Before Australia rushes back to protectionism, it would be wise to recall some of the basic reasons why we abandoned it in the first place — and the costs of returning.
Protectionism — whether in its traditional form of tariff or quota barriers that either increase the price of imports or simply keep them out, or in its more modern form of government assistance for industries — costs all of us. Tariffs and quotas are like a GST on every import or import-competing product — you’re paying more every time you buy something. When Australia had high textile, clothing and footwear tariffs in the 1970s and 1980s, for example, the price impact was substantial. For low-income families who sent their kids to schools where uniforms were worn, a Midford school shirt or a pair of Bata Scouts (with the compass in the heel) were a substantial chunk of the week’s family income. You ripped your school shirt or uniform at your peril — it would have to be sewn back up again, not thrown out, and last til you grew out of it.
Now, cheap textiles sourced from countries like China or Bangladesh mean school uniforms are an almost negligible cost for parents. It’s just one small example of how protectionism means higher costs for consumers, and not just trivially higher costs. Business also pay higher costs — in fact, more so than consumers, because a lot of business inputs are sourced from overseas. At the moment, for example, the construction sector spends an extra $2 billion on steel because we’re determined to keep cheap foreign-made steel out of Australia. That means the costs of protectionism cascades through the economy — the business must charge higher prices to cover its higher costs.
It also means that other, unprotected industries must compete for investment and workers with the industries we’re propping up, increasing their costs and making it harder for companies to flexibly respond to changing preferences or needs. Take health, for example. In 1984, health and caring services employed one in 12 of the Australian workforce. Now it’s more than one in eight. We’ve needed a massive increase in our health and caring workforce — where would those workers have come from if we’d had a less flexible economy that sought to freeze our 1980s economy in amber?
More modern forms of protectionism cost us via a different means: you don’t pay at the checkout, you pay through your tax return. Government support for industry costs money — lots of it. The new Royal Australian Navy submarine program will costs tens of billions more than necessary to be completed locally — with a price premium of perhaps 30% to employ just 2800 workers. So either we pay more taxes, we borrow more (which will have to be paid for with more taxes later) or the government cuts other goods and services. Which hospitals and school do you want to see closed so that we can build the submarines locally? Who should have their welfare cut (although cutting welfare isn’t going to be enough to pay for the subs)? There’s no free lunch.
And protectionism is always aimed at particular industries, as a result of political and cultural pressures. We don’t set out to support industries that, say, are nearly viable, but not quite, or industries that are cost-competitive if the Aussie dollar is below a certain level. There was no policy rhyme or reason for what we used to support. Manufacturing has always attracted protectionism because it has powerful unions and well-connected companies that can form an alliance of interests to secure government support no matter who is in power. Agriculture secures assistance because rural political parties make it the price of their political support. Exactly which industry is protected is a political, not a rational, decision — and can be influenced by donations, bribes and other forms of corruption.
It’s also a cultural decision. In Europe and Australia, small-scale “family farming” is protected for “cultural” and “heritage” reasons. In fact, the National Party supports agricultural protectionism in Australia because it is opposed to Australia having a more efficient, productive agricultural sector — which would mean larger economies of scale and less employment. And manufacturing is protected because the idea that manual labour is somehow superior to all other forms of labour is deeply embedded in our culture — only making something is a real job, unlike a mere “McJob” of providing a service to someone else. Male manual jobs were sanctified as authentic work, compared to more sedentary, or knowledge-based, jobs that could be done by anyone with skill.
But protectionism worked, didn’t it? Things might have cost a lot more, and we might have had to pay more via our taxes to support randomly selected industries, but it kept people in work, didn’t it? Well, not really. Let’s pick a benchmark year when there was still a high level of protectionism in our manufacturing sector — say, 1985. At the end of 1985, when manufacturing enjoyed an effective overall rate of assistance of 22% and much higher levels for cars and textiles, manufacturing employed just under 16% of the entire workforce, according to ABS workforce data. Problem is, the jobless rate at that point was just under 8% in trend terms — significantly higher than now.
That was the nadir of unemployment after the recession of the early 1980s — in 1986 unemployment began rising again to over 8%. And this was a very different workforce: the employment to population ratio was 56.5% in trend terms compared to around 61% now, and the participation rate was a full three percentage points below its current level. The Australian workforce was a smaller proportion of its population back then, but unemployment was still worse than now.
(If you go back to when ABS record first begin, in 1978, the trend unemployment rate was 6.4%, still higher than now, with even lower participation than in 1985).
So there was no golden era of pre-liberalisation employment in a cosseted economy, unless you want to go back to the 1950s and 1960s, when there was full employment but women were explicitly banned or discouraged from employment in many sectors.
What about if we start breaking down the numbers? Let’s look at the two states that benefited most from protectionism — South Australia and Victoria. In Victoria at the end of 1985 unemployment was 6.5%, the employment to population ratio was four and half points below its current level, and the participation rate over four points below its current level. In South Australia, unemployment was 8.5%, nearly two points higher than now, from a participation rate 1.8 points lower and an employment to population ratio nearly three points lower. Even back in the Fraser years, when automotive protectionism meant an effective rate of assistance of about 80% for that industry and there was an average rate of manufacturing assistance of 26%, unemployment was 6.7% in South Australia compared to 6.6% now. In Queensland, the home of One Nation, unemployment is currently 6% in trend terms. In 1985 it was 8.9% (and 7.2% in 1978), again with lower participation rate and employment:population ratio.
The rise in participation rate since then has been because significantly more women are in the workforce. Female participation nationally is now around five percentage points higher than in the mid-80s. In both Victoria and South Australia, female participation has increased a whopping 11 points. The abandonment of protectionism and the shift from manufacturing to services employment has coincided with, and contributed to, the economic empowerment of Australian women.
What about Australia’s regions? Have they done it tough because protectionism has been abandoned? This is harder to answer because unemployment data becomes problematic with such small sample sizes and the ABS has only been collating it since 1998. So the best we can say is that unemployment in the “rest of Victoria” outside Melbourne was 7.6% in 1998 and 4.4% now — though it has been above 5% for much of this year. In the rest of South Australia outside Adelaide, unemployment was 9.8% and is now 5.7%; in the rest of Queensland outside Brisbane it was 8.2% and is now 6.2%. But you can find some regional Queensland centres like Townsville and Mackay where unemployment is now higher than in 1998, even if other traditional manufacturing centres like Geelong have lower unemployment.
So, at best the evidence that recent economic policies have been bad for regional employment is mixed — especially when you take into account that, despite the best efforts of the Nationals, agricultural productivity has surged in Australia and employment in that sector has actually declined in real number since the 1980s while the rest of the workforce has grown substantially. So whatever else protectionism might have accomplished, there’s no evidence that it provided more employment for Australians. And Australian women have benefited from the economic changes partly wrought by the ending of protectionism.
And there’s one final reason to reflect on why protectionism won’t help. If we put up our barriers to trade, other countries are more likely to follow suit. That means we’ll sell fewer exports, reducing our national income and increasing unemployment. We’ve been here before, in the 1930s, and it was only a global conflict and mass slaughter that got us out of that.