The End Of Australian Manufacturing?

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Is this the end of manufacturing in Australia? For car making, it certainly is. The announcement yesterday by Toyota that it would shut down its Australian plant at Altona marks the end of auto manufacturing in Australia, after more than 60 years.

For those prepared to apportion it, there’s plenty of blame to go round. Australian car making suffers from economies of scale. Our market is not big enough to justify the very large production runs of more efficient overseas facilities. Australian costs are high; we are a high-wage and high-cost country, especially when counted in cheaper overseas currencies. Toyota says their plant here wasn’t making money.

There’s no doubt that the high Australian dollar is a key culprit. For that we can blame Australia’s massive mining boom of the last decade. Mining wealth creates jobs and export income for Australia. But it also pushes the dollar up, making local industries less competitive. Imports become cheaper, while things made in Australia become more expensive.

Economists and commentators have been warning of the consequences of a high dollar for a long time now. When I wrote about the problem back in 2010, I quoted economist Saul Eslake, who explained that “one of the corollaries of the present mining boom is a very high value of the Australian dollar that is hurting the competitiveness of sectors such as agriculture, manufacturing, tourism and education.”

“Although the mining industry is generating a lot of prosperity for Australians at the moment, and will do in the foreseeable future, nonetheless the mining industry can't possibly guarantee prosperity for the vast majority of Australians given that it accounts for less than 3 per cent of total employment.”

And there’s the rub. While employment in mining has grown quickly in recent years, it only accounts for around 277,000 jobs, according to the most recent Bureau of Statistics data. Even after a long decline, manufacturing still employs around 943,000. Mining employment could triple and still employ fewer Australians than manufacturing. Industries like tourism and higher education, which have also been dramatically affected by the high dollar, employ hundreds of thousands more.

Manufacturing — particularly modern, “elaborately transformed” manufacturing — is important is other respects. It helps drive innovation, playing a crucial role in the system of industry-led research and development that academics call our “innovation system”. The shutdown of auto manufacturing in Australia inevitably means that plenty of skills and ideas will leave our shores for places where they are in demand. That represents a loss for the whole economy.

The centrality of auto manufacturing to Australia’s broader industrial economy was the key reason the previous Labor government was prepared to hand over billions of dollars of taxpayers’ money to global multinationals like Toyota, Holden and Ford. Opposition leader Bill Shorten argued last night that the demise of the car industry was “not inevitable”, and that more could have been done to keep Ford, Holden and Toyota making cars here.

Such arguments are now academic. The Abbott government has clearly decided that it won’t keep shelling out subsidies. The government is on firm ground here in terms of economic theory. For the economic dries like Joe Hockey and Matthias Cormann, government intervention is always a bad idea. An industry that can’t make money doesn’t deserve taxpayer support. QED.

Of course, nothing is ever that simple in economics, and there are many who argue that if Australia had done more to quarantine the explosion of mining wealth created by a once-in-a-century commodity price boom, the dollar would not have been so high. The purpose of Norway’s massive sovereign wealth fund, for instance, is not just to sock money away for a rainy day. It is also intended as a buffer against strong currency fluctuations that could damage Norway’s domestic economy. Australia has neither a sovereign wealth fund nor an adequate national mining tax.

A proper mining tax could have funded investment in sunrise industries, new technologies and growth exports (this was not where Wayne Swan’s mining tax was going to fund, by the way: it was directed towards super and infrastructure spending). Even if car making was ultimately doomed, mining profits might have been used to ramp up Australia’s basic research investment, and to provide better venture capital funding for promising start-ups and industries.

True to its beliefs that the market knows best, the Coalition has moved in the opposite direction when it comes to innovation policy.

The Abbott government will repeal the mining tax. It has announced cuts to the Australian Research Council, our key basic research fund. It plans to abolish the Clean Energy Finance Corporation, which is funding the renewable energy industry, even though the Corporation will actually turn a profit. When it comes to infrastructure spending, the Coalition has decided to fire the government’s chief infrastructure advisor, because he opposes the government’s pro-roads priorities.

None of this is good news for the Australian economy. The mining boom simply can’t last forever: what goes up must eventually come down. Indeed, iron ore prices are already looking weak. The huge gas boom that is fracking half of Queensland and New South Wales could also be vulnerable in the medium term, because new technologies like solar will soon represent a cheaper way to generate energy. Finally, much of Australian resources demand is of course tied to the health of the Chinese economy, which cannot continue to grow at current rates indefinitely.

The tricky economics of Australia’s hollowed-out manufacturing sector are also creating new political dynamics. Industry policy was one of Labor’s strong suits in office, and “fighting for Australian jobs” gives Bill Shorten a strong message that plays the strengths of a former union leader.

Abbott has handled the departure of Holden and the crisis at SPC Ardmona surprisingly poorly. With Holden, the government basically dared the carmaker to leave. At SPC Ardmona, it chose to attack the workers involved, claiming their wages and conditions were too generous. With Toyota, Abbott is running a line about “adaptable people” being able to get new jobs in other industries. History shows this won’t be the case for many of those laid off, and opens up Abbott to charges of callousness.

Lenore Taylor wrote a sound analysis in the Guardian yesterday, in which she pointed out that the sudden collapse of the car industry has focused politics back on economic issues. The economy — in the form of the carbon tax and the budget deficit — was a critical weapon for the Coalition in opposition. Bill Shorten’s challenge is to turn the economy to the opposition’s advantage.

As opposition leader, Abbott was skilled in convincing voters that Australia’s solid economic performance was actually being wrecked by the carbon tax. Now that he is prime minister, Abbott will have to contend with a budget deficit of his own, coupled to a slowing economy, in which unemployment is growing and inflation inching up. It’s a tricky set of numbers that offer Labor some genuine options for attack.

Ben Eltham

Ben Eltham is New Matilda's National Affairs Correspondent.

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