Globalisation and Industry Policy:
Australian Automotive Industry
Australian automotive for many years was the stronghold of the national manufacturing industry. It was cherished by governments and enjoyed considerable protection and assistance. However, as globalisation increases its significance and makes nations including Australia more economically integrated certain changes have happened in the structure of many economies. Australian manufacturing sector lost its efficiency and is unable to compete with overseas producers without external protection. The Australian PMV sector comprises subsidiaries of overseas firms: Ford, GM, MMC and Toyota. The industry is still heavily protected by the highest tariff in the developed world at 22.5% despite the fact that countries that are both major PMV producers and consumers have much lower protection. The international obligations and economic expediency suggest that tariff should be reduced to 5% by 2010 and eventually eliminated. However, it should be done in accord with implementation of a broad range of microeconomic reforms. Special attention should be given to addressing adjustment difficulties for regions most affected by designing programs for retrenched labour force and regional economic diversification and redevelopment.
Introduction: Australia and Globalisation
1.0 The Australian Automotive Industry-- Structure and Markets
1.1 Scope of the Australian Automotive Industry
1.2 Regional Concentration
1.3 Motor Vehicle Stock in Australia
1.4 Local PMV production
2.0 Assistance to the PMV Industry
2.2 Assistance from 1965 to 1985
2.3 Declining Levels of Assistance--1985 to 2000
3.0 Adjustment and Regional Issues
3.2 Change and Adjustment in the PMV Industry
3.2 Regional Adjustment
4.0 Australian PMV Industry In a Global Climate
4.1 International Automotive Industry
4.2 Globalisation of the Automotive Industry
4.3 Internationalisation in Production and Trade
4.4 Australia's Trade in PMVs
4.5 Barriers to Trade
5.0 Issues on Industry Protection
5.1 Effect of Tariffs
5.2 Protection of the Australian Industry
5.3 Microeconomic Reform
6.0 Inferences and Recommendations
INTRODUCTION: AUSTRALIA AND GLOBALISATION
Since the mid 1970s and on Australia as well as other countries entered the era when production, trade and finance patterns of nations across the world became linked more closely which is known as greater economic integration. The push towards lessening trade barriers generally brought about freer trade in many parts of the world. The globalisation exposed whole countries to the international competition for investments, technology and labour force. Most commonly, the globalisation or higher economic integration is seen in three main aspects: the development of multinational corporations; increased international trade and more active flow of finance across the boundaries (Webber: 1994).
Such development introduced pressure on the Australia's economy to undertake restructuring. Most notably, the Australian manufacturing sector was affected by the globalisation. Local manufacturing suffered the consequences of "double capital movement", when large Australian firms did not have sufficient economies of scale to compete with major OECD states like the US and Japan which were also heavily protected from the imports. Furthermore, Australian manufacturing was challenged by the inflow of goods from the Newly Industrialised Countries of the North and South East Asia. The fast growth of cost-effective hi-tech businesses in the Asia-Pacific undermined competitiveness of the Australian manufacturing.
Australian automotive industry which enjoyed the policy of import substitution in 50s and 60s was heavily protected by tariffs and other forms of government assistance. Since 1970s the industry is experiencing great difficulties adjusting to the new global patterns. Many producers (British Leyland, Chrysler, VW, Nissan) abandoned production facilities in Australia altogether. What is left became known as the Big Four: American firms GM/Holden and Ford and Japanese Toyota and Mitsubishi This essay is looking how the Australian Industry was affected by globalisation and economic restructuring in recent decades.
1.0 THE AUSTRALIAN AUTOMOTIVE INDUSTRY-- STRUCTURE AND MARKETS
The Australian automotive industry has begun the transformation from one competing internally to one competing in the global market. Globalisation in the automotive industry and the lowering of protection of local manufacturers have been strong influences on the automotive market in Australia. Between 1986-87 and 1994-95 the value of industry output has increased by 9 per cent in real terms. Although a large part of the vehicle production remains focused on the local market, all vehicle producers and some component producers are competing in international markets for an increasing part of their business. As government intervention and assistance continue to fall and as a result of technical change and globalisation, further change can be expected. The exact future structure of the Australian industry is difficult to predict.
