Australia's auto industry collapses as America's booms By Scott Sumner

From the Economist:

Toyota’s announcement on February 10th that it would join Ford and Holden in pulling out of carmaking in Australia, closing its assembly line in 2017, was greeted with commensurate dismay. Yet beneath the obligatory political blame-mongering was an acceptance that everything has turned against carmaking in Australia. The departure of the last big carmaker is as inevitable as an argument at a barbecue over the merits of a Ford versus a Holden. Mitsubishi closed its plant in Adelaide six years ago. The latest exodus began last May, when Ford said it would go in 2016. Holden, part of General Motors, said just before Christmas that it would quit in 2017. The industry has been in decline for years. A decade ago Australia produced 400,000 cars a year; in 2013 it churned out just over 200,000.

You might wonder why the Australian government didn’t do something about this situation. After all, in a country of 23 million people an industry making 400,000 cars per year is equivalent to a 6,000,000 cars per year industry in the US, Here’s why:

Decades of generous state handouts have “forestalled but not prevented” the car industry’s problems, concluded a recent report by the government’s Productivity Commission. Since it came to power last September, the conservative administration led by Tony Abbott has declined to prop up struggling firms. It refused Holden’s plea for more subsidies in December. Last month it rejected an A$25m ($22.5m) bail-out for SPC Ardmona, a fruit-canning business that Australians regard with a sentimentality matched only by that for Holden. Mr Abbott says the role of creating jobs belongs to business, not government. One commentator lamented that Australia will join Saudi Arabia as the only G20 countries without a car industry. But carmaking is a small and unprofitable part of a shrinking manufacturing sector, employing relatively few, in an economy dominated by services and resources. The main damage caused by the carmakers’ departure is to Australians’ self-esteem.

It’s interesting to contrast Australia with the US, where car and truck output is booming. Our government refused to let Chrysler and GM go bankrupt, or perhaps I should say they prevented the most disruptive type of bankruptcy. Enough money was injected to keep the US carmakers operating.

At the time Americans were told that bankruptcy would be a disaster, costing lots of jobs. I was skeptical of that claim, because unlike Australia, the US does have a comparative advantage in making cars and trucks. There is a huge market for the cars made by GM and Chrysler. Most likely the GM and Chrysler assets and workers that were useful would have been picked up by other automakers, perhaps Chinese firms looking for a toehold in the US market, and access to US technology. Autoworkers probably would have had to accept deep pay cuts. (Some argued the bailout was of the UAW, not the companies.)

Although the US does have a comparative advantage in making cars and trucks, it’s not obvious to me that we have a comparative advantage in managing auto production facilities in the US. Over time a larger and larger share of the US auto industry is being managed by foreign forms. Today only GM and Ford remain American-owned. Without the bailout only Ford would have remained US-owned. American workers are quite good at making cars, as long as they are not in US managed and UAW organized facilities.

PS. In a recent post I discussed the growing importance of “sandy countries” such as Australia and Saudi Arabia. The Aussies are smart to recognize that their comparative advantage lies in services and mining. Too bad the US government doesn’t understand that America’s comparative advantage lies in making cars in non-union factories run by European and Asian management teams.

PPS. Australia is the only major developed country to avoid a recession in 2008-09. Their last recession was in 1991. Between 1996 and 2006 Australia’s NGDP grew at 6.5%/year. Between 2006 and 2012 Australia’s NGDP again grew at 6.5%/year. Good macro policy leads to good micro policies, and vice versa.