Methods of Protection

A country which employed a non-discriminating tariff as the only means of protecting domestic industry would have, in the height of the tariff needed to ensure for local products at least a fair share of the home market in competition with non-subsidized imports, a direct measure of the cost disparity between local and overseas production. But New Zealand in common with most other countries has had import licensing of varying degrees of severity almost continuously since the war and under such conditions it is almost impossible to estimate the extent to which factors of production have been diverted into those sectors of the economy where their productivity is considerably lower than that obtainable elsewhere in the community. In New Zealand's case the justification has been balance of payments difficulties, but many people feel that the flexible use of quantitative restrictions is a necessary prerequisite to sound industrial development.

There is little doubt that stable moderate tariffs provide the best means of affording protection to local industry. They leave the guidance of trade largely to private business, keep the need for cumbersome official administration at a minimum, allow competition from efficient overseas producers and provide revenue for the central government. Quantitative restrictions on the other hand limit overseas competition to the extent of the licences issued, require the arbitrary allocation of such licences, and lead to high administrative costs. By diverting demand onto home produced goods they add to inflationary pressures which provide the main cause of balance of payments difficulties.

Just what height the tariffs should be is debatable. In 1954 the Board of Trade suggested that an industry requiring a British preferential tariff of more than 25% over a period of time could perhaps be regarded as of doubtful economic worth. But in any system where tariffs are applied at a different level for various classes of goods, what is essentially happening is that various sections of the community are being forced to pay differing prices for foreign exchange, a type of discrimination which could equally well be achieved by the use of multiple exchange rates.

The suggestion has been advanced by theoretical economists³ that the best way to avoid this type of discrimination is to work towards a uniform ad valorem tariff as the sole method of protecting local industry. In New Zealand's case it would require at least two uniform rates, i.e. one for most favoured nation countries (say, 30%), another for imports from British Preferential sources (say, 25%). Admittedly raw materials and essential foodstuffs which at present face low or non-existent duties would rise in price for domestic consumers, but this should be offset by the lowering of price of more nearly finished goods facing lower tariffs. It would cause local manufacturers to seek where possible domestic substitutes for the raw materials now facing higher duties and the development of the aluminium and pulp and paper industries suggests that in many cases the degree of substitutability might be high.