A Modest Member of Parliament [Bert Kelly], “I, for one, still support the tariff cut,” The Australian Financial Review, July 4, 1975, p. 3. Reprinted in Economics Made Easy (Adelaide: Brolga Books, 1982), pp. 58-59, as “Twenty-five per cent Tariff Cut.”

When the Government announced its across-the-board tariff cut of 25 per cent in July, 1973, Eccles pushed me out on the political limb and made me publicly support the Government while the Opposition, in general, was critical.

Now I find that the Government is recanting on its tariff principles and there is a general tendency to assume that the cut was wrong. Eccles and I still think it was right.

The problem in 1973 was correctly thought to be that Australia needed more imports. We had then a great demand for almost everything in Australia and prices were rising because demand had outstripped the supply of goods. There were many reasons for this and one, of course, was the industrial strife that dogged us. The economy was booming, and we were in a state of over full employment. There were just not enough goods to go round, so a deliberate effort was made to increase the supply by importing.

There were two ways of doing this. One was to alter the exchange rate, to up-value the currency which would make imports cheaper. The other way was to reduce tariffs by 25 per cent across the board. The Government indeed used both methods bit it is the tariff reduction that has drawn all the criticism.

Both the exchange rate appreciations and the tariff cuts encouraged imports but it is estimated that the 25 per cent tariff cut had about the same effect on imports as a 4 to 5 per cent exchange appreciation. Yet since the Government has been in office the currency has been appreciated by over 20 per cent. So the exchange rate appreciations would have had about three times the effect on imports than has the tariffs cut. But because the tariff cut was visible for all to see it drew all the criticism.

We know that, in theory, we should have a floating exchange rate as advised so cogently by Professor Friedman. If we did, we would not have to face all the trauma involved in a tariff cut. But even if a truly floating exchange rate is not possible, and no one will tell me why it isn’t, then surely no one will argue that we could have left our exchange rate as it was in 1972.

It is true that the rate doesn’t have to float, it doesn’t have to alter a little each day, but at least it has to change in a few large steps once a year or so, as the Australian currency situation changes in relation to the rest of the world. So small changes each day, or a large traumatic change each year or so, there just has to be. And the sum total of these changes, be they a lot of little ones or a few big ones, affects imports more than the tariff cut.

The tariff cut was blamed because imports compete with Australian production, yet the rise in wages has been far more significant in making our manufacturers uncompetitive with imports. For instance, if you look at the knitting industry which has been blaming all its ills on the tariff cut, you will find that the cut has been equivalent in cost terms to a rise in wages of between 6 per cent and 13 per cent. Yet the actual rise in wages between December 1972, and September 1972, was 60 per cent (56 per cent for men and 73 per cent for women). Giving women equal wages with men increased knitting costs in a way that has made imports much more damaging than tariff cuts.

I suppose that, looking back on 1973 with all the wisdom that comes with hindsight, it may have been better to have encouraged imports by appreciating the exchange rate even more, about 4 per cent more, in fact.

Both methods would have been about equal in their effect, but there is no doubt that the cause of tariff reform has been damaged by the vociferous and illogical blame that has been fastened on it by industry leaders who have found themselves affected by escalating wage costs, strikes and inflation.

But the tariff cut has been blamed because it is an easy weapon with which to beat the Government. But that doesn’t make it the right one to use.

As the Copland Report said in 1929:

The most disquieting effect of the tariff has been the stimulus it has given to demands for government assistance of all kind with consequent demoralising effect upon self reliant efficiency throughout all forms of production.

Eccles and I are unrepentant and still think the Government was right in 1973 and what’s more, we don’t care who knows it.