Protection in the Motor Vehicle Industry

Current Issues Brief 22 1996-97

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
  1. Industry Commission, The Automotive Industry, Draft Report, 20 December 1996.
  2. 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.
  3. R M Conlon, 'An overview of protection of Australian manufacturing: Past, present and future,' Economic and Labour Relations Review, 1994, vol. 5(1).
  4. Capling and Galligan, op. cit., p. 201.
  5. ibid.
  6. loc. cit.
  7. D Owens, 'The Button plan in retrospect', Economic Papers, 1995, vol. 14, pp. 69-79.
  8. Industry Commission, The Automotive Industry, Report no. 5, 17 December 1990, p.184.
  9. Treasurer, Hon P Costello, 'Industry Commission Draft Report on the Automotive Industry', Media Release, 20 December 1996.
  10. Department of Industry, Science and Tourism, State of the Australian Automotive Industry 1995, Canberra, 1996.