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The Australian Economic Review, vol. 30, no. 4, pp.

35973



The University of Melbourne, Melbourne Institute of Applied Economic and Social Research 1997
Published by Blackwell Publishers Ltd, 108 Cowley Road, Oxford OX4 1JF, UK and
350 Main Street, Malden, MA 02148, USA
* This paper was first presented as a keynote address to the
37th Annual Conference, Federation of Automotive Prod-
ucts Manufacturers, National Convention Centre, Can-
berra, 16 June 1997. I am grateful for the assistance of Mr
Xu Xinpeng in preparation of tables and diagrams.

Abstract

Lobbyists for car industry protection argue
that Australia should delay reducing tariffs
until trading partners have reciprocated, but
in reality, trade liberalisation and import ex-
pansion have been increasing East Asian and
global markets for competitive Australian sup-
pliers of automotive products. This reality is
one reason why the car industry is a success
story of Australian reform, with quality im-
proving, real value added rising and exports
increasing strongly over the past decade, as
protection has fallen rapidly.
The recent government decision to suspend
the reduction in protection from 2000 to 2005,
and over the five years taken as a whole greatly
to reduce the rate of decline, is a symbol of a
more general reform malaise in Australia.
The car manufacturers said that they would
have accepted larger reductions in protec-
tion in the context of more vigorous pursuit of
efficiency-raising reform in other areas, nota-
bly in taxation. It is time for the government to
take the industry at its word: to commit itself to
replacement of more distorting indirect taxes
by a value added tax; and to use this congenial
context to restore momentum in the reduction
of protection.

1. Introduction

Automotive manufacturing over the past dozen
or so years has been a success story of reform.
As a member of the Committee that advised the
Minister on what became the Button Plan for
the passenger motor vehicle industry, and in
which I suppose my distinctive role was to ex-
plain the case for removal of quantitative re-
strictions on imports, I recall the Department of
Industrys theory of the Flip Flop Point. The
nominal tariff equivalent of the import quotas
was then about 90 per cent, and the removal of
the quotas would leave a tariff of 57.5 per cent.
It was proposed to remove the quantitative re-
strictions gradually, by lowering in a series of
steps the import duty that was applied to im-
ports in excess of quota. The Department
warned about the Flip Flop Pointa level of
tariff equivalent below which the whole indus-
try would disappear. It was probably some-
where between 90 per cent and 57.5 per cent.
The trouble was that you could not know the
point in advance of its catastrophic realisation.
So, Minister, it is wise to be cautious.
The quantitative restrictions were removed
by 1988, and in that year the tariff was reduced
to 45 per cent. The industrys performance in
raising productivity must have forced the Flip
Flop Point back below 45 per cent! The 1988
May Statement initiated reductions in the tariff
by 2.5 percentage points per annum, down to
35 per cent in 1992.
My

Australia and the Northeast Asian
Ascendancy

(Garnaut 1989) was released for
public discussion in November 1989. It

Australian Cars in a Global Economy

Ross Garnaut*
Research School of Pacific and Asian Studies
The Australian National University

360 The Australian Economic Review December 1997



The University of Melbourne, Melbourne Institute of Applied Economic and Social Research

recommended the removal of all Australian
protection by 2000. The reduction in protection
was to be supported by a far-reaching program
of cost-reducing reforms, and efforts to link
Australian economic life more productively
into East Asian dynamism.
A few months later, in 1990, I was invited to
exchange views over dinner by the national ex-
ecutive of the car industry group. I recall from
that occasion the industrys description of the
unnatural barriers that then stood in the path of
truly internationally competitive performance.
The greatest of these were work practices,
which made it more or less impossible to oper-
ate the increasingly expensive manufacturing
plants for more than about 36 hours per week,
when competitors in Nagoya and Detroit ran
similar plants for 168 hours, less only neces-
sary downtime for maintenance. Worst of all
was the rostered day off, a product of a metal
trades employers deal with the unions in the
early 1980s. The rostered day off had become
managements Golf Day, so no one would have
been available to lead the factory floor into new
and more productive patterns of work even if
the workers had been at the plant. Capital over-
heads were a major component of costs, and
management and work practices made them up
to four times higher in Australia than in world
class performance.
I understand that some plants in Australia
are now doing much better in capital utilisa-
tion. Relative to the rest of the world, quality
has improved and costs have fallen. Our best
automotive manufacturing operations have
been more profitable in recent years than at the
high tide of protection in the early 1980s. The
most efficient plants have been able to grant
substantial increases in real wages to their
workers, at times of real wage pressure in
much of the manufacturing workforce. Real
value added in automotive manufacturing rose
2.6 per cent per annum from 1985 to 1995, as
the tariff equivalent of protection fell by an av-
erage of almost 5 percentage points per annum.
Automotive exports rose from a few hundred
million dollars in 1985 to around $2 billion in
1996sure, helped by export facilitation, but
still growing strongly as the rate of export sub-
sidy fell steadily with the tariff. Employment
in the industry fell over the decade but, per-
haps surprisingly, by a similar number to the
previous decade when protection increased
greatly.
We know that the Australian car story of the
past decade is not all good. There are still some
places where management has its Golf Day
Off, and where expensive plant is operated for
a quarter of a potential working week. Some
plants remain a long way below world class
productivity, and make losses despite con-
tinuing protection. And reading Associate
Commissioner Webbers contribution to the
Industry Commissions report, and Simon
Creans to the Parliament, the ghost of the Flip
Flop Point still haunts those who walk Austra-
lias industrial sites.
But the main story is that in an industry that
12 years ago was written off as hopelessly inef-
ficient by friend and foe, the best firms are now
close to international levels of performance.
These producers have caught the wave of re-
gionalisation and globalisation of production,
to the discussion of which I now turn.

