Protection versus Free Trade - Essay Example

Protection versus Free Trade Author’s Name Grade course Institution Tutor Date Introduction Free trade refers to government policy where equality in treatment is accorded between goods and services that are exported or imported into a country. On the other hand, government can choose to adopt trade protectionism. Under protectionism, governments make deliberate efforts to promote exports or curtail import (Dunkely 2003, 34). Trade protection is achieved through various ways such as subsidies and other barriers to trade such imposing quotas as well as import duty. In Australia, the debate on free trade and protectionism has been in the news in the recent past. This has been prompted by the notice issued by General Motors, through Holden, its local subsidiary, to cease production of motor vehicles in Australia by 2017. The decision by the giant auto maker has been informed to a large extent by the prevailing conditions in Australia's auto market. The essay examines whether it is right for the Australian government to continued subsidizing the local car industry (Taylor & Bennett 2013, 43). Discussion 1. Debate has been rife as to whether the Australian government needs to subsidize the local motor vehicle manufacturers. Whereas differences in opinion lie as to whether subsidies should continue or not, it should not be lost the fact that the Australian auto industry indeed requires subsidies to survive. One reason why subsidies should in fact be increased rather than scrapped away is the fact that almost all vehicle manufacturers all over the world do receive subsidies of some sort in the making of their vehicles. The subsidies for vehicle manufacturers take different form in different countries (Taylor & Bennett 2013, 2). The subsidies could be through injection of the relevant funds through tariffs or in kind. Some countries use currency manipulation to maintain a competitive advantage for their motor vehicle manufacturers. There are still many other ways through which governments can assist motor vehicle manufacturers to ensure that they gain an edge over their competitors and this would still amount to subsidies. It is a fact that other countries offer more subsidies than Australia does. When motor vehicle manufacturers are subsidized, it is only natural that their products end up being cheaper. Such manufacturers are therefore able to access a larger share not only of domestic but international market. This reality means that doing away with subsidies for the Australian manufacturers removes them between a rock and a hard place since it is very difficult if not impossible to compete with their competitors that are better taken care. This is despite the fact that Australian auto makers could be producing vehicles of similar or even superior quality (Taylor & Bennett 2013, 46). By its nature, motor vehicle manufacturing is both capital and labour intensive and this means that losing a competitive advantage translates to enormous losses. Australia does not have a comparative advantage when it comes to manufacturing cars (ABC 2013, 1). First, the industry does not receive sufficient governmental support which puts it at a disadvantage in comparison to manufacturers in other countries. The Australian dollar has continued to improve on its value. This has made more expensive to sell Australian made cars as compared to the foreign made ones and this has seen a significant drop in the number of customers purchasing cars made in Australia. 2. The argument for the removal of subsidies offered to the auto manufacturers are also convincing. A huge number of people, the majority, feel that it is neither right nor feasible for government to maintain subsidy scheme as well as bailing out struggling companies in the motor vehicle manufacturing industry. There is no justification therefore why tax payers' money should be spent on vehicle manufacturers whereas such funds would be better utilized in other more beneficial projects. Introduction of subsidies unnecessarily distorts the playing field as far as the motor vehicle industry is concerned (The Journal Gazette, 6). Subsidies go against the principles of free trade which envisage a situation where there should be no subsidies at all. Removing of the subsidies from the motor vehicles industries would therefore save a huge amount of tax payers’ money which would be invested in projects that would be directly beneficial to members of the public rather than individual companies. Some experts advance the argument that continued provision of subsidies to the car industry amount to throwing good money after bad money. The loss of job in Australia's car industry should be seen in light of whether it makes economic sense to continue manufacturing cars in the country. According to some of those opposed to subsidies, car manufacturers are inefficient and therefore government should not waste good money owing to the fact that resources are scarce (The Journal Gazette, 6). The car industry also unfairly benefits from heavy tariffs which are imposed on all imported vehicles be they new or second hand. This results in imported second hand vehicles being very expensive in Australia as compared to other countries. The opponent also oppose that subsidies help maintain highly skilled labour in Australia and point to the fact that this would be so but it is done to the detriment of other jobs which would be created in other sectors of the economy which are more efficient but receive less assistance from the government. It is also a fallacy to claim that motor vehicle manufacturing jobs require more skills than others. Opponents of the subsidies argue that the market forces should be left to decide the optimal number of manufacturers for Australia which would even be none (Taylor & Bennett 2013, 49). 