Manufacturing Industry Protection and Liberalisation Essay Example for Free

Manufacturing Industry Protection and Liberalisation Essay For a long period in history, the Australian manufacturing sector has enjoyed protection with the government aiming at establishing a stable manufacturing sector to ensure self-sufficiency as well as provide job variety to its citizens. Successive governments over the past decades have introduced several structural changes. Australia now has a regime which is said to have the lowest protection for manufacturing industries. The argument is that protection is only given for a limited amount of time to allow the industry to establish itself. It is not only the manufacturing industry that has undergone reforms but the whole economy as a whole. Liberalisation of trade is becoming a norm in Australia with the government withdrawing from participating in trade matters and issuing fewer restrictions to businesses. The idea is to give them the freedom to make decisions without the government influence and this according to economic analysts is bound to improve the economy as competition increases (Productivity Commission, 2009). Conservatives and the labor party are against deregulation citing that sooner or later it could have serious negative impacts on the citizens through commodity price increases and rise in unemployment levels. This paper seeks to analyze the reasons for the reduction in the Australian manufacturing sector protection as well as the consequences this reduction is likely to have on the economy. Further, a discussion on liberalisation of the economy is introduced showing the reasons as to why liberalisation is a good idea for Australia. Decline in protection in the Australian Manufacturing Sector There has been a significant decline in the trade protection for the Australian manufacturing sector over the years. The tariff provisions reduced from 25 percent in 1983 to 6 percent in 1997 (Chemlink, 2001). Import duties on foreign manufactured goods have also fallen significantly from as high as 60 percent to 5% in 1997 (Chemlink, 2001)). The government following the advice of the productivity commission now plans to abolish tariffs on all manufacturers. The arguments behind the reduction in protection include the ability of the Australian industries to compete in the world market (Wilson, 1998). When the foreign produced goods are allowed into the Australian market, the competition caused should be a wake up call for local industries to be innovative in order to counter this competition. According to Anderman (2001); Productivity Commission (2009), tariffs offer little incentives for competition are likely to cause industries to be less innovative due to reliance on the government for protection. Protection is being reduced because it has led in the decrease of innovation which is a direct result of lack of competition. Protection creates monopolies within the country hence the high costs of goods. This is one of the arguments of protectionism and it maintains that due to protection from competition, industries tend to take advantage of this to charge high prices on the goods (Anderman, 2001). By allowing foreign goods into the market, monopolies are abolished by the competitive mood that results. The consumers can therefore get the same goods at a more favourable price (Landek, 2003). The Australian government through the AusAID wanted to help Least Developed Countries (LDC) to develop their export industry. The strategy used by AusAID was to remove tariffs on goods from LDCs. While benefiting these countries, Australia can easily import goods from these countries and have little effect on the productivity of Australian manufacturing industry and employment (Leigh, 2002). Effects on the Australian Economy As a result of the reduction in protection of the manufacturing sector, the domestic industry is highly likely to go into a slump and consequently slow down economic development in Australia. According to Anderman (2001), state protection ensures that domestic industries are saved from competition brought by foreign manufactured goods so that they can effectively establish and develop themselves. Reduction in protection just goes on to encourage the entry of foreign goods into the country. Since most of these goods are likely to have lower prices than Australian goods they will capture the market originally being served by Australian manufacturing sector pushing Australian industries out of business (Wilson, 1998). A situation where foreign goods are sold at a lower price than the price in the importing country is known as dumping which is quite harmful to the local goods market (Anderman, 2001). As the level of competition from foreign goods increases, high levels of unemployment are likely to be witnessed. This results from the fact that foreign goods flood the market and if they are cheaper than local goods they are likely to attract more customers (Anderman, 2001). The consequence of this will be that the Australian goods will have little of no market such that the industry owners will have no option but to close down. In return, workers will lose their jobs leading to economic suffering and high income inequality (Wilson, 1998). Current statistics as at the end of 2008 indicate that unemployment is at 5. 