2. Regionalisation and Globalisation

There has been rapid expansion of the foreign
trade share of global production throughout the
postwar period. Table 1 demonstrates the point
by reference to the ratio of imports of goods to
production of goodsthat is, to GDP less
output of services. This is a more revealing
measure than the commonly used ratio of mer-
chandise trade to total GDP.
The globalisation of goods production is ev-
ident: worldwide, the ratio of imports of goods
to goods GDP has risen rapidly, from 6.4 per
cent in 1965, to 20.8 per cent in 1975, 31.7 per
cent in 1985 and 41.4 per cent in 1995. The
most rapid increases in the share of imports in
production in the past decade have been in re-
gions and groups of countries where it had been
lowestrespectively the Rest of the World,
Eastern Europe and the Soviet Union, and
North America. The ratio has increased less
sharply in East Asia, and has actually slipped
back a bit in Western Europe. The Australian
ratio is unremarkable in global context, except
for its high starting point and its slow growth in

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Table 1 Ratios of Goods Imports to Goods Production, Major Regions

(per cent)

Source
EC-12 East Asia North America Eastern Europe and FSU Rest of the World World
Importing region 1965 1975 1985 1995 1965 1975 1985 1995 1965 1975 1985 1995 1965 1975 1985 1995 1965 1975 1985 1995 1965 1975 1985 1995

Australia 11.1 7.8 9.2 11.1 4.5 6.7 14.8 18.8 7.8 5.7 9.8 12.2 0.2 0.1 0.1 0.1 5.3 5.1 7.0 9.3 29.0 25.6 41.0 51.5
EC-12 14.4 24.0 34.4 34.5 0.9 2.0 4.3 6.6 4.6 4.8 6.2 5.3 1.1 1.6 2.6 2.2 11.0 15.4 18.1 13.4 32.0 47.9 65.5 62.1
East Asia 1.0 2.4 3.2 4.9 2.0 7.3 12.5 19.1 2.4 5.1 6.3 7.1 0.2 0.4 0.5 0.5 2.4 8.4 8.6 6.4 8.0 23.6 31.1 37.9
North America 2.4 3.3 5.2 6.1 1.4 3.5 8.9 13.7 4.3 7.3 9.9 15.8 0.1 0.1 0.2 0.3 2.9 5.7 5.1 5.8 11.0 19.9 29.2 41.7
Eastern Europe
and FSU 0.8 3.7 4.2 15.6 0.1 0.7 1.5 2.0 0.2 0.8 1.0 1.8 0.3 4.7 10.6 15.1 1.1 3.6 8.0 8.2 2.4 13.5 25.2 42.7
Rest of the World 1.3 5.0 7.4 12.6 0.2 1.3 2.7 4.9 0.6 1.9 2.6 4.2 0.1 0.7 1.4 1.1 0.7 3.4 5.4 7.3 2.8 12.2 19.5 30.0
World 2.4 7.4 10.3 14.3 0.5 2.4 6.0 10.0 1.4 3.6 5.5 7.5 0.2 1.1 1.8 1.4 1.9 6.3 8.1 8.2 6.4 20.8 31.7 41.4

Notes

: East Asia includes Japan, Korea, China, Taiwan, Hong Kong, Thailand, Malaysia, Philippines, Indonesia, Singapore and Vietnam.
North America includes United States, Canada and Mexico.
Eastern Europe includes Albania, Bulgaria, Germany, Hungary, Poland, Romania, Czech and Slovakia.
FSU represents Former Soviet Union.
Data for Taiwan are not available in IMF database and are estimated based on

Taiwan Statistical Databook, 1996

. Data for Germany after 1991 refer to unified Germany.
World GDP data are from

World Development Report 1996

(World Bank) where only two data points, 1980 and 1994, are available. World GDP in 1980 is $US10 759 322 million and
$US25 223 462 million in 1994. The estimates for other years are based on this benchmark figure taking into account growth rate and inflation rate provided by

World Economic Outlook

(October 1996, IMF).
GDP data for Eastern Europe and Former Soviet Union are extremely difficult to get. The estimates here are based on World Banks estimate of GNP per capita and population in 1990 for
these countries and take into account the growth rate provided by World Development Report 1996.
Data for GDP exclude service value added. Data for sectoral share of service for most of the economies are from

World Bank World Tables

while for some economies they are estimated
by the author.

Source

: IMF,

Direction of Trade and International Financial Statistics

, International Economic Data Bank, Australian National University.

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Table 2 Intensity of Trade in Goods, Major Regions

Importer
EC-12 East Asia North America Rest of the World
Exporter 1965 1975 1985 1994 1995 1965 1975 1985 1994 1995 1965 1975 1985 1994 1995 1965 1975 1985 1994 1995

EC-12 1.21 1.39 1.58 1.66 1.77 0.20 0.15 0.18 0.21 0.21 0.35 0.28 0.32 0.26 0.27 0.67 0.69 0.75 0.86 0.87
East Asia 0.31 0.31 0.28 0.31 0.28 3.34 2.59 2.06 1.93 1.88 1.36 1.25 1.27 0.97 0.88 0.81 0.81 0.63 0.47 0.47
North America 0.51 0.47 0.39 0.34 0.36 0.91 0.96 0.81 0.69 0.67 1.92 2.18 1.88 2.23 2.12 0.80 0.73 0.63 0.61 0.66
Rest of the World 0.72 0.58 0.78 0.91 0.87 0.60 0.59 0.42 0.57 0.63 0.54 0.51 0.41 0.51 0.57 1.05 1.31 1.63 1.52 1.54

Notes

: East Asia includes Japan, Korea, China, Taiwan, Hong Kong, Thailand, Malaysia, Philippines, Indonesia, Singapore and Vietnam.
North America includes United States, Canada and Mexico.
Self trade is excluded.

