Do we need to re-establish why Australia needs an automotive industry?

We import our trains, our trams, our buses (or at least their engines). Every one prefers imported cars so why bother making them here at all?

In these times of skills shortage all those workers who want to work will have no trouble getting jobs in the West Australian iron ore mines or Queensland coal mines. With the Murray Darling Basin drying out we need to move people from Victoria and South Australia.

Nick's article shows the degree of differences which can arise in modelling fairly simple scenarios over (I assume) a ten-year period. I remind OLO readers that ALL IPCC climate change scenarios involve economic modelling of very complex scenarios over a 100-year period.

Draw your own conclusions.

As for the article, it seems reasonable that the major gains in tariff reductions come from bringing the huge levels of protection which Australia's PMV and TCF industries had down to modest levels; and that at the margin, gains are modest. Quite where that margin lies is an empirical matter.

Economists advising the Hawke government's Ministerial Taskforce on Longer Term Economic growth in 1985 unanimously recommended big cuts in PMV and TCF protection as a first step, as there would be dramatic gains to other businesses and consumers which would make it easier to get other worthwhile reforms accepted. Unfortunately, the government cut tariffs for lesser-protected industries while maintaining high PMV/TCF protection for a long time.

In a submission 23 years later to the current TCF inquiry, I pointed out the great gains from reduced protection and expressed concern at the drift of the review - today, "There is a vibrant TCF retail sector, providing many opportunities for both entrepreneurs and employees, and an enormous range of good quality, low-cost merchandise. This transformation has not only benefited consumers and retail employees directly, it has reduced inflationary and wage pressures and freed up spending to the benefit of other industries.

"I was therefore amazed to see that the Federal Government has instituted a – presumably protectionist – review which “signifies the Government’s commitment to further developing and maintaining the capacity for innovation, productivity and international competitiveness in these industries.”"

I don't think that TCF tariffs have yet reached their optimal level; nor will continued government aid help the sector to become more competitive.

Nicholas, I'm having a bit of trouble coming to grips with this. A corollary of what you say would appear to be that all domestic product should have a 5% tariff on it, which appears to me to be counter-intuitive.

If that applied between countries, why wouldn't it apply within countries? Another corollary might be that the total abolition of charges between the states at federation would have cost the country income. Which again doesn't sound right. Where do you draw the line at trade barriers?

Is there a simple mathematical derivation for this rule, or do you have to run models?

Faustino and GrahamY the maths for this economic modelling is quite simple and well known to anyone with a passing acquaintance with econometrics.

The problem with this kind of 'modelling' is that there is simply no way to predict what new (or rediscovered) technology is just around the corner waiting to reshape industry. All we can say with certainty is that zero tariffs provides the best way to allocate consumers' money to people who have earned it, by selling desirable products at competitive prices, rather than to those who just happen to have political clout. In the interests of morality, if not economics, this should be our goal.

Am I missing something?

Some 80 per cent of the vehicles sold are imported and attract a tariff of 10 per cent which we can call a tax. In effect therefore, that tax represents the equivalent of 40 per cent (say $12,000) collected for every car made in Australia (do the sums).

Isnt it incredibly selfish for the so called "working family" to be taxed to maintain three dinosaur companies? Isnt it time we followed New Zealand and allowed these moribund activities to fade out?

Isnt $12,000 collected tax for each Australian-made fuel guzzler car not obscene?

As a lefty, I am surprised that I seem to be the only one so far agreeing with Nicholas's idea of optimum tariff levels.

I take it that everyone's argument is that all forms of support for domestic industry including tariffs, susidies, grants, quarrantine etc should be removed as they constitute protectionist interference and all industry be subject to the unfettered market.

Perhaps someone could compile and post a list of things we can produce at least as cheaply as manufacturers in rice bowl countries - some of whom, incidently, maintain 10%+ tariffs themselves - and explain just how those industries will survive against such an onslaught. Or perhaps we should just give up doing anything for ourselves and concentrate on digging up rocks and growing things.

Whoops! Qaurrantine regulations constitute protectionist interference - they should go as well. But an entire primary produce industry in my region was COMPLETELY DESTROYED in a rare example of quarrantine failure where infected plant material was successfully smuggled in from overseas. Never mind, I'm sure imported fruit would have been cheaper for the consumer anyway - wouldn't it? But I digress.....

The point is, if domestic industries cannot stand up to the near-impossible odds of competing against massive foreign output and super-cheap labour, do we allow it all to die and make ourselves totally dependent on offshore production in the name of ever cheaper consumption goods?

