A case for removal of tariff protection

Abstract

This paper is a response to the Tariff Working Party Report to the Minister of Trade and Industry, 1987. Objectives of the paper are to: expand the case for removing import protection; provide some insight into the future of New Zealand as a less protected economy; and emphasise the importance of interpreting the removal of protection in the context of an integrated policy package. A number of arguments about static effects of import protection are discussed, namely comparative advantage, costs of lobbying and costs of economic slack. The dynamic inefficiency argument is also discussed. It is shown that removal of protection would have greatly assisted low income households by making the prices of goods that they buy (or would like to buy) cheaper, thereby removing an implicit regressive tax. This would happen without an accompanying long term increase in unemployment. Some evidence on the perverse nature of import protection as an implicit subsidy paid to the major metropolitan areas and an implicit tax paid by regional areas is presented. It is suggested that removal of protection would be a very positive form of regional assistance. It is noted that removal of import protection is best implemented as part of a package of policies designed to improve flexibility and efficiency throughout the economy and to maintain a low real exchange rate during the transition period. The conclusion is that New Zealand's future economic welfare is most likely to be higher without import protection. Complete removal of protection over a period of about five years is recommended.