1.1 Scope Of The Australian Automotive Industry
The Australian automotive industry now comprises a diverse range of businesses. It is one of a rather complex nature. Its activities include wholesale and retail of both new and used motor vehicles, repair, accessories, services and manufacturing of vehicles and components. Industry participants vary from large multinationals such as General Motors -- the world's largest company -- to small private firms involved in innovative niches such as vehicle design. At its broadest level of specification, the total automotive industry is less than 5 per cent of total employment (1)
1.2 Regional Concentration
The majority of PMV production and manufacturing employment is in Victoria and South Australia. Victoria accounted for about half of automotive manufacturing activity in 1994-95. The other portion took place in South Australia.
1.3 Motor Vehicle Stock In Australia
Comparisons with other countries show Australia has one of the highest rates of car ownership in the world. At June 30, 1995 there were 8.6 million passenger vehicles registered in Australia. This amounted to a vehicle for every 2.2 Australians. The Australian market can be defined as mature. That is, the rate of new car purchases per capita has ceased to grow significantly (2).
1.4 Local PMV Production
Currently, there are five model lines being produced by four PMV manufactures. The four local PMV manufacturers are -- Ford Motor Company of Australia Ltd; General Motors -Holden's Automotive Ltd; Toyota Motor Corporation Australia; and Mitsubishi Motors Australia Ltd. Local PMV production while fluctuating with economic conditions, has trended downwards, while value added has trended upwards.
A major change in the PMV market occurred in 1988 when import quotas were abolished. Since then there have been numerous new entrants into the domestic market.
The PMV market is generally divided into four major segments: ~ The small car segment - includes such cars as the Mitsubishi Lancer. the Toyota Corolla is the only locally produced car in this segment. ~ The medium segment - includes the two Australian built four cylinder vehicles, the Mitsubishi Magna and Toyota Camry. ~ The upper medium segment - dominated by locally produced cars including the Holden Commodore, Ford Falcon etc. ~ The luxury segment - includes sports cars. The Holden Statesman and Caprice and the Ford Fairlane and LTD are the only local vehicles in this segment (3)
Exports of completely built up (CBU) PMVs have increased significantly from under 3000 units in 1985 to over 20000 units for the last seven years. During this period both Ford and Mitsubishi started significant export programs with the Capri and Magna. the greatest number of CBU PMVs exported from Australia in 1996 were to New Zealand, followed by NAFTA and the Middle East (4)
The ABS estimated that CBU PMVs comprised about one third of the value of automotive imports in 1996. Over the period 1989 to 1996 imported CBU PMVs have increased. Imported PMVs presently dominate the small/micro/light and luxury segments (5).
2.0 ASSISTANCE ISSUES
The Australian Automotive Industry has received government assistance since its commencement in the early 1900s. Assistance to the industry has had a dominant influence on its development since the introduction of the first Motor Vehicle Manufacturing Plan in 1965. After 1965 the complexity and level of assistance to the automotive industry increased considerably until the introduction of the Button Car Plan in 1985. After 1985 the complexity and level of assistance to the industry declined dramatically (6).
2.2 Assistance from 1965 to 1985
Throughout the 1960s and early 1970s the major aim of Government automotive industry policy was to increase the level of local content in vehicles assembled or produced in Australia. The competitive position of the industry steadily declined in the late 1960s. the government responded by increasing tariffs on PMVs from 35 per cent to 45 per cent in 1966. By the mid 1970s the Government recognised that there was a potential conflict between its policy objectives: high costs of production in Australia means that the higher the level of Australian content in vehicles the less competitive they become against imports and to the extent that higher protection is provided the greater is the price to consumers (7).
This highlights the fact that the government realised the need for structural change to improve the industry's efficiency. However; in 1978, the industry's competitiveness declined further and the government increased the tariff rate on PMVs to 57.5% (8). In 1979, the government introduced export facilitation measures into the plan. This was the first policy designed to encourage the Australian industry to integrate into the global automotive industry, rather than being protected from it.
2.3 Declining Levels of Assistance--1985 to 2000 In 1985 the level of assistance to the automotive industry peaked. It had become one of Australia's most highly assisted industries. The PMV sector was assisted by tariffs, quotas, duty concessions and export facilitation. The component sector was assisted by an 85 per cent local content scheme.
Since 1985 the government has been winding back assistance to the automotive industry. It has been in the form of a progressive reduction in protection. In 1984 import quotas were replaced with tariff quotas and in 1988 tariff quotas were abolished and tariff reductions commenced. There was no longer the concept of 'open ended' assistance (9).
The government introduced the Button Car Plan in 1985. In the announcement of the plan the government expressed concern about the adverse effects of previous plans: Government policy since the 1960s has been increasingly characterised by short term crisis containment lack of direction and inward looking policies. The results have been increasing protection and declining levels of performance (10).
