Tariffs And The Australian Automotive Industry

The second instrument of trade policy that will be discussed are subsidies, which are defined as a benefit given by the government to an entity, usually as a cash payment or tax reduction (Brander & Spencer, 1984). Thus with subsidies, company’s are able to cover extra expenditure, costs and expenses, without having to raise prices to cover those costs, allowing them to keep a competitive advantage in regards to price. There are many reasons why a government would provide subsidies to an industry, the main one however, is to protect and support jobs (TAI). If that industry was to fail or collapse, then a large amount of workers would be left unemployed, in addition to the belief that the industry’s survival and ability to thrive is in the nations

Throughout the 1960’s and early 1970’s, the government relied heavily on tariffs to push consumers to buy locally manufactured vehicles, with a tariff level of 45%, which was decreased to 33.75% in July of 1973 (Conlon & Perkins, 1995), this decrease resulted in the deterioration of the industry’s competitive advantage. This action result in an increase in the demand for imports, therefore the government decided in 1978 to increase tariffs back to 57.5%, which re-established locally manufacturers as the leaders of the market. These high tariffs effectively created a barrier of entry for any international car manufacturer from entering into the market, which allowed Ford and Holden to dominate the market. From this, the local manufacturers had a very strong hold of the Australian market, however in the early 1990’s, the government moved to liberalise the economy, and reduce the tariffs placed on imported cars. “There was a strong support for reducing protection and avoiding government handouts,” (Garnaut, R. 1989) however only this was only partially adhered to. To help local manufacturers and protect local jobs, the government decided to pay subsidies to these companies, totalling $12billion in direct subsidies (business insider). “This support ensures that vehicle prices remain competitive and encourages consumers to purchase locally,” (Reidy & Diesendorf, 2003), however the subsidies were not used for research and development, instead used subsidise the production of existing models, whilst car companies elsewhere in the world were focused on developing fuel efficient and less expensive cars, without compromising on quality. Following Australia’s accession into the World Trade Organisation, which