Import competition in Australian manufacturing industries

Abstract

The response of domestic factor markets to relative price adjustment is analysed with special emphasis on the role of import competition since industry policy in Australia is primarily concerned with intervention in import flows. Trade expenditure functions are applied to data for 35 Australian manufacturing industries for the period 1968/69 and 1982/83. The elasticity results show import flows to be more price responsive than suggested by previous studies, with implications for tariff policy formulation and the industry consequences of devaluation. Import flows are shown to be even more price responsive to domestic developments in industry product and factor markets. The industry output and employment consequences of domestic price changes are shown to be substantially larger than those for comparable import price changes. Domestic price policies are shown to be more effective in influencing industry output and employment than tariff or exchange rate policies. The import substitution elasticities show imports are not as substitutable for locally produced goods as previously thought, with implications for the calibration of computable general equilibrium models. Capital-labour substitution elasticities are shown to be close to unity for most industries. The labour demand and substitution elasticities show that output changes and not real wages are the main cause of changes in labour demand. The Australian tariff protects capital at the expense of labour in a majority of industries, but there is a small group of highly protected industries where income is distributed in favour of labour and at the expense of capital. The total intraindustry effects of a tariff change show that a tariff increase reduces employment and so tariff increases are antiprotective in the short run. Conversely, import price increases through a currency devaluation encourage contractions in output and employment in the short run and this result helps to explain the sluggish output and employment response of many manufacturing industries to the recent devaluation of the Australian dollar. The effects of tariff and exchange rate policies after the 1973 tariff cut are compared and it is concluded that tariffs and exchange rate effects had approximately equal effects on import flows, output and employment. Both tariffs and exchange rate effects were dominated by inflation in domestic output prices, the effect of the commodities boom on materials prices and the wage increases which occurred after 1973/74. The results emphasise the importance of domestic price developments rather than import competition in assessing the implication of tariff and exchange rate changes. The data also reject the existence of value added with implications for many productivity studies which use growth accounting techniques. More seriously, the lack of separability implies substitution is biased with adverse consequences for effective rate of protection measures. Using the elasticity estimates and capital intensity rankings, it is nevertheless possible to show that the directional properties of the effective rate of protection index are preserved for the most highly protected group of manufacturing industries. Despite the rejection of crucial theoretical assumptions, the index retains its usefulness for resource pull analysis provided reference is made to the substitution biases present and the capital intensity rankings for the industries being compared. Show more