Government Initiatives to Reduce Protection (HSC SSCE Economics): Revision Notes
Government Initiatives to Reduce Protection
Introduction
Australia has undergone a dramatic transformation in its approach to trade protection over the past five decades. Once regarded as one of the most protectionist economies globally, Australia has systematically dismantled trade barriers to become one of the world's most open economies. This shift represents a fundamental change in economic policy, driven by recognition that protection often creates inefficiency and reduces competitiveness.
The government's decision to reduce protection reflects four core objectives:
- Enhancing international competitiveness by exposing domestic industries to global competition, forcing them to improve efficiency or exit the market
- Reallocating resources toward industries where Australia possesses comparative advantage, ensuring the economy specialises in what it does best
- Maximising consumer and business welfare by providing access to goods and services at globally competitive prices
- Driving structural change to align Australia's productive capacity with global demand patterns
Historical evolution of protection reduction
The turning point: 1973
Australia's journey toward free trade began in 1973 when the Whitlam Government implemented a groundbreaking 25% across-the-board tariff reduction. This marked the first significant challenge to the traditional protectionist model that had shielded Australian manufacturers from foreign competition.
However, the most comprehensive reform program did not commence until 1988. From this point forward, Australia reduced tariffs at a faster rate than virtually any other developed economy except New Zealand. This sustained reform effort reflected growing consensus among policymakers that protection was harming rather than helping the Australian economy.
Tariff reduction timeline
The decline in Australia's average tariff rates demonstrates the scale and consistency of this reform program:
Key Trends in Tariff Reduction:
This data reveals several important patterns in Australia's liberalisation journey:
- Between 1968-9 and 2023, average tariffs fell from 36% to just 0.5% – a reduction of over 98%
- The most dramatic falls occurred between 1986-7 and 2002, when rates dropped from 19% to 3.7%
- The pace of reduction has continued, albeit more gradually, in recent years
- By 2023, Australia's average tariff rate had reached just half of one percent
Current protection levels in Australia
Tariff arrangements
Today, Australia operates one of the world's most liberal tariff regimes. Nearly 90% of all imported goods enter Australia tariff-free, while the remaining 10% of goods, predominantly manufactured items, face a general tariff rate of 5% or less.
Historically protected sectors like motor vehicles and clothing/textiles have seen their special arrangements progressively dismantled, with final reductions occurring in 2015. Most remaining tariffs do not apply to imports from Free Trade Agreement (FTA) partner countries, including South Korea, Japan and India.
Australia's average weighted tariff rate (calculated by giving more weight to goods that are traded in larger volumes) now stands at just 0.5%. This compares favourably with other advanced economies such as the United States, which maintains an average rate of 1.5%.
The Productivity Commission estimates that the total dollar value of tariff assistance provided to domestic producers was $2.1 billion in 2020-21. While this seems substantial, it represents a tiny fraction of Australia's GDP and far less assistance than provided by comparable economies.
According to World Trade Organization criteria, tariffs exceeding 15% are classified as "large". Fewer than 0.5% of Australia's tariffs meet this threshold, compared to approximately 10% of tariffs globally.
Subsidy levels
When examining protection more broadly to include subsidies for domestic producers, Australia's position as a low-protection economy becomes even more apparent. Agricultural subsidies provide a clear illustration:
International Subsidy Comparisons:
- In Australia, subsidies account for less than 3% of farm income
- In the United States, this figure rises to 11%
- In the European Union, subsidies represent 18% of farm income
- In South Korea, an extraordinary 49% of farm income derives from subsidies
These comparisons reveal that Australia provides far fewer direct subsidies to domestic producers than North America, Western Europe or East Asia. This reflects a policy conviction that markets should determine resource allocation, with minimal government intervention distorting competitive outcomes.
Export assistance programs
While Australia has largely eliminated import barriers, some export promotion initiatives remain. These programs are administered through Austrade (the Australian Trade and Investment Commission), which provides:
- Financial support for exporters
- Information about potential export markets
- Marketing advice and strategy development
Export Market Development Grants (EMDG) Scheme
The flagship program is the EMDG scheme, established in 1974. This program has supported over 51,000 small and medium-sized exporters in promoting their products across more than 180 countries. A 2023 operational review confirmed that EMDG successfully achieves its objectives of:
- Simplifying and streamlining export assistance
- Developing exporters' marketing capabilities
- Improving program accessibility and information provision
These export assistance measures differ fundamentally from import protection. Rather than shielding domestic industries from competition, they help Australian businesses compete more effectively in foreign markets.
Australia's approach versus international requirements
Australia's reduction in protection has typically exceeded the requirements imposed by international trade agreements such as those negotiated through the World Trade Organization (WTO). While some countries reduce barriers only to the minimum extent required by their treaty obligations, Australia has pursued a more ambitious unilateral liberalisation strategy.
This approach reflects the economic philosophy that free trade benefits Australia regardless of whether other countries reciprocate. By removing barriers, Australia allows resources to flow to their most productive uses, consumers access goods at lower prices, and businesses source inputs more cheaply.