2 percent. According to Sterle (2009), the manufacturing sector provided more than one million jobs in 1996 but this had so far reduced by 300,000 at the end of 2008. Kelmax for example has already closed its Adelaide operations leading to a loss of 80 jobs. Other examples of companies which have laid down workers include Westpac, Manildra Group and Silcraft. Innovation in the country will be discouraged as cheaper goods enter the Australian market. Innovation is encouraged by the presence of a prospective market (Landek, 2003). However, if the market is not assured then investors may not be willing to take the risk. Stiff competition from foreign goods also reduces industry productivity such that profits are reduced. Since innovation requires large amounts of finances, the local industries cannot afford to innovate. The government will lose out on income with reduced protectionism. This stems from the keep money at home argument which maintains that when countries import, they get the benefits of the goods while the foreign country goes with the money (Anderman, 2001). This means that the importing country is benefiting the other by increasing its earnings on foreign exchange. By protecting its domestic industries, a country would have both the goods as well as the money. Likelihood of trade imbalance is increased when protection of domestic industries is abolished. An unfavourable balance of trade is dangerous to a country and it occurs when a country starts importing more than it is exporting (Anderman, 2001). Reduction in exports would come as a result of lack of incentive to innovate and closure of domestic firms. Liberalisation  One of the latest Australian government reforms is the liberalization of the Australian economy. Government reforms to liberalisation have been a topic of controversy as economists insist that free trade is in essence the key to economic welfare for Australia. Conservatives and the labor party are not for liberalisation. Labor party maintains that it will lead to harmful negative results in future (Sterle, 2009). According to them, liberalisation will give firms too much freedom which they may use to exploit customers, engage in unethical business practices and cause the decline in employment levels. I personally do not agree with these views and in this regard I totally support the government in the liberalisation reforms because I believe that it is going to work in favour of the Australian economy. Deregulation ensures steadfast commitment to competition which is a fuelling factor for development (Coonan, 2007). Competition is useful in two major ways: promotion of innovation and reduction in prices of goods. Trade liberalisation fosters competition leading to better quality goods and more affordable prices (Leigh, 2002). Competition promotes innovation so that as firms try to outdo each other they come up with better products to win customers. The direct results of innovation are better quality goods, development in technology and more competition so that development is a continuous process (Leigh, 2002). Free trade enhances competition among firms producing similar products and as we know it, competition has a significant influence on the reduction in prices as companies try to secure more customers and a gain large market share (Leign, 2002). We can therefore collectively say that competition leads to better quality goods for customers and variety at affordable prices. Free trade or liberalisation will create jobs for Australian citizens (Coonan, 2007). Arguments have been put forward by the conservatives that liberalisation it is likely to lead to a rise in unemployment levels. However, the gains obtained in free trade override the losses (Smith, 2007; Productivity Commission, 2009). There could be some sense in that firms in their efforts to increase their profits may lay down some workers (Smith, 2007). The number of new firms and expansion of existing firms however is likely to take on board more workers than those who have been left jobless (Landek, 2003). Increase in innovation and profits will definitely lead to the expansion of the existing industries which are going to need workers. This way, employment is enhanced as opposed to where government regulations limit the business operations. As an illustration of the advantages that liberalisation can bring, I take a case of the telecommunications industry in Australia. The liberalisation in the telecommunications industry has earned Australia an extra $15. 2 billion since 1997 following a decision by the Howard government to liberalise the sector (Coonan, 2007). In a report issued by the Communications, Information Technology and the Arts minister Hon Helen Coonan in November 2006, more than 17,550 jobs were created in the year 2005. Apart from these, use in Information Technology has risen with an average of 5. 9 million having subscribed for internet services and 80 percent of Australians have mobile phones. This should indeed serve as an illustration to the conservatives that liberalisation has positive economic effects and this is the way to go for Australia. Conclusion Tariffs and trade restrictions protect domestic industries from competition caused by free import of foreign goods. This ensures that new industries can establish themselves without having to bear competition pressures. With globalisation however, countries use of tariffs are going down and the reasons for this is to encourage competition so that the local industries can become more innovative and consumers can obtain quality goods at reasonable prices. This together with trade liberalisation have embraced the spirit of free trade that ensures minimal government intervention in trade activities. Just like in reduction in protectionism, deregulation or liberalisation ensures that consumers can get better goods due to increased innovation and quality goods as a result of increased competition among firms. In conclusion, trade liberalisation is an effective instrument in increasing the productivity of a countrys economy.