Source

: UN trade data, International Economic Data Bank, Australian National University.

Table 3 Automotive Trade Intensity, Major Regions

Importer
EC-12 East Asia North America Rest of the World
Exporter 1965 1975 1985 1995 1965 1975 1985 1995 1965 1975 1985 1995 1965 1975 1985 1995

EC-12 1.42 1.50 1.66 1.91 0.19 0.20 0.21 0.10 0.49 0.38 0.43 0.35 0.58 0.66 0.74 0.64
East Asia 0.10 0.24 0.05 0.05 3.64 2.79 2.50 2.63 1.97 1.41 1.02 0.50 0.74 0.90 0.69 0.37
North America 0.32 0.26 0.20 0.22 0.32 0.73 0.22 0.47 2.46 3.10 3.85 4.01 0.77 0.77 0.33 0.57
Rest of the World 0.56 0.51 0.64 0.66 0.57 0.23 0.55 0.67 0.23 0.23 0.46 0.74 1.35 1.27 1.29 1.55

Notes

: East Asia includes Japan, Korea, China, Taiwan, Hong Kong, Thailand, Malaysia, Philippines, Indonesia, Singapore and Vietnam.
North America includes United States, Canada and Mexico.
Self trade is excluded.

Source

: UN trade data, International Economic Data Bank, Australian National University.

Garnaut: Australian Cars in a Global Economy 363



The University of Melbourne, Melbourne Institute of Applied Economic and Social Research

early postwar decades. The ratio is naturally
higher in small economies.
The biggest contributions to expansion of
global trade have been intra-regional within
each of Western Europe, East Asia and North
America, and intercontinental trade to and
from East Asia. This underlines two other dis-
tinguishing developments in the international
economy: some tendency to increased region-
alisation of international trade; and the rapid
economic growth of East Asia.
Table 1 does not in itself make a strong point
about regionalisation of trade: the rising share
of intra-regional trade in East Asia results from
the rapid expansion of the regions share of
world trade and income, rather than from ris-
ing regional bias in trade. The intensity in-
dexes presented in Table 2 demonstrate this
statistically: they are ratios of the trade shares
of partner regions, relative to the partner re-
gions shares of global trade. Table 2 shows a
steady increase in the intensity of intra-
regional trade in Western Europe, little change
in North America, and a steady decline in East
Asia. At this level of aggregation, intra-
regional trade is disproportionately intense in
all major regions, but increasingly so only in
Western Europe.
Table 3 brings the discussion closer to our
current interests, by presenting intensity of
trade indexes for cars alone. Here the picture is
a little different. Intra-regional trade intensity
is high everywhere, but especially in North
America. It is rising steadily in Western Europe
and rapidly in North America. And it is high in
East Asia, but since the mid-1970s not increas-
ing.
Overall, the globalisation of trade is more
evident than the regionalisation of trade with
the clear exception of Western Europe.
What is behind the globalisation of produc-
tion, the regionalisation of trade, and in Europe
the tendency for increased regionalisation?
The remarkable and continuing globalisation
of production derives partly from trade liberal-
isation, at first mainly in the developed coun-
tries of the Northern Hemisphere, and over the
past decade everywhere but especially in the
developing countries and in the developed
countries of the Southern Hemisphere.
It derives partly from technological change
which has reduced the costs of transport and
communications.
And it derives partly from reductions in the
costs of transactions between countries, with
greater knowledge of opportunities, the devel-
opment of cost-reducing institutions such as
the multinational firm, and movement to more
compatible commercial law and standards.
As the globalisation of production has run
deeper with the reduction of protection, trans-
port, communications and transaction costs, it
has been associated with finer and finer spe-
cialisation in what each country produces best.
Trade in components has expanded much more
rapidly than trade in final goods. Production
costs of a final product have fallen as compo-
nents are drawn from their lowest cost sources,
and finally assembled where this activity has
lowest cost. No product is now made wholly in
any country. At an extreme, for example in the
huge and intense trade between Hong Kong
and adjacent Guangdong Province in China,
some components may cross the border many
times as successive layers of value are added in
the place where it has lowest cost.
In this new world of global production, com-
petitiveness in one process depends on being
able to source complementary components ef-
ficiently from their lowest cost sources. Hong
Kong, for example, remains competitive in
many products despite rapidly rising and now
relatively high wages because free trade and
low transport and transaction costs allow it to
source labour-intensive components in China.
Australias relative isolation places it at a dis-
advantage in these matters, and protection and
high cost port, telecommunications and civil
aviation services have compounded the natural
misfortune. Recently the shift in the centre of
gravity of world production and trade towards
Australia with economic growth and trade lib-
eralisation in East Asia have helped to redress
the disadvantage.
The early trade liberalisation amongst the
developed countries of the Northern Hemi-
sphere was mostly in the context of successive
multilateral trade negotiations within the
GATT. The more rapid trade liberalisation in
the remainder of the world over the past decade

364 The Australian Economic Review December 1997



The University of Melbourne, Melbourne Institute of Applied Economic and Social Research

has been mostly undertaken unilaterally by
each individual country, for its own benefit, as
part of its own strategy of economic reform and
development.

