In 1990 the Australian Government relaxed restrictions on the import of pigmeat, particularly from Canada. In response to declining producer prices and their consequent effect on profitability, the Australian pig industry raised concerns with the Australian Government that the decline in producer price was due to lower priced imports from Canada and this was seriously injuring the industry. In 1998 the Australian Government asked the Productivity Commission to form an inquiry to investigate whether WTO Safeguard Action against imports was warranted. The Commission found that imports were seriously injuring the industry but, in the interests of promoting structural adjustment, a WTO Safeguard tariff-quota regime was not justified.
This thesis reviews the evidence presented to the Productivity Commission Inquiry and attempts to identify the factors affecting changes in the market equilibrium of the pig industry in Australia. More importantly, this thesis presents an industrial organisation view of the Australian pig industry that highlights the role of imperfect competition, factor market distortions and scale economies.
The results in this thesis suggest that prior to 1990 pig producer prices were relatively stable and producers could be confident of being able to predict market movements. After 1990 there is a structural break which induced volatility in pig producer prices, not only making producer decisions more difficult, but removing any long-run equilibrium relationship. Unlike other studies, this thesis has found a statistically significant relationship between import volumes and import prices and domestic production and domestic prices at all levels of the marketing chain. The results indicate that import volumes and prices depress producer and retail prices. Producer prices seem to be more affected than retail prices, indicative of an asymmetric price transmission effect. The increase in the marketing margin and the associated exertion of market power suggests that the benefits of trade liberalisation have been captured by one particular interest group and not spread throughout the economy.
The results of this thesis have implications for industrial and trade policy, in that the presence of imperfect competition, factor market distortions and scale economies induce violations of the gains-from-trade theorem underlying Walrasian general equilibrium trade models. The lack of stability in the market equilibrium has implications for microeconomic reform in that policy recommendations which rely on either the Stolper Samuelson or Rybczynski theorems should be viewed with caution.