Government policy adherence to WTO principles

Stevan attended the 2012 WTO Public Forum in Geneva where he represented The University of Western Sydney. He is currently studying a Bachelor of Business and Commerce and is working extensively with Australians from migrant backgrounds.

Abstract 

The paper will examine the role of government policy in synthesising adherence to WTO principles while supporting deteriorating industries. Are these agendas reconcilable under an amalgamated trade policy or are the two an incompatible polarity? This essay provides some insight to the subject through a case study of Passenger Motor Vehicle (PMV) industry. The particular appeal of this sector lies in its far-reaching political implications, extensive media power and powerful labour union presence. Has the PMV industry suffered as the result of multilateral and unilateral trade policies and the removal of government assistance? 

The essay contends not only that many problems PMV manufacturers face are economically inevitable but self-inflicted; it maintains that all claims for culpability of trade liberalisation are versions of the same falsity. The research reaffirms the decline is caused by fluctuation of macroeconomic variables: currency appreciation; increase in price of major inputs: iron and steel; competitiveness of foreign imports; diminishing domestic and global demand; and most importantly, insensibility to shifting consumer and market trends. Further it reasserts the significance of PMV industry in technological innovation. The essay proposes that there is a logical solution: Australian government can simultaneously provide appropriate support to the PMV sector and adhere to WTO agreements. The industry should be assisted through WTO-friendly, non-trade restricting polices, in particular research and development subsidies.  

Introduction 

In the face of growing international competition and less than favourable economic conditions, Australian PMV sector has encountered upward costs and a shrinking market share1. Sentiment towards contraction of PMV industry has been severely distorted by political implications2. The sentiment has also shifted. In the early 2000s the popular opinion on the issue was largely bipolar, either demanding increase in tariff protectionism and government intervention or advocating neo-liberalism and rejecting government interference. Since, Australian public has largely accepted the benefit of hitherto tariff reduction and free trade3. The debate has shifted away from scrutiny of tariff levels and towards the question of whether non-tariff industry support should be provided to struggling PMV producers4. 

This essay will look at the reasons for the decline of the PMV industry and the importance of PMV sector to the manufacturing sector and the economy as a whole5.  

The hypothesis is that the PMV sector has declined for problems inherent to the industry and as the result of a structural shift in the economy. This stands in direct contrast to the role of trade protectionism through tariff quotas, and the arguments that the PMV industry should be safeguarded. The decline is not simply a result of overwhelming foreign pressures but is also due, in part, to the lack of competitive advantage and decline in productivity. The PMV sector should not be protected through tariffs or non-tariff measures.  

The Political Debate 

The lack of uniformity6 on the subject of tariffs and government protectionism is best reflected in the diverse range of responses to the rollercoaster performance of the manufacturing sector and steady decline of the PMV industry.  The manufacturing industry has long been the center of the protectionism debate and the barometer for the government’s stance on international trade flows. Australia has presented its compliance with WTO’s push for a multilateral trading system and support of tariff rate reductions through reforms, deregulation and trade liberalization in PMV and manufacturing sectors. The PMV industry, however, remains a political minefield and has proven to be an economically fragile topic.  Recent appreciation of the Australian dollar against the major trading currencies has made the role of the government in protecting domestic industries from overwhelming asphyxiation by foreign imports a contentious economic and political debate. It has helped highlight the differences in attitudes to the role of tariff and non-tariff measures. ABC News urged the Australian government to ‘act decisively to help retrain workers’7 and The Australian reasoned that the latest downturn in the sector has ‘fuelled industrial unrest and led to calls for a rethink of government plans’8. Recent media headlines on the PMV industry have ranged from ‘handout addicted car industry needs some tough love’ to ‘pay for a car industry or live with the consequences’9. The Daily Telegraph argued that ‘there is nothing wrong with the industry… only with wasting taxpayer billions on it’10. Australian Labour Party’s stance on the issue can be inferred from Julia Gillard’s response to the manufacturing industry downturn, she argued the following: 

If you want Australian taxpayers' dollars, then you're going to have to give Australian businesses a fair chance to compete for work11.  

When discussing the PMV manufacturers, Julia Gillard has pointed out the significance of the automotive industry to the Australian labour force: 

Yours is an industry employing 55,000 people across the nation and on which the jobs of another 200,000 workers depend. It’s a crucible of new skills and new technologies 

This argument has gradually lost momentum as manufacturers adjust to low profit margins, cost pressures and technological innovation. Employment numbers have declined at an estimated annual rate of 6.7%12. Labour in manufacture of motor vehicles, such as the assembly line, has contracted ‘due to automation trends, plant closures, cost cutting, model downsizing, Mitsubishi’s withdrawal from manufacturing activities and improvements in labour productivity. Ibisworld market analysis argued that the industry is too small to be profitable13.  

