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A letter to the Editor in defence of free trade, published in The Australian on 9 October 1990, p.12

Dr John Carroll in supporting increased tariffs (The Australian, 1 October 1990, p.11) admits only two arguments in favour of free trade. He omits at least two rather more important grounds.

Firstly, there is the denial of individual freedom: a tariff involves the forcible subsidisation of the producer by the consumer. Secondly, there is the loss of comparative advantage: favouring a productive activity that we are no so good at denies resources (land, labour and capital according to the text book) from something we are good at. This reduces the total value of our nation's output and, consequently, Australians' standards of living (this is what is meant by the shorthand expression 'misallocation of resources').

Against these we are offered the nebulous 'good' of 'real' employment, that is, making things. Stripping the ornamentation from the argument, we are left with the Marxist notion of absolute value: that certain types of labour possess more intrinsic worth than certain other types.

This is plainly ridiculous. Ever since individuals found it convenient and enriching to specialise in their activities, necessitating either trade or conquest, all participatory activities in both production and trade have been valuable. Their relative value is determined by the market - the settling of a price which matches supply to demand and vice versa.

The other social reason for supporting increased tariffs offered by Dr Carroll is to increase employment. But the misallocation of resources does precisely the opposite: either incomes become less than they otherwise would be or, if incomes are inflexible as would seem to be the case in Australia, unemployment increases.

The government is berated (rightly, in my view) for the monumental blunder of using high interest rates to try to kill the current account deficit. Yet Dr Carroll advocates that the government (the same one?) engages in 'a fine art', finds a 'balance' and becomes 'selective and judicious' in the imposition and subsequent management of tariffs. I believe I have more respect for the honesty and altruism of Australian politicians than most, but let's face it, if you assemble any collection of good upright people into a government, it must inevitably bow to political realities and surrender subtleties for image. Even without this, government is necessarily a slow, lumbering beast; with the best will in the world, fine arts and balances are generally beyond it.

Dr Carroll ventures that tariffs are 'the only sure means ... of forcing us to stop living beyond our means.' But what about the National Farmers' Federation's proposal: allow the exchange rate to slip? This would make exports more competitive and imports more expensive, effectively providing the industry protection he seeks. And it would not weaken Australia's moral position at GATT.

By way of contrast, Dr Carroll's suggestion would lead to more expensive imports and less competitive exports (as the increased costs of the imports would flow through into the sale price of exports). In addition, his scheme would have the additional expense paid by consumers finding its way into the Government's pocket.

Much of Dr Carroll's article seems directed against the high interest rate policy adopted by the Government. Attacking this directly, rather than being lured into a damaging proposal for the erection of fortress walls, would be rather more productive. A precipitous lowering of interest rates would help families with inflated mortgages, help small businesses with 21% per annum overdrafts and help bring down the dollar against foreign currencies. Of course, it would not be completely pain free: a diminished Australian currency would harm the borrowers of overseas funds (but that's the chance you take when you deal in foreign currencies); increase the expenses for those Australians wishing to travel overseas; cause a one-off burst of inflation as import prices increase; and, finally, hurt the pride of many who have an emotional attachment to a misleadingly tagged 'strong' currency.

© 1990 - Stephen Dawson