3. Trading Blocs

Have regional trading blocs been important in
the globalisation and regionalisation of trade?
Yes, for Western Europe. A little bit, for
North America. And hardly at all in the rest of
the world. However, APEC, a regional organi-
sation but not a trading bloc, has been of con-
siderable importance to trade liberalisation in
major East Asian developing economies in re-
cent years.
The European Union, the North American
Free Trade Area (NAFTA) and Asia Pacific
Economic Cooperation (APEC) represent three
radically different approaches to regional co-
operation and trade liberalisation.
The European Union is first of all a Customs
Union, with no official barriers to internal
trade, but a common external tariff and trade
restriction. But it is much more than that, with
strong movement towards common standards
and regulatory arrangements, more or less free
internal labour and capital movements, and
now attempts to establish a common currency
with a common monetary policy and, to sup-
port it, more similar fiscal policy.
The European Union is based on deep inte-
grationthe convergence of standards and in-
stitutions, and, to the extent that it can be
secured by law and regulation, values, all
achieved through the enforcement of agree-
ments that are meant to be binding.
The membership of the European Union and
its predecessors has risen in a series of steps
from the original 6 to 15, and another 9 in East-
ern Europe have been given hope in varying
degrees. In addition, country by country free
trade areas have been established around the
edges of Europe, generating large problems of
identification of country of origin and what
Jagdish Bhagwati describes as a spaghetti
bowl of discriminatory trading arrangements.
The European Union undoubtedly promoted
expansion of intra-European trade, but at the
same time it was associated with slow growth
in the intercontinental trade of Europe relative
to that of other regions.

1

The intercontinental
trade share of European GDP increased over
the formative years of the Customs Union, but
not over the past decade. Third countries trade
opportunities in Europe grew more slowly than
they would otherwise have done, but there
were some compensations. Trade diversion
and a focus on intra-regional opportunities re-
duced Europes competitiveness in the rest of
the world, providing a boost to trade among
non-member economies.
European economic integration has now out-
grown the European model of regional co-
operation. It is a law of good governance that
the larger the area covered by a state or by co-
operative arrangements among states, the
greater must be the tolerance of diversity. This
has been learned from good and bad examples
of statecraft since ancient times. Attempts at si-
multaneous widening and deepening of the Eu-
ropean Union are running into trouble. At least
one will have to give, and probably both. Eu-
rope will now be more cautious in admitting
new members, and slow to offer new free trade
areas to desirable outsiders.
Europes large automotive trade is strongly
intra-regional. European imports increased by
almost one and a half times over the past de-
cade, with over 80 per cent of the increase
being supplied from European sources. Never-
theless, imports from outside Europe increased
rapidly and by an absolutely large amount,
from less than $13 billion to almost $30 billion
(Table 4) in constant 1995 prices.
North American regionalism is very differ-
ent. There is no common external tariff.
NAFTA is far from comprehensive in free in-
ternal trade, with long transitional arrange-
ments for highly protected agricultural
industries. There is some pressure for regula-
tory convergence, notably on some environ-
mental and labour market issues, but much less
than in the European Union.
Since NAFTA, the expansion in North
American trade has been intra-regional and
trans-Pacific to East Asia. After the threefold
expansion of North American automotive im-
ports in 197585, less than half of it intra-
North American, the slight expansion in the

Garnaut: Australian Cars in a Global Economy 365



The University of Melbourne, Melbourne Institute of Applied Economic and Social Research

last decade 198595 was entirely from within
North America. North American automotive
exports grew strongly, with almost half of the
growth intercontinental, notably to East Asia.
The different outcome in the latter decade
seems to follow from a large improvement in
the competitiveness of North American econo-
mies in general and automotive production in
particular, rather than increased discrimination
against intercontinental trade. Key factors in
the improvement included the powerful indus-
try response to the East Asian competitive
challenge of the 1980s (including a valuation
effect vis-a-vis Japan), the depreciation of the
real exchange rate from the mid-1980s, and the
utilisation of opportunities for reduction of the
cost of components through new patterns of
trade specialisation within North America.
East Asia has been the main world centre of
both intercontinental and intra-regional trade
expansion over the past decade. This has been
driven by the interaction of rapid economic
growth, official trade liberalisation, and the re-
duction of transactions costs for international
trade through the operation of market forces in
the private sector.
Trade liberalisation has proceeded strongly
in every economically important East Asian
economy, other than Hong Kong and Sin-
gapore, which had free trade in goods in the
mid-1980s. It has proceeded most rapidly of all
in the economies which had the highest official
trade barriers in the mid-1980s: China, Viet-
nam, Indonesia and the Philippines. Over-
whelmingly, national governments formed
judgments that liberalisation was good for de-
velopment in their own countries. In the case of
Japan, Korea and Taiwan, some additional
steps were taken in response to bilateral pres-
sures from the United States. In Japan and Ko-
rea, some important steps in liberalisation,
especially on the most politically sensitive
areas in agriculture, were taken in the context
of the Uruguay Round of multilateral trade ne-
gotiations. There is a long way to go in many
countries, but the progress that has already
been made has transformed the opportunities
available to Australia.
Formal international agreements among East
Asian economies have been relatively unim-
portant in the huge expansion of intra-regional
trade. The largest trading economies are in
Northeast AsiaJapan, China, Hong Kong,
Taiwan and Koreaand none of these partici-
pates in a regional free trade area. In Southeast
Asia, the ASEAN Free Trade Area (AFTA) has
committed itself to internal free trade (defined
as tariffs no higher than 5 per cent) by 2003,
with some important exceptions, notably in ag-
riculture. AFTAs members have been making
progress towards that goal, but so far over-
whelmingly by reducing barriers to imports on
a multilateral basis. Singapore and Brunei have
virtually no protection for goods. The Philip-
pines and Indonesia have undertaken to reduce
most favoured nation tariffs broadly in line
with AFTA requirements. Malaysia is reducing
overall protection rapidly, so far at a rate that
has mainly kept up with AFTA liberalisation
commitments, although it is possible that Ma-
laysias AFTA tariff will become moderately
discriminatory over the next half dozen years.
That leaves Thailand alone of the old
ASEAN partners where AFTA may turn out to
be discriminatory in ways that have large ef-
fects on the opportunities of third countries.
But I doubt that it will. I doubt that in the con-
text of Thailands active participation in APEC
and the World Trade Organisation (WTO), the
Thai political economy will support the unre-
quited generosity towards its ASEAN partners
that the maintenance of substantial trade dis-
crimination would involve.
East Asian trade liberalisation has been sup-
ported by APEC, especially since the 1994
Bogor Declaration on free and open trade in the
APEC region by 2010 (developed countries) or
2020 (developing). APEC trade liberalisation is
fundamentally different from the Customs
Union in Europe and the free trade area in
North America. APEC is premised on open re-
gionalism, or trade liberalisation within a re-
gion without discrimination against outsiders
(Garnaut 1996). It is built upon the continua-
tion of the voluntary, unilateral liberalisation
that has characterised trade policy in all eco-
nomically significant Western Pacific coun-
tries over the past dozen years, including
Australia and New Zealand. Its modus operandi
has been described since the Osaka leaders