This quote illustrates that the government recognised the weakness of the industry but they believed that with the correct policies they could turn it into a strength in the Australian economy. The stated objectives of the new plan were to:
* give the industry more time to restructure and modernise;
* to make it more efficient;
* to hold down the price of cars; and
* to reduce the job losses in the short term and provide job stability (11).
To achieve these objectives, a variety a variety of measures were implemented:
#the 20 per cent tariff quota on vehicle imports was replaced by tariff quotas set to phase out by 1992; #the local content scheme was retained with only minor adjustments (12); #access to the export facilitation scheme was increased; #labour adjustment training arrangements were put in place; and #the Automotive Industry Authority was established to oversee the new arrangements. The central theme to this package was the idea of exposing the industry to international competition. It is an attempt to achieve some economies of scale inorder to improve efficiency. Tariffs on PMVs were reduced from 57.5 per cent to 45 per cent immediately, phasing down to 35 per cent by 1992.
Maintaining adjustment pressure
In its March 1991 Industry Policy Statement the government announced new assistance arrangements for the automotive industry. The March 1991 Industry Policy Statement explained: the government's prime objective remains the development of an Australian industry that is viable and internationally competitive, providing higher quality vehicles at lower prices to consumers (13).
Under these new arrangements, the tariff phasing continued, with tariffs declining to 15% by 2000, and export facilitation provisions were expanded and made more flexible. The government also announced that penalties for low volume production would be abolished and an improved labour adjustment package was offered. In July 1991, the government introduced a specific tariff of $12000 on imported second hand vehicles. This specific tariff was introduced to overcome local industry's fears that a high volume of Japanese imports would have an adverse effect on the local sector.
General Summation of Assistance Issues
The assistance government has given to the automotive industry has been through a thorough reformation of ideas. The levels of assistance have been reduced immensely, with the phased decline of tariffs and the abolition of import quotas and the local content scheme. It has been explained that the current arrangements consist of tariffs, import duty relief, export facilitation, Commonwealth funding through general industry programs and State government assistance. The reduction of assistance has increased global competition, which has in turn led to an improved industry performance. Nevertheless, despite the reductions in assistance, this industry will still receive assistance which exceeds the average of all other industry sectors. Due to the industry's geographic concentration, adjustment in the industry will have regional implications (Feaver: 1997) (14).
3. 0 ADJUSTMENT AND REGIONAL ISSUES
3. 1 Introduction
Many groups from South Australia, expressed concern about the employment consequences of further reductions in assistance to the automotive industry. Many are concerned that the decline in assistance to some firms may cause these firms to lose market share to imports -- which would affect employment in the short term, and also cause some firms to reconsider their investments in Australia (15). Firms within this industry said that they expect to have a substantial presence in Australia beyond 2000. Each of these vehicle manufacturers employ a relatively large number of people within its geographical area and most are subsidiaries of multinational companies. These firms may decide to leave Australia or scale back their Australian operations for many reasons, including a long-term lack of profitability, their perception that Australian production no longer fits in with their global strategy, the parent companies own lack of profitability, or simply because Australia is less a less competitive place to make motor vehicles than some other locations. The main concern throughout the industry is that the adjustments will tend to affect only those regions where PMV production is concentrated. in this we are only dealing with Victoria and South Australia.
3.2 Change and Adjustment in the Automotive Industry
The automotive industry is subject to many market pressures -- such as the development of new sources of supply, technological change and the globalisation of the industry. These pressures have had greater effect over the past 15 years as the market has gradually been opened to international competition.
History of changes in industry structure
When they first commenced manufacture other than basic assembly in Australia, Ford and Holden established manufacturing or assembly plants in Queensland, NSW, Victoria, SA and WA. The set up of so many assembly plants was due to the high cost of transport. It was cheaper to decentralise operations. The establishment of assembly plants in each State was also influenced by State Government regulations and assistance, including State purchasing preferences. However, each company consolidated its manufacturing capability as transport became cheaper, economies of scale became more important, and State Governments reduced the incentives to operate multiple assembly operations. There are now four motor vehicle producers manufacturing in Australia, operating four vehicle assembly plants and producing five models of vehicle. Holden and Mitsubishi's plants are located in Adelaide, while Toyota and Ford have assembly plants in Melbourne (16).
