INDUSTRY POLICY: by Martin FeilNews Weekly
What will come after the mining boom?
, February 18, 2012
The decline of manufacturing in Australia is a topic that I believe is almost the defining question for the future of this country.
It is an issue that has engaged me for virtually the past 40 years. During that period, manufacturing’s share of gross domestic product has fallen from 27 per cent to 8.3 per cent.
Our net foreign debt in 2012 is about $740 billion. It would be almost a trillion dollars if our exchange rate against the US dollar hadn’t been distorted upwards by our unprocessed mineral exports boom and the speed with which the US Treasury is printing money.
I fervently believe that Australia must have the ability to pay its way in the world and to control its own destiny. We need to leave to our children a land and society that are not substantially owned and directed by overseas interests. We own much less of Australia now than we did 40 years ago.
Alf Rattigan was chairman of the Tariff Board during the Whitlam Labor Government. It was renamed the Industries Assistance Commission, then the Industries Commission, and finally the Australian Productivity Commission.
Manufacturing doesn’t get a look in at Australian Productivity Commission inquiries. I worked for Alf Rattigan and admired him, but I sincerely believe his philosophical legacy in industry policy has damaged Australia.
Manufacturing industry will pay the highest price for our hubris on climate change and the Gillard Government’s tax on carbon dioxide emissions. The uncertainty of the tax, the auditing and administrative costs, the growth in public service authorities’ “independent” boards and inquiries, and the increase in the competitive advantage of overseas exporting manufacturers — all these will further reduce the competitiveness of Australian manufacturing.
Australian manufacturing is on its knees now, but this new burden will throw it flat on its face. In one mad policy moment, Labor has confirmed the view that it is a poor manager of the Australian economy.
A few months ago, the Melbourne Age published an article by me on the import/export outcomes of our free trade agreement (FTA) with the United States. Many commentators of course regard the FTA as a milestone in our relationship with what is still the largest and most powerful economy in the world.
However, some figures reveal certain uncomfortable truths.
According to the Department of Foreign Affairs and Trade (DFAT), over the seven years of the FTA, America exported over $100 billion more of merchandise goods to us than we exported to America. Australia also has a services deficit in the region of $20 billion.
The DFAT publication, Trade in Primary Manufactured Products Australia 2010, provided pie charts for a number of countries showing the proportions of their imports and exports of elaborately transformed manufactures (ETMs) — that is, sophisticated products such as electronic components, telecommunications equipment, motor vehicles and a variety of other machinery and equipment.
The figures for the Australian economy are devastating. We are at the very bottom of the industrialised world performance league in ETMs.
This performance is a condemnation of the prevailing policy that, in Australia, we just dig stuff up or grow it and ship it out. We have taken our eye so far off the value-adding ball that it can’t be seen on our economic horizon.
We have started talking about manufacturing pharmaceuticals and creating an aerospace industry. This is belatedly seeking to get into the manufacturing space that belongs to the dominant manufacturers in the US, Europe, South Korea, Japan and China. It is a sad joke.
Our performance in innovation and productivity improvements is woeful. Yet the present government has spent a lot of money on this area. Virtually all of it has been a waste of time and money. Malaysia, Thailand, England, Singapore and all of the second-grade manufacturing countries also leave us for dead in the simple process of adding value to raw materials.
The Commonwealth government and the Australian Business Foundation commissioned ETM studies 10 years ago, but the results have been forgotten in the relentless government and academic pursuit of illusory productivity gains.
We have managed to remain solvent by selling property, houses and good businesses. No one seems to know exactly how much we have sold, but I understand that the Prime Minister has initiated a study into it. Treasury tried to do something recently, but gave up when it was confronted by a massive haystack of owning entities that couldn’t be traced to their origins.
Australia’s behaviour reminds me of the silly toffs of the English upper classes in the 19th century. They lost fortunes gambling every night at Whites and Boodles until the family assets of four or five centuries, created by building up acreage and acquiring ownership of coal-mines and properties, were all entailed and lost. Then they fled to France and a life of penury, pursued by the bailiffs.
If everybody else in the world is trying to balance their ETM exports and imports, why doesn’t Australia?
The greatest policies that any Australian government could introduce would be to get back to producing ETMs for our own market at least. Forget about becoming world-class competitors in massively capital-intensive industries. Forget about “the greatest moral challenge of our time” (global warming). And re-negotiate the Australia-United States FTA.
Restructuring the Australian economy requires a lot more knowledge and commonsense than is available from some redundant and archaic economic theories. We need to re-learn how to make stuff and cherish the remnants of manufacturing that we still have.
Tariffs not an option
First, we need to radically change our thinking about industry assistance.
Let’s begin with one simple, empirical fact — tariffs are dead and have been dead for 20 years. Paul Keating said they were dead in the early nineties, and he was right.
However, the assumption that consumers would automatically benefit from tariff cuts was always a joke. There has never been a legislative requirement to pass on to consumers the benefits from cheaper imports. Importers and retailers either passed on a bit or nothing at all.
