Strategies for survival following tariff reform.

Tariff protection in Australia

Early this century, Australia's tariff barriers were low but by the 1970s the situation was reversed[1]. The belief was that production of manufactured goods should be at recognized international levels, compared to all domestic output including agriculture. Furthermore, this was conducive to attracting immigrants, an important government issue over a long period. However, the Australian economy has suffered badly during the past 40 years, which economists attribute directly to the protection its industry has enjoyed[2,3], so the case for reform began to receive sympathy in various policy making centres. However, some critics consider Australia naive to be "first cab off the rank" when most of its trading partners practise protectionism, whether tariffs, quotas, surcharges, export subsidies, restrictive labelling, packaging, and quality controls, or, plain bureaucratic obfuscation. A recent Parliamentary Inquiry refers to large-scale job losses and recommends a 12 month pause in tariff cuts and a review of government policy. Others think that tariffs should not be reduced unless foreign governments reciprocate. The new (Coalition) government sympathizes with the latter position, although its main platform is to bring down the costs of doing business at a rate which at least matches the erosion of protection[4].

The rules pertaining to Australia's earlier development no longer hold and local manufacturers face other challenges. A generation ago a trip to Europe lasted for days and mail took weeks to arrive, but now the flying time has shrunk to 24 hours and facsimile machines transfer information within minutes, while containerized shipping has facilitated imports/exports. This has been reflected in the worldwide domination of various industries by multinational corporations. China has ended a self-imposed isolation and seeks to expand trade with the rest of the world, and even Brazil has felt the effects of its low costs[5]. It used to be the world's number one supplier of cheap footwear, but in 1994 slipped below China and Italy in volume, accompanied by factory and tannery closures, and 42,000 layoffs.

A newspaper[6] reports that the clothing industry has been devastated by government policies. Once quotas were removed (by 1995), the import duty was set at 50 per cent, but, unfortunately, the promised micro-economic reforms failed to materialize. A shake-up was required to boost productivity, and this has occurred, along with increased exports. Notwithstanding this, the plan to make this sector world-competitive has backfired, and the main consequences have been plant closures and offshore manufacturing. Lovable Clothing decided to source shirts from Shanghai, because they cost $2 each as opposed to making them in Sydney for $7-9. Their managing director stated that even the most advanced equipment could not bridge such a gap.

Offshore production

The literature generally discusses going offshore to facilitate sales in those countries, not replace domestic production[7]. For example, the Japanese opened automobile assembly plants in the USA, circumnavigating the strong yen in the process, and their consumer electronics firms moved into S.E. Asia to spearhead global exports, based largely on assembling home-produced components. However, Markides and Berg[8] see a trend for American organizations to go to Mexico, the Caribbean, S.E. Asia, etc., just to ship output back home, and Slack et al.[9] describe a French clothing company going to Shanghai for its low cost labour and ready supply of materials, but also to establish themselves within a region of huge market potential. Subcontract arrangements minimized the initial risk, and presented a chance to evaluate suppliers with a view to opening a joint venture factory later. Ansell constructed plants in Malaysia, Thailand and Sri Lanka for gloves, condoms, and balloons to avoid importing rubber and save labour costs[10]. Once exports accounted for 15-20 per cent of Australian output but now there is no production there, while Ansell has become a major player in global markets.

On the plus side, there is cheap labour, factory overheads, and often raw materials, besides tax concessions and other inducements. Even so, the list of possible drawbacks is long:

1 tariffs;

2 additional transport costs;

3 additional administrative costs;

4 bigger finished goods inventories;

5 lower productivity;

6 quality problems;

7 poorer customer service (slower response due to longer lead times);

8 extra training costs;

9 labour problems at home;

10 less control over costs, resulting from relative currency movements, inflation, and rising standards of living;

11 regulations limiting percentage ownership of subsidiary, leading to reduced share of profits and loss of control;

12 host government pressure to transfer technology, raise local content, etc.;

13 open to "piracy" and may create competitors;

14 "freezes" product development, particularly if the supplier base moves offshore;

15 "hollows" the organization, by diminishing (or eliminating) …