Examples of recent adjustment in the motor vehicle industry
Australian vehicle producers have been under substantial pressure in recent years to increase their productivity, as a result of increasing competition. Some of these adjustments include:
* the closure of Nissan's manufacturing facility in Clayton, Victoria; * the relocation of Toyota's production facilities from Dandenong and Port Melbourne to Altona; and * the reduction in Ford's workforce in Geelong and Broadmeadow, due to increased productivity, and the closure of its Homebush plant in NSW (17).
3.3 Regional Adjustment
Many participants have argued that, should further substantial change in the regional structure of the automotive industry occur, it would be likely to have significant negative effects on particular ares of Victoria or South Australia. For example, the federal member for Boothby said: "South Australia is enormously reliant on the automotive industry -- that is a historical thing -- and especially its impact in southern Adelaide. The regional impact, if there is a downturn in automotive employment, would be quite severe." (18).
The effects of industry adjustment will also be affected by the actions of government authorities in encouraging regional growth and responding to a disturbance of the regional labour market caused by industry adjustment.
General Labour Market Adjustment Issues
The labour market's ability to adjust to changes in industry structure is obviously affected by the regional factors. Two of the most significant impediments to labour market adjustment are:
1) a lot of workplace flexibility; and 2) restrictions on the geographic mobility of the labour force. Government regulations and taxation arrangements can affect both workplace flexibility and the level of geographic mobility of labour (19).
More flexible workplaces are likely to be better at adapting to change. However, the current enterprise bargaining system may lack this flexibility required, particularly to cope with significant structural change in a region because it is constrained in its application and scope by the awards underpinning it (Jones:1981).
Impediments to geographic mobility
There are a number of factors that restrict labour mobility, including:
* costs of moving
* government impediments to moving - eg. Taxes and other regulations;
* emotional attachment to a particular location (20)
Labour Market Programs
Types of labour market programs and their effectiveness
Labour market programs generally fall into four categories: 1) job broking and job search assistance; 2) training programs; 3) wage subsidies to private employers; and 4) direct job creation.
Labour market programs in Australia are generally offered by the Commonwealth Government, through the Department of Employment, Education, Training and Youth Affairs (DEETYA) (21).
PMV Labour Adjustment Package
The PMV LAP was introduced in February 1991, and is still assisting some clients, although it is no longer available to people losing their jobs in the automotive industry. The main assistance arrangements under the PMV LAP were: formal vocational training, wage subsidies; and relocation assistance (Bertone, 1994). One of the advantages PMV retrenchees gained from the LAP was the immediate access it provided to programs that were usually only available to the long-term unemployed. Holden commented on the effectiveness of the PMV LAP with respect to its own workforce: Whilst the PMV LAP has featured in separation agreements between Holden and the automotive unions, it has had very little effect. The key reasons for this are two fold. First, the primary process for displaced employees has been to place them in other parts of the enterprise. Secondly, many of those who are ultimately 'separated' are those who do not wish to seek re-employment because of their age (22) The above statement explains the depths that need to be considered in promoting different type of successful policies.
4.0 AUSTRALIAN PMV INDUSTRY IN A GLOBAL CLIMATE
4.1 International Automotive Industry
Today the car manufacturing industry internationally is represented by large companies which operate in many countries. The operations may include either vehicle assembling facilities or component manufacturing factories. The product line and production techniques are greatly diverse within the industry. Most often, car producers use typical standardised platforms for vehicles manufactured in separate locations worldwide with certain degrees of specific alterations for a particular market. For instance, Toyota makes the Camry model in 5 countries and sells them in 160 ones (IC: 1997 p. XXIII).
Car manufacturing industry is a high profile industry in many industrialised nations. It also takes momentum in emerging economies of Latin America, Asia and Eastern Europe.
From 1991 to 1995, the production of motor vehicles worldwide has not changed much and was 33.9m units in 1995. The largest share of passenger motor vehicles (PMV) is produced and consumed in Japan, Western Europe and North America. Australia produces just less than 1% of the total world PMV output.
On the supply side, in the regions mentioned the production of cars was either stagnant or decreasing during the last decade. The production in North America has dropped by around 1m cars from 1985 to 1995. However, the impact was offset by the Japanese producers shifting the assembling lines from Japan to North America. Japan's PMV output has also declined while in W. Europe it rose slightly corresponding to the population growth.
The fall in output is attributable to the underlying large excess capacity in the industry worldwide. Estimates are that North America and Japan both have around 4m units and Europe 5-6m units of excess capacity (Keller: 1996). Such excess capacity is due to the constant changes in the global demand for cars.
