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