Bert Kelly, IPA Review, Vol. 45 No. 4 [PDF], 1992, p. 12.

I was recently asked to talk about the tariff on cars to a group of bright young people. I accepted gladly; I am not often asked to talk to anyone these days and the tariff on cars is a subject that has been dear to me for many years. I plodded through the mournful history of the mess that all our government have made of the car industry and then I described the mess it is in now. I mentioned that the Industry Commission’s last estimate of the tariff subsidy cost was $1.4 billion and that we were paying about $25,000 for each person employed in making cars or car components. Then I told them that the $1.4 billion subsidy was paid, in the end, by exporters and said that it did not seem to me to be very sensible to damage the industries we were good at, the exporters, to help the industries we were bad at, those that had to be protected by tariffs.

I was rather pleased with myself when I sat down but they did not seem very excited. One chap said, “I have heard all this before, Bert, but when I start telling people about the tariff burden being borne by exporters, they go glassy-eyed. They just don’t believe me. They think it is the car buyers who pay the $1.4 billion subsidy and not the exporters. So please go over that part again.”

This I did. I began by saying that, if there was an increased tariff on sheets, even if a farmer did not use sheets but used super bags instead, he would still have to pay his share of the increased cost of sheets because the increase in the cost of sheets gets built into the CPI and so into wages. Then the increased wage costs are passed back along the production line, from one industry to the next, until they come to the farmer at the end of the line who has no one to pass them to. He can ask his overseas client for more for his wheat; his client will be very sorry for him but he can get cheap wheat from France. Then I said that the farmer, if he was an exporter, had to pay the tariff subsidy on cars even if he had not bought a car for years and indeed had no expectation of being able to buy a new one ever again with the wheat market being as it is. It is true that the car tariff subsidy of about $4,000 a car is paid in the first place by car buyers but, as with sheets, an increase in the price of cars gets built into the CPI, then into wages, then back along the production line until it comes to the exporters, be they farmers, miners or secondary industry exporters; anyone at the end of the production line has to pay the tariff subsidy. There are no free feeds in the commercial world.

When I had finished this tirade one man said: “That’s all very well for you, a farmer, to go on about the exporters paying but you are only an ordinary chap really. Surely you must have some economy theory to back you up.” So I hand him a paper entitled “How Protection Taxes Exporters” by Professor Ken Clements and Larry Sjaastad who say what I have said in a really authoritative way. And, of course, this is not a new thesis; for at least 50 years all economists have known it.

But when I said that all economists agreed with me one man went quite pale. “It’s no good talking economic theory to my mob, Bert,” he said. “They just sneer at economists, particularly professors. Surely there must be a better way out of this car mess besides being led by two blooming professors.”

Then a young chap who was studying economic at the university piped up, “Why do we have to protect the car industry by tariffs with all this theoretical stuff about the exporters being slugged? My lecturer tells me we could use bounties instead of tariffs to protect cars. The government could pay car makers $4,000 for every car they make and the money would come from the taxpayer and not the poor old exporters you are so worried about.”

The young man must have been gratified at the reception he received. Soon the group was painting rosy pictures of getting rid of tariffs which were so hard to understand and which exporters had to pay, while instead they could protect the car industry by laying the protection burden on taxpayers instead. “And then everyone would be able to understand how much we were paying to protect the industry,” one chap said. “Each year the $1.4 billion bounty would appear on the budget. It’s all so simple; we cannot understand why you haven’t been using bounties instead of tariffs all along. You old chaps really need a short in the arm from us young ones.”

I warned them that perhaps they would find that their fine new solution was not quite so popular with the car makers because perhaps not all of them would welcome seeing their $1.4 billion bounty money exposed to the public view in the budget each year. And what if the government ran out of money as they seem to these days? And how would our prestigious car makers, the big business people who have been so scathing about the lack of business understanding they have received from us all, feel about having to line up at the tax trough with the pensioners, university students and greenies? But they may do it; I know they are not afraid of asking for help if an election looms.

My reason for writing this piece is to hammer home the fact that too few people realise that the burden of protecting the car industry, be it $1.4 billion or whatever it is, is borne by exporters if tariffs are used, or by taxpayers if bounties are used. The size of the bounty burden would be there for all to see, but it is much harder to understand the size of the burden that exporters have to carry if tariffs are used. Perhaps we would see things more clearly if we did. But someone has to pay; there are no free feeds.