PROTECTION.

Auckland Star, Volume LXV, Issue 162, 11 July 1934, Page 9

PROTECTION.

LOCAL INDUSTRIES.

GOVERNMENT'S VIEW. INTERPRETING OTTAWA. PRODUCTION COST PROBLEM. "Notwithstanding objections which may bo raised, it must, I think, be recognised that New Zealand has now reached a, stage of industrial development where regard must be had both to the primary industries and to those secondary industries which are conducted on an economic basis," said Mr. Coates. "So that a general view may be obtained of the extent of production in New Zealand and the relation between that of primary and secondary industries, the following figures are quoted, on the value of production for the year ended March 31, 1933: — £ Agricultural, pastoral, dairying, poultry and bees (primary indusl riosi 52,500,000 Mining, tisherivs and forestry 5,000.000 Factory production (secondary industries) 17,700,000 Building and miscellaneous... 10,000,000 Total £83,800,000 "In these .figures the production of butter factories, cheese factories, meat freezing works, etc., is included with the primary industries, and also the value of the agricultural and pastoral products used by the secondary industries. The total value of the production of secondary industries, including the cost of materials used by them and shown above under the production of primary industries, was about £27,000,000 for the year 1932-33. Methods of Assistance. "The figures of secondary industry production include those of evtain sheltered industries such as newspaper production, gas and electricity production, which are not subject to competition from abroad. There are, of cour.se, other industries outside this category, and the questions arise as to the means by which and the extent to which assistance, if any, should be accorded to them. Various methods have in the past been adopted in different countries to assist their industries—for instance, tariffs, subsidies, embargoes, and, more recently, quotas or quantitative regulation of imports. Hitherto in New Zealand the method of assisting industries by means of subsidies or embargoes has been adopted to only a very limited extent, and there are strong objections to botli these courses. The granting of subsidies is open to the objection that, if there are many such industries and if they are on a large scale, the amount of taxation required to provide the subsidy would be a heavy burden on the revenue. Further, if this system were generally adopted, many difficulties might arise as to the amount of subsidy under varying conditions and the allocation of the subsidy, whether, for instance, it should bo paid only to efficient units or to all units irrespective of efficiency. There is another point that deserves consideration, and that is the reaction of other countries to such a policy. In the Government's view the adoption of such a policy generally would not be in the best interests of New Zealand, and should be limited to exceptional cases. "With respect to embargoes, these are open to the objections that they tend to create internal monopolies by the elimination of competition from abroad, and that they may provoke retaliation by other countries affected. TJie only other principal substitute for tariffs is the policy of quotas or quantitative, regulation. It is possible that New Zealand may yet be driven, as a result of action taken by other countries, to adopt the last-named policy in dealing with its import trade, but in the meantime the most satisfactory method suitable to New Zealand by which assistance may be given to industries is by means of the tariff. "I now propose to deal with the question whether assistance by way of tariff protection should be given to any industries, and, if so, the industries to which such assistance should be accorded. Owing to the higher costs of production of many articles in New Zealand than in the United Kingdom, and most other countries which send goods to this Dominion, it is clear that if some tariff protection is not given many industries will be unable, under existing conditions, to operate on a satisfactory basis even when allowance is made for the advantage received by such industries through freight, etc., from abroad. When it is remembered that in the protected in- , dustrics of the country the number of . persons engaged and the value of production are so large it will be seen that . it is advisable that certain industries : should receive protection. :

" Reasonably Suited." "Generally speaking, it may be stated that only those industries which are reasonably suited to our conditions should be protected. In determining such industries the following points should receive consideration: (a) The market available; (b) the number of persons employed or likely to be employed and the amount of capital invested; (c) whether local raw materials are utilised and to what extent; (d) the proportion of the factory cost which is due to the wages of employees; (e) the advantage enjoyed by local industries through freight and other charges on finished imported competing articles; (f) whether the industry manufactures a full range of articles in a class required to meet the public demand; (g) the frequency of changes in the nature of the article produced; (h) whether the industry has operated successfully under protection; (i) whether there is reasonable competition from outside New Zealand; (j) the extent to which vested interests have arisen under existing tariffs. '"It does not seem likely that in the near future any considerable market will be found outside New Zealand for the products of our secondary industries. Hence, generally speaking, the market will be limited to the local demand. It is obvious that where there is only a small demand for an article it would not, except in very exceptional- cases, be economic to assist the manufacture of such an article by a protective duty. It is impossible to state in advance what would be the limit of demand warranting protection in every case or even in any group of cases. This must be decided in each case on its merits. Employees and Capital. ''The number of employees likely to be engaged in any industry is, of course, a very important factor in determining whether protection should be granted to that industry. . This is especially the case at the present time, owing to the