Well Billie, if it is so well-known perhaps you could use your allocation of 350 words to put a few equations down or references. It doesn't pass the smell test to me, unless what the equations say is that every product ought to be about 5% more expensive than it is (to adopt Nicholas's 5% tariff figure). In which case perhaps we should be looking for indirect rather than direct benefits in the last 5% - things like efficiency in the economy - the costs of collecting a 5% tariff must be huge, plus the potential flow-on costs of persuading everyone who doesn't get a tariff benefit for their industry that they should sit by while someone else does.

There is more to life than econometrics. Indeed, some would suggest that econometrics isn't really life at all!

Can I suggest we stop obfuscating and call a spade a spade. That a "tariff" is a tax. That is not "the government" supporting the industry, but taxpayers, ie YOU.

Can I suggest we make this tax visible. So when we buy a new Mazda, Holden Barina etc, we get a separate impost and say, this is to keep Australia's shrinking (17% of sales at last count) car industry in business producing cars the public (less than a quarter are bought by individuals). I wonder how long this surcharge would be tolerated?

The invisible costs including for all the rural props are not visible and hence continue. Time for some transparency in our economy.

Yes a tariff could be regarded as a kind of a tax - one that can be legally avoided by buying Australian. Did you miss coming to the conclusion that this would be the core purpose of it? To allow domestic production to compete - actually just to exist - in a market dominated by giants with access to very cheap labour.

Doesn't it seem strange that an industry that has been here 40 odd years and would know the local market better than anyone else simply refuses to make and sell the cars that it knows people want to buy? Are we to take it that our local manufacturers are smart enought to make big cars but too dumb to make smaller cars for which there is a bigger market? Perhaps tariffs have come down so far already that it is already unviable to try and compete with the importing of smaller, more fuel efficient cars wich no doubt cost foreign exporters less to bring here than big cars and have a higher turnover.

"The invisible costs including for all the rural props are not visible"

Not sure what you're insinuating here - are you suggesting that quarrantine be removed as "protectionist interference" for the rural sector? If you are, you have missed the part of my post about complete destruction of an industry. You are coming accross as one who believes that the right to the absolute cheapest consumption goods possible trumps any and all negative side effects for communities and the nation itself.

Surely there is only one criterion applicable, that of the well-being of society? Surely it is not one of preservation, but of flexibility to use our resources to best advantage. Havent we shown that rigidities ossify? (For example look at the transformation of say ICI to Orica to becoming an international service company. ICI once enjoyed tax (ie.tariff) benefits of more than 60%)

Reducing our disposable income to prop up the three remaining car plants ossifies. That tax (say $12,000 collected for every single car made in Australia) REDUCES your well-being. These Oz cars are tired technology fuel guzzlers and so not surprisingly just one-quarter of the 17 per cent (ie. 4 per cent) are bought by private individuals. The patient is dying and politicians are hoping its death can be deferred to the next political cycle(Howard's govt even gave $50m to make a V8 engine). Now is a good time for death with labour shortages in Qld and WA.

Australia could rebadge itself into a progressive country to match its Olympic prowess. We could operate with one car plant producing extraordinary cars. Holding on serves no-one - it costs every Australian insidiously on EVERY car sold, even second hand.

The tax serves only politicians to create opportunities for a rah rah rah of Bilateral Free Trade Agreements. The tax serves politicians and not you!

I agree that the wellbeing of society is the criterion here. However, that is where our agreement ends because there comes a point where chasing ever cheaper consumption goods at any cost ceases to enhance the overall wellbeing of society and may even begin to damage it.

The automotive tariff does not reduce your wellbeing. You only pay it when you buy an imported car - do you buy a car with every basket of groceries?

Personally, I don't think paying an extra $2000 or so for something I might only buy once every 10 years in order to maintain the survival of 65 000 highly skilled Aussie jobs is hurting mine or anyone else's wellbeing. Conversely though, being willing to wipe out all these jobs and the industry just so I could buy a commodity slightly cheaper demonstrates zero concern for the wellbeing of our society - the argument that a local industry and jobs must go in order that consumers can purchase slightly cheaper cars smacks of pure avarice, not concern for society.

In any case, think longer term. What will it cost the nation in unemployment benefits? (not all of these people will secure new jobs and when the resource boom up here winds down the demand will drop further). And what makes you certain you will continue to pay less in the long term, having destroyed all local competition?

Reducing this nation to the state of a quarry for the sake of an ideaology is a stupid idea.

NO. Every time you purchase a car, be it an import (83%) or a local one, you pay the tax or the indirect impact of the tax. While a tariff may be applied only to imports, they inflate the local price of ALL cars (ie, their reason to improve profit margins). That is why our cars are so expensive thanks to this beggar-thy-neighbour invisible impost.

