A Quantitative Assessment of the Inter-War Australian Trade Policies Using the CGE Approach

Abstract

Federation was the beginning of a new era of the Australian trade policy with the introduction of free trade between states and the adoption of a common external tariff against imports. During the early years under the new Commonwealth government, revenue raising was the prime purpose of import dudes and protection to domestic industries was a secondary issue. The 1908 Lyne tariff was the first significant step towards a protectionist Australian tariff since federation. The second and more important tariff increase was the 1921 Green tariff when the Commonwealth decided to provide protection to industries which emerged during World War I. The establishment of the Tariff Board was another important policy decision of the year. There were number of tariff increases during the 1920s on the advice of the Tariff Board. While manufacturers were receiving protection, there was a growing dissatisfaction among the primary producers because they believed that the higher costs imposed on the Australian economy by tariffs were finally borne out by the farming sector. The policy of protection in Australia in the 1930s was to ensure that a significant change in income distribution would occur in favour of wage earners. However, the attitude toward such need has gradually diminished over last three decades. Hence it may be questioned whether the strong historical public support for protectionism in Australia distracted policy makers' attention from more efficient trade policy alternatives (Anderson and Garnaut, 1987, p.31). The purpose of this paper is to provide a quantitative assessment of this trade policy debate of the 1930s Australia. This is achieved by comparing the impact of a tax on wool exports with that of a uniform increase in tariffs on imports. We use a computable general equilibrium (CGE) model of the Australian economy in the 1930s Australia to derive the empirical results. A computable general equilibrium (CGE) model of the Australian economy in the 1930s is used to analyse the effects of protection to manufacturing and the impact of a tax on wool exports at macroeconomic and sectoral levels. The results lend support to the proposition that the policy of protection would have resulted in a higher national income and welfare for the inter-war Australian economy. This is the effect of improved terms of trade due to tariffs and the wage earners seemed to have benefited from that trade policy. The findings however reject the hypothesis that a tax on wool exports would have been a better substitute for a uniform tariff on all imports.