existing large number of unemployed. It must, however, be borne in mind that the mere fact that an industry might employ a large number of persons is not, in itself, a warrant for the granting of protection at an abnormally high rate. For example, protection has for some years been granted to the motor-body building industry at a relatively high rate, and yet during the last six years only 10J per cent of the bodies for motor cars used in the Dominion have been manufactured locally. This is due, inter alia, to the frequent changes in model and design of motor car bodies rendering efficient production in New Zealand impossible. It is understood that the position with respect to this industry has been accentuated by the recent changes in design of motor car bodies. "Another point that, is of importance . in this connection is the cost to the community of the tariff encouragement. If, for example, in an industry utilising imported materials the total of the , wages paid to the employees iii that ; industry during any period is less than the amount of duty that would have been paid if all the goods (including . those made in New Zealand) had been imported, it is clear that, unless there ; are some other special reasons, protection should not be accorded to such an industry. This appears to be the position with respect to the linseed-crushing industry. The question as to the amount < of capital required to provide machinery ] and plant is also of great importance, especially where the market for the product is limited. "Tlie production of raw materials in New Zealand is the result of the em- . ployment of labour and capital. The extent to which such raw materials are utilised by an industry is therefore a point for consideration in determining . whether protection should be accorded , to it. Illustrations of such industries . are those manufacturing cement, boots, s j clothing, etc. The woollen industry is, ] to an extent, also one to which this | applies, but it is worth mentioning that , the purchase of wool by the local , woollen mills during the last few years accounts for only about 21 per cent of i the total New Zealand clip. Relation of Labour Costs. i "If the proportion of the total labour ' cost to the factory cost of an article j its relatively low, this is a factor which must be borne in mind when consider- ' ing whether protection should be granted. I Among industries in which labour cost s is relatively small are those manufac- | turing white lead and iron and steel ( pipes. There are, of course, other rea- ■ sons for the action which is proposed with respect to particular products—e.g.. white lead and linseed oil arc the chief bases from which the tradesman makes his paint. Again, iron and steel pipes *j are required for large developmental \ work, and it is considered that protec- \ tion thereon should, if required, follow C . the establishment of a basic iron and ! steel industry. ;

' "Tlie advantage received by an inj dustry by freight and other charges on _ competing imported goods is also a matter for consideration. Where goods are of a bulky or heavy nature this advantage is often sufficient protection : for the local industry—for example, tariff protection has never been accorded 1 to ordinary building bricks, yet they are never imported. It is considered ' that a similar advantage exists with ' respect to lire brickfi, lire clay and soda : crj'stals. Woollen Manufactures. "It is important that where an industry receives protection it should 1 manufacture a full range of the articles to which such protection is accorded and : for which there is a considerable demand. The best illustration that can be given of this is the woollen textile manufacturing industry. This industry has received protection for-many years witli respect to all articles containing wool, except certain unions, linings, etc. With the exception of silk mixtures, the industry has, I understand, generally speaking, adopted the policy of manufacturing only all-wool products. Xotwithstanding this, the Government is advised that during the years 1928 to 1932 fabrics made from wool mixed with other materials and known as 'woollens' or 'worsteds' were exported from the United Kingdom to Xew Zealand to the following extent:—l92B, £193,000; 1929, £213,000; 1930, £19.5,000; 1931, £144,000; 1932, £158,000. "This means that, although the industry received protection for these products, they have not met the public demand by manufacturing them. In my opinion, an industry, -to justify the retention of protection for goods, must be prepared to make any classes of those goods for which there is a considerable local market and which can bo manufactured on an economic basis. It will be remembered that in 1927, with a view to enabling these fabrics to be manufactured, the duty was taken off raw cotton and cotton yarn of British origin. The Government are of opinion that if protection is to be maintained on textiles of this nature manufacturers must be prepared to make them. If, after the expiry of a period of, say, two years, the manufacture has not been undertaken on a satisfactory basis, the Government consider that the question of withdrawing the protection with respect to those goods should then be gone into. It is, of course, recognised that it may be more satisfactory if the manufacture of these products were' undertaken by Anns other than those engaged in the manufacture of pure woollens. "The general point to be made, however—and its reasonableness will be evident—is that when protection is granted there is an obligation on local enterprise to take advantage of the opportunity thus given; it must, within a reasonable time, 'deliver the goods,' and this is the sine qua non of the continuance of protection. Frequent Changes. "It is clear that in a country like Xew Zealand, where industries are more or less limited in scope, articles with respect to which there are frequent changes in design or construction as a result of scientific or industrial development in other countries are not usually suited for economic production here, and hence do not warrant protection. The motor car body building industry falls within this category. "Where an industry, notwithstanding that it has received protection in the past, has been unable to operate on a profitable basis, this is prima facie a reason why protection should not be continued. "The Government recognise that it is only by competition cither internal or external that the public can be assured that prices will be kept at a proper level. It is, of course, generally desirable, that where there is an efficient local industry., it should receive protection from unreasonable competition from combines or trusts operating outside Xew Zealand. It is likely that if the local manufacturer were driven out of business the price of the article to the consumer might be considerably raised. :

