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Protection in the Motor Vehicle Industry
David Richardson
Economics, Commerce and Industrial Relations Group
The current motor vehicle protection arrangements are due to end with
a tariff of 15 per cent in the year 2000, down from current levels of
22.5 per cent. The present arrangements were due to be reviewed by December
2000, the end of the present car plan. The review was announced in August
1996 as a formal reference to the Industry Commission. The Industry Commission
released its draft report on 20 December 1996 in order to elicit comment
and discussion prior to presenting its final report to the Government.(1)
This continues a long standing practice whereby the Industry Commission
attempts to draw out responses to its initial thinking prior to its final
report. The final report is now expected to be presented to the Government
on 12 May 1997 after which we can expect a Government decision on the
post 2000 arrangements for motor vehicle protection.
The draft report's main recommendation was for a continuation of tariff
reductions beyond 2000 with further reductions of 2.5 per cent per annum
until the tariff has fallen to 5 per cent. However, the draft report contained
a strong dissenting minority report which sought to maintain tariffs at
15 per cent, at least until the year 2005. The purpose of this Current
Issues Brief is to present some of the history of protection arrangements
in the industry over recent years.
Early this century vehicle assembly and the manufacture of vehicle bodies
was protected by tariffs on imports.(2) To preserve foreign exchange during
the First World War the Hughes Government imposed a ban on the importation
of car bodies. In the 1920s protection was extended to chassis and other
parts. This led to the establishment of vehicle assembly facilities and
parts manufacture by Ford, GMH, Chrysler and British Leyland. Increased
protection for the complete manufacture of motor vehicles was offered
and taken up by GMH in 1948. Not long after that the other established
Australian players began production in Australia, British Leyland being
then the two separate British producers, Austin and Morris.
For a period after the war it was import licensing and not the tariff
which protected Australian industry - the moderate effect of the tariff
being unnecessary under post war import quotas designed to conserve Australia's
foreign exchange.(3) In addition to the five full producers in the high
volume plan, import licensing encouraged local assembly and some modest
manufacturing by low volume companies such as Standard, Rootes, Rover
and Volkswagen.
Import restrictions were lifted in 1960 leading to intense competition
from imported cars and components, despite the prevailing tariff then
at 35 per cent. The owner of Repco (since incorporated into Pacific BBA)
at the time, Charles McGrath, proposed local content plans to the Government
under which a high volume producer could import components duty free provided
95 per cent of the motor vehicle was sourced in Australia. However, the
local content plan allowed for a lower level of Australian content for
lower volume model runs. Hence the system contained an incentive towards
low volume vehicle production - a large number of models produced inefficiently.
Competition from the new Japanese producers from about the mid 1960s with
smaller, more economical and better quality cars saw the Australian share
of the market fall from 84 per cent in 1966 to 68 per cent in 1973. Chrysler
began to record losses and British Leyland ceased operations in 1974.
In 1972 Nissan and Toyota applied to become high-volume manufacturers
under the car industry plan, posing a serious threat to the remaining
producers.
The Whitlam Government referred car industry protection to the Industry
Assistance Commission (IAC), as it was known then, which recommended phased
reductions in tariff protection to 25 per cent. The IAC recommendations
were met with 'universal hostility'(4) and the Whitlam Government instead
increased protection in a package of measures beginning in January 1975,
including:
- simplifying local content plans with an 85 per cent local content
requirement with duty-free entry for the remaining 15 per cent,
- applying local content rules on a company basis rather than a model
basis,
- increasing tariffs to 45 per cent, and
- introducing quotas to restrict imports to 20 per cent.
There was further market fragmentation with model and parts proliferation
when Nissan and Toyota were allowed to produce under the local content
plans in 1976. In response to further import pressure, the tariff was
raised from 45 to 57.5 per cent on completely built-up units in 1978.
Despite the high protection, Chrysler sold out to Mitsubishi in 1980 and
Renault, the last of the low volume assemblers, ceased its local assembly
operations in 1981. While the quota was intended as a short term measure
in 1974 it remained largely intact for the next 13 years.
Following another IAC review, the Lynch Car Plan of 1981 announced arrangements
to apply from 1984. The IAC had recommended a tariff-only model with reduced
rates. However, the eventual decision included earlier proposals put by
GMH for an enhanced export facilitation scheme with export credits being
expanded gradually to a 15 per cent ceiling.(5) This suited GMH's plans
for a large four cylinder engine plant to export engines to manufacturing
locations elsewhere in the world. This was to be Australia's particular
function within General Motors' global car strategy.(6) Other features
of the Lynch plan included:
- retention of the tariff at 57.5 per cent, and
- replacement of the strict quota system with a 'tariff quota' system
which permitted out of quota imports but at a penalty rate of 150 per
cent to be phased down to 125 per cent by 1992.
In October 1983 the Minister for Industry and Commerce, Senator Button,
established a tripartite body - the Car Industry Council - and gave it
the task of reporting on the long term future of the car industry and
how to make it efficient. The result was eventually an announcement in
May 1984 which included the vision of an industry with 3 producers and
6 or fewer models being produced. This followed general concern that 20
years of steadily increasing protection had produced an inefficient and
uncompetitive industry and that rationalisation was needed. The essential
elements of the Button Plan, which were intended to cover the period to
1992, were:
- maintenance of the tariff at 57.5 per cent,
- increase in the import quota to 22 per cent but with the tariff on
out-of-quota imports reduced to 100 per cent, to be phased down to the
general tariff level of 57.5 per cent by 1992 at which point tariff
quotas would become redundant,
- inclusion of light commercial and four-wheel drive (4WD) vehicles
in the tariff quota system, and
- improved access to export facilitation.
