Supermarket chain Coles Myer has agreed to support a food industry proposal to promote the benefits to consumers of buying Australian-grown produce, according to the Age newspaper.

This comes as economists and analysts warn that any attempt to downgrade Australia's support for open international trade with the introduction of protectionism would damage the cornerstone of economic growth over the past decade, the paper said.

Tasmanian farmers protesting in Melbourne met senior Coles executives to discuss an industry review involving government, retailers, farmers and producers.

A Coles spokesman described the meeting with the Fair Dinkum Food Campaign as positive. "95% of our fresh produce is sourced locally and 85 per cent of all goods sold in Coles are locally sourced," he said.

"Our first preference is to buy Australian, but the key criteria in our negotiations with suppliers is that they must be able to supply sufficient and good quality produce at good prices."

But the farmers claim the supermarket chain's preference for imported products is pushing Tasmania's A$180m (US$135m) vegetable industry out of business, and this will force the state's food processing plant to close within the next two years.

National Australia Bank's chief economist, Alan Oster, said any efforts to protect jobs in one sector of the economy would slow the country's growth rate.

In 2003-04 Australia exported $21.8bn of processed and unprocessed food while it imported $6.2bn. But according to Richard Bovill of the Fair Dinkum Food Campaign, imports at the moment are growing faster than exports.

The executive director for the Centre for International Economics, Andrew Stoeckel, said competition was one of the pillars of growth, critical for getting efficiencies. "Trade is a two-way street," Dr Stoeckel said. "A lot of people appeal to xenophobia in these situations. Tasmanian farmers should try to outcompete their competitor and not always necessarily on price."

Woolworths was unaware of any plans for an industry review group. But a spokeswoman said the retailer supported the need for the introduction of clear and accurate country-of-origin labelling to help consumers make informed choices.

"For many years Woolworths has exceeded (labelling) requirements by voluntarily identifying the country of origin on the very small percentage of fresh items that we do import," the spokeswoman said.

Woolworths said 97% of fresh food and 100% of the meat sold in its outlets was Australian grown or produced.

Federal agriculture minister Peter McGauran has set up an inquiry into the sale of imported foods in supermarkets, to be conducted by the Australian Bureau of Agricultural and Resource Economics.

An ABARE spokesman said the interim results would be available within two to three months.