Posts Tagged ‘bailouts’

A car (industry) in search of direction?

November 10, 2008

So the Australian government has delivered its latest pile of assistance for the car industry. The new package looks like delivering $6.2b in assistance over the next 13 years. This is $3.4b more than previously allocated. That is certainly a large sum. As discussed in an earlier post, the auto industry is a wonderful case study in the dynamics of government-business interaction in the face of globalisation pressures.

So is this a case of greater trade barriers, and thus a retreat from globalisation?

This is not as easy question as it might first seem. Certainly, this is a huge package of subsidies. Any aspects that reduce the costs of producing a car in Australia (such as significant topping up by the government of the firms’ R&D spending) are distorting the allocation of resources away from free market outcomes where comparative advantage can play out.

On the flipside, Australia continues to reduce tarriff levels on imported vehicles. This is an unequivocal move towards freer trade.

So we are left trying to weigh up the globalising versus distorting dimensions of the package. Or put differently, we might want to look at the rationale for the distortions. Australia does not make these decisions in isolation. Other Western nations, from the US to Europe are also looking at ways to salvage the auto industry. The industry itself attracts disproportionate amounts of policy-makers’ attentions and cash due to the prestige and visibility of the products, the noisy labour market ramifications of any downsizing, and the much discussed flow-on effects on local suppliers.

Multinationals are increasingly able to pick and choose between locations with regards to availability of subsidies. Australia could be seen as just trying to compete with its Western rivals in this market. It is a perverse form of trying to build comparative advantage, but its the political reality.

Meanwhile, the real story is the ongoing success and growth of Asian automobile manufacturing and assembly. As I said in my earlier post, the sad part of the story is the lack of consideration of where this $6.2b could be more effectviely spent (tertiary education anyone?). I am also not alone in fearing that this level of industry pandering might spread.