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Manufacturing a Half-Baked Manufacturing Policy

Another weekend, another big political announcement. The Gillard Government today unveiled what is to be their big plan, their attempt to keep manufacturing viable in Australia. The plan involves money, lots of it, and will also require legislation of a somewhat coercive nature enacted by the parliament. When it all boils down, what we are left with is an expensive set of ideas which will not have much benefit for the Australian manufacturing industry. On top of that, government interference in industry decision-making markedly increases – again for little material benefit.

The Gillard Government’s attempt to keep manufacturing jobs in Australia will cost $1 billion. To fund this new manufacturing policy, the government announced it will remove a tax concession for big businesses with a turnover of more than $20 billion, which is aimed at promoting research and development.

The government would want to be absolutely sure that removing this tax break will not hamper the research and development efforts of Australian companies. Who knows, perhaps research and development conducted in Australia might discover a way to produce Australian manufactures more cost effectively.

The move to end the tax concession is also effectively a hit on the bottom line of those companies.

Under new legislation to be introduced into the parliament, large companies with projects worth more than $500 million and business opportunities which receive $20 million in state or federal funding, will be required to give local firms the ability to bid for contracts before any off-shoring can occur. They will be required to compile Australian Industry Participation Plans. All this does is increase the length of time businesses will have to take in order to make commercial decisions.

Individual ventures which are worth $2 billion dollars or more will be required by law to employ Australian Industry Opportunity Officers. They must do this in order to receive a five percent tariff reduction on imports. Further, these businesses will need to report on their efforts twice a year. Again we have another cost to business and more red tape to negotiate.

Neither of these two initiatives place any emphasis on improving the competitiveness of Australian manufacturing. For there to be any real benefit to the whole economy, it is essential that aiming to improve the manufacturing side of the equation is not neglected by government policy. All efforts the government can make which help cut the cost of business should be explored and implemented.

The Gillard Government also plans to spend $500 million dollars of the money raised to establish ten industry precincts in manufacturing hubs around Australia, starting with Melbourne and Adelaide. This will go part of the way to improving the manufacturing industry in Australia. It will bring manufacturers closer together so that collaboration is easier. This is however just a small element in the overall policy framework required to improve the lot of manufacturing in this country of ours.

Other elements of the policy include plans to help SME’s attract business and an increased vigour in the area of venture capital which is an integral part of modern business.

Like other policies the government has announced, the manufacturing policy is an attempt to influence decision-making that only looks at half of the policy equation. It’s also a further attempt to pursue big government at the expense of smart government.

It is quite intriguing that the plan which will cost $1 billion over four years, according to government figures, may add as little as $1.6 billion dollars to industry. This is not a particularly large sum when taking into account both the cost of the new framework and the susceptibility of the industry to internal and external shocks.

More Misguided Industry Policy

The Gillard Government has announced another plan that, in their oodles of wisdom, they believe will perform some truly heroic feats in terms of saving the ailing Australian manufacturing sector.

Prime Minister Julia Gillard, on a visit to OneSteel yesterday, announced that her government would set up an anti-dumping commission to police the dumping of imported goods in Australia which are sold at below cost price. The Prime Minister also announced a doubling of the Customs’ Anti-Dumping squad as part of the plan.

To fund the plan, Australian Customs will receive extra funding of about $24.4 million over four years which will be directed towards furthering the aims of the commission and its investigators.

This plan comes after the Coalition’s announcement in November last year that they would establish a body to investigate anti-dumping if they were occupying the government benches.

According to the Australian Customs and Border Protection Service’ Anti-Dumping website dumping “occurs when goods are exported to Australia at a price that is below the ‘normal value’ of the goods. The website defines the ‘normal value’ of goods as “the domestic price of the goods in the country of export.”

The Customs website acknowledges that dumping is not illegal under international trade agreements, but that “remedial action may be taken where dumping causes (or threatens to cause) material injury to an Australian industry.”

There are a few observations to be made about both the announcement by Prime Minister Gillard and dumping itself.

The first is about the increased bureaucracy as a result of the plan. How a larger public service will substantially resolve what is termed as a problem for Australian industry is uncertain. By virtue of the fact that dumping is not illegal under international trade agreements, surely resolving the vast majority of cases in a positive way for Australian businesses will be a near impossible outcome.

What’s even more sad is that both sides of politics agree that a response needs to be initiated. Both sides of politics want the same kind of action in this area. They both think the same action will provide some significant relief to industry. Of course, industry groups think this will happen too.

Both sides of politics are living in a policy fantasy land akin to being on some kind of LSD trip.