As to welfare, when tariffs were 40-60 per cent plus there were less exports than now and it COST. Tariffs impede trade, impede flexibility and impede competitiveness FACT. They demonstrably reduce your well being (eg. read any of the then Industries Assistance Commission studies).

Australians work the longest hours and yet despite our resource endowment, we languish slipping to no.30 in the world. Ask the so-called “working family” how they feel about paying another $2k and working longer hours for this tax? Something wrong!

Countries like Denmark point to what is possible with little more than sand and wind. Meanwhile some want to hold onto a glorious past and ignore those struggling to pay off the family car. You can do multiplier studies, but in the end, the tax is something best dispensed off over cups of tea by politicians at Bilateral Free Trade pow wows. Like communism, protectionism was an experiment based on patently flawed logic and idealism. Politicians are the beneficiaries of this legacy today.

Lets instead of waffling over this tax create a vision for an Australia building up its skills instead of importing them even from 50 year old countries like Israel. Let the car industry die NOW while we can still afford it and create a tax regime conducive to creating comparative advantage. It is only a living dead producing cars bought by just 4 per cent of individuals (yes 4%) out of 17 per cent of sales. Tired made competitive (inc. exports) only by furphies. Amen.
Sorry chaps but hundred and hundreds of thousands have already lost their jobs in Australia. This is but a drop in the bucket. It is time!

You seem quite the little Freidmanite (the best service that mongrel ever did for the world was to croak).

I think you are overstating the value of trade, appearing to regard it not merely as an important economic activity (which it is) but as the panacea for everything (which it is not). You are arguing a simple dichotomy - unfettered markets = good, any industry protection = bad. No wonder you seem unconcerned with collateral damage such as jobs, livelyhoods and industries lost and ever-increasing reliance on imports.

Everything in it's proper place at the proper time. When correctly used, protective measures (which include tariffs among other things) do not exist to completely block any and all imports but to allow local producers to compete, thus preventing the economic and social mayhem arising from the broadscale destruction of industries and livelyhoods.

Competition is going to struggle to exist if some people can simply dump very cheap goods on a market with the intention of destroying local structures and replacing them with their own. In which case I ask again: how can you be certain prices will not creep back towards parity with the old price once local production is only a memory?

So, presumably you would remove tariffs and other assistence from the auto industry and anywhere else say, the TCF industry - to hell with the jobs, consumers demand ever cheaper cars, jeans and running shoes. Problem is, these two industries alone account for around 130 000 jobs - you would risk throwing large swathes of the population out of a job (the unemployed have trouble affording even cheap cars and designer jeans) so that the rest could buy certain commodities a bit cheaper. Something wrong!

Incidently, you might want to tell booming economies like China and Brazil that their 30%+ car tariffs are damaging their economies - but I don't think they'll believe you.

cont later

I heard Nicholas on Counterpoint and now know how he comes to the conclusion that a 5% tariff is optimal. It comes from the assumption that the money redirected from the tariff to additional production won't realise its full price on the international market because you will have to discount to gain market share.

I think there are some problems with that, but I'd be interested to hear from Nicholas. For example, price might be lower, but if your productivity is higher, return on capital could also be higher, negating the price discount, because return on capital is what it is all about.

And in the real world, discounts tend to last only as long as it takes to get established, so a discount should disappear over time, whereas a tariff wouldn't. Which assumes that you would have to discount in the first place. May well be that you can charge a premium.

For example, if the additional money went into opening up an iron ore mine, you could probably just piggy back off BHP Billiton and Rio and realise much the same price as everyone else.

May I suggest instead of looking at countries behind us (like Brazil) look at countries AHEAD of us; there are now 30 and growing fast. And they do NOT use tariffs to preserve.

Instead of focussing on numbers of jobs in our living dead car industry, look at the bulk of our country that is now operating without tariffs.

Instead of talking about preserving, talk about how we can unlock this country to engage the world economies.

Instead of creating the conditions for maintaining a public service administering taxes, consider how we can gain comparative advantage - to be smart like the streaking ahead of us.

Australia's future lies with vigorous competition. Read success stories in say M.E. Porter, The Competitive Advantage of Nations.

There is only one place for such predatory taxes - for the cups of tea events called Free Trade Agreements. And that is no doubt why when we reduced our tariffs under Hawke/Keating, they werent reduced to zero but 5, leaving a little succour for those cups of tea events.

Some still hold on desperately while the world moves on.