"It is a matter of history that many industries carried on in New Zealand to-day have come into existence under the shelter of tariffs devised for revenue purposes. This is not of itself any argument for or against the continuance of protection, but the vested interests created must, subject to the Ottawa agreement, be considered in determining whether' or not protection should be granted. Extent of Protection. "The view of the Government is that protection should be granted to local industries only to the extent necessary to enable them to function economically and efficiently. Broadly speaking, the rate of protection should be determined by considering the manufactured cost and selling prices of New Zealand-made goods in relation to the landed cost of imported competing articles under normal conditions. .So far as articles manufactured in the United Kingdom arc concerned, the question is affected by article 8 of the Ottawa agreement. Among the factors to be taken into consideration i:i fixing the amount of protection on any class of articles are the extent to which imported raw materials are used and the advantage accruing to the industry by freight and other charges on imported finished goods as compared with the freight, etc., on raw materials used in New Zealand and the distribution charges in the Dominion on the locallymade goods." " . Effect of Ottawa Agreement. The articles of the Ottawa agreement which affect the aspects of New Zealand tariff policy with which I am now dealing are numbered 7 and 8. Article 7 is as follows:—"'His Majesty's Governjment in New Zealand undertake thao protection by tariffs shall be afforded against United Kingdom products only to those industries which are. reasonably assured of sound opportunities for success.' It will be seen that t.be policy embodied in this article is outlined above for determining the industries to which protection should be granted, and it is unnecessary to enlarge further upon it. "Article 8 of the agreement is as follows:—'His Majesty's Government in New Zealand undertake to institute an inquiry into the existing protective duties, and, where necessary, to reduce them as speedily as possible to such a level as will place the United Kingdom producer in the position of a domestic competitor—that is, that the protection afforded to the New Zealand producer shall be on a level which will give the United Kingdom producer full opportunity of reasonable competition on the basis of the relative cost of economical and efficient production.' "The Government recognise that, owing to the numerous factors affecting the question, it is not possible to compare production costs in two countries on a purely arithmetical basis. The production costs of different manufacturers, even in the same country, are not always compiled on lines admitting of satisfactory comparison. It is also a fact that the articles concerned are not always directly comparable, and differ in certain details. Prices of raw materials also fluctuate. These and other factors must be borne in mind when any comparison of costs is being made. As is pointed out by the Tariff Commission in its report, the various articles of the agreement should receive a generous interpretation. In other words, they should be considered from a practical point of view, with a view to giving the United Kingdom manufacturer a reasonable opportunity of competing on this market and at the same time to enable efficient and economic industries in the Dominion to operate satisfactorily.

"It must be understood, however, that, as the chief factors for consideration under article S arc the production costs, the only industries to which the provisions of this article can be applied are those which supplied to the commission the necessary information. Any other modifications proposed are based on other considerations. Employment Question. "It is particularly important that at the present time every opportunity through industrial activities should be explored for the employment of our people consistent with the carrying-on of industries which are likely to assist in the recovery of the Dominion. It is, of course, not in general of advantage to this or any other country that an industry should be fostered by tariff protection where the direct and "indirect cost of that protection is greater than the benefits likely to be derived by the community. "Owing to the depressed conditions through which we are passing it is even< more essential now than formerly that a determined effort should be made tc reduce costs of production and costs of living. The tariff, as proposed, makes very considerable reductions in this respect.