In t h e classification of imports according to competing industry subgroups we have included values of all imports which, if they were produced locally, would be included in the activities covered by the Secondary Industries Bulletin: that is, only those items were excluded which were the products of primary, mining or quarrying industries.
This basis was adopted for two reasons; first, the reduction in supplies of imported goods would not only encourage increased produc tion of existing lines, but also encourage production of lines not previously produced here. Second, for many items it is not clear whether a directly competitive product is being produced locally at
2
any particular time. Moreover, the problem of production which began during the period is avoided.
Figures were thus obtained for imports competitive with the
output of a local industry - directly competitive, that is; indirectly they would be competitive with a wide range of items produced by other industry groups, but it is assumed that this indirect competition is
1.
The construction of this Table is discussed in more detail in A p p e n d i x T h e c.i.f.e. valuation is discussed in Appendix H.A.
2.
With a few exceptions, production of manufactured goods in Australia is unregulated; statistical requirements do not include the provision of separate data for each product. Detailed commod ity data is published for less than one half of total output; much of this is in terms of value only or quantity only data. Even an authority such as the Tariff Board frequently has to rely on evidence presented at its enquiries for information as to whether an item is being produced in Australia.
only relevant to the total demand for a product and not for the share supplied from the alternative sources.
The market shares data presented in Table VTI-5 conceal some important movements in the separate components: thus a rise in the percentage figure for any industiy could be a result of constant imports and increased local production, falling imports and constant local production, falling imports combined with rising local produc tion, or even rising imports, but a faster rising local production or vice versa. For these and other reasons given in the appendix, partic ularly that prices and price changes are ignored and that variations in raw material imports do not necessarily show up in the figures, these tables of changes in local industry*s contribution to total supplies cannot be taken to indicate accurately the extent of direct import replacement, although they may be a reasonable guide to areas where import replacement may have taken place. It must be stressed that these figures can only be approximations; the nature of the approximation is spelled out in more detail in the Appendix.
The second problem, that of excluding the effects of the other significant influences, can generally only be dealt with in consider ing individual cases, although the movements in tariff levels in a number of industries are dealt with in Chapter XIII, together with more general aspects of tariff protection during the period. In Chapter XV we also attempt to draw some general conclusions regarding the move ment in relative price levels for imported and domestically produced goods.
188
We have already commented on the fact that prices and profits as well as the volume of output may have received protection from the controls on imports. It may be useful, then, to consider how this aspect of the investigation will be approached.
Available price indexes are insufficiently disaggregated for our purposes since we are interested in comparing the behaviour of two groups of industries within secondary industry - those in receipt of incidental protection from import licensing and those which did not benefit directly from the controls.
We shall, therefore, direct out attention to other sources of evidence of price behaviour under the shelter of the quantitative restriction of imports. In the event, the Tariff B oard’s reports on its examinations of the protective needs of domestic industries pro vided a substantial amount of evidence on a number of aspects of our enquiry, including evidence of pricing policies and the level of competition within a number of industries. This source of informa tion, together with some other sources of relevance to particular industries, has the important advantage of overcoming the difficulties of interpretation of price data, since it often provides explicit information on profit levels and, particularly, profits per unit. The use of evidence from Tariff Board hearings involves using evidence from a somewhat biased sample. A producer who is not only willing but able to adjust prices in order to remain competitive with imports will probably have no need to seek tariff protection and would
not therefore come within the scope of its enquiries. Similarly, the .what implication here tends to be that producers who make no more than/the Tariff Board judges to be ’reasonable' profits have not taken advan tage of the limitation on imported supplies to raise prices, while companies that have made more than 'reasonable' profits have in fact
'ridden the market'. While this will often be the case - sufficiently often it is judged to justify the use of this evidence - it is not necessarily the case. There are good reasons why under the same condi tions, e.g. levels of tariff protection, severity of import licensing, tvjo firms will earn considerably divergent profit rates.
While the evidence from the Tariff Board reports - and from other sources - provides some guidance in respect of the response of business men to reductions in import competition, this evidence does not enable the importance o f t h i s aspect of the restrictions t o be placed in full perspective. For one thing, it concentrates on those cases where the evidence is fairly clearly indicative of the increases in prices
1.
It is widely accepted that the Tariff Board considers net profits on funds employed of up to 10 per cent, as 'reasonable1. This would appear to be the implication of the following comment by the Board: "Current bounty legislation provides broadly that industries .... assisted by bounty will not be paid bounty that will result in profits, before tax, exceeding ten per cent, on funds employed ... This legislation ... is an indication of the view of Parliament on the question of profits in assisted or protected industries,"
Tariff Board, Annual Report
1952-53* p.7.
Profits on funds employed provide no indication of the profit per unit which is reflected in the price of the product.190
which took place under the shelter of the restrictions. Moreover, it is limited to consideration of cases where import licensing in fact did take or was claimed to have taken, the place of the tariff as a means of protecting the local industry from overseas competition.
