The final report of the Bracks review into Australia's automotive industry is not nearly as bad as it could have been.
It recommends that the 10% tariff be reduced to 5% in 2010. While that is the existing policy setting, it was widely feared Bracks would backslide on trade liberalisation. That is a plus of the report -- yet he could have gone the whole way and recommended eliminating tariffs altogether.
Going by the underlying logic of the report, however, Bracks would never advocate a unilateral abolition of tariffs, despite the fact that he clearly recognises that tariffs increase prices paid by consumers.
Yet, the report has little to say about Australian consumers.
It talks about changing consumer preferences and how free trade agreements can enhance consumer welfare, but the interests of motor vehicle manufacturers and workers dominate.
We are rightly told that free trade agreements are good for the economy and consumers. But the report points out that free trade agreements also adversely affect producers.
That, however, is the whole point of free trade -- consumers get better quality products at lower prices. Like so many others, the Bracks report views free trade purely as an opportunity for Australian producers to export goods, not as an opportunity for consumers to import cheaper goods. Cheaper imports expand domestic consumption, and ultimately provide cheaper inputs into subsequent exports.
It is a delicious irony that Bracks calls on state governments to harmonise and reduce stamp duty, registration fees and compulsory third-party insurance fees. His own government did little in this area. Nevertheless, this is good policy. Rather than use these fees and changes as revenue sources they should be used to price transport use correctly.
This document, at heart, is an old-style "winner-picking" industry policy. The most important point to note is that industry profitability is falling, and component manufacturers have reduced profit margins. Meanwhile, productions costs are rising. The market is sending a clear signal that motor vehicle manufacturing is something that should happen overseas. To make matters worse, the Bracks report also shows a big switch in consumer preferences to smaller cars. These are not the types of cars that Australian manufacturers tend to make.
The Bracks solution to all this is to throw more money at the problem. Doubling the Green Car Innovation Fund, as he proposes, is problematic. The Government seems to be struggling to spend the money already allocated to this fund. Replacing the existing industry grant scheme with another hardly seems worthwhile. Other solutions involve "automotive ambassadors" and talk-shops. The various governments around Australia already spend far too much money promoting exports and the like.
For all the Government's rhetoric about encouraging an innovation economy, simply throwing money at research and development does not guarantee useful innovation. Instead the Government should concentrate on providing an environment in which the private sector can choose how best to allocate resources. That environment would be one of lower tariffs and lower government taxes, fees and charges -- policies Bracks does advocate.
Bracks notes that the automotive market is very competitive and that this country's economy is very open to that market. This is all true. There is an oversupply globally of automotive manufacturing capacity. We should allow market forces to determine outcomes in that market. Rather than propping up an industry that may not survive, the Australian Government should prepare for industry consolidation and company exits.
The biggest losers from an activist industry policy are the workers in these industries. The automotive industry employs 64,000 people -- these people are investing their human capital and their careers in that industry. Flexible labour markets and a growing economy are the best mechanisms to ensure that these people are not left behind when industry policy fails -- as it always does.
Despite being an old-style industry policy, this report lacks a silver bullet to "save" the automotive industry.
This will have been the most sympathetic review the automotive industry has had in more than 20 years, yet it proposes more of the same -- more government largesse, more platitudes about the importance of the industry, but not much substance.
In short, many of the recommendations are spin -- appearing to be doing something, but not providing objective, verifiable deliverables. The report contains no plan to ensure the long-term viability of the industry. Ironically, that is its great strength.
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