The AIG wakes up

It seems that the Australian Industry Group has finally gotten my message and has sloughed its genteel suasion of policy in favour of a full-throated roar for protection. The campaign is a macroeconomic gamble and may do nothing to alleviate members suffering. But, at least the manufacturing “crisis” I have been calling for has arrived and it does contain the seed of a real solution, even if buried:

Statement by Heather Ridout
Chief Executive Australian Industry group

“The extensive restructuring announced by BlueScope Steel represents chilling news not only for those directly affected in the Illawarra and Western Port but also for all those involved in manufacturing in Australia,” Australian Industry Group Chief Executive, Heather Ridout, said today.

“The steel industry has been battling weak demand, big cost increases and reduced competitiveness and, very importantly, sees no let-up to these pressures in the foreseeable future.

“As responsible management, BlueScope Steel must respond, and this has clearly involved some very difficult choices. No company wants to cut jobs and as a company with such a long and proud history of steel making in Australia, taking such a decision must be extremely tough.

“Ai Group has been warning for some time that the resources boom has not been going to plan and despite the predictions of optimists, is not delivering the promised growth and related opportunities. At this point, the big employing sectors of the economy, of which manufacturing is at the fore, are experiencing stressful trading conditions with the prospect of any respite mired in uncertainty.

“Indeed, manufacturing as a whole is enduring many of the same pressures as BlueScope – weak demand fuelled by global uncertainties and rising interest rates (which are arguably already too high); rising labour costs which are not backed by productivity gains; rising electricity and other input costs; and a high dollar which has pulled the ground out from below our export and import competitiveness.

“To address this requires a comprehensive response which does three things:

  • Responds to the immediate impacts on businesses and employees affected by restructuring which today has focused on BlueScope Steel but needs to be expanded to be available as required.
  • Builds for the medium-term competitiveness of the manufacturing industry.
  • Delivers a longer-term strategy to ensure we have a diversified and balanced economy beyond the boom.

Note that points one and two completely contradict one another. Providing immediate support for businesses affected by restructuring is code for a bailout. And that’s exactly what’s being given in return. From The Australian:

The Gillard government today a $100 million cash injection for BlueScope Steel and foreshadowed a manufacturing rescue package, to be released this week, in the wake of the company’s announcement that it would close its export operations with the loss of 1000 jobs.

But how exactly is this going to improve manufacturing productivity? It isn’t, it’s going to worsen it. If there can be no restructuring there can be no improvement. Moreover, as we know, both the RBA and Treasury have targeted manufacturing for annihilation in the name of freeing up resources for mining. All things being equal, if the Bluescope’s of this world don’t lose workers then interest rates and the dollar will go higher still.

At that point one of two things happen. Either manufacturers lose jobs anyway or the protection is of sufficient magnitude that the AIG succeeds in palming the burden of adjustment onto another tradable goods sector like tourism or education (which is why I’ve been recommending a combined non-resource exporters campaign). If they all got together they might succeed in passing the adjustment onto retail, via the internet and falling house prices.

Of course, I suspect all such pressures will subside as the global economy slows and the dollar falls in the months ahead. But that’s not the point is it? I have no desire to see any other export sector lose jobs either.

A better, more structural approach to the defense of manufacturing is, in fact, point three of the release:

Delivers a longer-term strategy to ensure we have a diversified and balanced economy beyond the boom.

It goes on:

We need a longer-term strategy to deal with the dollar and its impacts. This needs to be articulated and advocated and may include the establishment of a Sovereign Wealth Fund that stabilises the economy without the need for interest rate rises when surges in commodity prices create the risk of overheating. Other countries, including Norway, have adopted this approach and have at the same time helped to offset the appreciation of the exchange rate by investing the fund in assets held offshore.

Yes, they have. But the money has to come from somewhere. Either the government cuts spending and funnels the money offshore or it imposes greater taxes on the boom sector, mining, then funnels the proceeds offshore. So the AIG has to push the government to either consider taking money out of voter’s pockets or out of miner’s pockets. That’s no easy task either way but one looks to me easier than the other.

Houses and Holes
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Comments

  1. The current situation is a high tax and regulation for businesses operating in Australia and little or no tariff. That makes Australian based manufacturing a sitting duck.

