108

23rd May, 1927

PERSONAL & CONFIDENTIAL

My dear Prime Minister,

THE AUSTRALIAN TARIFF AND AUSTRALIAN PROSPERITY

I have just read for the first time Mr. Julius [1] presidential address at the Sixth Annual General Meeting of the Institution of Engineers at Hobart, delivered on February 18th 1926, and it has interested me very much indeed. You will, of course, have read it but I wonder whether you might not find it worthwhile to refresh your memory of the points he then made.

Mr Julius' thesis was that the production of real wealth through manufacturing was hampered by the wide application of high protection over a vast number of articles which, for many years, could not effectively be manufactured in Australia and he selected the electrical industries to illustrate his point. He certainly chose the most striking illustration and indeed presented an overwhelming case, but I would suggest that there are one or two pertinent criticisms that might be made and the conclusions which he reached might be given a considerably wider application than Mr. Julius then attempted.

This latter point is no criticism of the paper for Mr. Julius covered an enormous field in the course of his presidential address.

My purpose in drawing attention to this address is because Mr.

Julius, starting from entirely different premises and employing utterly different arguments, reached the same general conclusion as I reached in the memorandum I handed you before you left England ('A Selective Tariff Policy').

The whole question of Australian tariff policy appears to me to be a burning one both from the purely Australian point of view and also in an Imperial sense and as I know how interested you are in the problem, I shall not apologise for again discussing some of the points.

Assuming, therefore, if I may that Mr. Julius' address is within your memory, I should like first to make the following tentative criticisms:

(a) It is assumed that Australia's real wealth can most readily be increased by manufacturing. Mr. Julius states that the prices for Australia's primary exports are at their maximum, and therefore he sees more scope for the increase of wealth through a sane policy of manufacturing than through rural development. This is, of course, a matter of opinion, but the possibility of a decline in the relative price of manufactures as compared with food and raw materials, is a very weighty point which it behoves Australia fully to consider.

Again, many of the primary Australian industries have as much to learn in improved efficiency as many secondary industries and this, when achieved, will bring a large increase of real wealth.

Even the application of power to the primary industries may well increase productive capacity and thereby diminish cost of production.

(b) Mr. Julius suggested the repeal of all duties (save 10% ad valorem on foreign) on electrical goods and the substitution of a bounty upon the production of a carefully selected list of such goods. With the idea of 'selection' I entirely agree but my political instincts are opposed to the general use of bounties.

You, I am sure, will agree that bounties are politically 'kittle cattle' and from the producers' standpoint likely to prove a broken reed whenever a Federal Treasurer found an economy campaign a useful political weapon.

So much for my criticism, now I should like to suggest that the deductions drawn by Mr. Julius in his examination of the electrical industry are of much wider application and should be the basis of Australia's tariff policy.

Australia's purpose in using her tariff should surely be to enable (i) such industries to develop as will rapidly increase her real wealth.

(ii) to allow of a reasonable state of preparedness for war. (I use the word 'reasonable' with some emphasis for defence reasons can be made to cover almost any tariff application. Australia can most readily improve her defence position by increasing her population and her wealth and any policy which severely curtails these essentials is a bad defence policy.) Mr. Julius suggests that in manufacturing Australia should concentrate upon those forms of activity in which she can work up her own raw materials with a reasonable hope of a world market.

It will unfortunately be a long and uphill task for Australia to compete in the world's markets with manufactured goods when the rapidly rising tide of International industrial competition is considered. Nevertheless Australia ought to be able to make progress overseas in some forms of production for which she has great natural advantages, if only the whole question of National Industrial efficiency can be taken seriously.

If only it were politically possible one would like to see a definite overhaul of the whole tariff based on these ideas:

(1) A selection of those industries and of those items within each industry which it was the considered policy of Australia to protect to the fullest necessary extent.

(2) A declaration of policy that the tariff would give full protection to such industries, based upon the ascertained needs of the really efficient plants operating in such industries, but that in order to defeat overseas competition Australia would be prepared to raise the tariff to any height or even to place an embargo upon imports.

(3) A decision to lower the duties upon such industries and on such items in each industry as it was seen Australia had little chance of developing successfully on a large scale within a short period of time, and especially the reduction of duties upon the tools of trade or of production, using these phrases in the widest sense so as to include the electric motor as well as the carpenter's tools and the essential means of transport when the cost of Australian production would impose too heavy a burden upon Australian industry as a whole (i.e. the Motor Chassis unassembled).

(4) A declaration that tariff changes would be minimized to the greatest possible degree and that the empirical, experimental, inclusive policy of tariffs for all would be abandoned for a scientific selective policy based upon the interests of Australia as a whole and without consideration to the special interests of groups of employers or of trade unions.

Mr. Julius has conclusively shown that such a policy would foster large scale manufacturing production in a way that the present tariff would never do. He has omitted the at least equally important reaction upon the costs of production in the primary industries and upon transport.

Thus far I have discussed the tariff, from a purely Australian point of view, and almost exclusively from the secondary industries standpoint. When, however, one turns to consider the Australian export trade and Imperial economic policy, the advantages of a carefully selective tariff policy become obvious indeed. On the basis of such a change in Australia's policy, there would be the material for a great Imperial Economic Conference at which the whole question of closer bonds of Imperial economic relationship could be discussed with the happiest chances of success. Great Britain needs the Empire markets in a way she has never done before. She is beginning to wake up to the facts. In another two years she may be wide awake to them. She must realise the Dominions' determination to select such industries for protection as they choose but on the basis of a settled policy of selection Great Britain could be guaranteed such markets in the developing Dominions as would be worth large inducements on her part to create. So far as I can judge every English visitor to Australia, whether a Protectionist or Free Trader now returns with grave misgivings over our tariff policy. This must retard Anglo- Australian cooperation in Australian development, while the irritating effect of small changes, of deferred duties, upon industry here gravely hinders the campaign of Imperial economic education on which so much time, energy and money is being spent.

I am afraid I have 'spread' myself over this subject but if only some such ideas could be adopted or even fully examined during the next two years, and if simultaneously these ideas could be quietly discussed in London, there would I feel be the possibility of such an Imperial Economic Conference in 1929 as would go far to realise the ideals which you have so signally represented in 1923 and again in 1926.

Mond [2] preaches the Free Trade Empire with tariffs against the foreigner and suggests an Imperial compensation fund for the Dominion industries adversely affected. Imperial Free Trade is impossible but the idea of concrete progress in Imperial economic development based upon the division of manufacturing on a selective basis, in which each Dominion decides for herself what industries she will specially foster but uses economic commonsense in her choice, and having made her choice gives some assurance that tariff tinkering will be severely limited and Great Britain allowed the fullest advantage of preference, seems to me a line along which progress is possible. In return for such a policy Great Britain might well be prepared to guarantee markets for the produce of closer settlement in the agriculture of the Empire.

Finally, I believe such a policy, even apart from the Empire aspect, is essential if Australia is to make really rapid progress in the near future.

Yours sincerely, F. L. MCDOUGALL

1 George Julius, Chairman of the Commonwealth Council for Scientific and Industrial Research.

2 Sir Alfred Mond, Conservative M.P.; Chairman of Imperial Chemical Industries Ltd.