Is this protectionism or is this investment?

Guy — Tue, 10 Jun 2008 22:15:02 +0000

The Rudd Government’s foray into the car manufacturing industry looks set to divide expert commentators. The Australian is already running what seems to be a fairly strong editorial line in opposition to the $35m subsidy granted by the federal government to Toyota towards the development of a hybrid Camry, on the grounds that Toyota was going to fund the development regardless. It goes without saying that your average economist is probably going to be very sceptical that such a grant amounts to much more than rank economic protectionism; an approach that should have been buried last century. On the other hand, one would imagine that the average environmentalist is going to feel generally positive about the grant, which has been matched with another $35m from the Victorian Government.

Philip King’s observations in The Australian exemplify the orthodox economic argument:

There’s only one winner out of the announcement that $35 million will be handed to Toyota to produce a hybrid Camry in Melbourne. It isn’t the Government, the car workers, the environment or the Australian consumer.

It’s Toyota.

…

It means threats by a senior executive last year that Toyota might quit Australian manufacturing can now be put on hold, for a few years at least.

Beyond that, the dividends look dubious in the extreme. Toyota was on track to make the announcement in a few months anyway and claims it already had the business case sewn up.

I am neither an economist nor an environmentalist in the formal sense, but I am a little sceptical about the real benefit that this grant will bring. By the sounds of things this grant has been made to Toyota effectively as a kind of reward for exhibiting willingness to pursue the development of hybrid technology. It does not seem that Toyota’s work on a hybrid Camry was contingent on receiving the subsidy; it was going to happen anyway. However, now that the company is to receive the subsidy, it has also been burdened with a greater degree of public responsibility with respect to green car development. Toyota is directly receiving funds from taxpayers, and I am sure that the Rudd Government and indeed taxpayers will make it clear that they want something in return for their investment.

This first grant from the Rudd Government’s $500 million Green Car Innovation Fund does represent something of a watershed, and it does fly in the face of the established economic orthodoxy. It will make the usual suspects angry as a result, but I am not sure we can seriously expect a workable alliance to be built on climate change issues without some give from both industry and the taxpayer. That this grant also represents a pork barrel salve for Australia’s slowly dying car manufacturing industry is perhaps too politically convenient for Federal Labor for comfort, but the mere fact that this is an economically unorthodox step does not mean it is a misstep. Over the coming days, I expect that we will see a number of conservative economic pundits make the mistake of rebutting the rationale for the grant based on a dogmatic argument rather than a reality-based argument.

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Guy Beres » Toyota

Is this protectionism or is this investment?