    My preferred solution would be much more limited regulation and tax governing business in Australia AND keeping low tariffs. And let’s just say that my free market credentials are pretty good.

    However, there is the small matter of political reality.

    I suggest that it might be possible to sell the public on a fixed increase of a 10% tariff across the board (with no carve outs – certainty would be the key) in exchange for a 10% reduction in net tax for business in Australia (ideally this should be made as neutral with respect to business form as possible – yes I know this is complicated – but let’s for arguments sake say a 15% reduction in corporation tax). It must be locked in too so that it impossible to tinker with otherwise you’ll get all sorts of vested interests trying to get exceptions or asking for the tariff to be raised higher on their particular industry. Think GST – flat rate limited, if any, carve outs.

    The end result would be to get the same revenue we get from tariff as we do currently from domestic businesses. Over time we should try to do with less revenue and become a freeer society relying less on government and more on ourselves.

    Again, yes I know this would be a breach of our WTO obligations and other trade commitments (and, again, I stress my preferred option would be just to reduce tax and regulation in Australia).

    It’s not as though the fluctuations in the dollar don’t increase the cost of goods anyway (and – if I’m thinking clearly this afternoon – the tariff would be higher for consumers when the dollar is high and lower when the dollar is low).

    I would genuinely be interested in criticisms of this approach.

    • You’ll need to be collect a LOT in tariff to make up for the cut in corporate tax rate. Further more, cut in corporate tax means nothing when you’re making a loss due to the high dollar.

      A potential solution is to tweak the ‘carbon tax’ so it’ll be imposed on import from countries without one (i.e. China, India, etc), and then rebate our exporters. It’ll also be more politically acceptable.

      • It would possibly mean higher prices for plasma screens and Great Wall crap..oops.. car.
        .
        That would see Hardly Normal and every used car salesman (but I repeat myself) and their bogan customers up in arms.

    • Tarrifs are going to be out of the question diplomatically. The US sure as hell won’t like it (and it’d probably be illegal in our FTA) and we’re currently pursuing a FTA with China I believe?

    • Under a floating dollar this would – if it achieves its objective of reducing imports – result in a higher dollar (effectively taxing exports).

      While this would support domestic only market manufactureres it would criple export oriented manufacturers.

      It would then become a question of if the whole australian market provides sufficient scale to achive cost reduction to be compeditive (with the 10% tarif advantage). A dicey question given population and market spread.

    • No need to breach WTO rules. From today’s Crikey (http://is.gd/GRgbUs):

      Gavin R. Putland writes: Re. “I’m not a protectionist, but … more help for the steel industry” (Monday, item 2). The simplest way to help the Australian steel industry is to levy royalties on iron ore and coal at the point of exportation instead of the point of extraction.

      In the domestic market, a royalty on exportation of a raw material is a deduction from the global price, allowing domestic industries to get that material more cheaply than foreign competitors. The argument applies not only to the steel industry, but to all industries that process Australian minerals.

      Problem: State mineral royalties are not taxes; if they were, they’d be excises and therefore unconstitutional. So the royalties are imposed using the power of ownership rather than the power of taxation. Hence the States can’t impose royalties on exports if the ownership changes before the point of exportation.

      Solution: The Commonwealth imposes a tax on mineral exports and remits the revenue to the respective States from which the minerals came, on the condition that the states abolish their own royalties. Try calling an export tax “protectionist”!

      • Gavin this already happens to some extent. Most WA royalties are levied as ~6% ores, 4%concentrates 2% metals. One of the reasons there is a large Alumina industry rather than a bauxite export industry (like in QLD). There is also a nickel smelter and refinery and pretty much all gold in WA is sent out as bars not ‘concentrates’.

    • no sorry, the Mrs made me watch farmer wants a wife. There is one realy hot contestant on there though, Samantha, and she is smokin!

      • lol.

        Think you mean ‘Sam’

        yeah, I missed it as well… but err not TFWAW… mine made me watch it as well…

        😉

        Ahh Monday’s!

        TM.

