Wednesday, December 8, 2010

Would a fair-minded person say that devastation of the Australian apple crop is a price worth paying for cheaper apples?

‘I don’t think any fair-minded Australian would think that the devastation of the Australian apple crop is a price worth paying for cheaper apples.’ Please discuss.

That might be a reasonable examination question for an introductory economics course. The weaker students would probably be distracted by the allusion to fairness and the images that the word ‘devastation’ brings to mind and forget all the economics they had been taught.

There are several ways the stronger students could answer. One point they could make is that a fair-minded person would be open to weighing up the economic benefits and costs of the proposed policy action. They could raise the question of how large the value added by the Australian industry might be after making appropriate adjustments to remove price distortions, such as those resulting from import barriers. A further point they could mention is that market systems have evolved because fair-minded people have been persuaded in the past that the outcomes of market competition were generally preferable to outcomes that applied when governments attempted to protect local producers from external competition. In that context the relevant issue is whether individual consumers would voluntarily pay a higher price for the Australian product in order to prevent devastation of the Australian crop.

There are other relevant considerations, but they do not alter the general point that fair-minded people would accept that the price that needs to be paid for preservation of local industries is not always a price worth paying. If that were not so, our living standards would probably not have improved since the 18th century when regional communities within all countries were all largely self-sufficient.

How does it change the way we view this issue if we are told the quoted statement was made by Craig Emerson, Australia’s Minister for Trade, in commenting on the WTO’s recent ruling against Australian quarantine restrictions preventing apple imports from New Zealand? (The quoted statement was in an article by Geoff Kitney in the Australian Financial Review of Wednesday 1 December, p 49.) The Minister was talking about the possibility that the Australian apple industry might be devastated by a plant disease rather than by price competition from New Zealand apples. Does that make a difference?

One relevant consideration is that the part of the Australian industry that is most vulnerable to import competition from New Zealand will not need to be protected from imported diseases. It will no longer exist.

A paper entitled ‘Australia’s quarantine mess’, by ANU academics Malcolm Bosworth and Greg Cutbush, suggests that the annual cost to Australian consumers of the ban on apple imports was around $250 million per annum. This represents a very large proportion of the domestic industry’s gross value of production of around $300 million and perhaps 10 times more than local growers’ profit in a normal year.

These figures suggest that even if the introduction of apple diseases from New Zealand resulted in devastation of the Australian apple crop it is highly unlikely that any associated losses would exceed the $250 million per annum cost that the ban imposes on Australian consumers. As Bosworth and Cutbush point out, however, the probability of an incursion of any of the relevant diseases is very low under normal orchard hygiene practices, and even in the unlikely event of Australia-wide infection, annual costs of coping with the problem would be in the range of $3 to $10 million per annum. Bosworth and Cutbush also note that the apple diseases present in New Zealand have not prevented it from being one of the world’s top apple exporters.

I have previously thought of Craig Emerson as one of Australia’s most economically literate politicians. It is disappointing that he has seen fit to use his considerable rhetorical skills to imply that fair-minded Australians should always be in favour of protecting domestic industries, irrespective of cost.

No comments: