The government this morning responded to BlueScope Steel’s announcement of 1000 job losses and the closure of a blast furnace at Port Kembla and another facility in Victoria by rushing forward its “Steel Transformation Plan” from its carbon pricing package. The $300 million plan was due to start with the carbon price on July 1 next year but BlueScope will be able to access up to $100 million between now and then. The funding is conditional on the company remaining committed to steel production and not permanently shutting down the facilities it is closing. There’ll also be a package of transitional assistance for the affected workers.
Welcome to “Dutch disease” — what happens when a resources boom sends your currency skyrocketing and wrecks your manufacturing industry. Paul Howes of the Australian Workers’ Union is warning there’ll be a lot more of it in coming weeks.
While the Steel Transformation Plan — a testimony to Howes’ lobbying on behalf of his members in the carbon tax process — will see several hundred million dollars devoted to propping up the lazy BlueScope management (see Glenn Dyer’s excellent comparison of BlueScope and OneSteel below), the package is more significant for what it doesn’t do — succumb to growing protectionist pressure. The government is under considerable pressure from backbenchers and the AWU to somehow increase domestic demand for locally manufactured steel. But the government has correctly resisted it, even as a “temporary” measure. The two ideas being floated are to make greater use of local steel by making “local content” a greater requirement for government infrastructure projects, or to force the private sector, and especially mining companies, to make greater use of locally-manufactured steel.
Both are lunatic. Forcing contractors on government-funded projects to use locally manufactured steel rather than cheaper imported steel ensures taxpayers pay more for infrastucture and get none of the benefits of a rising dollar. Protectionism is protectionism whether it’s enforced or voluntary. It’s cheaper and more effective simply to give money directly to steel companies rather than try to send it indirectly via infrastructure construction contractors who’ll swipe a cut for themselves. And if adopted, at what point can taxpayers be allowed to start asking for projects to be done on the most cost-effective basis rather than on the basis of whatever is best for Australian industries? “Infant industries never grow up” is an old anti-protectionist line, and sick industries never recover. There’ll always be a demand to persist with “local content” rules even when the dollar is back down and the industry is in rude health. Don’t want to cause job losses eh?
Forcing private companies to use locally manufactured steel goes even further into economic cuckoo land, in effect imposing a tax on them to prop up other industries. Again, there’s a far more effective way of doing that, via a proper resources rent tax regime, rather than imposing elaborate and costly regulatory requirements.
And that’s to say nothing of the signal Australia, one of the few committed free trading countries in the world (apples aside), would be sending to other countries as they grapple with the onset of another economic slowdown and are tempted to, in turn, start imposing their own forms of protectionism — never called that, of course — to shore up their own economies.
As Dyer shows with OneSteel, a higher dollar need not be a crippling blow if a management is innovative and seeks opportunities — especially opportunities offshore, which are now considerably cheaper courtesy of the higher dollar. There are benefits as well as “Dutch disease” costs in a stronger currency if companies are prepared to pursue them offshore.
Maybe Australia’s domestic industries should have thought all this through when they sat back last year and watched the mining industry destroy the Rudd government’s RSPT, which would have effectively used the resources boom to deliver real benefits to local manufacturers through lower taxes, a bigger savings pool and better infrastructure. But that sort of vision is probably too much to have asked for.
Protectionism, protectionism, protectionism–if I say it often enough will Bernard Keane, Craig Emerson, and the rest of the free traders stomp through the floor?
When did protectionism become such a dirty word? Providing protection is a noble action. The only people who should hate the idea of protection are predators–like pedophiles.
Bernard, you attack local content policies as ‘lunatic’ as if they are something Kim Jong Il or Colonel Gaddafi would pull out a hat on a magic carpet ride to crazytown.
Actually local content policies in one form or another are used around the world. That debased third world dictatorship Canada has a comprehensive local content arrangement with (guess who?) Chevron for its offshore oil sector (google ‘Hebron offshore oil project). Local content policies are about recognised that resources can only be dug up, tapped or pumped once – and the wealth generated can disappear very quickly unless specific policies are implemented to ensure domestic industries get benefits from the process.
Yes I am sure in an alternative universe there is a robust resource rent tax operating with theoretically perfect elegance to support a range of local industries. But we don’t live in that one, we live in the universe where business and political opposition torpedoed that tax. Now we can either wait until the perfect tax comes along and watch the benefits of the resources boom disappear, or we can do something concrete now. Local content requirements are a proven way of doing that. The lunatic thing to do would be nothing.
What Tim Dymond said. Sometimes BK does a good job of imitating an economic rationalist, even if it destroys the village to save the village.
Every major country in the world has local content arrangements either overt, or indirect–like Japan with their extraordinarily complicated multi-tiered supply chains, or France and their Poitiers strategy.
It is a valid government strategem to build local capacity. Take the NSW train sets debacle: the lowest cost bid was accepted from a undercosted bid from a Chinese company that, though they almost certainly benefited from the contract in building up their own capacity, could not in the end provide the high-spec required; thus the final build was outsourced to another (Chinese) company and NSW taxpayers paid hundreds of millions extra (and several years delay and a local company was essentially bankrupted). And in this country with its huge geography and need for improved train lines and trains, ends up with less capacity. This was an extraordinary lose-lose situation.
If we were ever to support High Speed Rail in our backward country (another issue on which I disagree with BK) its construction should certainly be conditional on everything being built locally, including those specialist steel rails, and trains. It would have to be part of contracts with bidders (China, France, Germany, or Italy). Just like how China itself builds local capacity–in HSR, nuclear power stations and aviation (Airbuses are now being built in a China factory).
Or you could use government policy to lower the value of the Aussie dollar.
There is no real reason why local steel should actually cost more than imported steel, we certainly have the raw materials and expertise to compete. The long and the short of it is that we have gone so far down the “laissez faire” road that we have given up on the idea of supporting any kind of manufacturing industry in Australia. Governments that should be making decisions based on rational self protection leave every decision to the “market”, which means that only those things that someone can make a dollar out of, happen.This abrogation of government responsibilty has brought to the situation we now find ourselves in, where we are forced to buy from countries whose industrial and environmental practices are still in the 1840’s, and , because of this, they can supply steel at a few dollars a tonne less. Perhaps Australia could live up to its international obligations and refuse to allow products into the country that are made by slave labour, I know this would upset shoppers at the $2 shops but the unfair advantage caused by countries that breach international labor laws makes it very difficult for our industries to compete, and my view is, why should they have to?