366 The Australian Economic Review December 1997



The University of Melbourne, Melbourne Institute of Applied Economic and Social Research

meeting as

concerted unilateral liberalisation

.
There are no binding agreements saying that
one country will liberalise A in reciprocation of
another countrys B. Rather, the reciprocity is
indirect and diffuse. The fact that a set of coun-
tries, that together account for a large majority
of the foreign trade of each, are liberalising to-
gether, increases the gains that each receives
from its own reform. It supports the domestic
political economy of liberalisation in each. Ul-
timately, the sanction is that large backsliding
will destroy a process that has the potential to
generate gains for all countries.
APEC has already had important effects on
the liberalisation of East Asian trade. It pro-
vided important support for the far-reaching
liberalisation of Philippine importsreducing
all manufacturing tariffs to a maximum of 5 per
cent by 2004which was legislated last year
in the approach to the APEC leaders meeting.
It was important support for the major Indone-
sian liberalisation packages of May 1995 and
1996. It provided context for the import liber-
alisation package that China presented at the
Osaka APEC meeting in 1995. And by compar-
ison on a trivially modest scale, but for us sig-
nificantly, the APEC commitments in Manila
in 1996 placed limits on Australian backsliding
in its own automotive liberalisation, by turning
the announcements in 1991 on continued an-
nual tariff reductions to 2000 into international
commitments.
The first three of these established achieve-
ments of APEC trade liberalisation are of his-
toric importance for the development and place
in the world economy of the first and fourth
most populous countries on earth, and of a third
country that will soon be more populous than
any in the European Union. All three involve
neighbours and important trading partners of
Australia.
There is a sense in which, at this stage, the
goal of Asia Pacific free trade is important
mainly for the support it provides for the pro-
cess of trade liberalisation in the Western Pa-
cific. North America for the moment judges the
value of APEC more for its contribution to
trade liberalisation negotiations in major sec-
tors within the WTO than for the free trade end
point itself. This is not small value, as the Ma-
nila APEC meetings role in the WTO informa-
tion technology agreement attests.
So far, since 1994 all Western Pacific econ-
omies have been reducing protection at an av-
erage rate in excess of that which, if it were to
continue at a linear rate, would meet the APEC
free trade targets. The action plans tabled in
Manila in November 1996 commit Western
Pacific economies to continue to reduce protec-
tion at or in excess of the Bogor Target Rate
until 2000.
The United States and Canada have not
moved so fast. That is not yet a problem for
APEC. Both are relatively open economies,
and the United States Uruguay Round com-
mitments in highly protected industries will
bite deeply early next century.
It is important for APEC, however, that the
United States is able to demonstrate commit-
ment to continued progress towards the free
trade target as the implementation of the Uru-
guay Round draws towards its completion. It is
important that, by this time, continued trade
liberalisation and import expansion in the
Western Pacific are noticed and brought to ac-
count by the United States polity. The tradi-
tional United States commitment to specific
reciprocity in trade liberalisation, and its reluc-
tance to accept European Union free riding
on American contributions to APEC liberalisa-
tion, will then lead APEC trade liberalisation
into the WTO. At that time, in the early years
of next century, APEC, with full North Am-
erican participation, will be in a position to
challenge the European Union and the interna-
tional community to expand the Bogor Decla-
ration into a WTO objective of global free
trade by 2020. This would reconcile the pleth-
ora of contemporary regional trading arrange-
ments with an open multilateral trading
system.
East Asian economic growth, trade liberali-
sation and import expansion have not bypassed
the automotive sector. East Asian imports of
cars and parts in constant dollars increased
fourfold between 1985 and 1995. East Asian
import expansion was much less regionally fo-
cused than European or North American. East
Asia went from being a small market for Euro-
pean automotive exports in 1985 (one-eighth

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Table 4 Imports of Cars and Parts

($US million, constant price 1995)

Importer
EC-12 East Asia North America Rest of the World World
Source 1965 1975 1985 1995 1965 1975 1985 1995 1965 1975 1985 1995 1965 1975 1985 1995 1965 1975 1985 1995

EC-12 7 414 26 910 47 904 117 924 755 1 390 2 016 11 636 2 707 6 684 16 174 13 547 8 135 20 840 18 959 27 644 19 012 55 823 85 053 170 751
East Asia 52 2 270 7 098 15 498 430 2 219 6 692 18 299 513 6 537 39 984 36 813 532 5 693 14 245 20 946 1 526 16 719 68 019 91 556
North America 419 796 803 4 252 297 723 569 7 143 3 972 26 900 60 896 79 492 2 927 5 683 3 475 8 908 7 614 34 102 65 743 99 795
Eastern Europe
and FSU 0 0 0 0 0 0 0 0 0 0 89 139 595 5 199 5 225 3 108 595 5 199 5 314 3 248
Rest of the World 416 2 110 4 916 9 721 89 265 521 1 805 180 798 4 452 3 266 757 3 739 4 107 6 606 1 443 6 912 13 996 21 398
World 8 300 32 085 60 721 147 395 1 571 4 597 9 797 38 882 7 373 40 919 121 595 133 257 12 946 41 154 46 011 67 214 30 190 118 755 238 125 386 748

Notes

: East Asia includes Japan, Korea, China, Taiwan, Hong Kong, Thailand, Malaysia, Philippines, Indonesia, Singapore and Vietnam.
North America includes United States, Canada and Mexico.
Eastern Europe includes Albania, Bulgaria, Germany, Hungary, Poland, Romania, Czech and Slovakia.
FSU represents Former Soviet Union.
Data have been deflated using Commodity Price Index (IFS, IMF. Base year 1995).

