The Toyota plant at Altona.

The Toyota plant at Altona. Photo: Penny Stephens

THE PRODUCTIVITY Commission, the theoretical economists and the ideologues in the government have finally got their way - the automotive industry is to be shut down and tens of thousands of people will lose their jobs.

Now we will get the chance to see the outcome of their theoretical models.

I have no doubt about the result - a rise in the Australian unemployment rate and serious social disruption in many regions of the country.

The models, of course, say otherwise. All the workers made redundant over the next few years will step instantly into higher paying, highly productive new jobs. The capital deployed in the factories will instantly be put to more productive use. National productivity will rise and everyone will be richer.

The economics editor of The Australian Financial Review, Alan Mitchell, put it this way: Toyota's closure "will release skilled labour and other scarce resources for use by industries more suited to the Australian economic environment. These include innovative start-ups that have been among the invisible victims of past protectionist policies."

What nonsense. Does anyone seriously believe nano-technology start-ups, or biotechnology firms, or information technology developers were desperately waiting to employ automotive production line workers?

Similarly, did the high cost of socks and underpants hinder these start-ups when we had protection for the textiles, clothing and footwear industries? No way.

I am not arguing for high tariffs here. But it has to be recognised that when protection goes, jobs go too. Five years after they lost their textile, clothing and footwear jobs, half the retrenched workers had not found another job.

Much the same will happen when we lose our automotive industry.

There is a middle way. Despite the pig-headedness of the Abbott government, the Victorian government has come up with a package to enable development of the SPC Ardmona cannery in Shepparton.

Looking at the real world - something the Productivity Commission has historically found difficult - we know that when Toyota closes any useful machinery will be shipped off to South Korea or elsewhere, to produce cars there. Its Australian factory will lie empty, surrounded by businesses slowly going broke, and vacant service sector buildings, sandwich shops, gyms, chemists and the like.

Today the Geelong town centre is decorated with "For Lease" signs. Opportunity shops, offering second-hand goods, are the new growth industry. And it's going to get worse when the Ford factory closes, the Alcoa plant at Point Henry goes and the Shell refinery at Corio shuts down.

The unemployed former workers will have to take comfort from the standard Productivity Commission model that shows them instantly re-employed in highly paid productive jobs. When will those in authority (and journalists) stop giving any credence to such rubbish?

The Productivity Commission's quantitative modelling on the car industry is due out this month. Could the commission, just for once, be honest in its assessment and factor in the unemployment of people and resources?

In an exercise in wishful thinking, Treasurer Joe Hockey has instructed the commission to reorient its inquiry to look at the components sector. There is no need to waste too much time there.

The answer is clear. The sector is doomed. Once component companies lose orders from any one of the car companies, they will lose viability. Management will then be reluctant to inject the capital necessary to keep operations running and will plan an exit strategy.

Another piece of wishful thinking is that we can keep an automotive research and development sector without an automotive industry. We can't.

Other industries will suffer. Our steel industry will be troubled by the loss of 5 per cent of its overall sales to the automotive sector.

Critics of the Australian car industry like to emphasise the billions of dollars used to support it in recent years. This is what the ideologues wanted when they campaigned to have tariffs replaced by grants. Tariffs do several things: they generate revenue for the government, raise the price of all cars in the market and enable local producers to compete with imports.

The theoreticians argued that if we were to have protection, we should have grants because then all car buyers would not have to pay a higher price. But grants add to the budget deficit and are seen as a burden on taxpayers.

The ideologues never point out the converse - that tariffs make a contribution to revenue and, in part, this is paid by foreign suppliers.

Today the tariff on cars is 5 per cent. Had it been left at 10 or 15 per cent, the dead-weight loss economists like to complain about would have been relatively minor.

In making the decision to leave, Toyota management would not have missed the Productivity Commission's recommendation two weeks ago that the company's funding support from the Automotive Transformation Scheme should "cease in 2020, and not be extended or replaced with other specific assistance".

Toyota pointed out in its closure announcement that Australia has one of the most open and fragmented automotive markets in the world and the government had decided to increase competitiveness through free trade agreements.

What was new there?

In December, Prime Minister Tony Abbott and Trade Minister Andrew Robb signed an agreement with South Korea. The fact-sheet they released on the deal blithely states: "It is true that some sectors may face increased competition from imports of Korean products and services, such as motor vehicles, automotive parts, steel products and textiles, clothing and footwear. This impact will be in line with the progressive liberalisation already underway in the Australia economy."

Soon Australian workers in these industries will be truly liberated.

Abbott seems to think this liberation will take some time: he told the ABC on Tuesday "these jobs aren't being lost tomorrow, next week, next month or even next year". But Ford has now decided 300 jobs will go from June.

Our unemployment rate is already up as a result of the destruction of manufacturing. Soon the economists will be telling us the acceptable new Non-Accelerating Rate of Unemployment is 10 per cent-plus. But don't worry, it's not jobs that will have vanished.