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Who needs a car industry anyway?

Ideas@TheCentre – The CIS newsletter (Sydney), 17 February 2012

On Monday, The Australian reported that struggling car manufacturer GM Holden had agreed to give its employees a substantial pay rise of up to 22% over the next three years. This was surprising coming from a company that depends on ongoing taxpayer support for its survival. However, after decades of car industry subsidies, the public has almost become used to such scandalous behaviour.

It is easy to criticise Holden’s pay deal for the obvious prevalence of lobbying over rational economic policy. It shows the power of unions to extract subsidies from their mates in government. And we could also wonder why ordinary Australian taxpayers should have to pay for the production of cars they are shunning as consumers.

However, the fundamental question is much simpler: Should Australia have a car industry at all?

Supporters of an industry – any industry – always come up with the same arguments: it is a major employer; it generates technological spill-over effects; and it is ‘strategic’ (though the term is seldom defined).

The closer you are to an industry, the more such arguments seem to make sense. After all, nobody likes to see a big employer disappear from one’s city or state. And of course there will always be a few successful or innovative parts of the sector. But do they justify keeping the whole industry alive at enormous costs?

A dispassionate look from the outside may aid a more balanced view. The same arguments being made for keeping Australia’s car manufacturers alive have been made for Germany’s coal industry for decades.

Since the late 1950s, German black coal could no longer compete with imported coal – much of which came from Australia and cost between a third and half the price compared to domestic deep-mined coal. For employment, technological and strategic reasons, German governments continued to subsidise mining for decades at a total cost of about $430 billion with no success in making the industry competitive with countries like Australia; subsidies are scheduled to be phased out by 2018.

From an Australian perspective, it is obvious that Germany’s coal subsidies were a complete waste of money. All these years, Germany could have imported cheaper energy from Australia while saving enormous amounts of money – money it could have spent regenerating former coal towns.

It’s the other way around for Australia: Instead of pumping in billions of dollars into the car industry, Australia could have imported vehicles from countries that are simply better placed to produce them on a large scale. Countries like Germany, for example. The money saved could help find a new raison d’être for places like Elizabeth, South Australia.

Holden’s outrageous pay deal is just the tip of an iceberg of wasted subsidies. Australia needs a car industry as much as Germany needs its own black coal mines.

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