A 'win-win’ rescue package for Australia’s car industry

5 Jul 2013

As someone who identifies as a ‘rational economist’, and has taught and studied both international trade and economic policy, I am going to do something that I never imagined I would do. In this short article, I am going to advocate a government assistance package for the Australian car industry.

To be blunt, government subsidisation and protection of the car industry is widely recognised as a policy failure. Regular reports have made this abundantly clear from as far back as the Industries Assistance Commission’s 1974 report on assistance to ‘passenger motor vehicles, etc.’. Somehow, such assistance has persisted to today despite enormous cost to the Australian people. The direct cost of protection and the many other guises it comes in, such as the recent $1 billion ‘innovation package’ is only part of the story. There is also the higher cost of imported cars to consumers and businesses. Locking up resources in less efficient industries prevents these resources being used in other, more efficient industries and reduces our productivity. Had these policies been scrapped years ago, there would now be as many, probably more, and higher paid jobs in other sectors.

So it is not a matter of supporting ‘jobs and growth’, but rather a matter of short-term structural adjustment. Such myopic industry protection has never worked, and never will. There is no better opportunity to get rid of assistance and undergo structural adjustment than during times of full employment and skill shortages, like those Australia has just experienced. Assistance to the car industry has persisted purely for political reasons, namely the lobbying and voting power of those companies receiving the handouts, and of the unions and workers whose jobs are temporarily protected. The political process fails because those who would be employed in better paying jobs if we weren’t propping up local car manufacturers don’t know who they are, so they have no political sway.

Early trade theory concentrated on differences in costs of production and factor endowments as the explanation for why countries trade. This theory worked well for explaining inter-industry trade, like Australia exporting primary produce and importing manufactured goods. The fact is, however, that a substantial proportion of the world’s trade flows are intra-industry trade – countries import and export very similar goods to one another. The new trade theories that emerged to explain this intra-industry trade focussed on consumer preferences and the role of economies of scale.

To take a relevant example, in Australia there is an enormous range of cars available for sale –small and economic runabouts, luxury sports cars, family cars, four-wheel drives, people movers, utes, panel vans, convertibles, and so on. Because the cost of producing each model falls with the size of the production run – economies of scale - a county producing only for its domestic market has a choice of either a very limited range of products or very high prices. By countries specialising in certain models and brands and then trading, consumers have access to products that meet their full range of preferences and at much lower cost. It is these benefits to consumers that drive intra-industry trade and much of global trade. Competitiveness derives not so much from factor prices, but simply companies finding their niche in the market and innovating to keep it – think of Porsche, Ikea furniture, Nike, The Wiggles and any other enduring global brand.

Before getting to my proposal for a rescue package for the Australian car industry, there is one more piece to the jigsaw. The level of disadvantage facing Aboriginal and Torres Strait Islanders living in remote Australia has been extensively documented. It extends to poverty, cultural marginalisation, life traumas and physical and mental health, as reflected in the Council of Australian Governments’ ‘Closing the Gap’ agenda. They are also a highly mobile population. They often need to travel vast distances over poor road conditions to access basic services, to get their children to school and to comply with various regulations applying to them and their communities.

However, other key drivers of Aboriginal and Torres Strait Islander mobility are the desire to maintain kinship networks and attachment to country. It should be noted that much of this contemporary mobility occurs now as a result of past policies of displacement, including forced removal of children from their families, permit systems and other limitations on movement, and removal from traditional lands. That mobility of this kind persists, despite hundreds of years of attempts to stamp it out, is testament to the importance of connection to kin and country for Aboriginal and Torres Strait Islander Australians. Effective policy and service delivery needs to try to accommodate Aboriginal and Torres Strait Islander mobility, rather than see it as part of the problem. With little in the way of public or commercial transport, there are substantial barriers to mobility. Road and weather conditions take their toll on crowded vehicles, trips often take unexpected turns due to one crisis or another, and people end up stuck in towns and crowded housing or sleeping rough, unable to return to their community.

So, in resignation to the political reality of ongoing protection, I propose that the Commonwealth Government spend $1 billion to commission the Australian car manufacturers to design and produce an all-terrain vehicle specifically to meet the needs of Aboriginal and Torres Strait Islanders living in remote communities. Ideally, there would be extensive consultation with people in remote communities and collection of data on likely usage patterns in the design phase. However, some key attributes may well be that it is extremely basic, reliable and easy to service and drive, with few mod-cons other than an emergency beacon, perhaps a top speed of only 60 kms per hour; runs on Opal (non-sniffable) fuel; able to carry numerous passengers safely – perhaps the capacity to add additional ‘carriages’ as needed; and built in water tanks.

There are around 1,000 remote Aboriginal communities in Australia. Ideally the vehicle would be cheap and accessible, perhaps a price-tag of around $10-$15,000. But even if it was produced at a price of $25,000 each, then instead of the $1 billion (anti-)innovation package we have now, we could provide 4 such vehicles to every community every year for the next 10 years, and that’s without any cost recovery. Jobs would still be ‘saved’, but instead of a rescue package we know will only harm Australian consumers and productivity, and possibly invoke retaliation from trading partners, why not a policy that would bring substantial social benefits to one the most disadvantaged groups in Australian society? A group for who past policies have mostly inflicted nothing but suffering. And who knows what the international market for such a vehicle might be – it might just be one of those market niches that saves the Australian industry. I’ll even propose a name – The Dream Machine – built specifically for traversing the Dreaming.

Alfred Michael Dockery is Associate Professor of Economics at Curtin University.

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