
phase out the protection.
This line of debate is only valid if the resources are more
productive in their new use than they would be if the
industry had not been started. From this, eventually the
industry must be able to supply its products to the market
at a price lower than that of the imported product. The
problem is to quickly identify those so called infant
industries that are going to grow, with the help of
temporary protection, into productive enterprises that will
have a competitive advantage. 
In practice this argument is destroyed, as those "infant
industries" that are protected usually fail to grow out of
the infant stage, and are not able to face foreign
Defense of National Self-Sufficiency: 
 This is where a government chooses to protect those
industries it believes will be crucial in time of warfare.
The problem that results from this form of protection is
that it stops the standard of living of the rising country
and therefore is not often supported by citizens. 
Protection of Home Industry: 
 This argument is most prevalent at the moment, and it
involves government and entrepreneurs appealing to the
public patriotism to buy "Australian made" products, no
matter the price the public has to pay or the quality of
the product purchased. As the consumer is usually paying a
higher price for the domestic goods, buying "Australian
made' increases their standard of living. If the home
industry needs protection from lower cost overseas
industries, the question asked is how efficient the home
industries are. In many cases the answer is that they are
not very efficient, and it must be considered if the
protection resources could be used more productively. If
they could, then there is no basis for Protection of

The argument provided by those who follow this line of
thought is that importing goods amounts to the exporting of
jobs. Originally there is a loss of jobs for some of the
workers in the less protected industry as there is no
longer a market for their skills. These workers may then
need retraining to gain employment in the work force.
Australia sometime provides adjustment assistance to the
workers in firms that suffer from increased imports
resulting from government actions that lower trade
barriers. The reason behind this support is that the
removal of trade barriers leads to increased trade, and
since the whole nation realizes gains from the increased
trade, some of the gains can be used to compensate those
workers who suffer loss during the transitional period. 
As long as the economy is operating at capacity,
unemployment resulting from increased foreign competition
should only be transitional. Any long term unemployment
problems should be blamed on fiscal and monetary polices
and other domestic polices for dealing with unemployment. 
 Is the situation resulting from a country having a
competitive advantage in only one or two products. The
international trade of this country may be subject to wide
fluctuation in the prices it receives because of the
changes in world supply and demand. They are considered as
having " all their eggs in one basket" as they are
extremely vulnerable to changing economic conditions and
future trends and technological discoveries. 
Favorable Balance of Trade:
 There are two main lines of analysis against this

 1. All countries cannot have a favorable balance of
trade, because if some have a favorable balance some must
have a unfavorable balance. It is then a selfish policy
which seeks protection at the expense of other countries
 which will reduce total international trade. 

 2. A favorable balance of trade causes the country to
accumulate foreign 
 exchange balances which reduce the standard of living as
they are only useful 
 when they can provide us with goods and services that can
satisfy more and 
 more wants. 
Over the last few decades there has been a general
consensus of opinion that the reduction of tariffs is a
good idea. This change of attitude and action against
protection has come about because of: the gradual change in
the belief that high protection was in the national
interest and that it protected manufacturing industries. 
No matter what the result of the forthcoming election,
there will be a reduction in governments protection of
industry because both parties tariff policies involve the
gradual fading out of Australia's over-protection of
industries. Labor's exact plans are to reduce tariffs for
most industries to 5% by 1996, clothing, textiles and
footwear at 25% and automotive rates at !5% by the year
2000, with no possible changes to legislated program until
1996. The liberal goal is for all industries by the year
2000 to be between 0 and 5% tariffs, with no review in
With these policies in mind, if the protection industries
are to survive when tariffs are dropped, they must become
more efficient and gain a competitive advantage so as to
successfully meet foreign industries head on in free
international trade.



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