Source

: UN trade data, International Economic Data Bank, Australian National University.

368 The Australian Economic Review December 1997



The University of Melbourne, Melbourne Institute of Applied Economic and Social Research

of North America), to being almost as large a
market as North America in 1995. By 1995,
too, East Asia was much larger than Europe as
a market for North American automotive prod-
ucts (Table 4).
We should not let focus on the three heavy-
weight regions, North America, Western Eu-
rope and East Asia, obscure the reality that
there has recently been much trade liberalisa-
tion in the rest of the world, that some countries
elsewhere have begun to achieve higher rates
of economic growth, and that reform and
growth are beginning to be reflected in stronger
import expansion. This is true of Bangladesh
and India in South Asia, several countries in
Latin America, and some in Africa. Eastern
Europe and the Former Soviet Union taken as a
whole have made heavy weather of transition
to market economies, but the tide has turned in
some countries. Already in the decade to 1995,
growth of $21 billion in 1995 constant prices in
the Rest of the Worlds imports of automo-
tive products greatly exceeded that by North
America. The Rest of the World, mostly free
of the discriminatory trading arrangements that
exclude outsiders, will be second to East Asia
as a source of global trade dynamism in the de-
cade ahead.
It has been common recently in the Austra-
lian contest over motor vehicle protection to
emphasise the exceptions to the general trend
of liberalisation, especially in East Asia. There
are certainly examples of egregious car protec-
tion in our region, notably in Korea, Malaysia
and Indonesia. But like Australia, each of these
countries has been rapidly expanding its im-
ports of automotive products, despite protec-
tion. Korea and the ASEAN countries have
been the most rapidly growing markets for the
Australian industry over the past decade (Table
5). Thailand, Malaysia and Indonesia together
are a larger market than the United States.
None of the ASEAN countries or Korea has
such a large domestic market that it can aspire
to anything like automotive autarchy, even
with exceptionally high protection of the old
Australian kind. Neither can we expect re-
gional free trade to the exclusion of others
within AFTA to provide a market for large-
scale autarchic production, since several
ASEAN members are implementing regional
free trade commitments in a non-preferential
way. Wasteful protection for the car industry,
and the money politics with which it has been
associated, have come under recent domestic
political challenge in the ASEAN countries
and Korea. Timor cars were the subject of vio-
lent attack through the 1997 Indonesian elec-
tion campaign. OECD countries are initiating
action against Indonesian automotive policy
within the WTO. The Korean government rec-
ognises that automotive trade liberalisation is
necessary for Korea to achieve outcomes that it
values in the WTO, the OECD and APEC. As
a matter of domestic development strategy,
Table 5 Australias Automotive Exports
($US million, constant price 1995)
Partner 1965 1975 1985 1995
EC-12 3 10 18 40
East Asia 22 72 49 213
North America 1 8 36 85
Eastern Europe
and FSU 0 0 0 0
Rest of the World 138 197 157 358
World 164 287 260 695
Of which
New Zealand 84 103 138 316
Japan 0 6 40 82
United States 1 8 35 76
Thailand 3 4 1 38
Malaysia 11 3 1 30
Singapore 0 8 2 19
Korea, Rep. 0 1 2 18
Germany 0 0 0 13
France 0 1 0 12
Indonesia 3 25 0 11
Notes: East Asia includes Japan, Korea, China, Taiwan,
Hong Kong, Thailand, Malaysia, Philippines, Indonesia,
Singapore and Viet Nam.
North America includes United States, Canada and Mex-
ico.
Eastern Europe includes Albania, Bulgaria, Germany,
Hungary, Poland, Romania, Czech and Slovakia.
FSU represents Former Soviet Union.
Data have been deflated using Commodity Price Index
(IFS, IMF. Base year 1995).
Source: UN trade data, International Economic Data Bank,
Australian National University.

Garnaut: Australian Cars in a Global Economy 369



The University of Melbourne, Melbourne Institute of Applied Economic and Social Research

Malaysia is phasing down protection for the
Proton Saga. ASEAN and Korean car protec-
tion, damaging though it is to development,
confidence in government and living standards
in those countries, has not prevented consider-
able growth in market opportunities for those
who can attain international standards of com-
petitiveness, including Australian automotive
component producers.
So the story of regionalisation and globalisa-
tion of world automotive trade is broadly simi-
lar to these features of total world trade. There
has been huge expansion of automotive trade,
as manufacturers have sought lower cost means
of meeting consumer requirements. Intra-
regional trade is more intensive than intercon-
tinental, but both are growing strongly except
in North American intercontinental imports.
The regional market most open to extra-
regional imports, and the most rapidly growing,
is East Asia. This has large and favourable im-
plications for a country in Australias location,
if it is prepared to commit itself to first class
performance in an international environment.

