September 17th 2011

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Articles from this issue:

COVER STORY: Remembering the day that shook the world

EDITORIAL: A decade after 9/11: bin Laden's failure

CANBERRA OBSERVED: Can Labor learn from the Rudd and Gillard fiascos?

IMMIGRATION: Labor in denial after High Court sinks "Malaysia solution"

OPINION: Party of the last, the least and the lost

ECONOMIC AFFAIRS: Australian manufacturing at the crossroads

SOVEREIGN WEALTH FUND: Consensus builds for new national approach

FINANCIAL AFFAIRS: Ruby anniversary of demise of gold-backed currency

MARRIAGE: Same-sex marriage will damage family and society

OPINION: Julia Gillard's gift for Father's Day

SOCIETY: Fatherlessness linked to violence

ABORTION: Women deprived of independent counselling

BOOK REVIEW A sequel that surpasses the original

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Australian manufacturing at the crossroads

by Ken Aldred

News Weekly, September 17, 2011

On Friday, September 2, the ABC midday news reported that 9,000 jobs had been lost in recent weeks, many of them in manufacturing. It capped off a series of disastrous retrenchment announcements by major Australian companies, including the 1,400 jobs lost in BlueScope Steel.

Paul Howes, national secretary of the Australian Workers Union, claimed manufacturing had entered a “major crisis”. He and others commenting in the media claimed that cheap imports from China and the marked rise in value of the Australian dollar were the culprits.

Moreover, industry chiefs and industry association heads, union officials, parliamentarians of all parties, columnists and numerous journalists have called upon the federal Labor Government “to do something”. This has already led to the announcement of some band-aid measures, such as the $100-million emergency assistance package for BlueScope Steel to restructure.

A number of observations have to be made about this frenzy of media activity and panic-stricken remedial measures.

First, the pressure from Chinese imports and our currency appreciation may well have been the catalyst that pushed much of Australian manufacturing over the edge. However, the decline of Australian manufacturing has been incrementally going on for a quarter of a century, and the present crisis has obviously been coming for a long time.

Second, there has been no coherent national industry policy throughout that time, though there have been spurts of microeconomic policy initiatives that have impacted on industry overall, such as labour market reform, research and development grants, and occasional export drives in particular markets.

Third, many of those now calling for “something to be done”, especially in the media and academia, have long espoused the economic rationalist line of the federal Treasury. In addition, they have been highly critical of those who have mounted a case for a viable manufacturing industry sector in Australia, often dismissing them as “troglodytes”.

Nevertheless, whatever past positions that organisations and individuals have held on industry policy, it is good that everyone has now had a long overdue reality check!

We now need to consider the exact state of manufacturing in Australia today and how we got there. Manufacturing’s contribution to Australian gross domestic product (GDP) peaked in the early 1960s at over 25 per cent, but has since fallen steadily. By 2005-2006 manufacturing contributed about 10.4 per cent of Australia’s GDP.

As at June 2010, manufacturing was only 8.65 per cent of GDP, or $111.1 billion out of a total GDP of $1,284.0 billion. Manufacturing makes the highest contribution to state economies in South Australia (15 per cent), Victoria (14 per cent), Tasmania (14 per cent) and New South Wales (11 per cent).

However, these overall GDP figures are misleading for there has been a significant shift in manufacturing output among states. At the beginning of the period 2001-2002 to 2006-2007, New South Wales and Victoria accounted for 64 per cent of total manufacturing output; but by the end of this time their share had fallen to 60 per cent. At the same time, Queensland, Western Australia and Tasmania all increased their share of the national total.

This is explained by very differing growth rates among the states. New South Wales and Victoria have had very poor growth rates. In fact, in real terms, output fell. Between 2001-2002 and 2006-2007, manufacturing’s gross value added (GVA) in New South Wales declined by just under 1 per cent, while for Victoria it fell by over 3 per cent.

The complete opposite applied in Queensland and Western Australia over the same period. Queensland’s average growth rate was 4.5 per cent, upping manufacturing GVA over the five years by nearly 25 per cent. It was just as marked in Western Australia where the average annual growth was just over 6 per cent, increasing manufacturing GVA by 35 per cent.

Over the past decade, employment has remained remarkably static at just over one million people. While employment in the wider economy grew by 2.4 per cent during 2001- 2002 to 2006-2007 there was no growth in manufacturing employment. It fell from 12 per cent of total employment in 2001-2002 to 10 per cent in 2006-2007.

As far as industry sub-divisions are concerned there are, as with the states, substantial differences. In the 2001-2002 to 2006-2007 period, food, beverages and tobacco, and metal product sub-divisions grew at an average annual rate of just over 1 per cent. Meanwhile, wood and paper products and the printing, publishing and recorded media showed average annual growth rates of just under 1 per cent.