    • Instead of watching the 7.30 report and wasting my time I went to see Red Dog. Set in the glorious Pilbara in the 70’s, Hamersley Iron, Dampier, Port Hedland – it’s changed and then in a way it hasn’t beautiful landscape – the great vastness of the north-West. Go see. Still mining there after 40 years, but bigger and better.

      One of the country’s great industries.

  2. Another Ridout quote today…

    The Reserve Bank and Treasury have been warning for some time that manufacturing is going to have to quote ‘make way’ for the mining boom. But if this is the pain that is going to be part of this adjustment, I suspect it is more acute than most people thought because I think they actually thought the income boom that the resources boom would generate would be much more widespread and consumers would be much more confident, so we’d get demand in other areas.

    It is just not happening.

    Precisely. Its just not happening.

    The much promised benefits of the resources boom, just aren’t happening. Gittins! and the Funster promised us we’d all benefit, but we haven’t. Its bullsh*t and the Big Lie has now been exposed to everyone.

    The Australian economy is eating itself alive.

      • Gees, if every other export industry is priced out of the market, just think of how wll our close-to-most-expensive-in-the-world houses would sell!

      • Jousting sticks

        Harry Triguboff does! 80% of his apartments sell to Chinese buyers apparently. Who knew he was such a great Aussie exporter?

    • make way the big way: for each mining job, ten manufacturing/export/tourism/education jobs are going to disappear.

      BHP just 22billions profit and do not know what to do with all its cash.

    • Precisely.

      Mining is not insignificant but it is relatively small. The economic boom that accompanied the pre-GFC mining boom was not in the main, caused by that mining boom. It was largely caused by the biggest boom in private sector credit in history which ran more or less coincident to that mining boom. The RBA seems to believe it was all driven by digging up dirt and seem to have been scratching their heads in wonder as to how we can be exporting more dirt than ever before and at never before seen prices – yet the economy simply isn’t responding and is slumping down instead.

  3. H&H

    I agree that the $100million to BlueScope Steel is a waste of money and does not address the problem.

    The Government’s economic advisers have told the Government not to worry. Australia is “in transition.” But they have not said what we are transitioning to.

    We are transitioning from a wealthy highly developed country to a poor highly indebted country. We should not attack countries like Greece for their economic problems. Tomorrow we will be among them.

    As we all know, our floating exchange rate system ensures that no foreign money affects our money supply. When one sector of the economy increases its exports, the only way that the economy can respond is to appreciate its currency to shift demand from domestic products to imports. That shift in spending kills off domestic industries. See http://www.buoyanteconomies.com/AusIndustryDemise.htm .

    We need new foundations for our economy, not another attempt to patch up the cracks.

  4. Let me tell you the story of Republic of Nauru from wikipedia, “When the phosphate reserves were exhausted, and the environment had been seriously harmed by mining, the trust that had been established to manage the island’s wealth diminished in value.”
    Sound similar

        • And we are not a small island built on bird shit.

          Our resources are not exhausted, our environment not seriously harmed (good grief, widespread deforestation and agricultural use has caused far more ‘harm’, but some would arguing with a balancing benefit) and you are right, we have no trust to decline – but as the Government will assure you, we have national savings in the form of superannuation…

          • The trust was rather pointless anyway, from the economy of nauru article:

            “However, because of heavy spending from the trust funds, including some wasteful foreign investment activities, the government is now facing virtual bankruptcy. To cut costs the government has called for a freeze on wages, a reduction of over-staffed public service departments, privatization of numerous government agencies, and closure of some overseas consulates. Economic uncertainty caused by financial mismanagement and corruption, combined with shortages of basic goods, has resulted in some domestic unrest. ”

            Pretty much they spent the trust on consumption and and oversize public service anyway.

            There was also considerable speculation on australian property and loans to AFL clubs in their “investments”. Even the bigggest SWF in the world wouldn’t survive that kind of mismanagement.

  5. Jumping Jack Flash

    So… where has all the money gone? and where is it going now?

    houses?
    offshore?
    the pockets of the miners ie, locked up in the bank?

    because it certainly isn’t being spent.

    Hey, maybe thats why groceries are so expensive. everyone’s been eating their profits?

    • Jumping Jack Flash

      I just read a news report that said that mining companies were buying imported steel.

