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

By Ray Evans - posted Thursday, 22 September 2011


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.

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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.

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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.''

But at the same time Courtis tells us, what everyone who is watching the international monetary scene, knows full well - the days of the US dollar as the medium of international trade are coming to an end.

America is burdened with debt, debt that will never be repaid in current dollars. Therefore, businesses that can write their contracts in other currencies, or more significantly in gold or other tangible commodities such as soybeans, are doing so. China is propping up the US dollar, and although it seems certain that China will continue to do that for the immediate future, there will be a price to pay at some point.

There is nothing the Commonwealth Government  can do about the international monetary system. We will have to adjust as events unfold. But there are things it could do which could make the survival prospects of Australian manufacturing much brighter.

At the top of the list is the seriously negative impact of Canberra’s labour market laws. Fair Work Australia has become a millstone around the neck of every business, and its repeal would provide new hope for the future for every business facing bankruptcy.

Next comes the repeal of the most onerous tax laws. The most damaging tax by a country mile is the capital gains tax. John Howard tacitly recognised the damage it was doing when he exempted small business from its impact.

What John Howard did for small business, the current government could do for the manufacturing sector. The gold industry was saved in the 1970s by exemption from company tax and from tax on dividends paid to shareholders.  This is something else the current government could do for manufacturing.

Most of the things that governments do increase costs and burden industry. The carbon tax is just another example of the destructive impact of government delusions. We are told the carbon tax will increase employment and underwrite the growth of new industries. If this were true, why not set the carbon tax at $200, rather than the $23, which is the current proposal, and really speed up economic activity in Australia?

The record of Australian Government involvement in the defence industries, notably submarine construction and naval ship building, is so bad that people refuse to believe the numbers involved. We are looking at many hundreds of millions of dollars of pure waste.  Government withdrawal from these activities would be a huge benefit.

Therefore, there are things that the Australian Government can do which would benefit the manufacturing sector. In the past, industries such as gold mining and viticulture have enjoyed special tax concessions, and today both those industries are important export earners.

So the Opposition Committee chaired by Sophie Mirabella, which is inquiring into these matters, should look at the history of government support for beleaguered industries, and draw some useful lessons as a result of their inquiries.

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About the Author

Ray Evans is Secretary of the Lavoisier Group Inc. He is also an adviser to Bert Kelly Research Centre.

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