These two forms which protection under the direct control on
imports could take, are really only different in degree but are import ant in consideration of evidence provided by Tariff Board Reports. In t h e first case, protection from overseas competition enables the local industry to produce and to earn a normal or reasonable rate of profit on its output. This is generally the protection that the tariff aims to provide. If additional protection is provided the industry is able to produce more or earn higher unit profit on its existing production. When the additional protection, provided in this case by import licensing, is removed, the local industiy may or may not be able to produce at satisfactory output and profit
levels with the existing tariff protection alone. If it is unable to do this it may apply for further tariff protection - these, broadly, are the cases from which the evidence to be presented has been taken. If it is able to operate at a reduced but nevertheless ’reasonable*
(in Tariff Board terms) level of profits, it will be unlikely to go to the Tariff Board. No evidence will, therefore, be available from Tariff Board reports of the extent to which the licensing of imports has merely enabled the local industry to increase its level of
reasons other than an application by the local industry for
1
additional protection*
In practice, of course, the distinction is far less clear cut. In any particular industry receiving tariff protection where there is more than one producer, levels of profit are unlikely to be the same. One producer may be in the position where the protection afforded to him by import licensing was not necessary for operation on a profitable basis, and merely enabled him to operate more profit ably* Another firm in the same industry may have found upon the removal
able of import licensing that it was unable to maintain a profit/level of operation. Such a situation, of course, implies imperfections in the system, otherwise one would expect the more profitable firm to expand its share of the market at the expense of the less profitable firms.
Moreover, it is also the case that in a number of industries examined by the Tariff Board, no mention is made of the profits earned
2
by the applicant industry.'’ In some cases it seems reasonable to infer
*"Since the war, the great majority of inquiries by the Board owe their origins to representations made by firms for increased tariff protection. The other principal source of inquiries is the Depart ment (of Trade) itself. Inquiries originated by the Department usually involve By-law questions”• G.J.Hall, The Australian Tariff Board, unpublished Master of Commerce thesis, Univ. of Melbourne 1958, p . 42. Increasingly in recent years, the Board is recommending a
further review of the protected needs of an industry after two or three years. Where the recommendation is accepted these reviews are initi
ated by the Department of Trade.
2.
"“'The BoardTs concern with profit levels within applicant industries, appears to vary according to the composition of the Tariff Board.
192
from the evidence that there is sufficient price competition in the domestic market to limit excessive profit taking. In others it is not possible to deduce whether the applicants have taken a higher profit during the period of the restriction or not. If the profit taken were substantially above that judged to be reasonable by the Board one could perhaps assume that it would be commented upon by
the Board in more cases than not. It may be, however, that the rest rictions enabled a firm to operate at a reasonable level of profits, when in the absence of restrictions it would have earned little or no profit. Again, the intensity of internal competition might be such that, in the absence of import restrictions, profits were lower than the B o a r d ’s ’reasonable’ level, but moved up to this level under the shelter of the restrictions. In these cases, also, the industry could possibly expect to receive some additional assistance from the Tariff Board, and so seek a Tariff Board hearing. This discussion is sufficient to show that the evidence available from the reports of Tariff enquiries covers only a limited field. In an attempt to assess the overall signi ficance of businessmen’s pricing policies an examination was made of
1*
“ Often, however, the Board quotes an average level of profits for an industry, consisting of a number of producers, which is itself
’reasonable’ when the implication is clearly that there are quite wide variations in individual profit levels. Moreover, the Board has noted on occasions that it does not know the level of profits taicen at the distribution level by subsidiaries or associate
companies. (See, for example, Tariff Board Report, Pneumatic Tyres and Tubes. 30.3*1962, p.6). Prices in these cases may well be notional intercompany transfer prices, and there would clearly be an incentive to keep them relatively low.
the ratios of gross profits to turnover in secondary industries, The results which this enquiry revealed are presented in Chapter XV, It may be useful to discuss at this stage some of the theoretical and statistical considerations involved.
Annual statistics are published by the Commonwealth Statistician
1
2
of value of output, the value of production and the value of salary
3
and wage payments for each of the industry groups in Table V I 1-5, If changes in stocks are ignored, the value of output can be considered equivalent to total turnover of the industry. The value of production (net value of output) in turn consists of salaries and wages paid plus overhead costs plus profits. Overhead costs in this case do not contain the wages and salaries of staff not directly involved in production - returns to which are usually considered part of overhead
1.
Defined by the Commonwealth Statistician as ”the value of goods manufactured or their value after passing through the particular process of manufacture and includes the amount received for repair work, work done on commission and receipts for other factory work. The basis of valuation is the selling value of the goods at the factory, exclusive of all delivery costs, and charges and excise duties, but inclusive of bounty and subsidy payments to manufacturer
of the finished article” . Introduction to Secondary Industries Bulletins.
2.
Defined by the Commonwealth Statistician as ”the value added to raw materials by the process of manufacture. It is calculated by deduct ing from the value of the factory output the value (at factory) of materials used, containers and packing, power, fuel and light used, tools replaced and materials used in repairs to plant (but not depreciation changes),” Ibid.
3.
Excludes amounts drawn by working proprietors, but includes manager ial and clerical staff, chemists, draughtsmen,etc.
costs - since these are already included in the salary and wages item. It contains items such as maintenance of buildings, depreciation, insurance, pay roll tax, income tax, advertising, interest payments, bad debts and similar sundry charges. Movements in these items are assumed to be random in relation to the purpose of the exercise. The value of production less salary and wage payments, therefore, consists of overhead costs plus profit. As a percentage of the value