In the wake of the downsizing of Ford’s Geelong operations, Victorian Premier Steve Bracks has urged the federal government to reconsider its planned 5% tariff reduction on imported cars, due in 2010, in an effort to help the domestic market.
There’s that special pleading again for the car industry. I expect Steve Bracks is on stronger ground than he realises. Cutting tariffs below their current levels will of course harm the car industry. That’s actually how tariff cuts have helped economic growth in the last decade – by slowly moving resources from lower productivity industries to higher productivity industries.
That’s going on at greater pace right now as returns to mining surge and the economy directs increasing resources to it.
But below some level, cutting tariffs actually makes little sense. Like some economic advice followed during the depression, the pain appeals to our sense of virtue but if anything it makes things worse in the long term – not better. Why? Because cutting tariffs increases imports which must be paid for by increased exports. And for some exports — like wool and wheat and coal — we can’t increase them without cutting their price.
So, as the Productivity Commission’s modelling illustrates, the economic gains from shrinking the industry a little are outweighed by losses from export price falls. The argument is actually stronger than this, but the industry hasn’t funded the necessary work to demonstrate it.
Nor has the Bracks or Rann Government. Surprising – yes. Sad – definitely. But true.