Death of an Auto Industry

800px-2008-08-19_Flat_tireIt’s not just the auto industries of Canada and the United States that are plodding along towards a slow demise. The auto industry in Australia will soon be a piece of history, according to Iain Marlow writing for The Globe and Mail.

With the pullout of General Motors’ owned  Holden by 2017, Australia will be the only other G20 country (along with Saudi Arabia) to not have a major auto industry, “and all the economic activity and middle class jobs that come with it.”

The apparent problem is the Australian government’s lack of desire to provide deep subsidies. Without this lifeline, auto factories will disappear as manufacturers move production to lower cost countries. Australia’s auto industry has been in sharp decline since 1984, the year that industry minister John Button introduced his reform plan for the automotive sector called “the Motor Industry Development Plan.” At the time the auto sector was protected by high tariffs – 57.5% in 1978 – as well as import quotas and local content requirements.

Today, 30 years on from the reduction of these tariffs and quotas, the auto industry in Australia faces intense foreign competition. It costs GM about $2,000 more per car to build in Australia than elsewhere. To complicate matters, with a population of only 23 million people the Australian market is too small for the economies of scale that can occur in industry with large amounts of output. Ford Australia chief Bob Graziano has defended the withdrawal from the Australian market, stating “The business case simply did not stack up… Our costs are double that of Europe and nearly four times Ford in Asia.”

The auto union, for its part, has been heavily lobbying the government for subsidies to regain “competiveness.” As it is clear these are not forthcoming, it has switched tactics to focus on having the government pay the cost of retraining and fostering new industries for the dislodged auto workers.

As with any subsidy, tariff or quota, there are winners and losers. The auto industry in Australia has gained from these policies while every single Australian has lost in the sense that not only have they been forced to finance an uncompetitive industry, they have also had their access to cheaper foreign-made cars reduced. Indeed, as Australian Treasurer Joe Hockey laments “Australians effectively determined the future of the Australian motor vehicle manufacturing industry by not buying Australian-made cars.”

In short, Australians have financed an industry that they don’t even want.

The lost jobs are a pity, but if every job was protected from competition I would hazard the guess that we would be set back hundreds of years in our quality of life. Horse drawn carriages would carry us around had protectionist measures been supported at the advent of the automotive age.

If anything, one can make a case that the magnitude of the problem now facing Australia – a sudden shift out of the auto industry leaving hundreds of thousands looking for employment – is itself the result of decades of failed government policies. As the auto industry was protected artificially by government mandates, it plodded along while others sped by. Once upon a time in the not so distant past, China was a backwater with no productive capability. Australians would have laughed at the thought of losing an industry to the Chinese. Yet gradually countries like China have caught up. And gradually countries, like Australia, have protected their domestic industries more and more from this foreign competition. Without these protective measures, Australia’s auto industry would have gradually declined as China surpassed it.

Instead, shielded by barriers to trade, the Australian auto industry remained artificially large. Remove those barriers and the emperor is caught with no clothes on. In a heartbeat, the industry is at a complete loss of competitiveness, and with it the sudden demise of an oversized industry is eminent.

Rather than lament the loss of its auto industry, Australians should rejoice. Not only will they gain access to better and cheaper cars (the ones, incidentally, they have been buying for many decades now), but they will not have to support an industry that is better suited elsewhere.

(Originally posted at Mises Canada.)

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