External Stability

Trade Barriers

There are obvious difficulties associated with making a product in one country, and then selling it in another. The most obvious is transport; any product that is made in China (for example) must be transported to Australia before it can be sold in this country. This also gives rise to a second problem – some products have an expiry date. Fresh fruit, vegetables and meat must all be stored in a particular way before they can be moved between countries, and this will increase the cost associated with moving the products.

But these barriers are natural obstacles. A producer who makes cheese for the export market understands that they will need to package and store the cheese in such a way that it will be edible when it reaches its destination. On the other hand, there are some barriers that are intentionally put in place by governments to limit the number of imports that come into a country.

Tariffs

A tariff is a tax on an import. For many years the Australian government moved towards reducing all tariffs on imports into this country, and today our tariff rate is amongst the lowest in the world. However, after the election of the Rudd government in 2007 a review of Australia’s policy – particularly in regards to the tariff that protects the motor vehicle industry – has been under review. Similarly, in 2009 the US government elected to re-introduce a tariff on tyres that are imported from China. This tariff was introduced at 35%, although it was phased down by 5% each year for the two years that followed.

When an imported product attracts a tariff it will appear more expensive to the market. As a result, any domestic competitor may appear slightly more attractive. The direct result of this is that more domestic production should be sold, which will help to protect jobs. You can read more about the impact of tariffs here.

Quotas

A quota is a limit on the number (or value) of products of a particular type that can be imported. This strategy is often used when the government believes that domestic producers are not able to completely satisfy the market, but they don’t want to be wiped out by an influx of imported products. In this way, the foreign market is used to “top up” domestic production so that local demand can be satisfied.

For example, when Australia and the USA negotiated the free trade agreement that exists between those two countries, one issue was the use of quotas. Eventually the US agreed that in 2005 (when the free trade agreement began) the quota for Australian beef would be increased to 398,214 tonnes. Between 2005 and 2023 this figure would increase to 448,214 tonnes. After 2023 the quota will be eliminated. (It should be noted that the US also charges a tariff on Australian beef – in 2005 the tariff on beef inside the quota was eliminated, but the over-quota tariff was 26.4%. This figure will also be reduced to 0% by 2023.)

Subsidies for Producers

Many countries around the world use subsidies, particularly for the agricultural sector. While there are many types, a subsidy is basically an amount of money that is paid to a producer for their output. This helps to lower the effective cost per item, which means that the producer can now sell at a lower price. Once again, this means that domestically produced items appear more attractive, and as a result local jobs are protected.

As part of the Common Agricultural Policy the European Union maintains a complex system of subsidies. In fact, almost 48% of the EU budget is spent subsidising farmers. There are several criticisms of this program, and reform is underway. For example, subsidising farmers encourages over-production, which also results in damage to the environment. In addition, artificially low prices tend to crowd out farmers from developing nations that can not afford to pay subsidies. As a direct result of the CAP many in Africa have suffered.

Legal Obstacles

It is also possible for a government to put legal obstacles in place that make the consumption of locally produced products more likely. These laws act to distort trade in such a way that certain products are given preference over others.

As a simple example, consider the fact that in Australia we drive on the left hand side of the road, while in the USA they drive on the right hand side of the road. If a producer in the USA wants to sell cars in the Australian market, they must structure their manufacturing in such a way that they can produce cars with the steering wheel on the right hand side of the car. Not all US producers choose to do this, and as a result more Australian made cars than US made cars are sold in this country each year.

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