      Looks like some of it went offshore.

      Good old Wayne is getting to the bottom of it, so don’t worry. Our saviour. He’ll make sure the boom money is spent in ‘strayla!

      Oops. Horse. Bolted. Gate!!

  6. We can’t afford to leave manufacturing behind but throwing money on strategies and policy and bureaucracies isn’t going to do it. We can’t compete on price (because of volume constraints unless our people work for Third World wages and we reduce our standard of living) then we need to focus on quality aka Sweden and Germany in the ’50s. Many of us would pay more for quality if we were assured that it was quality we are buying. By setting and policing quality, health and safety standards for imports we can reduce import volumes and still honour our internation trade agreements. The downside is that if other countries retaliate by restricting import of our resources, we would be stuffed.

    The other

    • In some industries we can achieve sufficient scale and control to survive.

      Vertical integration has got to be key for australian manufacturers. We cant compete if we are shipping raw materials offshore and then buying them back partially transformed and then trying to compete. This will however mean that some of the ‘dirty’ industries will have to end up back in australia.

      The issue is not one of third world labour prices, but achiving economic productivity. Japan still has a considerable manufacturing sector (abiet not growing fast) and substantial wages (not any where near as high as australia’s though).

      • Germany also has a reasonable industrial sector. Intriguing to think that the two post-War economies retained industrial capacity when the rest of the developed world was offshoring a quickly as possible…a sound foundation?

      • 3d1k, I figure that has something to do with the political power to remove non performing industries. In a wartorn nation people have to be productive in order to just get by.

        Old inefficient legacy or traditional industries are gone, and new plants and work practices can be installed relatively easily. Similar to after a natural disaster or a severe recession.

        Both countries also have labour structure that favour industry/trade unions over overarching or umbrella unions. This gives the governments the power to stop supporting individual industries when they are no longer economic and to favour others. Japan pretty much actively dismantled its textile industry when it was no longer economic.

  7. I worked at a site that had a die casting plant. The union had used OHS as a successful negotiating tool for years. When it was finally outsourced, it almost looked like we were doing it for humanitarian reasons as the risk allowances were comparable to working in a nuclear reactor, in bare feet on Mars.

    At the time I met a few Union officials, most were a perfect fit for the old school class warefare stereotype. But one was calm, thoughtful and polite. He was well aware of the balance between the short term desires of the workers for pay increases and payouts with the longer term issues of keeping those jobs viable for another generation. He was on top of the details and understood our business well.

    Although unsuccesful in negotiating a rescue, he left me very impressed. This was mid way through the Button plan tarrif squeeze and I remember thinking, ” If only this guy could make it into federal politics”.

    It was Greg Combe and I just can’t understand why a guy with such obvious tallent, discliple and experience has been so ineffectual in rationalising industry policy. Why are they proposing simplistic handouts when they could be doing so much more?

    • Welcome to the 24 hour news cycle. You have less than 24 hours to respond to anything the media calls a crisis. Doesn’t exactly give you time for a well thought out response.

    • Yes, Any great new big industrial reforms will induce sleep. And Tony Abbott will call it “Great new big regulation” anyway.

  8. Did our second favourite Bullhawk – Bloxo – just got macrobated?
    .
    “Mr Bloxham, a former Reserve Bank economist, said a sovereign fund would probably require higher taxation of mining.
    .
    ”If you held that [extra revenue] in a sovereign fund, you would be slowing the pace of structural change in the economy and potentially put downward pressure on the exchange rate,” Mr Bloxham said.
    .
    ”We are well into this mining investment boom now. What would have helped is if we had had a larger mining tax – it would have discouraged some of this investment from happening so rapidly,” he said. ”We could probably all do with a little less structural economic change.”
    .
    Read more: http://www.smh.com.au/business/industry-cuts-trigger-call-for-sovereign-wealth-fund-20110822-1j6qv.html#ixzz1VpKzyodK

    • Good grief – they’re all jumping on the bandwagon.

      It is too late. We have MRRT negotiated at a rate that satisfies the government. There is no SWF. There will be no SWF (not of any quality if devised by this government).

      Forget the what-if’s and deal with the what-now’s!