The ultimate retail mark-ups on import prices may be hundreds of per cent. Evidence presented to the current Australian Productivity Commission’s retail industry inquiry proves that.
The rise of China and India has cremated tariffs for once and for all and blown away the ashes. In the eighties, every country began moving to non-tariff forms of industry assistance.
Government assistance is not protection. The purpose of government is to provide assistance to people. It may be in the form of roads, railways, schools, universities, hospitals, health, aged care, street lighting, defence, tackling climate change, public servants. Governments of Australia, from the Commonwealth down to the local council level, spend a couple of hundred billion dollars a year assisting a range of industries through the massive provision of both economic and social infrastructure.
Why should manufacturing be singled out as unworthy of assistance?
What is our overriding national, economic purpose? It is to employ our population and to avoid having to sell off our land, businesses and assets, because we can’t earn enough income from our exports to the rest of the world.
The rest of the world has used a number of non-tariff assistance policies for manufacturing and other industry sectors for decades, including massive assistance to the services sector.
Europe and the US established non-tariff forms of assistance to agriculture long before World War II. This assistance has undermined the Kennedy and the Doha Rounds for global trade liberalisation for over 50 years. Europe and the US will not reduce their assistance to agriculture and allow developing countries unfettered access to their markets.
The World Trade Organisation (WTO) provides very substantial forms of global protection for the ownership of intellectual property. Service providers such as doctors, dentists, lawyers and academics have effective state and institutional measures to protect their home-grown products.
Sometimes a government must partner its citizens to create infrastructure that has a benefit far beyond specific profit-generation for entrepreneurs.
Iron ore and coal are not even at the level of simply transformed manufactures (STMs), such as clay bricks, paper, pig iron and plaster.
The cost of transporting our iron ore and coal from the mine to the port by road and rail, and then by foreign-owned vessels overseas to China, is almost as much as the cost of digging up the minerals and coal. Our logistics industry contributes more to Australia’s GDP than the manufacturing sector. Logistics contributes 12 per cent, or over 3 per cent more than manufacturing.
STM (simply transformed manufactures) and ETM (elaborately transformed manufactures) country comparisons clearly show that our governments have not partnered private enterprise to develop Australian manufacturing. Governments have had a negative attitude towards manufacturing, and the outcome is plain to see.
Australian agriculture shares the manufacturing dilemma. We don’t add value. We export unprocessed agricultural and meat products and let other countries add value to them. Furthermore, we have allowed our successful food-processing companies to be acquired by overseas food-processing companies.
Our quarantine system has preserved an environment free of pests and diseases, which is unique in a land-mass of our size. Some regard our system as too onerous as it involves physical as well as documentary checks.
Our quarantine rules are being relaxed. Why? Imports of apples from fire-blight-affected regions have been permitted into Australia, following a protracted dispute with the WTO. One of the major arguments for the decision has been the supposed benefit to Australian consumers. The model suggested that import competition from New Zealand would reduce supermarket apple prices and create consumer savings of many millions of dollars. That isn’t true.
The closest we have come recently to a major quarantine disaster was the outbreak of equine influenza in New South Wales in 2007. It occurred because physical examinations of imported horses were replaced by documentary processes which didn’t do the job. The outbreak ruined a number of small businesses.
It is wrong to argue that Australian complaints about “dumping” should not be allowed. It is a global policy of the WTO to stop goods being dumped in your country. Damage to a domestic industry resulting from predatory pricing policies by overseas competitors is unfair.
Australian Design Rules and Standards used to be a very powerful form of non-tariff protection. Similar practices are still employed in the EU countries and have a substantial impact on imports from the US. They are very important in the motor vehicle industry.
Vehicles had to be “homologated” — that is, officially certified to have met specified regulatory standards. Producers had to spend millions of dollars on design, testing and satisfying government before they could sell a vehicle model in a market.
Australia doesn’t participate in many global manufacturing supply chains. Some companies do, but we have generally missed the boat in this area because we have no assistance incentives to offer to owners of the supply chains.
TRIPS [trade-related aspects of intellectual property rights] is a major policy of the WTO. It is totally at odds with the free trade philosophy. That policy is sensible. Without TRIPS we would have no pharmaceuticals, luxury goods or world-wide brand names.
Drugs can be reverse-engineered as soon as they are developed and proven. Global brand names cost an enormous amount of money to develop, but are easy to counterfeit. All of these goods are manufactures, and every country agrees with this type of intellectual property assistance.
The mechanism employed for the TRIPS policy is seizure and destruction of the fakes and an attempt to jail the marketers. That direct government action is vastly more effective than a 5 per cent tariff.
Martin Feil is an economist specialising in tax and industry policy, and is a former director of the Industries Assistance Commission. This article is a shortened version of a speech he delivered at the National Civic Council (NCC) national conference, held in Melbourne on February 4, 2012.