Planning for a Soft Landing

Like most debates that enter the political sphere, the discussion around the demise of the Australian car manufacturing industry is plagued by emotionally charged falsehoods, meaningless rhetoric and ideological blinkers. A more impartial analysis suggests that while there is a case to be made for the free market to take its course, the human cost of the broader structural shift demands attention.

In the political realm, the government trumps ‘co-investment’ as an example of their ongoing support for ‘Aussie jobs’. While the opposition uses the situation to point out that something undesirable is happening on the government’s watch. Therefore it must be the product of economic mismanagement.

In the ideological realm, the free-market fundamentalists say that ‘co-investment’ is a euphemism for wasteful, taxpayer-funded, market-distorting subsidies. On the other extreme, the patriotic unionists decry the structural shift in the Australian economy as symbolic of a weaker and less dignified nation.

When Ford announced recently that it would cease production in Australia in 2016, all of these parties reacted predictably. The government expressed disappointment while pledging support for the workers, Tony Abbott blamed the carbon tax, unions said Ford and the government have blood on their hands and neo-liberals hailed a victory for capitalism.

Ford’s announcement was a long-time coming, and few analysts would be surprised if other car producers with operations in Australia followed suit in coming years.

CEO and President of Ford Australia Robert Graziano stated that car production in Australia is four times more expensive than in Asia and twice as expensive as in Europe [1]. Furthermore, Australians preference for Australian made cars is fading; Roy Morgan Research estimated that out of the 2,240,000 consumers that will buy a new car in the next four years, just 40% even factor in whether it was made in Australia or not [2]. So outside of hoping that domestic consumers have a surge of nationalism, Ford has few cards left to play.

The bottom line is the industry is not competitive in its own right, it probably never will be, and arguably never has been. Government intervention has always been a part of the manufacturing landscape, and car production is one of the brightest examples. For over a century now, governments have tried varying combinations of tariffs and subsidies.

Indeed, Ford had to be enticed here in the first place. In 1925 the then federal government promised ongoing assistance if the firm set up operations in Geelong. Tariffs have always existed in some form, and in the last decade alone Ford has received $1.1b in subsidies [3].

However, put into a global context, automotive protectionism in Australia is somewhat insignificant. In per capita terms, Australia subsidises $US18 per annum. Compare this to Sweden’s $US330, the US’s $US260 and Germany’s $US95. Consider also that 86% of Australia’s new cars were imported in 2011, and 21% of these attracted no tariff and the rest attracted one of the lowest tariffs in the world at 5% [4]. It is hard to escape the surprising conclusion that Australia has one of the most open vehicle markets in the world.

In this light, those calling for more protection may not have the economic theory on their side, but the real-world numbers suggest they have a point.

One of the reasons manufacturing attracts such high levels of government assistance is the unique position many employees find themselves in. A retrenched 50-year old husband and father who had worked in the Ford factory for over 25 years faces a number of barriers in the labour market. It is this cliché yet somewhat realistic portrayal of a low skilled, but honest and hard-working family man that brings emotion to the discussion and compels people to lobby for protection.

It is estimated that 54% of manufacturing workers in Australia are functionally illiterate [5]. It is thus no wonder why people fear for the former Ford employees prospects in a modern day labour market. Without assistance, they would become the epitome of the workers disposed of by a structurally shifting economy.

Those who argue for free-market absolutism have it wrong. A capitalist economy is not inherently just; a worker who has toiled in a factory for 25 years can be left behind by an axiomatic principle that lacks nuance.

On the other hand, it is unsustainable and ultimately pointless to continue to prop-up a failing industry. If the government continues to hand out subsidies to multi-national corporations, two things will result. Firstly, the rational manoeuvre for the corporation is to use the concern for the workers livelihoods as political capital and lobby for higher subsidies. Secondly, generations of workers who lack the sort of dynamic skill set needed in a service-based economy will continue to develop.

The idea that particular manufacturing sectors are crucial to the Australian economy needs to be abandoned. It is not a necessary function of any economy that it be able to produce one specific good. At the same time, we must acknowledge that we are going through a period of drastic change, in a region that is going through a period of drastic change.

It is simply wasteful to persist with propping up a failing industry, but it is also unjust to allow it to fall freely. Government intervention must be focussed on helping those, who would otherwise be left behind, transition with the changing economy. Resources would be better spent addressing the hardships of structural unemployment, rather than delaying them, as subsidies designed to resist structural change are destined to be overpowered.

In an increasingly globalised world, long-term production patterns will inevitably be determined by the principle of comparative advantage. Government’s role should simply be the necessary softener for the short-term pain of changes in those patterns.

Sources

[1] Joshua Dowling & Stephen Drill, ‘Ford workers fear for their futures as plants to close in 2016’, news.com, 24 May 2013, para. 25, <http://www.news.com.au/business/companies/ford-workers-fear-for-their-futures-after-decision-to-shut-down-geelong-and-broadmeadows-factories-in-2016/story-fnda1bsz-1226648895882>, accessed 30 May 2013.

[2] Roy Morgan Research, ‘Have Australian-made cars lost their shine?’, Roy Morgan Research, 14 March 2013, para. 1, <http://www.roymorgan.com.au/findings/finding-2002-201303140557>, accessed 30 May 2013.

[3] Chris Berg, ‘Insane obsession: Australia’s auto industry waste’, The Drum, 28 May 2013, para. 27, <http://www.abc.net.au/unleashed/4717262.html>, accessed 30 May 2013.

[4] Paul Bastian, ‘Brakes on manufacturing as Ford pulls out’, The Drum, 24 May 2013, para. 13-14. <http://www.abc.net.au/unleashed/4709810.html>, accessed 30 May 2013.

[5] Stewart Riddle, ‘Literacy ‘key’ to Ford workers future’, SBS Comment, 24 May 2013, para. 2, <http://www.sbs.com.au/news/article/1770290/www.ncver.edu.au/popups/limit_download.php?file=Dresearch/proj/2345.pdf>, accessed 30 May 2013.