The political debate is further complicated by PMV industry’s cultural and national significance.  Socio-cultural externalities of the industry’s productions are seldom scrutinized but hold great value in understanding the overwhelming political gravity associated with issues related to the PMV sector.  The industry employment provides a high level of job satisfaction and is seen as a reflection of a sector employing hard-working blue-collar Australians14. It can be affirmed that PMVs in Australia are a source of nationalism. Motor sports and ‘Aussie-made’ vehicles such as the Holden Commodore and Ford Falcon have become an intrinsic part of the Australian culture15. Australian preoccupation with support of ‘Australian-made’ domestic production, common in attitudes towards vehicle manufacturers, has largely ignored the global interdependence of the PMV industry. Australia’s largest car manufacturers and three of the largest truck producers are all part of a global chain, owned by foreign companies16. 

Tariff Rates in the PMV industry 

The history of the manufacturing industry in Australia illustrates changing attitudes towards trade protectionism and a search for the optimal degree of government assistance to struggling industries. The Australian government has had a central, nurturing role in the development of the PMV industry. The safeguards were implemented in the form of tariffs and taxes. By the 1970s the Australian manufacturing and PMV industry was, by OECD standards, ‘small, fragmented and inward looking’17. The ‘closed’ industry and protection policies were ineffective in catalysing competition and innovation within the domestic market, productivity growth slowed and economies of scale and scope were limited18. In turn, Australian products were not competitive by international standards. By the early-1980s it was recognised that protectionist policies were counterproductive to the manufacturing industry as a whole19. Australia, under the Hawke government in the 1980s began implementing trade liberalisation policies across the manufacturing industries. More recently, political pressures and economic policy revision influenced by WTO, unilateral trade agreements and other regional trade forums have led to a drastic reduction in protection through tariff quotas. 

Legislation framework for tariff rates, in accordance with the international standards, was established through Australia’s participation in General Agreement on Tarriffs and Trade in Uruguay, signed in 1994. The Australian signatory commitment to WTO presents a bound tariff schedule ranging from 15% to 40%. The tariff quotas were negotiated in Uruguay 1994 round and have not been re-adjusted. Bound rate of duty on motor vehicle parts, for use in the assembly or manufacture of passenger motor vehicles, is set at 50%, air conditioning machines used in vehicles 15%, electrical signal and safety 15%, seats 15%, voltage regulators 15%. The agreed bound rate of duty on passenger motor vehicles is 40%. Although the adjustments to tariff quotas in the Doha Development Round have not been agreed to, the overall effect of WTO and regional trade agreements has lead to a applied tariff reduction from a record high of 57% in 1984 to 5% by 200520, thus moving Australia a long way towards the Asia-Pacific Economic Cooperation and World Trade Organisation goal of free trade access. 

Nevertheless, today’s Australian PMV sector of is not assistance-free. The Australian government has shifted away from direct intervention in the operation and apparatuses of market, focusing instead on microeconomic reform that induces efficiency, welfare and productivity. The industry receives a government purchasing preference on domestically manufactured vehicles, a luxury sales tax of 33% on cars above $57 466, a government subsidy estimated at $1.6 billion annually and supplementary taxes on second-hand imported vehicles21. The cost of assistance to the PMV industry is approximately $1.6 billion annually22. In 2012, Government has announced a$24.8 million investment in the Manufacturing Technology program, providing grants of up to $250,000 to help manufacturers acquire and integrate new technologies23.  

Australian PMV manufacturers, however, have faced an uphill battle. Rising price of industry-essential commodities, in particular iron and steel, have placed significant cost pressures on PMV manufacturers; falling domestic and global demand; appreciating Australian dollar; shift in consumer preference, resulting from an increase in the cost of petrol and climate change awareness. The Motor Vehicle Manufacturing in Australia report24 has forecasted the industry to contract at an annual rate of 9.4% over the next five years.  

The difficulties faced by Australian PMV producers contemporarily can be contributed to poor market analysis and misinterpretation of market trends25. Australian motor vehicle demand has shifted from high cylinder, fuel-inefficient vehicles and towards ecologically and fuel friendly models26.  The market strategy of large domestic manufacturers, such as Holden and Ford, has largely ignored market trends and continued production of core products, Holden and Ford. The point is perhaps best evident in the diminishing market share of the two iconic ‘Australian’ vehicles and gradual emergence of market oriented, consumer preference-conscious, value-oriented producers, such as Mazda and Hyundai27.  

