The government this morning responded to BlueScope Steel’s announcement of 1000 job losses and the closure of a blast furnace at Port Kembla and another facility in Victoria by rushing forward its “Steel Transformation Plan” from its carbon pricing package. The $300 million plan was due to start with the carbon price on July 1 next year but BlueScope will be able to access up to $100 million between now and then. The funding is conditional on the company remaining committed to steel production and not permanently shutting down the facilities it is closing. There’ll also be a package of transitional assistance for the affected workers.

Welcome to “Dutch disease” — what happens when a resources boom sends your currency skyrocketing and wrecks your manufacturing industry. Paul Howes of the Australian Workers’ Union is warning there’ll be a lot more of it in coming weeks.

While the Steel Transformation Plan — a testimony to Howes’ lobbying on behalf of his members in the carbon tax process — will see several hundred million dollars devoted to propping up the lazy BlueScope management (see Glenn Dyer’s excellent comparison of BlueScope and OneSteel below), the package is more significant for what it doesn’t do — succumb to growing protectionist pressure. The government is under considerable pressure from backbenchers and the AWU to somehow increase domestic demand for locally manufactured steel. But the government has correctly resisted it, even as a “temporary” measure. The two ideas being floated are to make greater use of local steel by making “local content” a greater requirement for government infrastructure projects, or to force the private sector, and especially mining companies, to make greater use of locally-manufactured steel.

Both are lunatic. Forcing contractors on government-funded projects to use locally manufactured steel rather than cheaper imported steel ensures taxpayers pay more for infrastucture and get none of the benefits of a rising dollar. Protectionism is protectionism whether it’s enforced or voluntary. It’s cheaper and more effective simply to give money directly to steel companies rather than try to send it indirectly via infrastructure construction contractors who’ll swipe a cut for themselves. And if adopted, at what point can taxpayers be allowed to start asking for projects to be done on the most cost-effective basis rather than on the basis of whatever is best for Australian industries? “Infant industries never grow up” is an old anti-protectionist line, and sick industries never recover. There’ll always be a demand to persist with “local content” rules even when the dollar is back down and the industry is in rude health. Don’t want to cause job losses eh?

Forcing private companies to use locally manufactured steel goes even further into economic cuckoo land, in effect imposing a tax on them to prop up other industries. Again, there’s a far more effective way of doing that, via a proper resources rent tax regime, rather than imposing elaborate and costly regulatory requirements.

And that’s to say nothing of the signal Australia, one of the few committed free trading countries in the world (apples aside), would be sending to other countries as they grapple with the onset of another economic slowdown and are tempted to, in turn, start imposing their own forms of protectionism — never called that, of course — to shore up their own economies.

As Dyer shows with OneSteel, a higher dollar need not be a crippling blow if a management is innovative and seeks opportunities — especially opportunities offshore, which are now considerably cheaper courtesy of the higher dollar. There are benefits as well as “Dutch disease” costs in a stronger currency if companies are prepared to pursue them offshore.

Maybe Australia’s domestic industries should have thought all this through when they sat back last year and watched the mining industry destroy the Rudd government’s RSPT, which would have effectively used the resources boom to deliver real benefits to local manufacturers through lower taxes, a bigger savings pool and better infrastructure. But that sort of vision is probably too much to have asked for.

Peter Fray

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