Nick. Industry protection is costly to both consumers and the broader economy. Not only does protection artificially inflate the cost of goods and increase the general level of taxation, it also encourages bad management, poor working practices and a general climate of complacency, while diverting scarce labour and capital from efficient industries. The fact that all of the available workers recently retrenched from Mitsubishi were quickly redeployed to other more productive jobs is evidence of my last point.

If the Rudd Government truly wants to increase the level of innovation and boost productivity, it should remove barriers to import competition not increase them.

As an aside, your 'optimal tariff' argument also fails to acknowledge the risk of retaliation from our trading partners. For a small open economy like Australia, liberalised trade is essential to our prosperity. Maintaining our trade barriers is a retrograde step.

And as for economists, they are the ones who will know tomorrow, what they projected for today, was wrong.

Yes an economist like Nick might conclude 5 per cent is about right. But it is "about right" for the CURRENT profile of Australia. As Professor ME Porter found (Competitive Advantage of Nations" see eg. http://tinyurl.com/5c6pv7) you cannot pick winners. You cannot say what is appropriate. Simply taxing some (reducing their disposable income) to favour others does not work to promote competitiveness. FACT (ask me for references and studies).

It is time Australia practiced what it preaches - that fair go. That means a level playing ground. A level playing ground that does not discriminate you in favour of jobs at Fisherman's Bend (and farmers who try to convince us that droughts, famine, fires are something we non farmers must insure them against).

I have a vision for Australia. Smart and flexible like the Israelis and the Danes.

Our Olympians are successful as they do not look at who is behind - they look ahead.

We are now no. 30 in the world. How far do we have to sag in the country stakes before we shake out the parasites? Those that rob others, you and me, to subsidise and insure them against failure.

Those ahead of us don't practice tariffs. Tariffs remain cup of tea opportunities without adding value to Australia.

"May I suggest instead of looking at countries behind us.."

Heh, nice try at re-framing the discussion - maybe if you ignore the fact that some of the fastest growing industrial powers have grown exponetially while using such practices (and continue to grow), maybe if you just ignore the facts they'll go away right?

Wrong.

Rising stars such as China and Brazil shoot your theory out of the water. Surely such restrictive practices should have prevented any modernization and expansion - but quite the contrary, their modernization and expansion has been little short of phenomonal.

And what is this constant reference to Denmark? As a member state of the European Union - one of the world's most powerfull trading blocs - Denmark enjoys privellaged access to markets in ways that we could never have. It exports quite a lot of manufactured goods, last I heard around 70% of it's exports went back into the EU. To portray Denmark as having made a roaring success out of little more than wind and sand is rather inaccurate, it is part of a kind of trade collective and a rather powerfull one at that. Unlike us.

"Look at the bulk of our country that is now operating without tariffs"................but then you said....... "We are now no.30 in the world. How far do we have to sag in the country stakes....."

Now there's a contradiction I'd like to hear an answer to. We've been following your prescribed course of action yet somehow we've fallen to 30th place. Are you seriously going to argue that a few protected industries have dragged us to the wrong end of the field?

Everything in it's proper place at the proper time. True flexibility is not about applying a rigid, one-size-fits-all ideaology (ie all tariffs must go), it's about working in the national interest - loosening controls when necessary, tightening others when necessary, playing your full hand.

Fozz says: “……it's about working in the national interest - loosening controls when necessary, tightening others when necessary, playing your full hand.”. Ahah! Spoken like a true Keynesian bureaucrat. Point to one success story in Australia and I will give you five failures of bureaucrats in action in return.

As to your exampled countries, in any race at any point of time you do indeed see some that streak away (eg. reference to say like Brazil where they pay factory fodder rates), but they run out of puff. I am encouraging to stay focussed on increasing countries now AHEAD of Australia.

So, if there are NO successful countries ahead of Australia using tariffs for other than cup of tea events to reduce them, why then should Australia?

Shouldn’t we all not be embarrassed at Australia’s pathetic economic performance given our natural endowment owned by just twenty million people?

Shouldn’t we be exporting our skills rather than importing them from a country that is one-quarter our age and with all of its young people in arms (I talk of Israel) and stop copping out in excuses why Denmark with just wind and sand (producing one-fifth of its energy from wind exporting its know-how as SMART manufactures and services) is AHEAD not only in Europe, but in the world. Studies and examples abound showing discriminatory tariffs impede growth, smartness, flexibility and wealth creation. Just read the volumous Industries Assistance Commission studies and reports. Lefties hate them of course. Yes 5 per cent is just right, to PRESERVE a failing (yes it is failing thanks in good part to Fraser and Howard governance) economy.