The demand for PMV (calculated as a number of car registrations) in OECD from 1985 to 1995 has slightly rose. In North America registrations fell in that period by 24%. In Japan and Europe it crept up in sync with the population growth.
Despite being characterised as mature, markets in rich world are strengthened by the continuous replacement of cars by owners (EIU:1995). In the emerging countries, the demand is forecast to grow. However, the undergoing economic crisis in emerging economies will certainly weaken the demand for PMVs. According to EIU (1996) sales of cars worldwide will slightly rise in the medium term and reach 37m units in the period to 2000.
4.2 Globalisation of the Automotive Industry
When it comes to the PMV manufacturing the globalisation is understood as process when the car producers trade vehicles assembled with parts made in different places. The firm may have one business strategy whereby it attempts to achieve efficiency by taking advantages of world trade and favourable economic conditions on a global scale, i.e. the single firm may become extremely "globalised". It is talked today of the World Car, the vehicle whose origin of manufacture is virtually impossible to determine since its parts made in so many different locations.
Global strategies involve such activities by a MNC as supplying vehicles for regional and international markets; constructing production facilities abroad; using components from alternate suppliers, or alternative operations within a company; sourcing engineering and design services from outside corporations or related subsidiaries; establishing contacts between the market competitors in various locations (23).
Globalisation is regarded as the increase in PMV trade as well as flows of foreign direct investment. However, in practice it is often the same: PMV manufacturer performs transnational trade between its subsidiaries which were constructed using FDI. In Australia, Ford is a manufacturer and a large trader: it has assembling facilities and is the second largest importer of motor cars. Similarly, other major car makers are both investors (producers) and trading companies (24).
4.3 Internationalisation in Production and Trade
Fierce competition forces the PMV manufacturers to develop rationalised product lines with more emphasis on the international platforms which results in creating highly inter- and intra- industry cooperation. For instance, Ford Motor Co. has 185 wholly owned, partially owned and joint venture factories in about 30 countries -situated in North America, South America, Western and Eastern Europe, Asia and Australasia- producing more than 5m vehicles pa. Overall, Ford employs around 350,000 people. Ford has links through joint ventures with other car manufacturers such as FIAT, Mazda, Nissan, Suzuki, Volkswagen. It has equity interest in several companies Mazda, KIA, Jiangling (PRC) and others. It also wholly owns British firms Jaguar and Aston Martin (25).
Other Australian car manufacturers are subsidiaries of overseas parent firms which also have extensive global network in trade and production. General Motors has presence in 50 countries. Mitsubishi operates in 31 nations and Toyota in 25. These companies are increasingly sourcing components from the least expensive suppliers all over the world either from subsidiaries or outside parties. Much of production facilities is being shifted to locations in the emerging economies. The share of local production (i.e. in a country of origin) of the leading car makers is steadily declining. For instance, only one third of the output of Volvo, VW or Honda is produced in Sweden, Germany and Japan respectively. GM has half and Ford two thirds of their production in the US (26).
The globalisation also increasingly occurs in the components manufacturing. Companies search for cheapest locations to produce parts and extensively source components from other firms.
In terms of trade, the bulk of automotive products is traded through intra-regional and intra-company contracts mostly by countries in the same trade agreement. Apart from simplified access to market, PMV makers use regional agreements as a measure to cut costs by placing production facilities closer to the target markets (27).
Large portion of trade is conducted within a single PMV company. Intra-firm trade helps firms to achieve cost efficiency by establishing facilities in cheapest possible places. For instance, GM exports Australian-made Vectra to Asia whilst selling Thailand-made Astras here. Thus car companies worldwide are at the same time producers for domestic markets, exporters and importers. E.g., Ford Australia assembles Falcons for the domestic market importing components from overseas but then it also exports cars and parts abroad as well as imports other PMV models to Australia (28).
4.4 Australia's Trade in PMVs
The share of exports of Australia-assembled motor vehicles has changed over the last ten years increasing from 2500 units in 1985 to 39,500 in 1996. Their value totaled $837m in 1996. In the next decade, exports are forecast to rise due to GM, MMC and Toyota intentions to extend new export markets. By 2000, the Federation of Automotive Product Manufacturers (FAPM: 1996) expects Australian exports to reach 100,000 PMV units pa. (29).
