Manufacturing not an economic maybe

August 31, 2011 By Ian Porter, SMH

MANUFACTURING is not a take it or leave it option for Australia.

It has to be a central part of the economy in coming decades if the Australian population is not to get dragged into a race to the bottom in terms of living standards.

The exact split between primary, secondary and tertiary industries in a healthy economy cannot be defined by any formula, but the potential for a sharp shrinking of the Australian manufacturing sector threatens to seriously unbalance the economy and lead to social disruption in coming decades.

The minerals boom and the resultant very high value of the Australian dollar pose a threat to manufacturing of a scale never seen before.

Sixty years ago, when the wool boom sent the currency soaring, the local manufacturing sector - just getting started under an umbrella of federal government industrialisation policies - was protected by tariffs and a relative lack of goods to import from Europe and Asia.

Fast-forward to the present and those elements that "saved" manufacturing back then are absent. There are no tariffs any more and there are many sources of cheap imports.

It has been suggested that the minerals boom could last 20 years - or as long as it takes China to lift 1.4 billion people out of poverty. If the Australian dollar stays where it is now for that long, the consequences for manufacturing, and the people dependent on it, would be dire.

As BlueScope and the carmakers have found, it is impossible to export when the Australian dollar is above parity with the US dollar. And that sort of valuation also makes imports abnormally cheap.

It is not just manufacturing workers and their families who will suffer. Even if they do find other work - and there are not one million jobs out there in the market waiting to be filled - it is unlikely to pay as well, leading to an adverse impact on their own standard of living, but also on that of almost every other Australian.

The drop in living standards caused by a decline in manufacturing will flow into the economy. There will be reduced demand for goods. Even if those goods are imported, the retailers - who comprise one of the largest employment sectors in the economy - will sell fewer of them.

Rushing into tertiary industry - services - will not help. With fewer people employed, there will be less demand for everything, whether it's haircuts or legal services, IT services or shoe-shining. Australia has been lucky and lazy in the past. Instead of processing many of its own primary products like wool, foodstuffs and minerals, it has simply shipped them offshore and let someone else earn the manufacturer's margin.

The wealth foregone is almost unimaginable. It's the manufacturing margin where the wealth is created. A $50 strip of steel can be converted into a $700 refrigerator, 10¢ worth of wool into a $2 pair of socks.

Australia has a chronic trade deficit problem and it's no wonder. We sell iron ore at $180 a tonne and import it back in the form of cars at a rate of $20,000 a tonne.

If Australian manufacturing is to survive in the long term, we need to pull back a lot of this processing onshore and create the wealth here. And we should start with the sector that is visiting the mayhem on manufacturing - minerals.

This is what the federal government had in mind when it first granted export licences to BHP and Rio Tinto (then CRA) when they proposed giant ore mines in Western Australia. One condition was that they beneficiate (process) a proportion of the ore into a value-added product.

Forty years on and there is still nothing concrete to show. BHP lost billions when its hot briquetted iron plant blew up - although its pellet plants in Brazil work fine - and RTZ is still fiddling with a smelting system that is supposed to produce pig iron more efficiently.

Does the parlous state of manufacturing mean that all the protection and assistance over the past six decades and more has been wasted? Far from it.

The industry assistance plans have helped manufacturing overcome a crucial shortcoming in Australia, a small domestic market. Purists would say a country with a small domestic market should not aspire to make cars, refrigerators or even steel if the market can't support them with no assistance.

But that ignores the stimulus manufacturing provides in many areas, whether it's education and the trades or management or innovation, quite apart from employment and general economic activity.

Manufacturing itself is a multiplier of value, turning basic materials - steel, aluminium, plastic, glass, rubber - and components like electronics into products worth much more than the core ingredients.

Yes, other countries may be able to do it cheaper, especially when the Australian dollar is ridiculously overvalued, but importing products creates few jobs in Australia, and low-paid ones at that.