It has been barely more than 230 years since Smith penned those words of wisdom, and still the “sophistry of merchants and manufacturers” and their political mouthpieces prevail. Unable to contest the free traders’ position Hill, for instance, resorted to the ad hominem, accusing them of being “ideological” and “out of touch with the real world”. Hill clearly does not realise that he has challenged the free traders to restate their case. So be it. Moreover, this is pretty rich coming from a gullible man of such limited intellect that he swallowed green ideology hook line and sinker.

The aim of tariffs is to raise the price of imports to a sufficiently high level as to encourage the production of more expensive domestic substitutes. In short, living standards are lowered because tariffs cause an irrational allocation of resources; instead of resources being directed to their most valued use they are directed into less valued lines of production causing a net loss of economic welfare. By now it should be obvious that protection can only exist at the expense of more efficient industries, especially export industries, thus wasting resources and malinvesting savings in the process. These are some of the hidden costs to which we can add corruption of the political process, business sloth, etc.

But we cannot compete against cheap labour, goes the cry. These people cannot grasp that most ‘cheap’ Asian labour is not cheap. To have any meaning ‘cheap’ has to be expressed in relation to the value of the labourer’s product. Once we do that we realise that most Asian labour is not so ‘cheap’ after all because its productivity is low. Contrasting American wages and productivity with Asian countries brings home this point. A 1995 Federal Reserve Bank study revealed that labour costs per unit of output in Korea, Thailand, Malaysia and the Philippines were very close to US levels, the lower Asian wages being the result of much lower productivity.

A well-known study by Stephen Golub, an American economist, found that though Malaysian, Filipino, Indian and Thai manufacturing wages in 1990 were only about 15 per cent of the American level, so was average productivity. What is particularly interesting, though not surprising, is that Filipino, Indian and Malaysian unit labour costs exceeded the US level. Economic analysis makes it clear that Asian labour is not so ‘cheap’ after all. Clearly, wages are determined by domestic conditions and not by international trade. In economic terms this means that it is rising productivity, brought about by the use of more capital, that increase real wages. (Paul Krugman, Pop Internationalism, The MIT Press, 1997, pp. 55-56).

Therefore the abundance of Asian labour relative to the size of the capital structure means that Asia in general has a cost advantage in labour intensive products. It follows that the more capital intensive a country becomes the less competitive its labour intensive industries will be and vice versa*.

Another variation of the cheap labour theme is the level playing field wail. If by level playing field critics of free trade mean cost differences, then what they are really calling for is an abolition of international trade because trade of any kind only takes place because of cost differences. The law of comparative advantage (which has never been refuted by any protectionists, despite innumerable efforts) demonstrates why international trade is mutually beneficial even when one country can produce goods more efficiently than its trading partners**. On the other hand, if they are referring to foreign subsidies or tariffs, their criticism is justified but reciprocal action is not. To act in kind would only be to compound the injuries already being inflicted on ourselves.

Therefore, not only does the law of comparative advantage easily dispose of protectionist arguments that tariffs should not be reduced further until our trading partners do likewise, but the pattern of our exports clearly show that such a call is pure humbug. As Professor Peter Lloyd pointed out years ago (Australian Financial Review, 2 January 1996) most Australian exports of cars and auto-components actually go to North America, Western Europe and Japan. Tariffs in these countries on auto industry products were mainly below 5 per cent, while ours were 22.5 per cent — nearly 400 per cent higher.

Even at the proposed rate of 15 per cent by 2000, the car industry’s protection rate would have exceeded these countries tariff rates by 200 per cent. As I said, humbug. Moreover, critics persist in ignoring the important fact that lowering trade barriers are not about granting favours to other countries –– it is about raising real incomes in Australia.

Since the days of Adam Smith the likes of Hill have attacked and disparaged the proposition that countries benefit from unhindered trade. Nevertheless, the proposition has survived. Hence 95 per cent plus of economists surveyed in the United States strongly agreed with the proposition that tariffs and import quotas reduce general economic welfare. Just under 91 per cent of economists in Austria, France, Germany, and Switzerland likewise strongly agreed (see Frey, Bruno S., Pommerehne, W. W., Schneider, F., and Gilbert, G., Consensus and Dissension Among Economists: An Empirical Inquiry, American Economic Review, Vol. 74, pp. 186-94).

However, I would be the first to agree with the view that truth, especially in science, is not determined by a show of hands. (This fact also hold for global warming fanatics). Nevertheless, it is still incumbent upon Senator Hill and his mates in the car industry to demonstrate their grasp of the subject and show why the overwhelming majority of informed men and women who accept the free trade proposition are wrong in their assessment. If he cannot do this then he should cease forthwith from dismissing his opponents' argument on the anti-intellectual grounds that it is only ‘theory’.

1. It ironic that while protectionists scream that Australian cannot compete against ‘cheap’ Chinese labour, Chinese companies are beginning to complain about the rising wages. Employee turnover has also reached unprecedented levels, confirming economic theory that capital accumulation raises real wages. (This does not mean, however, that the Chinese economy is recession proof).

2. Ludwig von Mises made the indisputable point “that the volume of foreign trade is completely dependent upon prices; that neither exportation nor importation can occur if there are no differences in prices to make trade profitable”. (The Theory of Money and Credit, Jonathan Cape Limited, London 1971, p.250). It therefore follows that anything that distorts international prices will distort the pattern of international trade. (See F. W. Taussig’s International Trade, Macmillan Company, 1927, p. 347. A. James Meigs, Money Matters: Economics, Markets and Politics, Harper & Row, 1972, pp. 350-352. Brookes, The Australian economy and the decline of manufacturing — what is really happening? ). It is to be deeply regretted that Australia’s Free Market Club adamantly refuses to consider the possibility that the RBA’s reckless monetary policy may have undermined Australian manufacturing.

Gerard Jackson is Brookes’ economics editor

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