On the import side, there was a considerable rise in number of the PMV intake. In 1985 due to 20% quota restrictions, imports were quite low, at 114,500 cars. By 1996 the number of cars coming into Australia reached 233,000 units. Most imported cars were small PMVs which are not manufactured in Australia. Despite imports outweighing exports sixfold, the value of imported cars is four times greater than exports at $3b, i.e. Australia takes lighter and cheaper cars than it sells (30). The value of PMV components exports has also risen over the last decade from $700m in 1985 to more than $1.3b in 1995. Imports of components increased from $5b in 1990 to $6.2b in 1996. The largest share of those imports was destined to PMV assembling plants in Australia. Imports value is significantly larger than that of exports. From 1990 to 1996, imports rose by 23% in value whereas exports soared by 73% (31).
In terms of trading partners, (according to ABS) in 1996 New Zealand was the first destination for Australian exports (25%), followed by the USA (18%), South Korea (11%), ASEAN nations (10%), Japan (9%), Middle East (6%), Germany (4%), UK (3%), and other (15%). Imports came from Japan (49%), the USA (14%), Germany (10%), South Korea (8%), UK (5%), Sweden (2%) and others (12%) (32).
4.5 Barriers to Trade
In many places, car manufacturing is regarded as a strategic industry and enjoys special treatment in regards to governments assistance and protection. As John Olsen, the Premier of South Australia, puts it: "they do so because automotive manufacturing forms a key building block for an advanced manufacturing capability. It provides a training ground for a skilled labour force, and is a driver for technological change"(*). Generally, tariffs are the most widely used type of trade restrictions. Today, the major car markets have relatively low tariffs. As from 1997, USA imposes 2.5% import tax on PMVs, EU charges imports at 10%, and Japan has a zero tariff on PMVs. Australia and New Zealand have the highest tariff rates in the developed world at 22.5%.v
Far heavier tariffs are in place in developing markets. For instance, in China tariffs on PMVs are at 100%, in PNG 75%, Brazil has 70%, South Africa 61%, India 50%, Taiwan 30%-42%, the Philippines up to 40%, Saudi Arabia 25%, Mexico 20%. Indonesia has one of the largest PMV tariffs at 125% plus 75% import surcharge (33). However, apart from tariffs there are other forms of trade impediments. Many countries set import quotas and licensing regulations. China has a strict licensing system as well as some quotas. Taiwan (along with South Korea) prohibits imports from Japan, and poses 2000 units limit on Australian cars. India, Indonesia, Malaysia, Vietnam require licensing arrangements. Singapore, Brunei, Brazil all have some sort of quantitative limitations (34).
Although there's practically no discrimination against Australian made PMVs on a national basis, the country is somewhat affected by the increased significance of regional trade agreements (EU, NAFTA, AFTA, MERCOSUR) which grant import preferences for member nations. Nevertheless, Australia still has reasonable access to international markets, mainly to less protected North American, New Zealand and Middle Eastern markets. Factually, the assumption that trade barriers are substantial obstacles to export growth is not sufficiently supported since largest (by share) export markets are relatively open: Japan, US, EU, South Korea which represent 80% of the entire world PMV registrations have together average 5.1% tariff rate, ranging from 0% to 10%. The mentioned countries are also largest manufacturers producing 90% of the global PMV output.
In fact the Commission on the Australian Automotive Industry puts the existence of trade barriers in some markets the last on the list of four factors hindering the growth of PMV exports. More importantly, export ability depends on: i) strategies of overseas parent corporations; ii) differences in consumer demand between Australian and global markets and iii) international competitiveness of products (which includes both cost and quality) (35). Putting it another way, impediments to the international success of the Australian PMV industry lies not in trade restrictions but mainly in microeconomic imperfections (lack of competition, high transport and waterfront costs) and global strategies of MNCs (which is a form of globalisation described above).
5.0 ISSUES ON INDUSTRY PROTECTION
5.1 Effect of Tariffs
Classic microeconomic theory unambiguously supports the idea of free trade and specialisation without any trade barriers such as tariffs, quotas or subsidies. Since tariff is plainly a form of tax, it pushes up the cost of an item to the consumers and decreases the national income. Furthermore, it alleviates competition by granting local producers price advantage which stimulates higher profits. Another aspect of tariff protection, is that investors are attracted by excess profits in the protected industry and redirect financial resources there from other probably more efficient industries. Common sense suggests that industries demanding protection from overseas competition are already inefficient. Furthermore, tariff may create severe social problems. When industries start to flourish under the tariff umbrella, their fast expansion not only attracts finance but also large quantities of labour force. At first, tariffs boost employment, however, people employed in the inefficient sectors of the economy become hostages of the tariff since it becomes the guarantee of their employment.
