Manufacturers' Manifesto For Australia To Live With China's Boom Avoids The Pitfalls

The Age

Thursday April 20, 2006

KENNETH DAVIDSON - Kenneth Davidson is a senior columnist

AUSTRALIAN manufacturing is increasingly caught between the rock of an overvalued currency due to the commodity boom largely driven by China's phenomenal economic growth and a hard place in the form of Chinese labour costs that are about one-tenth of Australian rates.

For how long? Based on past resources booms, the good times for miners are unlikely to last more than two or three years. This is one reason why Treasurer Peter Costello is reluctant to give up his budget surplus.

The intense cost competition is likely to last much longer because China will be able to hold down wages for unskilled and semi-skilled workers to close to a subsistence rate for as long as the huge pool of underemployed rural labour is available to cool any incipient cost inflation.

How should Australian manufacturing meet the challenge except to continue to contract in the face of this withering competition?

Manufacturing's umbrella lobby - the Australian Industry Group - launched its blueprint, Manufacturing Futures Achieving Global Fitness, at the National Press Club in Canberra yesterday.

It must be said the document, based on interviews with industry leaders, workshops, and a survey of more than 800 manufacturing companies, provides a realistic picture of the challenges facing industry with a responsible list of policies demanded of government.

There was no request for increased protection against manufacturing imports. On the contrary, the overall theme was the necessity for further measures to globalise Australian industry including the continued pursuit of trade liberalisation, freeing up the movement of skilled workers both to and from Australia, a more generous export market development scheme, and the removal of tax barriers to offshore expansion by Australian companies.

The report faced the important question about what it will mean to be an Australian manufacturer in the future. It concluded "the totality of Australian manufacturing can no longer be defined as Australian sources production given a greater share of production and inputs will be sourced offshore".

In effect the report shied away from adopting a strategy that attempts to meet Chinese competition by cutting costs either by cutting wages directly or indirectly through cutting the value of the Australian dollar.

Instead the AIG adopted a strategy designed to push Australia up the value-added chain as far and as fast as possible where competition is based on product and process innovation rather than low-cost production.

In other words, Australian manufacturing will survive if it can operate in areas dependent on highly skilled workers irrespective of whether the operations are in China or Australia where the workers are in the position to demand wages well above subsistence in China as well as Australia.

The AIG appears to recognise this will require a much bigger investment in education and training than now.

The AIG also recognises this expenditure on skills formation will have to be matched by higher levels of spending on capital equipment and R&D through accelerated depreciation and making R&D concessions more generous.

However, the report also contains the apparently now obligatory calls for income and company tax relief, which seem to have a higher priority in the report than targeted assistance to industry and skills enhancement.

But the document might have had far greater impact if it had been prepared to offer revenue proposals to offset its sensible expenditure proposals such as quarantining negative gearing on investment housing and the introduction of a resource rent tax to ensure Australians get a fairer share of the benefits of the commodity boom.

And why not an increase in the mandatory renewable energy target?

kdlv@ozemail.com.au

© 2006 The Age

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