Manufacturing, the Australian dollar and what, if anything can be done about it.

To begin this article I quote the doyen of The Australian columnists, Paul Kelly:

“Put bluntly, the boom with its high dollar is punishing large swathes of manufacturing, tourism, education, services and construction. The alarm bells are sounding. Job losses are threatening. The new fear is rising unemployment in a range of sectors off the back of weak domestic demand, the legacy of natural disasters, rising costs and falling competitiveness.”

Every commentator and many politicians are talking about the two-speed economy. In Western Australia and Queensland, mining revenues are generating large export incomes and pushing up the Aussie dollar. The key problem for the mining industry in those States is finding the skilled labour they need to continue generating the export volumes, which fuel not only the economies of those States but Australia as a whole.

In States traditionally dependent on manufacturing activities, there is pessimism within many parts of the manufacturing sector about their capacity to survive, unless they get serious government support.

Not all manufacturing is in trouble. If you are a small manufacturer, making a niche product for world markets in a non-unionised plant and you can require your overseas contracts to be written in Australian dollars, you can do very well, even though the economic scene in the big markets such as the US is a gloomy one.

But the car industry is big, heavily unionised and historically accustomed to supplying a domestic market with tariff protection to provide a feather bed. So the hundreds of millions of dollars which Federal and State governments have injected into the industry under various “green” labels, will not be enough to save you from shutting down your operations. Already Ford has signalled the end of its Geelong engine plant.

Given that Australia abandoned protectionism under the Hawke-Keating governments in a phase out which began in 1984, and which has transformed the Australian economy as a result, there is no way we can retreat back to the protectionist days of Malcolm Fraser and his predecessors from both sides of politics.

So what can be done - if anything - to maintain a manufacturing base here? Currently the exchange rate is seen as a real problem for our manufacturers.

So, it is worthwhile to look at the history of the Australian dollar against the US dollar. In 1973, the Australian dollar was worth 150 US cents. In 1984, the Australian dollar was floated in one of the Hawke Governments most important reforms, and the exchange rate fell to 90 US cents. In January 1986, the Australian dollar fell to 60 US cents, and in 2001, ten years ago, Australia could only buy 50 US cents. Australia went back to parity in November 2010 and is currently trading at about 104 US cents.

Most commentators tell us that Australia’s future lies in mineral exports and other rural commodities to the rapidly growing economies of China and India. It is also noted that the Australian dollar will be a high value currency as a consequence.

To quote Ken Courtis, an eminent trade and international economist now based in China: ''Australia is positioned where everybody would like to be. It has the benefits of being a rich country without the debt burdens of the US, Britain, Europe or Japan, and the ability to exploit the rise of the developing countries.”

''You have strong connections into China, into India, into Japan - which is going to move from nuclear to coal and LNG - and into south-east Asia and into the US,” says Courtis. He also points out that Australia has a “high quality of living, big space, clean air, the rule of law, it's reasonably safe and clean - people hold Australia up and look at it and say, wow.''