While being the virtue for the concerned industry, tariffs can be quite harmful to other industries. Industries which are efficient may lack those valuable resources (finance and labour) which flowed to the protected industry.
The proponents of industry protection argue that assistance should be given to the 'infant industry'. In other words, those industries that are capable of growing and obtaining internationally competitive levels of efficiency may be subject to the initial temporary protection. Examples usually given are the economies of Taiwan and South Korea, which through industry protection became influential players in the world manufacturing industry.
However, the success of industry protection is a function of many variables. It is strongly correlated with micro- and macroeconomic foundations such as labour costs, size of market and consumer demand, access to foreign markets, level of income, costs of production, transport and marketing, interest rates, foreign investors attitudes, level of (un)employment, business confidence etc. In brief, the installation (as well as cancellation) of tariff alone cannot encourage or discourage producers from industrial expansion (or contraction).
Generally, the industry protection works when the economy is relatively underdeveloped, i.e. when there's excess economic capacity, unsaturated demand (shortages of supply) and ultimately, the economy must experience high growth of GDP and be in the boom business cycle. All those factors were true for the Newly Industrialised Countries which helped them to develop efficient industries, it also should be noted that they used other than tariff forms of protection such as rebates on imported production inputs (e.g. raw materials) and various export incentives.
5.2 Protection of the Australian Industry
Those aspects were also true for Australia in the aftermath of the W.W.II. Since mid 40s and into 50s there was a strong demand for manufactured goods and supply shortages. The economy's growth was suspended for the wartime years. Since the late 40s, a huge inflow of migrants from Europe started to come who were the base of lower-cost employment in manufacturing. The economy was booming, demand and income steadily rising. Federal and State governments encouraged inflow of foreign capital. During first two peacetime decades, investments came largely from (predominantly US and UK) companies in the form of foreign direct investment into manufacturing sectors.
The protection of industries to some extent (arguably it would happen even without protection) accelerated the growth in manufacturing industries. Particularly such sectors as textile and clothing, house electricals and passenger motor vehicle expanded quite rapidly.
However, as theory and very often practice prove the positive effect of the tariff on GDP growth, employment, balance of payments is temporary since the distortion caused by its installation ends in one (inefficient) industry benefiting at the expense of others. In the long run, the net costs on the whole economy outweigh benefits. Import taxes also set delayed-action bomb for society, since the employment in the protected industries is guaranteed only through maintaining tariffs. Complete removal of trade barriers will likely to solve the problem of resource allocation, but will generate social difficulties since many employees will be made redundant increasing already high unemployment figures. In the case of Australia, the issue is exacerbated by the high degree of regional concentration: most PMV industry facilities are situated in Victoria and South Australia, in many places there the industry is the only major source of employment. The implications of that is the need firstly to undertake microeconomic reform and address adjustment issues before eliminating tariffs.
5.3 Microeconomic Reform
In 1994-95 Annual Report, the Industry Commission indicated certain areas which can improve performance of the Australian PMV industry. They included increased competition, removal of barriers to trade across state borders, improved accountability, pricing which encourage more efficient consumption and investment and addressing issues of ownership, monopoly power and access to networks. (36). The Commission also pointed out that the microeconomic reform should address such issues as the performance of infrastructure, e.g. electricity, water, gas, railways, ports, roads. According to the Commission, these spheres enjoy excessive degree of government involvement and restrict private sector activities (37).
The issue of waterfront inefficiencies was also highlighted. The monopoly of the MUA imposes high costs on the PMV producers: it costs more to carry cars from Adelaide to Sydney using local facilities than from Sydney to Tokyo by overseas carriers. The IC stressed that the Commonwealth government should go ahead with the proposed labour market reforms which allow the access of non-unionised workforce to wharves and competition between unions. Governments should develop the program to increase the level of contestability for stevedoring operations. The overhaul should be conducted in workers' compensation issues. The IC finds that the scope for competition that inappropriately shifts costs between individuals, companies, workers' compensation schemes and government programs should be decreased; greater equity for injury and illness compensations must be achieved etc (38).
In a broad sense, the reform is needed in three main directions; i) labour markets, ii) competition and iii) economic infrastructure.
6.0 INFERENCES AND RECOMMENDATIONS
The government faces two main tasks concerning PMV industry. First is to conduct economic reforms and reduce trade barriers, on the other hand, to do everything possible to save the industry from decline and address adjustment issues, primarily alleviate social impact of the restructuring.
