What Does the Decline of the Australian Car Industry Mean for NAFTA?

The Australian automotive industry is in terminal decline—right on schedule. The last manufacturing plants will close in 2017. On October 3, Toyota shuttered the Melbourne manufacturing plant after fifty years of operation. On October 20, General Motors will close their last manufacturing facility, marking the end of domestic production for Holden after over a century. Plant closures will result in thousands of job losses.

But this is all going according to plan.

For decades, successive Australian governments have had an implicit policy of managed decline: the destruction of the domestic automotive industry in bite-sized chunks that were more palatable to the public. Managed decline was never the stated goal of any government; on paper, government support was intended to build a smaller, leaner, and more viable industry that could compete in the global car market. But managed decline was the inevitable result when multiple governments removed industry protections and encouraged downsizing. This made the industry more vulnerable and less important to the Australian economy. Ultimately, this made the collapse of the sector easier to swallow. Australia is now on the verge of phasing out domestic auto manufacturing with big consequences for the local economy. We don’t know if this was the right policy for Australia, but it is an instructive lesson for Canadians, Americans, and Mexicans as we grapple with NAFTA negotiations.

The slow decline of the Australian car industry began in the 1970s. Australia produced almost half a million cars in 1974, but stiff competition from larger and cheaper manufacturers put immense pressure on the country’s small industry. Australia never had a large domestic market, due to its small population, or any significant export advantage compared to foreign rivals. The industry faced intractable obstacles to market success, but an immediate collapse could instigate a recession and a public crisis. Industry leaders were begging for a government handout.

In the 1980s, the government launched the Button Plan to consolidate the industry and avoid the economic and political disaster of a sudden collapse. The stated goal was to consolidate smaller companies and make them more competitive with larger rivals. Sound just a little familiar? While the American market is more robust and sustainable than Australia, international industry consolidation and cheap foreign rivals are serious problems for domestic manufacturers.

The Button Plan failed to produce the necessary advantages for Australian manufacturers. Over the next two decades, the Australian government shored up local carmakers when necessary but also decided to open the market to foreign imports and cut subsidies. Managed decline was the result.

Unlike the United States, Australia decided that the cost to subsidize a domestic manufacturing base (given their small population) was untenable. They were the only country in the world that manufactured cars but had no tariffs or protections for local content. The consequences speak for themselves. Free trade destroyed the Australian auto industry. Consumers won with cheaper (and better) cars, but domestic autoworkers and the national economy lost.

Nissan pulled out in 1994, and Mitsubishi left in 2008. In 2008, Prime Minister Kevin Rudd rebranded auto subsidies as a green car strategy. It also failed to sustain a long-term uptick in industry fortunes, and the program was slashed in 2011. Automotive subsidies were cut completely in 2014 under Prime Minister Tony Abbott. The overall share of the economy devoted to auto manufacturing shrank decade over decade. The government didn’t dismantle the auto industry on their own or out of malice. The economy was reshaped by foreign trade no matter what the government tried.

Globalization lowered consumer costs for everyday Australians but made Australian manufacturing too expensive. Without government intervention, it was easier to import a cheap car from overseas. Different governments juggled different automakers and put just enough money into the system to prevent a precipitous collapse and a massive wave of job losses that would spark a political backlash.

Australia has entered the final phase of managed decline. Ford pulled out in 2016 and GM, and Toyota will follow this year. When that happens, analysts are worried that the final collapse of the industry supply chain will spark a wave of almost 200,000 job losses in related businesses. It was the same fear that sparked auto bailouts in 2008 and 2009 in the United States, but Australian commentators are reassured that managed decline has made the final losses more manageable. The government can plow money that would have been spent on car subsidies into economic development, employment insurance, and worker training. Australia is now hooked to the resource economy and trade with China, for better or for worse.

The idea that the United States would dismantle the auto industry is ridiculous. It’s not going to happen. The problem is that, on a larger scale, we are now facing the same issues that confronted Australian policy planners.  Globalization means that U.S. workers can’t compete with cheaper foreign labor. An even more apt comparison is Canada, with a smaller population and smaller domestic market. Australia couldn’t compete with Japan or the United States in previous decades. If the North American auto industry is going to compete with China in coming years, we need to confront the same conundrums that faced Australia and decide on the right balance between consumer costs and domestic jobs.

Unlike Australia, North American automakers have NAFTA. NAFTA protects domestic manufacturers with a combination of tariffs, labor market access, and economies of scale. But let’s be honest, China is set to dwarf NAFTA in coming years. U.S. businesses are eager to offshore manufacturing and gain access to the Chinese market.

If we want to protect domestic car companies and manufacturing jobs we need to make some smart choices, fast. We can’t just throw money at the problem forever but we shouldn’t tear up NAFTA out of anger or pride. If we don’t want managed decline, then we need managed success.