Here’s a repeat of some stuff I’ve written here at least a couple of times – on each occasion provoking the usual Pavlovian responses of rent seeking. Crikey rang me and asked me for a comment on the Ford closure which is reproduced below.
In the wake of the downsizing of Fords Geelong operations, Victorian Premier Steve Bracks has urged the federal government to reconsider its planned 5% tariff reduction on imported cars, due in 2010, in an effort to help the domestic market.
Theres that special pleading again for the car industry. I expect Steve Bracks is on stronger ground than he realises. Cutting tariffs below their current levels will of course harm the car industry. Thats actually how tariff cuts have helped economic growth in the last decade by slowly moving resources from lower productivity industries to higher productivity industries.
Thats going on at greater pace right now as returns to mining surge and the economy directs increasing resources to it.
But below some level, cutting tariffs actually makes little sense. Like some economic advice followed during the depression, the pain appeals to our sense of virtue but if anything it makes things worse in the long term not better. Why? Because cutting tariffs increases imports which must be paid for by increased exports. And for some exports like wool and wheat and coal we cant increase them without cutting their price.
So, as the Productivity Commissions modelling illustrates, the economic gains from shrinking the industry a little are outweighed by losses from export price falls. The argument is actually stronger than this, but the industry hasnt funded the necessary work to demonstrate it.
Nor has the Bracks or Rann Government. Surprising yes. Sad definitely. But true.