All remaining industry subdivisions recorded falls in employment. The worst was that of textiles, clothing, footwear and leather, which over the five years to 2006-2007 fell by 32 per cent.

On the evidence to date, the global financial crisis of 2008 appears to have simply hastened the trend already discussed. Demand for raw materials from a modernising China has boosted industry in Western Australia and Queensland, including for those elements of manufacturing that directly support mining. New South Wales and Victoria have continued to be under pressure.

So where did all this start? The demise of manufacturing can be traced back to the 25 per cent slashing of tariffs by the Whitlam Labor Government in July 1973. Certainly, some tariffs were at excessive levels, of over 60 per cent in the 1960s; but the dramatic cuts of July 1973 were a major blow to Australia manufacturing.

The Hawke and Keating Labor governments put in train a longer-running tariff reduction program from 1985 onwards. Our unilateral cutting of tariffs was not reciprocated by our trading partners.

Moreover, during the 1980s and 1990s Australia’s strong anti-dumping regime was dismantled, including the abolition of the Anti-Dumping Authority. It is now virtually impossible to mount an anti-dumping action even if the law is theoretically on your side.

In addition, while non-tariff barriers are effectively non-existent in Australia, our heroic stance has not been replicated by our trading partners. The French, Italian, Korean and Japanese governments, for instance, have used a range of simple administrative barriers with deadly effect against proposed imports to their markets. These barriers have ranged from inconveniently locating customs posts for particular items to raising alleged health and safety concerns about incoming foodstuffs.

Australia has over a quarter of a century lacked any cohesive industry policy or vision for manufacturing. There have been sporadic forays into labour market reform, research and development, export drives and numerous and often expensive bailout packages for particular companies.

At this point it has to be asked: is manufacturing worth saving? There is an overwhelming case that it should be.

First, there is the employment argument. Despite its diminished state, manufacturing still employs one million Australians. Mining employs only 200,000.

Second, we cannot accept a “hollowed out” economy based solely around mining and services. Germany and Japan would never accept such a proposition.

Third, mining itself needs a strong manufacturing base to produce the plant and equipment needed to operate Australian mines.

Fourth, we live in a volatile world at the moment with changing alliances. Australia would not want to be in an international foreign policy or defence crisis and find itself cut off from key manufactured goods, including defence supplies.

Finally, though it may seem academic at the moment, former Prime Minister Kevin Rudd’s rhetorical question, “What happens when the mining stops?”, is a good one. If you want an answer to that, look at Nauru, albeit it is on a small and limited scale.

As a matter of priority, the current federal Labor Government, or an incoming federal Coalition Government, needs to put in place a comprehensive industry policy package, backed by a stronger Department of Industry. Such a policy would need to bring together all the disparate elements that currently pass for industry policy on an ad hoc basis.

There is a strong case for a revamped and substantial investment allowance, backed by depreciation allowances, research and development grants, export and market development grants, that need to be implemented with more consistency than they have been over recent years. Constantly changing rules in these latter areas are very confusing to industry.

Our anti-dumping regime needs to be vigorously strengthened and, more to the point, actually applied against those that breach the regime. Many of our trading partners, in particular the United States, would never tolerate in their own anti-dumping provisions the cavalier manner in which our provisions operate. At the moment, it might as well not exist.

In addition, there is a good case for establishing and implementing local procurement policies by the federal government, as proposed by AusBuy and others. It would have to be done with care so as not to breach World Trade Organistion (WTO) rules, but it is possible. In some areas, such as defence supplies, it is crucial.

Also essential is a review of Prime Minister Julia Gillard’s industrial relations laws, as suggested by the Reserve Bank Governor, Glenn Stevens, in his recent appearance in Melbourne before the House of Representatives economic committee. He tellingly made the point that a slowing economy and weakening productivity in Australia made such reforms essential.

On the issue of tariffs there can be, in a balance of payments crisis, a case for a short-term tariff of say 10 per cent. Such a tariff at that level would not breach WTO rules. However, all of those still in favour of tariffs must remember that, in today’s world of rapidly changing exchange rates, it only takes a marked series of changes in the value of our currency to completely negate any short-term tariff that may have been applied.

Adoption of the foregoing measures would restore incentives and certainty to Australian industry. The past cannot be rewritten, but maybe a comprehensive industry policy would have encouraged BlueScope Steel to invest in its own iron ore and coking coal mines, which BlueScope’s chief executive Paul O’Malley conceded were a missed opportunity.

Above all else, if our manufacturing industry is to recover and progress into the future, it must be assured that the federal government, of whatever political persuasion, actually wants a viable manufacturing sector for Australia.

Ken Aldred is a former federal Liberal member from Victoria and a former chairman of the Society for Australian Industry and Employment (SAIE). 

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