3. There are many economic arguments which support not only a continuation, but rather, an increase in the subsidies given to the auto industry. A study conducted by the Federal Chamber of Automotive Industries indicates that there would be unpleasant consequences on the economy should the Australian car industry collapse. The Chamber of Automotive Industries sort the services of researchers from Monash University and Allen Consulting Group. The report indicates that subsiding the car industry added at least $21.5 billion to the Australian economy (ABC 2013). The car industry has a very huge employment base, boasting about 40,000 employees. It is evident that if the Australian car industry collapsed then serious consequences would result to at least 100,000 people who benefit directly from the car industry as a result of income gained. The amount of money that would be shed from the economy would be very huge (ABC 2013). The government assistance for the car industry in Australia amount to about $500 million per annum. These pales in comparison with the impact on Australia's Gross Domestic Product (GDP) would lose at least $7 billion (Dunkley 2003, 37). The arguments against continued subsidies for the car industry do miss a point. There are many other subsidies which the opponents of a subsidized car industry fail to take note of. Thee Australian banks receive huge amounts of money from the federal and state governments as subsidies. About $4 billion is spent subsidizing the mining industry. It is therefore apparent that almost all industries in Australia receive government subsidies in one form or the other. There are other areas where government subsidies are present including child care, university education, the first home. It appears discriminatory to single out the car industry to be the one to bear the brunt of having no government subsidies at all (Taylor & Bennett 2013, 1). This is despite the fact that the industry would actually need more money in forms of subsidies owing to the enormous returns received from such subsidies. Figures indicate that for every $1 that the government gives as assistance the car manufacturing industry returns an economic value totaling up to $12. There are other benefits for the government to be derived from the car manufacturing industry (The Journal Gazette, 6). The industry invests heavily in research and development, a lot of direct foreign investment is brought in as well as payroll tax. Almost all countries in the world subsidize their automotive industries. Leading economies offer more subsidies to their auto makers and it should not be lost the fact that there are genuine reasons as to why those governments opt to provide for the subsidies. Failing to provide subsidies would result in the Australian economy failing to attract entrepreneurs such as engineers who may not find any incentive to base their startups in Australia. There are other industries that support the auto industry (The Journal Gazette, 6). The companies manufacturing motor vehicle parts in Australia stand to lose a lot of business since they depend on the car manufacturers based in the country as their primary customers. This would translate to further job losses and the economy would take a negative beating. 4. Continued subsidies in the car industries would benefit a lot of people and on the flipside, a lot of other people would be disadvantaged by the subsidies. The winners include the car manufacturers. Continuing with subsidies or even increasing the subsidies further is greatly beneficial to car manufacturers. The manufacturers in Australia who include Holden and Toyota would be able to reduce their costs of production for the cars. This would remove one of their greatest weaknesses which has been the loss of Australian market share owing to cheaper imported cars (Dunkley 2003, 37). At the moment, Australian cars are more expensive compared to foreign manufactured cars which make it extremely difficult for Australian car makers to compete outside Australia while at the same time reducing their market share on their home turf. Another group of winners would be the thousands of employees who work for the car manufacturers in Australia. The car manufacturers employ at least 40,000 people directly. Therefore, at least 100,000 people earn their livelihoods directly from the jobs provided by the auto manufacturers (Dunkley 2003, 39). Without the government subsidies, many jobs would be shed and in fact Holden has given notice of halting manufacturing altogether. The pain and suffering that would result from the company wrapping up its operations is hard to quantify. There are manufacturers of motor vehicle parts. These get their business from the car manufacturers. With the government subsidies keeping the car manufacturers afloat, the manufacturers of various auto parts remain in business since there is ready market. The government also gains from the subsidies it provides to the car manufacturers. There are various forms of taxes that the manufacturers pay as well as propping up the Australian economy. However, there are losers in the subsidy scheme. Experts who support free economy argue that the money spent on car manufacturers would be better utilized in other sectors which are more efficient and beneficial to the public rather than keeping on industry afloat and which are not performing as per expectations. Foreign manufacturers also feel a pinch from the subsidies since they are not able to penetrate the Australian auto market as much as they would like to (Dunkley 2003, 41). 5. Australia should increase protection for its car industry. The car industry contributes at least $20 billion to the Australian economy and this makes its contribution quite worthwhile and which should not be lost. Almost all other countries subsidize their car manufacturers. Australia would place its car manufacturers between a rock and a hard place should it withdraw its support. Without government support, Australian car manufacturers would find it impossible to compete with heavily subsidized foreign manufacturers. One role of a government is creation and preservation of jobs for its citizenry. Failing to increase subsidies for the car manufacturers would result in numerous jobs being shed with thousands and thousands of people becoming destitute (Dunkley 2003, 44). Such people would be highly skilled but there would be no place to sell their skills and they would be turned into paupers while their plight would be addressed by the government doing the needful and increasing the subsidies. Research proves that subsidies to the car industry do in fact bear fruit and there is no economic justification as to why the government would fail to increase the levels of subsidies afforded the car industry. The Australian government should put in place measures that retain highly skilled labour in the country. Failure to do so would set the country back a number of years and it would be very painful in trying to recover lost ground. Increasing subsidies would act as an incentive for engineers would want to have their start ups in Australia. References ABC 2013, Car industry subsidies worthwhile, study concludes. ABC. Dunkley, G., 2003, Free trade: myth, reality, and alternatives. New York, Zed Books. Taylor, R & Bennett, J, 2013, GM Hits End of the Road in Australia, The Wall Street Journal. The Journal Gazette, 2013, GM to stop making car in Australia by 2017, Associated Press. Read More