Car tariffs drive competition - what nonsense

Bookmark and Share | Tim Wilson
The Age 22nd February, 2008

Following the closure of the Mitsubishi plant in Adelaide, the Australian economy and consumers would support Prime Minister Kevin Rudd and Industry Minister Kim Carr freezing car tariffs.

Instead, Rudd and Carr should use the closure as an opportunity to reduce tariffs, bolster the economy and reduce prices for consumers.

It is always difficult for workers when a factory closes. The loss of jobs, the need for reskilling and fears for workers' ability to put food on the table is an understandable reaction.

The immediate response from the Government is to try to save jobs. A large proportion of their response is driven by the need to "be seen" to be compassionate and caring. Rudd and Carr should not follow this formula.

The Mitsubishi plant closed because it was inefficient and produced cars that few wanted to buy. Days before the closure, Carr asked whether there was anything the Government could do to keep it open. Had Mitsubishi taken his offer, it would only have delayed the inevitable.

Now, Rudd and Carr are focusing on how to bolster the rest of the car industry. Their solution is to consider "freezing" tariffs that are due to be lowered in 2010.

In the late 1980s, tariffs on cars were 45%. Since then, tariffs have been reduced to 10% until 2010, then to 5% until 2015.

The argument for tariffs is that they make inefficient car makers competitive and keep workers in jobs. This logic is poppycock.

No job is "saved" by a tariff. Like most government-imposed regulations, tariffs keep people out of jobs.

Tariffs act to increase the cost of imported cars and aim to make Australian-manufactured cars more price competitive.

Every time an inefficient job is "saved" by government intervention, consumer capital is directed away from an efficient job to keep an inefficient job alive. This is simply not sustainable.

Sustainable jobs are necessary to provide long-term economic security to workers and the Australian economy. Tariffs provide a false foundation for job growth.

Tariffs also remove the incentive to innovate. They limit exposure to competition and remove incentives for car makers to innovate.

In the Productivity Commission's latest Review of Automotive Assistance report, it identified a core justification for the industry becoming an "exporter and innovator" since the late 1980s.

It was a "reduction in tariffs that exposed the industry to increased international competition and also reduced costs for consumers and increased their vehicle choices".

The point has not been lost on Mitsubishi. Its chief executive in Australia, Rob McEniry, admitted that one of the main reasons for closure was the domestic decline in the large-car market and changing consumer demand.

A tariff freeze will also have wider, negative consequences - it will keep prices high for consumers.

At the last election, Rudd claimed he would stop price rises in petrol and groceries. He has already expanded government regulatory power to try to stop price rises.

Rudd cannot stop price rises on groceries and petrol, but he can reduce car prices. Tariffs add to the price of vehicles. For consumers, that means higher loan repayments, particularly when coupled with rising interest rates.

Instead of pretending to care, Rudd and Carr should act in the best interests of Australians.

They should ignore the temptation of a tariff freeze and continue the gradual reduction in car tariffs to deliver sustainable jobs, a more innovative industry and cheaper prices for all Australians.