4. Australian Responses to Globalisation
and Regionalism

The internationalisation of economic activities
has reached into almost every corner of the
world. Even North Korean

juche

is approach-
ing its appointment with fate. Everywhere it
has been the source of adjustment costs, social
disquiet and political uncertainty, as different
societies crafted their response to it, or were
pushed along by incomprehensible forces.
The political tensions and economic adjust-
ment costs have been least in societies that have
responded positively to the new forces, and
used them to build new and more rewarding
ways of employing their people and interacting
with the world economy. The United States,
with its strong tradition of flexible response to
change in market conditions, has done better
than other rich countries, pushing unemploy-
ment back to and below the levels of the 1950s,
and since the mid-1980s, achieving strong ex-
pansion in high-value exports that placed it at
the top (incidentally, with Australia) of the
OECD manufactures export growth league.
Facilitation of deep integration into the inter-
national economy has been a characteristic of
sustained rapid growth in developing East Asia
since the mid-1980s. Reduction in barriers to
trade and investment and the associated fine
specialisation in production of what each coun-
try does best has been a key to rapid employ-
ment and incomes growth in China, Hong
Kong, Taiwan and one after another of the
ASEAN countries. Everywhere in East Asia,
employment and incomes growth, and in the
more advanced economies rapid structural
change into more sophisticated and demand-
ing, higher value processes and activities, has
brought increased political and cultural self-
confidence. Hong Kong is the exemplar of the
process, moving virtually all labour-intensive
manufacturing processes and components into
the mainland of China, training its people for
higher value activities, accepting a decline in
manufacturing employment from 1.2 million to
0.3 million in a dozen years, maintaining full
employment (even by the old Australian stan-
dards), and enjoying a quadrupling of per cap-
ita income and a trebling of manufacturing
wages measured in United States dollars.
For Australia, the technological change that
has driven the globalisation of production, and
the shift of the centre of gravity of world output
and trade expansion to East Asia, have con-
ferred two great potential benefits. They have
enabled us to slay the tyranny of distance, and
provided the means of overcoming the eco-
nomic disadvantage of small size.
Australia has to work harder than others to
take advantage of the new opportunities. Dis-
tance retains its tyranny and small size contin-
ues to exact its penalty until institutions have
been reformed to allow the new technology to
work its magic on the costs of international
communications and transport. Distance re-
tains its tyranny and small size continues to
exact its penalty until Australian minds have
been refurnished with the capacity to interact
intimately with international suppliers and cli-
ents. And, of course, the survival of protection,
even at low rates, artificially increases eco-
nomic distance, as surely as reef-ridden har-
bours, unproductive ports, or monopolistic
civil aviation, shipping or telecommunications.

370 The Australian Economic Review December 1997



The University of Melbourne, Melbourne Institute of Applied Economic and Social Research

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
0
5
10
15
20
25
services
manufactures
minerals and fuels
rural

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
-10
-8
-6
-4
-2
0
2
4
6
8

Figure 1 Growth in GDP and Manufacturing

Sources

: Asia Pacific Economics Group,

Asia Pacific Profiles 1997

; FT Management and Newsletter Reports.

Figure 2 Australian Exports

Australian reform took a long time to get
started. But Australia has gone a long way
since policy began to embrace internationali-
sation of economic life with the decisions on
financial reforms and removal of quantitative
restrictions on imports of steel, whitegoods
and some other commodities in 1983 and
1984. Beyond the removal of exchange con-
trols and reduction of protection, there has
been uneven but considerable progress in cost-
reducing reform of telecommunications, civil
aviation, energy supply and labour and man-
agement practices. Output growth in the 1990s
is well above the OECD average, after two de-
cades near or below. Inflation in the 1990s is
near the OECD average, after two decades
well above. Manufactures and service ex-
portsonce but no longer from a small base
have grown at the top of the range for OECD
countries, and greatly increased their contribu-
tions to national production (Figure 1). Re-
markably, but so far little remarked, Australia,
which had been a large net importer of ser-
vices since the first days of European settle-
ment, became a net exporter for the first time
in 199596 (Figure 2). A substantial part of
Australias automotive production moved to
within reach of internationally competitive
performance for the first time since the early
1960s.

per cent
of GDP
year

Sources

: Asia Pacific Economics Group,

Asia Pacific Profiles 1997

; FT Management and Newsletter Reports.
annual change
per cent
year
manufacturing output
GDP
manufacturing employment

Garnaut: Australian Cars in a Global Economy 371



The University of Melbourne, Melbourne Institute of Applied Economic and Social Research

83-84 84-85 85-86 86-87 87-88 88-89 89-90 90-91 91-92 92-93 93-94 94-95 95-96
-4500
-4000
-3500
-3000
-2500
-2000
-1500
-1000
-500
0
500
-1.8
-1.6
-1.4
-1.2
-1
-0.8
-0.6
-0.4
-0.2
0
0.2

As important to internationally competitive
manufacturing production as the microeco-
nomic reforms is policy on budget and mone-
tary policy, affecting domestic demand,
interest rates and competitiveness through in-
flation and the exchange rate. The continuation
of stopgo fiscal and monetary policies
through the deep recession and unbalanced re-
covery of the 1990s imposed unnecessary costs
on firms that were competing in open interna-
tional markets. The continuation of high defi-
cits late into the recovery pushed short-term
real interest rates and the exchange rate higher
than they would otherwise have been through
1996 (Figure 3). In my judgment, this was the
major cause of the stalling of manufactured ex-
port growth from late 1995, for the first time
since internationally oriented growth got under
way in the mid-1980s.
The performance of manufacturing industry
through the early 1990s recession attests to the
importance of the new exports. The decline in
GDP, and even more the decline in domestic
demand, were larger in the recession of the
early 1990s than in the 1980s. Now cushioned
by larger exports, the decline in manufacturing
output and employment was less acute in the
more recent recession (Figure 4).