Australian manufacturing, even if regularly successful in prosecuting anti-dumping cases, will still be at a distinct disadvantage compared with Asian companies when it comes to producing and selling cheap goods on a large-scale. Our inputs costs will always be higher than in Asian countries and therefore, so will the costs of our manufactured goods.

Next, why doesn’t someone in government think of the consumers?

Would it not be absolutely fantastic if we could receive even cheaper goods, especially when cost-of-living pressures are impacting on consumers in our domestic marketplace?

Many people have already shifted to online shopping through overseas businesses because of their ability to offer cheaper products than we could ever hope to have offered to us domestically and good on them for doing so. If ever there was an example of consumers being rational, then the decision to shirk Australian businesses is a positive example thereof.

Of course, the response, endorsed by both sides of politics is designed to appear as if they are doing something to support industry. And industry groups actually think the move will help them survive

The reality however, is that there is little that they can, or would be prepared to do in order to really protect what are largely uncompetitive industries in global terms.

Whatever happened to focusing on the things that we are good at as a nation? The areas of the economy where we can actually compete with the world and where we have a competitive advantage.

Australia: the World’s Value-Added Foodbowl?

Australia, way back over 200 years ago from the time of the First Fleet literally grew as a nation “on the sheep’s back”. As a nation Australia began to grow a broader agriculture sector which included a diverse combination of crops across particularly along the length of the eastern mainland states of Queensland, New South Whales and Victoria. That sector also included other animals in addition to sheep, with cattle and dairy farming playing a crucial role in the early economy.

Indeed agriculture does still play a crucial role in our economy albeit a much diminished one in recent decades with our comparative standing in various exports dropping markedly in some cases.

In the global community Australia is among the biggest exporters in the world of wheat, beef, wool and dairy and our three biggest exports are grain/oilseeds, meat and dairy that has obviously been the case for a prolonged period of time, given the industries on which Australia established itself as a fledgling colony and then nation state in the 1900s.

Agriculture in Australia now sits at only a 3% share of GDP in itself and last night Prime Minister Julia Gillard made a speech to the Global Foundation conference in Melbourne where Ms Gillard said she saw Australia becoming  a foodbowl power, particularly in the Asia-Pacific region, where a rapidly growing population needs increasing access to a variety of different food imports.

The Prime Minister in her speech last night said that Australia should harness our potential in agriculture, like we did in the past and like the mining sector is now harnessing the potential of our vast mineral wealth.

There is certainly a space for Australia to grow its agriculture sector again, particularly when faced with an economy that at present is powering along on resources which are finite, but the way we do it and the markets and niches we seek to develop as a nation are a lot more intricate than just producing and distributing food across our region and the world.

Prime Minister Gillard in her speech to the foundation did acknowledge that Australia would have to focus its efforts, for the most part, on exporting food products which are value-added, rather than simply trying to up exports of foods that have not undergone the value-adding process.

Australia as a nation simply cannot compete with nations in the region on many basic fruits and vegetables which can be produced in similar climates around our region with much lower input and final product costs than we can achieve in Australia.

We would also tend to be seeking more niche and higher-end markets with our value-added production, thereby in a way limiting just how much we can grow the sector, but still an improvement.

We would have to focus on sending more goods from Australia to countries in our region like China, which is booming and will have a bigger middle class market, as well as countries like South Korea and Japan, even though the latter continues to struggle with economic woes both prior to and exacerbated by the horrific earthquake and tsunami event that destroyed so many lives and areas of the economy with it.

Far from just focusing on Asia, there is huge potential for our food exports to go elsewhere, particularly to the United States of America and Europe in a bigger way than at present and that is being worked on at present in a fairly big, if little discussed way.

There is also huge potential to continue to expand the market for our top class wine, with very few countries in the world producing truly exceptional wines, making this market a great hope for Australian producers. This market could be expanded and is beginning to be delivered to Asia and for that to continue would be a massive boon for the economy.

In a way, it seems that the speech the PM gave last night was a subtle way of saying, “hey, here’s a way that we can keep the decline of manufacturing somewhat at bay if we do more food processing in Australia”.

If we add the processing of food products to the agriculture sector of the Australian economy, we suddenly get a sector that is approximately 12% of Gross Domestic Product, a significant sector by any measure when the services sector takes up over 2/3 of the overall national economy on its own.

So Australia can definitely look to becoming a major food exporter to both the region and the globe. There are various challenges, not the least of which is a water shortage along the Murray-Darling Basin food bowl and this will mean that the challenge to grow our food exports will be a medium to long-term effort, rather than a rapid expansion, which would be difficult in itself anyway even if external factors didn’t exist.

The vision is there, but helping to move the idea to a reality will be a long and enduring process that will require the political will of governments of both political stripes to oversee its development.

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