COVER STORY: by Peter WestmoreNews Weekly
Top manufacturer slams free trade 'fantasy'
, August 5, 2006
BlueScope Steel CEO Kirby Adams tells Canberra to drop ideology and stand up for Australian manufacturing.The chief executive of Australia's largest manufacturer of steel products, BlueScope Steel, has called for a reversal of Australia's pursuit of free market ideology to save Australian manufacturing industry.
Kirby Adams, American by birth but Australian by choice, was speaking at the American Chamber of Commerce on July 14, where he reported on the current state of BlueScope's global operations, and commented on the Federal Government's trade and industry policies.
Formerly BHP Steel, BlueScope is not only Australia's largest steel manufacturer, but also has steel manufacturing plants in many other countries, including China, Thailand and the United States, where it is growing rapidly.
Since being publicly listed as a separate company four years ago, BlueScope has undertaken a major global expansion, and now operates 84 manufacturing plants in 17 countries.
Mr Adams' approach therefore cannot be said to be influenced by a narrowly protectionist view. Yet he was highly critical of the Australian Government's adoption of the free trade ideology.Decline
After describing the relatively small size of the steel industry in Australia, compared with manufacturers in Asia, he said, "One of my genuine concerns has been the continuing decline of manufacturing in Australia, and the lack of concern in Canberra.
"Two decades ago, manufacturing comprised 18 per cent of gross domestic product. Today, manufacturing comprises just 13 per cent of GDP.
"That is smaller - as a proportion of our economy - than the manufacturing sectors of New Zealand (19 per cent), the United Kingdom (17 per cent), and the United States (14 per cent).
"And it is much smaller than China, where manufacturing accounts for 39 per cent of GDP (three times Australia's)."
While enthusiastically endorsing the success stories in manufacturing in Australia, including those in housing and car manufacturing, he said Australians must recognise that, overall, there has been a substantial "hollowing out" of Australia's manufacturing capacity which has "worrying implications" for the country's future prosperity.
"In our view, it is virtually unprecedented for an advanced OECD economy to have its manufacturing sector comprising less than 10 per cent of GDP. So we must ensure the sector does not get any smaller," he said.
"Despite its small size by world standards, manufacturing in Australia is still the largest employer, the largest investor in research and development, accounts for the largest share of merchandise exports by industry sector, and represents some of the best paying and highest skilled jobs.
"And yet the voice of manufacturers is not being heard. We believe it is vital that the 'unconscious drift' of manufacturing from Australia is halted, and that we do not accept its decline as a fait accompli
He said that a revitalised and carefully considered national reform agenda is needed, which would contribute to the growth of domestic manufacturing industry.
These include efforts to bring corporate tax rates into line with those which apply to countries with competitive industries. "For example," he said, "BlueScope Steel in China enjoys an effective tax rate of around 15 per cent, versus 30 per cent here."
Additionally, he called for more generous tax concessions for research and development, to keep technology in Australia for product development, manufacturing and export.
He also urged a major cut in government red tape, "currently growing at around 10 per cent per annum, or more than twice the rate of GDP growth".
He also called for infrastructure reform, saying "it is a national disgrace that, in the 21st century, we still cannot move our steel products over one unified rail system across Australia".
On trade policy, he described some government leaders as being "naïve" in their approach to international trade.
He said, "Let's be realistic - we are a nation of only 20 million people. Yet we are caught up in ideology ... in the fantasy that we can lead the world to a free trade 'nirvana' by unilaterally dropping our tariffs."
He warned that, while some people claimed there were overriding benefits for those countries that unilaterally liberalise trade, "there are massive costs for Australia's manufacturers, and for the millions of men and women employed by them.
"Australia unilaterally liberalised its agricultural tariffs, but now finds it faces a stalled Doha trade round - stalled by the refusal of the Europeans and Americans to do likewise - and we were inundated with EU-subsidised Belgian peas.
"Unilateral liberalisation is a precarious strategy. It means Australia has little to give away when negotiating bilateral trade deals."
In relation to the proposed free trade agreement with China, he said that negotiations must remedy some critical imbalances in the current trading relationship between the two countries.
"A threshold issue for the Australian steel industry is the current imbalance in tariffs between China and Australia. The Australian steel industry has very low levels of tariff protection, and negligible government support. In fact, most flat steel products are able to enter Australia from China tariff-free.
"By contrast, Australian steel companies face tariffs of up to eight per cent, if they choose to export flat steel products to China. This may not sound like a large barrier, but in a highly competitive global market, it is enough to make Australian steel products uncompetitive in China, the world's biggest market. That is one of the reasons why BlueScope Steel manufactures in-country in China.
"We certainly support the legitimate aspirations of China to modernise its economy and raise living standards for its people. But it is hard to argue that China is a developing country in relation to its steel industry - which is 50 times larger than Australia's, the world's largest by four times, and with most of that enormous capacity built within the last 10 years."
He said that any trade agreement with China must address these imbalances, either by lowering its tariffs, or increasing Australia's.
He admitted, "In Canberra, I might be labelled a 'protectionist' for expressing these views."
"Okay," he said. "I do want to protect Australian shareholders, Australian jobs and future jobs, and Australian exports. Isn't that why we employ our governments? To protect us?"
He emphasised that BlueScope Steel supported free trade and open markets, underpinned by a rules-based trading system.
"We were a strong supporter, for example, of the Australia-US Free Trade Agreement. In that case, an FTA was an important tool in ensuring a more fair trading relationship for Australia's steel industry.
"The story in China is, however, somewhat different. The Australian steel industry, and its manufacturing customers, do not want to see an amplification of the unfair trading behaviour of some Chinese manufacturers, which an FTA could bring."
Among these practices - referred to by the chairman of BlueScope, Graham Kraehe, at a recent trade conference in China - were instances of steel products being imported into Australia from China and sold at less than the cost of the raw materials that went into making them.
Another was where a company supplied by BlueScope said it could not compete with Chinese imports, even if BlueScope supplied the steel free.
"Pricing their products at below cost is a clear indicator of the non-commercial behaviour of some Chinese steel companies," Mr Kraehe said. "The conclusion that many Australian manufacturers draw is that some Chinese steel-makers are receiving subsidies or other support, either overt or covert."
Mr Kraehe added, "If companies are cross-subsidising their own products, that is one thing. But if subsidies or other supports are being provided by provincial governments, or by state-owned banks, or other state-owned infrastructure providers, then that must be addressed."
Mr Adams said that Australian manufacturing could only prosper by building international markets, because Australia's domestic market is too small for most manufacturers "particularly if we persist with this zero-tariff ideology".
However, he said that, for the sake of Australia's future prosperity, "we must acknowledge the importance of our manufacturing sector, in creating skilled, well-paid jobs, in driving innovation across our economy, in generating wealth for shareholders, and in generating the exports that will sustain Australia beyond the current resources boom".Support
Governments need to be more realistic in their support for and respect for manufacturers, he said.
"Governments need to be prepared to drop ideology, and find pragmatic ways to support manufacturers, when it is in the interests of the country to do so. And they need to take a tougher line with companies and trading nations who refuse to play by the rules," he warned, making a clear reference to unfair trading policies conducted by countries such as China.