Figure 3 Net Service Exports

Sources

: Asia Pacific Economics Group,

Asia Pacific Profiles 1997

; FT Management and Newsletter Reports.
$A million
per cent
year
of GDP
per cent of GDP
level ($A million)

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
80
90
100
110
120
130
140
150
160
vs Japan
vs industrial countries
total
vs East Asia

Sources

: Asia Pacific Economics Group,

Asia Pacific Profiles 1997

; FT Management and Newsletter Reports.

Figure 4 Competitiveness Index

competitiveness
index (1990 = 100)
year
improves (currency depreciates) falls (currency appreciates)

372 The Australian Economic Review December 1997



The University of Melbourne, Melbourne Institute of Applied Economic and Social Research

It is a pity for internationally oriented
growth, and therefore for sustained expansion
of employment, that the rate of fiscal consoli-
dation has been so slow. Nevertheless, the
steadier and more independent monetary pol-
icy that has emerged organically in recent years
and which has the public blessing of the
Howard government, and the new charter of
budget honesty, hold out the prospect of less
severe, periodic dislocations of Australian
competitiveness in the years ahead.
This could all be a reasonably good story for
Australia, of progress part of the way along the
path to an historic economic reorientation that
was beginning to deliver more productive em-
ployment and higher incomes, and which held
out the promise of correcting long-standing
weaknesses in Australian economic perfor-
mance.
It could be a reasonably good story if there
were understanding in our community of the
advantages of completing the journey, and of
the huge risks to living standards and ulti-
mately the security of Australians of alighting
before we had moved beyond the swamps of
mediocre performance. It could be a reason-
ably good story if there were commitment in
the community to seeing the task through to
Australias emergence as a self-confident
economy and society, winning its full share in
open international markets.
In such a good story, we might even be able
to see a decision to stall progress towards nor-
malisation of protection levels for cars between
2000 and 2005 in a slightly positive light. After
all, the announcement that tariffs would fall
from 15 to 10 per cent in 2005 is the first gov-
ernment decision since March 1991 to take lib-
eralisation further than was firmly announced
at that time.
But that is not now a credible good story.
The true story is that internationally oriented
reform by Australia has stalled. A failure of
Australian intellectual, business and political
leadership is raising fundamental doubts about
our future prosperity and security, amongst
thoughtful Australians, and amongst our best
friends abroad. In this more realistic context,
the 1997 automotive protection decision was a
symptom of a serious national malaise.

5. Regaining Momentum

How do we go forward?
The political problems are now truly formi-
dable. The anxieties that were massaged in the
motor vehicle debate will be touched as readily
on other protection decisions, taxation reform,
labour market flexibility, and institutional
change in public utilities and transport. The
same political arguments for stopping the clock
will have mounting appeal in all of these areas.
However the politics is managed, there is no
way forward without clear-headed recognition
of the opportunity that is offered for competi-
tive Australian producers to expand their ex-
port sales, by changes in the contemporary
international economy.
Australians have helped to shape these
changes, notably through the formation of
APEC and the support it has provided for trade
liberalisation. We have much at stake in
APECs successour future prosperity, our
national credibility and our security. First of
all, we must understand the character of Asia
Pacific trade liberalisation. This was ignorantly
misrepresented by the minority Commis-
sioners contribution to the Industry Commis-
sions report, who failed to acknowledge the
essential features of APECs open regional-
ism. APEC is not about binding agreements or
specific reciprocity. APEC would probably not
have been able to contribute so much to trade
liberalisation in the Philippines, China and In-
donesia if it were. Nor would it have contrib-
uted so much to ameliorating the political
adjustment to the huge change that has taken
place in our region.
To premise further steps in trade liberalisa-
tion in Australia on a kind of reciprocity within
APEC that is alien to the modus operandi of
APEC is, at best, disingenuous. If attempts to
do so are taken seriously, they will corrode
APECs capacity to support productive
change, and our stake in APECs success.
The automotive industry argued before the
Industry Commission that it would approach
differently future reductions in protection if
there were large progress in reform in other ar-
eas, notably taxation. The case is now widely
recognised for replacement of a wide range of

Garnaut: Australian Cars in a Global Economy 373



The University of Melbourne, Melbourne Institute of Applied Economic and Social Research

taxes on business inputs by a value added tax,
amongst other things to remove a bias against
exports in the existing taxation system.
It is now time to take the industry at its word.
A value added tax would levy sales of all im-
ports at the taxation rate. The reduction of the
automotive tariff by the value added tax rate
would wrap the restoration of momentum in
trade liberalisation into general taxation re-
form. The automotive industrys participation
in the promotion of this outcome would trans-
form the symbolism of the June 1997 decision
in a way that substantially ameliorated its con-
tribution to Australias reform malaise.
The restoration of momentum in reform is a
task to which the automotive industry must
now contribute. The task is more urgent and
important for our prosperity and security than
is yet widely understood.

First version received June 1997;
final version accepted August 1997 (Eds).

Endnote

1. European preferences for imports from third
countries were also reduced, with significant
effects. See Anderson and Snape (1994).

References

Anderson, K. & Snape, R. H. 1994, European
and American regionalism: Effects on and
options for Asia, Seminar Paper 94-04,
Centre for International Economic Studies,
Adelaide.
Asia Pacific Economics Group 1997,

Asia Pa-
cific Profiles 1997

.
FT (

Financial Times

) Newsletters and Reports,
May 1997, Hong Kong.
Garnaut, R. 1989,

Australia and the Northeast
Asian Ascendancy

, AGPS, Canberra.
Garnaut, R. 1996,

Open Regionalism: An Asia
Pacific Contribution to the World Trade Sys-
tem

, Institute of Southeast Asian Studies,
Singapore, & Allen & Unwin, Sydney.