For many decades, Australians have regarded a local car industry as a demonstration of our domestic capability. Sometimes, we have paid dearly for our enthusiasm.

In the late 1970s, import quotas limited the choice of cars available to consumers. If a particular car had an import quota of zero, it was not available in Australia regardless of local demand. Protection from imports in the form of quotas and tariffs raised the price of cars far above that in countries without such protection.

Trade reforms over the past three decades have lowered the price of new cars. In 1986, a base model new Toyota Corolla cost around A$15,000 (according to redbook.com.au). That is around A$36,000 in today’s dollars, which can buy a mid-range car far superior to the 1986 Corolla.

From this we can infer that trade reforms have allowed the domestic car market to take advantage of changing car technology. The cars we drive now are safer, more economical and less polluting than those of the 1980s.

The case for protection

From the late 1970s, computable general equilibrium (CGE) models were used to examine the impacts of trade reforms on the economy, led by academics now within the Centre of Policy Studies.

Modelling showed that if trade reforms allowed import volumes of cars and other manufactures to rise, indeed jobs were lost in the directly affected industries. But other trade-exposed industries, including agriculture and mining, benefited from the improvement in international competitiveness that arose from reducing protection.

In the past few years, something odd has happened to modellers at the Centre of Policy Studies. They have changed sides. No longer are they advocating further unilateral reductions in trade protection. This is because if we are to import more, we must also export more.

The trouble with exporting more is it’s difficult to do so without driving down export prices. This means that for a given level of output, our spending power drops. Therefore, cheaper imports might be more than offset by the negative impacts of a loss in spending power.

If trading partners improve access for our exports in their markets at the same time as we cut protection further, then our spending power losses are alleviated. But this now involves multi-lateral, not unilateral trade reform.

The policy question in the car industry concerns subsidies. Is it worth paying subsidies to foreign owners of car companies so that car assembly and parts jobs stay in Australia? It depends on circumstances.

When Mitsubishi closed in Adelaide in 2006, some workers may have struggled to find new jobs, but others took their packages and started new jobs within days.

At the time, prices for minerals were rocketing. This caused a mining investment boom. With the boom came jobs. Closing a car plant in those circumstances resulted in little economic damage.

The economy has shifted

Now the mining investment boom is likely to slow. Since this period is likely to coincide with the closure of the car industry, now that Ford and Holden are closing, with a real fear that Toyota will follow, there is a substantial risk affected workers will not move readily into new jobs. That is, in a labour market less buoyant than that of 2006, a closure of the car industry may cause quite a dent in the economy.

In these circumstances, the costs of subsidies paid to car manufacturers to keep the domestic industry going might be less than the economic losses from closure.

The trouble is that subsidies tend to be permanent, not temporary. Since there are circumstances in which closure of a car plant will not harm the economy, subsidies are not always worthwhile.

This raises a final question. If Australians are so keen on a domestic car industry, why have they not translated this into purchases of Australian-made cars? Demand patterns, not government policy, are driving the nails into the car industry coffin.