Australians are feeling the pinch.
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The price of meat is up 6.2 per cent over the last 12 months. Fruit and vegetables are up 7.3 per cent. Non-alcoholic drinks are up almost 8 per cent. Furniture is up 8.5 per cent.
Non-durable household products like clothing and footwear are up almost 11 per cent.
So imagine if, while Australians are facing the worst cost-of-living pressures in decades, the government had a policy whose sole purpose was to push up prices.
Imagine if that same policy cost more to implement than what it raised in revenue.
And imagine that this policy forced businesses to jump through multiple hoops only to discover that, 90 per cent of time, the policy didn't apply to them anyway.
Welcome to Australia's system of trade tariffs.
Back in the 1970s, Australia had tariffs exceeding 50 per cent on most of our imports.
The goal was to protect Australian businesses from international competition and to raise money for the government.
Luckily, our policymakers are a lot smarter than they were back then.
They realised that trade protectionism was a fantastic way to make us poor and to push up prices on our own citizens.
Policymakers realised that Australia has limited resources with which to make goods and services.
They realised we are better off making the things we are really good at making, selling those things overseas and then using some of that money to import the things we aren't good at making.
It's no surprise that as our policymakers got smarter, our tariffs got smaller. Tariffs which used to exceed 50 per cent and applied to most of our imports were reduced to an average of 5 per cent and applied to only 10 per cent of imports. Australia got rich.
While some were left behind by governments that should have supported them, the standard of living for the overwhelming majority of Australians rose significantly.
What's the problem? The problem, outlined by the Productivity Commission last week, is that we took down the tariff walls but kept the structures that held them up.
When Aussie businesses want to import something into Australia - like when our mining industry imports equipment so it can dig up resources to sell overseas - they are required to go through a long bureaucratic process to see whether they have to pay a tariff, only then to be told that they don't have to pay a tariff anyway.
The Productivity Commission estimated that businesses will incur a cost of around 2.8 per cent on average to discover that they don't have to pay a 5 per cent tariff.
This would be funny if it wasn't so pointless and expensive to the economy.
And it gets worse.
The Productivity Commission also looked at how much it costs the to implement this strange system. The answer is staggering.
They found that, once Australia concludes its free trade agreements with the United Kingdom, India and the European Union, the current system of tariffs will cost between $1.41 to $4.81 for every $1 of revenue raised.
And it's not as though these tariffs provide Australian businesses with any real protection, even if that was a good idea.
The Productivity Commission outlined examples of where we have tariffs on products that aren't even made in Australia.
And where we do have tariffs on things made in Australia, all we are doing is creating distortions that make us poor and push up the cost of living for Australian families.
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In a developed country like Australia, it's rare to have a policy that is so nonsensical.
But Australia's tariffs are definitely one of them.
So, why would we continue to have a policy like this in Australia?
The only argument used to justify this bizarre set of circumstances comes from our diplomats.
They argue that having a few tariffs lying around is handy in our trade negotiations because we can use them as a bargaining chip.
"Sign a free trade agreement with Australia," they offer, "and we'll cut our remaining 5 per cent tariffs for you, provided we get something in return".
This is tenuous.
As our tariffs decrease, and as we extend these cuts to almost the entire world, so too does their value as leverage.
Australia has included these 5 per cent tariff cuts in so many trade agreements that they are no longer worth much, and the countries that haven't already received these tariff cuts expect them to be offered as a matter of course.
And even if these 5 per cent cuts were exchanged for some other concession, there is no way that maintaining this expensive system would satisfy any rational cost-benefit analysis.
Australia's tariff system hurts Australian households and Australian businesses. It pushes up inflation, raises the cost of living, reduces the ease of doing business, costs more to implement than it raises in revenue, distorts the economy and provides barely any protection to Australian businesses, which would be a bad idea anyway.
It's rare for governments to get such an easy free kick in implementing meaningful reform, but abolishing Australia's tariffs and the system that supports them is one of them.
- Adam Triggs is a non-resident fellow at the Brookings Institution, a visiting fellow at the Crawford School at the Australian National University and a fellow at the e61 Institute.
Adam Triggs
Adam Triggs is a partner at the economics advisory firm, Mandala, a visiting fellow at the ANU Crawford School and a non-resident fellow at the Brookings Institution.
Adam Triggs is a partner at the economics advisory firm, Mandala, a visiting fellow at the ANU Crawford School and a non-resident fellow at the Brookings Institution.