In order to keep in line with the international trend of removing trade barriers and on the grounds of economic expediency it is recommended to subject the tariffs on PMV and components to further gradual reduction in the next decade and decrease the tariff to 5% by 2010. The current 22.5% tax is the highest in the developed world, more than twice as high as in the notoriously protectionist European Union (10%). It cannot be maintained for a long time as it significantly distorts the process of resources allocation and is inconsistent with Australia's commitment to removing trade barriers.
By doing so, the government should encourage emerging economies of the APEC (primarily, Indonesia, Malaysia and other Asian members) to reduce their trade barriers in respect to automotive products and stress the importance of eradication of the preferential treatment as well as commencing implementation of the accepted resolutions in regards to opening trade by all members of APEC.
It is also advisable to continue export facilitation schemes for the manufacturers and create such conditions which would stimulate parent companies to adapt new global strategies. For instance, they should be made interested in expanding production capacities in Australia with export oriented programs, rather than narrowly focusing on the domestic market supply.
Taxation is another area which needs reform. The Commission on the Automotive Industry recommends governments to provide wide spectre reform in tax law as to ensure the enhancement of the Australian economic performance including the enactment of the Goods and Services Tax and abandonment of the Wholesale Sales Tax (p.42). However, the recently re-elected Coalition government should develop more careful approach to the tax reform and make sure gains in efficiency do not seriously undermine equity and do not lead to rising income inequalities.
Competition policy and economic infrastructure should be also improved by implementing the National Competition Policy and introduction greater contestability for utility services such as water, gas, electricity, telecommunications and transport (roads, railways and waterfront). The comprehensive competition and infrastructure reforms contain great potential for cutting costs and growth in the PMV industry.
Another extremely important policy to consider while reducing tariffs is the development of the adjustment programs for the affected labour force. Especially it is relevant for South Australia whose economy and employment are heavily dependent on the PMV industry. The Federal and state governments together are needed to undertake labour market programs which can provide retraining and finding permanent employment for individuals suffered during the reform. They can use the example of LMPs designed in other OECD nations, e.g. in Nordic countries. When conducting cost/benefit analysis of the tariff cut, the costs incurred in LMP should be added to the equation.
Although, labour market difficulties are indispensable in the years of globalisation and profound economic restructuring, it is still necessary to minimise adverse effects by developing adequate employment adjustment schemes, particularly when net costs befall on a few regions where the industry densely concentrated. It is also recommended for governments of the states concerned to stimulate growth in other industries.
Australian Automotive industry is a very complex formation being the manifestation of the phenomenon called globalisation. The major PMV producers are all subsidiaries of foreign-owned parent MNCs who developed extensive international networks in production and trade. They established manufacturing facilities here in order to penetrate to the Australian market which was subject to tariff barriers. In the last couple decades the sector drastically lost its efficiency unable to compete with overseas counterparts without having external protection. Such protection causes distortion of resource allocation and is the source of inefficiencies.
Despite obvious costs to incur in the process, tariffs on the Automotive products should be gradually reduced and eventually eliminated. However, the reduction should go in sync with the broad microeconomic reform including reforms in the labour market organisation, competition policy and economic infrastructure. Special attention should be given to designing effective labour adjustment programs and regional economic diversification.
"The Automotive Industry", Industry Commission, the Report No. 58, 26 May 1997
1 Ibid, p. PC1
2 Ibid, p. D1
3 Ibid, p. 31
4 Ibid, p. C8
5 Ibid, p.C10
6 Ibid, p.K1
7 Ibid, p.K3
8 Ibid, p.K4
9 Ibid, p.K5
10 Ibid, p.K5
11 Ibid, p.K6
12 Ibid, p.K6V
13 Ibid, p.K7
14 Feaver, G. "International Business and Australia", Sydney 1997
15 Ibid, p. 355
16 Ibid, p.358
17 Ibid, p.360
18 Ibid, p.363
19 Ibid, p.375
20 Ibid, p.376
21 Ibid, p.378
22 Ibid, p.383
23 Ibid, p.14
24 Ibid, p.14
25 Ibid p.15
26 ibid, p.20
27 Ibid, p.177
28 Ibid, p.177
29 Ibid, p.178
30 Ibid, p.178
31 Ibid, p.178
32 Ibid, p.179
33, Ibid, p.183
34, Ibid, p.184
35, Ibid, p.192
36, Ibid, p.165-166
37, Ibid, p.165
38, Ibid, p.167
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© 1998 Andrei Sidorenko, Ameer Sarfudin