WTO Trade Policy Review Findings (2020)
A 2020 WTO Trade Policy Review of Australia praised the country's trade policies but identified several areas where further liberalisation could occur:
- The luxury car tax, which disproportionately affects exports from specific countries
- Certain foreign investment restrictions that limit capital flows
- Australia's frequent use of anti-dumping measures
Exceptions and ongoing criticisms
Despite Australia's generally open trade stance, several protectionist elements persist:
Anti-dumping measures
Anti-dumping duties are tariffs imposed on imports sold below their cost of production or below prices in the exporter's home market. The WTO review suggested Australia may be overzealous in applying these measures, sometimes implementing them without adequate economic justification.
The Productivity Commission echoed these concerns in a 2016 report, arguing that anti-dumping measures often produce net negative economic effects. Nevertheless, 2017 legislative changes made it easier for governments to maintain anti-dumping duties even after dumping activity has ceased.
Automotive sector protection
Despite the closure of Australia's domestic car manufacturing industry, the government continues to:
- Impose tariffs on new vehicle imports
- Heavily restrict imports of second-hand vehicles
These policies appear inconsistent with the broader liberalisation agenda, as they protect an industry that no longer exists domestically while forcing Australian consumers to pay higher prices.
The luxury car tax
Australia's luxury car tax applies to vehicles exceeding a certain price threshold. Critics argue this measure disproportionately affects exporters from particular countries and serves no legitimate policy purpose beyond raising revenue.
Contemporary challenges and policy debates
Case study: mRNA manufacturing in Australia
Case Study: Strategic Protection for Health Security
In 2022, the Australian Government and pharmaceutical company Moderna finalised an agreement to establish an mRNA research and vaccine manufacturing facility in Australia. This represented one of the first such facilities in the Southern Hemisphere. The deal involved:
- A 10-year arrangement worth billions of dollars
- Expected creation of hundreds of jobs
- Capacity to produce up to 100 million mRNA vaccine doses annually from 2024
- Substantial (though confidential) government financial support
Economic Analysis:
This arrangement could be characterised as a form of trade protection. Australia had sourced mRNA vaccines from overseas since 2021, and no evidence suggested Australia possessed a comparative advantage in local manufacture. However, the deal provoked little controversy, reflecting evolved thinking about free trade's limits.
Justification:
During the COVID-19 pandemic, countries prioritising their own needs meant that import-dependent nations faced delays in vaccine access. By establishing domestic manufacturing capacity, Australia aims to improve health security and ensure better access to vaccines and treatments during future pandemics.
Key Insight: This case illustrates that strategic considerations around supply chain security may justify selective departures from pure free trade principles, particularly for products critical to national security or public health.
Case study: China's tariffs on Australian exports (2020)
Case Study: Geopolitical Trade Tensions
In 2020, China imposed dramatic tariffs of 80-200% on Australian wine and barley exports. Chinese authorities officially justified these measures as anti-dumping and anti-subsidy penalties, though no credible evidence of dumping was provided. China also restricted other Australian exports (cotton, coal, lobsters, timber) through unofficial channels such as:
- Instructions to importers not to purchase from Australia
- Excessively strict customs and regulatory barriers targeting Australian products
Background and Context:
Most economists interpreted these measures as retaliation for Australian policy decisions perceived as anti-Chinese, including:
- Restrictions on major Chinese investments in Australia (such as 5G mobile network construction)
- Advocacy for an international inquiry into COVID-19 origins, which Chinese officials viewed as an attempt to blame China for the pandemic
The measures may also have partly responded to Australia's own anti-dumping measures on Chinese steel and aluminium.
Australian Response:
Australian exporters responded by seeking alternative markets in India, Japan and South Korea. The Albanese Government made improving relations with China a priority, and during 2023, China removed restrictions on Australian coal, timber and barley, suggesting further barriers may be reduced.
Key Lessons: This case demonstrates how trade can become entangled with broader geopolitical tensions, and how diversifying export markets can provide resilience when individual trading relationships deteriorate.
Remember!
Key Points to Remember:
- Australia's average tariff rate has fallen from 36% (1968-9) to just 0.5% (2023), making it one of the world's most open economies
- Almost 90% of imported goods now enter Australia tariff-free, with remaining tariffs generally 5% or less
- Australia provides far fewer subsidies to domestic producers than comparable economies – less than 3% of farm income compared to 49% in South Korea
- Export assistance through Austrade and the EMDG scheme helps businesses compete in foreign markets without protecting them from import competition
- Australia's liberalisation has exceeded WTO requirements, though exceptions remain (anti-dumping measures, car tariffs, luxury car tax)
- Contemporary policy debates focus on balancing free trade principles with strategic considerations around supply chain security and critical industries
- Geopolitical tensions can disrupt trade relationships, as demonstrated by China's 2020 tariffs on Australian exports