Following the mid-term review of the Button Plan in mid 1988 the reductions
in protection were accelerated. The substantial depreciation of the Australian
dollar in the mid 1980s had reduced the pressures on the industry to adjust
to the 1984 arrangements. For example, the value of the $A moved from
200 Yen at the beginning of 1985 and fell to 100 Yen by the end of 1986.(7)
The mid-1988 arrangements included:
- the immediate abolition of tariff quotas,
- reduction in the general tariff to 45 per cent, phasing down to 35
per cent in 1992,
- reduction in the tariff on light commercial and 4WDs from 35 and 25
per cent respectively down to 20 per cent and phasing down to 15 per
cent by 1992.
In December 1990 the Industry Commission (IC), which replaced the IAC,
was able to report that 'for the first time in at least twenty years,
there have been ongoing reductions in assistance to the industry'.(8)
In 1991, and following that IC report, the arrangements for post-1992
arrangements were spelt out. The new arrangements aimed to further reduce
protection in the years to 2000, with the main elements being:
- phasing of the general tariff rates down from 35 per cent to 15 per
cent in the year 2000,
- reductions in the tariff on light commercials and 4WDs down from 15
to 5 per cent in 1996, and
- retention of 15 per cent duty free entitlement for producers and export
facilitation arrangements.
These arrangements were to be reviewed before 31 December 2000 to inform
decisions on post-2000 arrangements. That review, to be undertaken by
the Industry Commission, was announced by the Treasurer, Hon. Peter Costello,
in August 1996. The review and the eventual decision takes place against
a long history of tariff reductions going back to 1987 (see table below)
but a stronger dollar than in the mid-1980s. The draft report was released
in December 1996 recommending that the tariff continue to be phased down
from the 15 per cent planned for the year 2000. It suggested further reductions
of 2.5 per cent per annum until the tariff reaches 5 per cent - the general
rate for protected manufactures. As is usual with Industry Commission
reports, a draft has been issued to promote public comment and debate.
The Industry Commission plans to hold final public hearings in late February
and early March. A final report is due to be presented to the Government
by 12 May 1997.(9) There is as yet no indication of when the final report
will be released and when the Government will decide future protection
arrangements for the motor vehicle industry. The Government has, however,
made it clear that it will not be making any decisions until the it receives
the final report.
As might be expected, the draft report has generated a good deal of
debate. A good deal of comment critical of the draft report has come from
the car producing states, Victoria and South Australia. Attention has
been drawn to the extremely high tariff rates in other countries in our
region. While Asian countries are committed to lower tariffs and are reported
to be lowering them, tariff rates of 50 to 100 per cent are still the
rule. Tariffs at these rates are designed to assist fledgling motor vehicle
industries. Only a decade ago Australia's motor vehicle tariffs were at
levels similar to those elsewhere in our region. However, at 15 per cent
in 2000, Australia's tariff will be closer to other OECD countries with
Japan having zero tariffs; the US 2.5 per cent; Canada 8 per cent and
Europe, 10 per cent for non-EU countries.
Within Australia there are now four producers, Ford, Toyota, Mitsubishi
and GMH; Nissan having closed in October 1992. The four now produce five
different vehicles, the Falcon, Commodore, Magna, Camry and Corolla. That
is one more producer and one less model than the original vision of the
Button plan. Automotive exports are now significant, more than 300 per
cent higher than 1984 values, and further rapid increases are expected.
In 1995 exports were 23 424 units, or 7.5 per cent of total production.
However, imports are now a much higher share of new car sales, having
increased from 22 per cent in 1985 to 44 per cent in 1995.(10)
Following 25 years of reform the final chapter could well be Government's
forthcoming response to the Industry Commission's final report. Against
the Industry Commission's present draft recommendations for further tariff
reductions there are a large number advocating a halt to further reductions,
at least until there is significant progress towards lower protection
in our region. Included amongst the later is the minority Industry Commission
report of Mr Ian Webber. It may well be that the Industry Commission's
final recommendations make some concession to that perspective.
Tariffs on motor vehicles - recent and planned rates
(%)
Years passenger vehicles light commercials four wheel drives
1987 57.5 35 25
1988 45 20 20
1989 42.5 19 19
1990 40 18 18
1991 37.5 17 17
1992 35 15 15
1993 32.5 12 12
1994 30 10 10
1995 27.5 8 8
1996 25 5 5
1997 22.5 5 5
1998 20 5 5
1999 17.5 5 5
2000 15 5 5
- Industry Commission, The Automotive Industry, Draft Report,
20 December 1996.
- Much of the historical material here relies on A Capling and B Galligan,
Beyond the Protective State: the Political Economy of Australia's
Manufacturing Industry Policy, Cambridge University Press, 1992;
Industry Commission, The Automotive Industry, Report no. 5, 17
December 1990, and Industry Commission, Annual Reports, various
issues.
- R M Conlon, 'An overview of protection of Australian manufacturing:
Past, present and future,' Economic and Labour Relations Review,
1994, vol. 5(1).
- Capling and Galligan, op. cit., p. 201.
- ibid.
- loc. cit.
- D Owens, 'The Button plan in retrospect', Economic Papers,
1995, vol. 14, pp. 69-79.
- Industry Commission, The Automotive Industry, Report no. 5,
17 December 1990, p.184.
- Treasurer, Hon P Costello, 'Industry Commission Draft Report on the
Automotive Industry', Media Release, 20 December 1996.
- Department of Industry, Science and Tourism, State of the Australian
Automotive Industry 1995, Canberra, 1996.
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