Economy-wide effects of assistance to the textile, clothing and footwear industries

• The textiles, clothing and footwear (TCF) sector currently receives assistance amounting to more than $0.5 billion a year in net terms.
  • This equates to an effective rate of assistance of 12 per cent, nearly three times the average for Australian manufacturing. Clothing producers receive a much higher rate than textiles and footwear producers.
• Modelling projects net gains to the community from the current program of phased reductions in assistance.
  • The projected annual gains are relatively small from an economy-wide perspective, given the small size of the TCF sector itself.
  • Nearly all of the benefits come from the legislated reductions in tariffs rather than removal of financial support (which is much smaller in magnitude and does not increase prices).
  • Options involving smaller reductions in assistance generate smaller gains.
• Reductions in assistance place further pressure on TCF production and employment.
  • But they reduce total burdens on consumers and taxpayers amounting to nearly $1.5 billion annually.
  • They also ease the export 'tax' effect of industry assistance and enable internationally competitive industries to attract the resources they need to expand.
• The modelling projects net gains from scheduled assistance reductions even when, as requested, applying such restrictive assumptions as tariff cuts not being fully passed on in lower consumer prices, or a related permanent increase in national unemployment.
• A simulated increase in the real exchange rate has more than double the impact of scheduled assistance reductions on TCF production and jobs.
  • Seeking to resist such pressures through assistance to TCF would come at a cost to the economy.
• Any policy-induced improvements to productivity would moderate pressures on the TCF sector and enhance economy-wide gains.
  • But whereas reducing tariffs would likely spur innovation and productivity growth, budgetary support for innovation would only bring net benefits if it generated additional spillovers worth more than the additional costs.

The Commission's modelling indicates that there would be economy-wide benefits from further reductions in the relatively high tariffs on TCF imports. Assistance reductions would involve some further contraction of the TCF sector, but this would be outweighed by expansion of other industries resulting from cost reductions. Consumers and taxpayers would benefit from a reduction in the $1.5 billion burden they currently bear.

The modelling also suggests that the benefits would be larger under the legislated program of reductions in tariffs to 5 per cent by 2015, than options with lesser reductions. Modelling also confirms that gains accrue even with pessimistic assumptions about employment and price effects.

The Commission's modelling indicates that a significant further appreciation of the Australian dollar, associated with the mining boom, could have a greater impact on TCF activity than assistance reductions. But trying to offset such pressures on the TCF sector through higher assistance would impose costs elsewhere in the economy.

In undertaking its research, the Commission benefitted from early meetings with Professor Green and his Secretariat, and from the feedback of modelling referees and other experts who attended a workshop in May to examine the model and the Commission's preliminary results.

• Preliminaries
  Cover, Copyright, Foreword, Contents and Abbreviations
• Overview
• Chapter 1 Background and approach to the study
  1.1 Introduction
  1.2 The Green Review and the Commission's study
  1.3 Background to the current assistance regime
  1.4 The Commission's approach to this study
• Chapter 2 Current assistance to the TCF sector
  2.1 Tariff assistance
  2.2 Budgetary assistance
  2.3 Other programs and policies
  2.4 Adding up TCF assistance
• Chapter 3 The modelling framework
  3.1 Why use the MMRF model?
  3.2 Key features of the MMRF model
  3.3 Implementing the scenarios
  3.4 Reporting the economic impacts
• Chapter 4 Modelling results
  4.1 Main mechanisms at work
  4.2 Results for different scenarios
  4.3 Results for the sensitivity scenarios
• Chapter 5 The modelling in perspective
  5.1 High level messages from the simulations
  5.2 How robust are the model specifications and key parameters?
  5.3 Accounting for 'exogenous' considerations
  5.4 Summing up on the economy-wide effects
• Appendix A Study request
• Appendix B Summary of referee comments
• Appendix C Additional results
• Appendix D Modifying the database and incorporating assistance
• Appendix E Additional simulations
• Appendix F Analysis of pass through under monopoly
• Appendix G Estimating assistance to TCF
• Appendix H Import substitution elasticities
• References