Introduction
The Australian car industry is on the rise and according to the country’s Financial Review, it emerged that the industry needed a huge amount of money to subsidize its operations for further four years (Alexander 2012, p. 1). In this case, the industry required about $34 million to fulfil its mission.
This necessitates a rescue program for the industry to avoid future problems and impending collapse, though other economists would consider it as being short-sightedness. Since the car manufacturing sector was started in the country, it has received a lot of assistance from the government to protect it from trade forces. The industry was protected through subsidies and sometimes tariffs, which enhanced the development of motor industry in the country. In reality, when the government assistance to the company becomes meaningless.
Economic Arguments against the Industry Protection
Economists and other researchers have advanced various arguments in contrary to the policies, which advocate for the protection of the car industry. Such bailouts are resisted because they increase the company’s independent on handouts, hence might compromise its liquidity and operations. Economically, some of the arguments against the protection of the car industry in Australia include the following;
Incentives matters: often, economists have argued that through protecting the industry, it might relent on its mandate of providing incentives to its workers so that the latter improves the quality of cars (Kemp 2008, p 102).
Since the success of car manufacturing depends on the quality of the output, provision of incentives the industry might be depending on government assistance at the expense of developing internal mechanisms (Kemp 2008, p. 108). Importantly, the workers normally initiate behaviour that would enable them rewarded for their hard work. In addition, economists believe that the bailouts decrease the competitiveness of the models, making the industry lose a lot of money due to poor sales.
Comparative Advantage: Notably, globalization and the current liberalized trade in the country ensure that the production suits structure (Salvatore 2012, p. 17). However, protecting the industry reduces its comparative advantage to the total number of existing car manufacturers in Australia and other parts of the world.
The extent to which the car industry could remain competitive explains the application of the Mercantilism theory of Absolute Advantage (Feenstra 2003, p. 55). Under this theory, Adam Smith argued that the company progresses and accumulates enormous wealth based on its inclination to the production of goods, in which it generally has comparative advantage compared to the others.
Indeed, comparative advantage revitalizes the business pattern, and this helps the company in making decisions, and might enable the company make reasonable profit (Feenstra 2003, p. 67).
Resource Allocation: the efficiency with which the Australian car industry operates in terms of resource allocation is likely to affect its output. Borrowing from the Factor Proportion Theory (FPT), Scholars argued that the resources necessary for efficient production system must be allocated fairly so that no industry benefit from undue advantage.
Since the auto industry needs a lot of resources, it is reducing in its quantity of production especially in Australia due to poor or inefficient resource allocation (Pomfret 2008, p. 82). The inefficiency has caused scale-back of productivity in the car industry, in Australia to a level worrying the stakeholders.
This is because the industry relies heavily on the subsidies than having a local initiative to improve on the utility of the available resources. The economists argue that the car manufacturers should embrace systems, which would improve efficiency in the sector (Pomfret 2008, p. 84). Therefore, they are against the increasing subsidies for the sector.
Economic Darwinism: there has also been the notion that only the best industry with efficient production systems could survive in the competitive economy. According to Darwinism theory of economic development, an industry cannot make significant improvement in its production, without efficiency and this effectiveness is achieved through local mechanism (Salvatore 2012, p. 99).
As a result, helping the industry in its production system was itself against the spirit of Darwinism, thus not acceptable. In this regard, the Australian economists were against the protection and subsidizing the car industry and instead, they were of the opinion that it should be left to survive on its own.
The increase in the cost of Australian manufactured cars was cited as the reason for the low preference for the cars, thus a major cause for the decline of the industry (Salvatore 2012, p. 101). Basically, the industry does not need any subsidy to make its production competitive, but simply needs an internal mechanism to make it economically viable.
Cost Benefit Argument: it is apparent the cost of input the majority of workers put in the production system of the industry does not benefit them, but only to a few individuals. Thus, economists believe that protecting the car industry would translate to taking care of the majority who do not benefit from the production, but only enrich a few individuals best placed in this industry, such as merchant traders, suppliers among others (Salvatore 2012, p. 105). Therefore, they believe that the government should not protect the industry.
Moral Hazard: economists also believe that it is inconsequential and a huge risk for the government to bailout the car industry in Australia. This is because; the industry has literally fallen short of the internal mechanism to enhance the ease with which it carries out its production. This means the company would be less aggressive and only wait for assistance, a situation that may only increase its problems (Adam, Bordo & Young 2009, p. 24).
Firm’s Failure: understanding the firm’s failure and establishing the practical economic approaches of solving such problems is more important than relying on subsidies to improve efficiency and quantity of production. The firm might not succeed if it cannot improve the internal efficiency to respond to the unprecedented market failures, thus will always depend on the external assistance during crisis.
However, economists argue that proper inbuilt mechanisms could adequately shield the company from undetermined crisis (Adam, Bordo & Young 2009, p. 26). The government could only assist when there are external forces affecting the production, but not due to its failure.
Inflexible Labour: notably, the inflexibility of the labour sometimes challenges the car industry in Australia. Though the government has some reasons for protecting the car industry from the changing labour market, the practice has no benefit to the general workers in the industry (Adam, Bordo & Young 2009, p. 27).
Economic Arguments for the Industry Protection
Despite the criticisms for the car industry protection, there are a number of reasons, which rationalizes its protection. A number of economists have reiterated that protecting an industry from negative competition is the best and surest way of promoting its growth. However, the protection should not be aimed at interfering with the operation of others, and supported by the following economic argument
Unfair Competition: there are trade competitions, which do not work to the advantage of the car industry in Australia. For instance, the high importation of cheap cars from the Asian region has a lot of impact on the manufacturing process. Indeed, the economists argue that the stiff competition from merchants necessitates protection of the car manufacturers in the country (Reuvid & Sherlock 2011, p. 41).
Changes in Labour Laws: there are regulations that might not be advantageous to the industry, especially those that tend to favour the employees (Reuvid & Sherlock 2011, p. 42). For example, the policy that advocates for increasing the salaries of workers would affect the company.
Market Failure: economists argue that the problems of the international market might inhibit the progress that the industry, creating a non-uniform field for competitive business operation (Reuvid & Sherlock 2011, p. 43). Indeed, leveraging is not possible in cases of market failure, thus making it difficult for the manufacturers to operate at a profit. In this case, market failure might cause the car industry to incur heavy losses, and threaten its termination. Therefore, it cannot compete effectively with other players.
Conclusion
In summary, though the government protection for the car manufacturing sector is necessary in certain occasions such as market failures, the development of internal mechanisms is vital. This means the level of efficiency in the company determines its smooth operations than unnecessarily relying on the subsidies.
References
Adam, K., Bordo, M & Young, W 2009, Theories of International Trade, Routledge, London.
Alexander, P 2012, Car Industry Handouts are Childish. Web.
Feenstra, R 2003, Advanced International Trade: Theory and Evidence, Princeton University Press, New York.
Kemp, M 2008, International Trade Theory: A Critical Review, Routledge, London.
Pomfret, R 2008, Lecture Notes on International Trade Theory and Policy, World Scientific Publishing, New York.
Reuvid, J & Sherlock, J 2011, International Trade: An Essential Guide to the Principles and Practice of Export, Kogan Page, London.
Salvatore, D 2012, Introduction to International Economics (3rd Ed.), John Wiley and Sons, New York.