Technological Innovation  

The significance of the industry and arguments for sector assistance can be found in the intertwining of the PMV sector’s engineering, technology and research and development with that of the broader economy. Manufacturers in the industry have searched for a comparative advantage in cost and quality, through the development of equipment sourced from the fields of robotics, hydrogen electrolysis and fuel cell technology. Technological innovation in the industry has far-reaching applicability in other economic segments. The sector’s developments and progress can be channeled to provide technological synergy to the wider economy. Furthermore, new technological breakthroughs also require correspondingly high-skill labour to facilitate use and application. As such, the sector is a gateway between new-age scientific developments and everyday economic application, whilst simultaneously encouraging human capital to support the technological infrastructure. 

Recommendations 

Multilateral trade policy is a two level game. It must successfully align the domestic political position with the international; this requires a harmonious positioning within the domestic political discourse and a consensus between various national governments. The complexity of negotiation heightens the possibility of asymmetry in trade policies and can jeopardise political compromise. The difficulty lies not only in synthesising the two political spheres but also in the slow and diffused benefits of multilateral agreements in comparison with hard hitting and specific outcomes of trade liberalisation. This is evident in the case of Australian PMV industry, where the benefits of a gradual structural shift towards more efficient economic sectors are inconspicuous and distributed across the Australian economy. In contrast, the decline in the PMV industry and the drastic job cuts in the sector are felt intensely and immediately. The negative externalities of policy change create a strong response amongst the public and the commercial sector. It is perceived as unjustified sacrifice of the PMV industry to the demands of WTO and bilateral agreements.  

The challenge is to resist short-term political pressures, decline in industry revenue and industry employment for longer-term economic gains. The question is not whether the sector should be protected but rather how can the structural shifts be encouraged while simultaneously supporting technological innovation of the sector? 

WTO trade agreements allow a substantial opportunity for non-trade distortive, non-discriminatory government assistance. Australian government can adhere to WTO policy, allow for the natural restructure of the economy and preserve the positive economic externalities from declining sectors. This can be achieved through promotion of technological innovation and efficiency through R&D subsidies. Non-discriminative support of Research and Development is in accordance with WTO policy.  WTO agreement on subsidies and countervailing stipulates that research subsidies are ‘non actionable’28 and may be administered within a broad legislative framework.  

In accordance with earlier analysis of WTO policy and the sector’s technological innovation, assistance to the PMV industry should be non-trade restricting and focus on encouraging research and development, technological innovation and productivity growth. It should allow for market clearing and structural adjustments to the economy. Government assistance should not impede on WTO vision of fair trade and multilateral trade policy.  

It is apparent from broader economic scrutiny that structural changes and labour market clearing has been slow and rigid. Nevertheless, further tariff reduction should be approached with cautious and mindfulness of the political and economic sensitivity to any drastic tariff modification.  Reallocation of resources away from PMV sector should not be forced as unexpected shocks or surges in cost pressures would cause unnecessary unemployment, output decline and negative public sentiment. Despite prudence on further immediate tariff reduction, this recommendation is in agreement with WTO agenda. There is substantial room for negotiation based on the large disparity between Uruguay Round tariff quotas, Australian applied tariff rates(reduced through unilateral policy)29 and tariff rates of other trading nations. 

The Australian PMV industry will struggle to compete with the Asian economies on cost30; however, technological innovation should create a competitive advantage for the Australian manufacturing based on quality. This should also strategically position the industry for export of consumer goods to the global markets with increasing purchasing power and, in particular, to the geographically proximate, growing Asian middle class.  

Conclusion

Australian PMV industry has declined as the result of unfavourable macroeconomic factors and more importantly, failure to adjust to a change in market and consumer trends. Support to the industry should be in exercised in the form of research and development subsidies, which adhere to WTO agreements and do not impede on open trade.  

The PMV industry has declined in the industry revenue proportional to GDP, the size of the industry labour force and the number of firms in the industry. It is forecasted to further contract by 9.4% annually. As hypothesised, the problems PMV sector is faced with are economically inherent to the industry; they are largely a result of a structural shift of the overall economy. The decline of the sector should not be attributed to reduction in tariffs, although liberalisation of trade and competitiveness of foreign imports has had an impact on industry revenue, as has the decline in government assistance. The shrinking of the sector is caused by a natural structural shift in the economy, away from an industry with poor rates of productivity, efficiency and demand relative to the global PMV industry. Although a contracting sector, PMV industry has great significance to the technological innovation in the economy. The PMV industry and the manufacturing sector have been an engine of technological innovation and efficiency.  

Australian government can endorse WTO vision of open trade and simultaneously support the technological innovation in the PMV industry through WTO-friendly research and development subsidies. Although there is a limited scope for immediate tariff reduction, multilateral policy dialogue has room for tariff negotiation due to the large disparity between Uruguay Round tariff quotas, Australian applied tariff rates and tariff rates of other trading nations.  

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