Tariff cuts do more than handouts

Bookmark and Share Trade & IP Unit | Tim Wilson
The Australian 11th June, 2008

Kevin Rudd likes to project himself as the heir of the Hawke-Keating reform agenda. But Bob Hawke and Paul Keating reformed even when it hurt politically.

The Government's own data shows that automotive industry assistance and tariffs are costing the economy the equivalent of almost 30,000 jobs. Rudd and Innovation Minister Kim Carr should demonstrate the same ticker for reform by phasing out tariffs.

Last Thursday the Productivity Commission released its report into the economy-wide modelled effects of removing automotive tariffs and support. The commission's modelling found that the benefits could be as high as $500 million, with most of the gains coming from removing tariffs. The present tariff rate is 10 per cent and is scheduled to be reduced to 5 per cent in 2010.

The commission's report coincided with the announcement by Holden it would cut 500 jobs at its Fishermans Bend plant. Following the announcement, Carr gave the strongest hint yet that the Rudd Government would act to protect jobs by freezing the tariff phase-out.

A tariff freeze would be a disaster for the Australian automotive industry and Australians generally.

The problem the industry has suffered from is that government support has shielded it from the need to adapt to changing consumer demand. It isn't until consumer demand collapses that the industry faces a crisis and adapts. During the past 20 years consumer demand has shifted towards smaller vehicles and sports utility vehicles.

Advocates of a tariff freeze believe it will protect jobs. It won't. Instead it costs sustainable jobs in viable industries. Australian Bureau of Statistics data demonstrates the cost to jobs caused by tariffs. In the 1980s, tariffs were as high as 57.5 per cent and Australia exported slightly less than $400 million worth of road vehicles.

Since then tariffs have been gradually phased down to 10 per cent. In 2007 Australia exported $4 billion worth of road vehicles.

Rudd and Carr should let the numbers speak for themselves: higher tariffs equal fewer exports, lower tariffs equal higher exports.

Analysis of the Government's data shows the true cost of protection.

Import duties on passenger cars and light commercial vehicles in the 2006-07 financial year totalled $1.2billion. According to the latest ABS data, the average full-time Australian income is $57,860.40. A simple calculation shows tariffs have cost the Australian economy the equivalent of 20,740 jobs. Similarly, between 2001 and 2015 the industry will receive $7.2billion of assistance through the Automotive Competitiveness and Investment Scheme. This program amounts to about $480 million a year in assistance. The ACIS program alone costs the equivalent of 8296 average Australian jobs.

Advocates of tariffs will argue that losing these 30,000 jobs comes at the expense of saving the present 61,200 jobs in the industry.

But such an argument is based on false logic. In the absence of existing jobs, the capital used to pay their wages would be redistributed to other sections of the economy, creating sustainable jobs elsewhere. Government trying to protect jobs during a skills shortage is absurd. Australia is importing labour from across the world to fill a growing void. Yet the Government thinks it is appropriate to act to protect jobs for workers who are in dire need in other industries.

Tariffs are also unduly cruel on those working in the industry. Temporarily propping up jobs creates disincentives for workers to reskill and adapt to the changing market. Instead they are encouraged to stay in their present jobs until the industry falls apart. Then they are left high and dry. They have only the Government's tariffs to blame.

But, ultimately, the cost of tariffs are felt by ordinary Australians. They are the ones who have to pay higher prices for vehicles because of tariffs.

Now the Government is going to splurge a further $35 million of taxpayer money to subsidise Toyota to build hybrid cars in Australia. Doing so is building an industry on false foundations. It is a symbolic measure so Rudd can appear as if he is doing something to reduce carbon dioxide emissions and to support jobs.

Rudd shouldn't go weak at the knees because Holden has finally cut unsustainable jobs. When the automotive industry review's report comes to cabinet, Rudd should prove his commitment to reform, promoting innovation and reducing the burden on working families. He can do all of this by opposing a tariff freeze.