Fozz: I will let you have the last say. You win. Bureaucrats that like to “play their hand” and walk away with their super regardless of how they have played.

“……working in the national interest” as you put it, reminds me of some graffiti on the Berlin Wall, under an image of Karl Marx “Sorry chaps, it was just an experiment”

PLEASE READ THIS AT

http://www.theaustralian.news.com.au/story/0,25197,24187806-26017,00.html?referrer=email or http://tinyurl.com/5qv33z

This makes this whole discussion redundant.
Eg. he cars our industry makes, we no longer want. The gradual removal of car tariffs, which have fallen from 57.5 per cent in 1984 to 10 per cent, came as an eye-opener to Australians. Ten years ago, you could buy a Holden Statesman V6 for about $50,000 and still be $9000 better off than if you'd bought a Mercedes-Benz C200, with a weedy 100kW four-cylinder engine and manual gearbox. Today, the equivalent starter-pack Mercedes comes in $4000 below the Holden.

OR...
exported Commodore, sold in the US as the Pontiac G8, starts at $US27,585, equivalent to $32,000. Here, the Commodore range begins at $36,790 with fewer bells and whistles and, obviously, doesn't have to cross the Pacific to reach a buyer. It must be comforting for Detroit executives to know that when GM is in trouble and US President George W. Bush won't come to the rescue, at least the Australian taxpayer is willing to help out.

I need say no more

Ah yes, The Oz-tray-lian - my favourite morningly online right wing snot rag. Read that article the other day, it changes nothing.

First things first. Yes I do think Keynes was a great economist.

We can all cherry pick evidence to support our arguments - give me one example of a trade liberalization success story and I could give you five failures, Latin America is a wealth of examples (in fact, the called it "the lost decade"). This is not to say that I am necessarily in favour of high tariff walls for their own sake (by what and whose standards should a tariff be regarded as "high"?) rather that I am in favour of not allowing the destruction of valuable local industries and tens of thousands of skilled jobs merely for the never ending pursuit of ever cheaper consumer goods.

Now, exactly which 30 countries were you referring to? And by exactly what kind of standards are we at the bottom of this list anyway? I need more information here.

Please explain what you mean by "exporting our skills".

If there's any conclusions here that are inescapable they are:

Many countries use tariffs and still succeed. Some use moderate tariff levels and do outstandingly well.

Many countries have reduced tariff protections while simeltaneously increasing non-tariff protections to compensate. These include subsidies, ongoing industry grants and even quarrantine regulations. They often pretend that they have reduced protection when they have just switched to another taxpayer funded form of protection to prevent the destruction of local industries they regard as valuable.

And some are just giants who can use sheer economic brute muscle to get what they want. Giants like the US and EU also use non-tariff protections on top of their sheer economic might.

cont later

Behind the former Berlin Wall there are still those that pine for the good old days under communism. Australia too had its gigantic trade wall that saw Australian's pay up to 100 per cent above free trade prices on some claim of jobs.

Today with close to zero tariffs, we have a shortage of people to fill those jobs.

It seems people like Nick and Fozz have their backs to the future.

I stand for a flexible well trained workforce, quality education, services, a competitive taxation system and efficient communications and transport.

Sorry chaps, you have had your day. The ideas of beggar thy neighbour taxes as tariffs are, have been exposed. Yes you can point to other countries that still have them, but I point to those that are in front and STAYING in front.

We have a shortage of people to fill those jobs because of a resource boom. We also had a shortage of people to fill those jobs in this here resource town that I'm posting to you from back in the late 60's - when the last boom somehow managed to occur despite higher tariffs.

It might be fun to pretend that tariffs have been removed when they have often just been replaced with another form of protection to compensate or the levels altered due to changing conditions, but to fantasize that economies will ever exist completely free of rules, regulations and controls is just a Milton Freidman wet dream and nothing more.

A post script.

Tariffs were introduced to kickstart industries in the nursery phase.

It worked and is working in other developing parts of the world.

BUT what demonstrably happened is that those industries remained in that nursery phase and DEPENDENT on beggar thy neighbour taxes. They remained small from inevitable fragmentation suffering from diseconomies of scale. Uncompetitive.

Nowhere it the truth of this better shown than in Australia's car industry with ONE manufacturer per just ONE MILLION of population. (17% of twenty million of population served by three companies). Producing yesterday's cars - legacy of yesterday's thinking.

Politicians like Fraser and Howard were too gutless to create the conditions for reform. The latter even giving $50m to GM to produce a V8.

An albatross around the current government.

Nowhere to go.

A legacy and a mirror of Australia's over-governed country with 13 layers of government that too is yet to rationalise.