72 actual removal of the deficit in any balance of payments deficit

In document The control of imports : Australia 1952-1960 (Page 77-82)

situation will result mainly from the cut in investment or increase in saving, both of which require - under conditions of full employ­ ment such that output cannot be significantly increased - a cut

in expenditure. Unless the reduced level of expenditure is redirected from its previous pattern by some change in relative prices, unemploy­ ment of resources will result. For example, a cut in expenditure will affect not only demand for those goods which enter world markets, and thus affect the balance of payments, but w i l l also reduce demand for those goods which do not enter into international trade. The necessary redirection of demand may be effected by a variation in the exchange rate, the imposition of tariffs or direct controls, the payment of export subsidies etc., policy weapons which are frequently thought of as being the means by which a balance of payments deficit is removed. If demand under conditions of full employment is redirect­ ed from imports and home produced exportables, or perhaps just from imports, by one or other of these measures without a cut in the level of expenditure, this simply produces a rise in the price level of home produced goods which sooner or later will restore the position, more or less, to that existing before the redirection of demand was attempted. Some improvement in the balance of payments may have resulted, but apart from the initial impact effect due to lags in the increase in prices, this is unlikely to be large and would be fortuit­ ous. Moreover, if there exists any significant multiplier effect of

rising price levels, as there most probably would be, the eventual balance of payments deficit could be significantly greater than before the redirection of expenditure was attempted.

In this study we are primarily concerned with the effects of the redirection of demand which was effected from 1952-1960 by means of direct controls on imports. Nevertheless it will be useful - and to some extent necessary - for the argument to make comparisons with the possible effects of alternative methods of effecting this redirection of demand. In order to do this we need to consider below the use of quantitative controls on imports for such a purpose in relation to alternative methods of achieving similar results in the balance of payments.

Broadly speaking the choice of instruments to affect the relation­ ship between exports and imports lies among four alternative methods: tariffs (including negative tariffs i.e. subsidies), quantitative import

controls, exchange rate variation and deflation, or various combina­ tions of these methods.

Before discussing these methods, however, it will be useful for what follows to demonstrate that for any quantitative limit on imports there is always a tariff wh i c h would be equivalent in its effect on the quantity of imports and the foreign price of those imports. There will be some difference in the effects on the redistribution of income and under some circumstances there may also be differences in the local prices of the goods

affected* These internal differences will he considered separately below*

x

In Fig. I, XY is the transformation curve of country A,

representing the production possibilities OX of x and OY of y* If

the international prices of x and y are given by CD (the terms of trade) it will pay the country to produce OG of x, OE of y, exporting BD of y

1.

This assumes both methods are used for the same purpose. If, as in Australia during the period under review, this is not the case, differences in expectations may be important*

line CD with the highest possible indifference curve I* at C.

Suppose now that a limit is placed on imports (LL) so that the maximum quantity of imports permitted is Br. The trade possibilities of the country are now indicated by the curve Y D t C ’W, (assuming no change in the terms of trade)* At any point on this curve, a line drawn between it and the transformation curve XZ, parallel to DC will be equal in length to any other line so drawn. Country A will now produce at D 1 a combination of 03 of x and OR of y, export

B!D’

and import B ^ ’ (=Br). This again can be seen to be an optimum, subject to the given constraint, since Country A is operating on its highest possible indifference curve 1 11. To achieve such a situation in the internal economy would require an internal price ratio P P ’, and its equivalent for the internal price of the traded goods a a 1, a level which would result from the complete freedom of internal prices.

If, instead of imposing a quantitative limit on imports, a tariff had been imposed such that the price of imports internally would have been represented by the slope of the line a a 1, the effect, insofar as the quantity of imports was concerned, would have been exactly the same. This will subsequently be referred to as the tariff or ad valorum equivalent of an import restriction.

76

While at any particular time there is always a rate of tariff duty which will restrict imports to the same extent as a quantita­ tive limitation on imports, the volume of imports under a particular level of tariff duties may change over time as circumstances change. If relative prices change, because of changes in the costs of domes­ tic production, or the level of internal demand, or because the offer price of imports changes, the volume of imports under a particular tariff rate or set- of tariff rates will change. In the case of a quantitative control there is a fixed upper limit on the level of imports which can enter the country.

In the event of an increase in the level of internal activity, not offset by increased saving or by appropriate fiscal and monetary policies, the existence of quantitative limits on total imports

means that this increase in demand must be spent entirely on domestic production. Where there are unemployed resources the increased size of the multiplier - since there is no import leakage - means that the response to the stimulus will be more rapid. If resources are fully employed - and it may be that the bottlenecks arise in respect of imported materials and components rather than in terms of labour - the rise in prices will be correspondingly greater. In the case of a tariff, the increase in demand will lead to some increase in imports which will have some effect in dampening down the rate of expansion of the inflationary stimulus, both because of the outflow of spending abroad and because of the increase in tariff

-j

re v e n u e .

T a r i f f r a t e s would have t o be in c r e a s e d t o o f f s e t th e

In document The control of imports : Australia 1952-1960 (Page 77-82)