Last week’s announcement by the prime minister of the automotive manufacturing industry policy to go through to 2020 came at a critical time for the local car industry which has had a difficult few years with a strong exchange rate and rising fuel prices.

Naturally most of that policy is focussed on the car makers, their access to duty free parts for the cars they make, incentives to invest and undertake R&D and the new Green Car Fund which was promised in the election. Arguably only the import tariff rate has wider relevance. 

Although the local car and component makers were diffident about it, the scheduled tariff reduction on cars from 10 percent to 5 percent in 2010 is a plus for most of the automotive sector.

Following rising tariffs and then quota protection from the 1960s, tariffs peaked at 57.5 percent for cars from 1978 while import quotas further restricted the number of cars that could be imported. Commercials and SUVs - there were few of the latter in those days - were on lower tariffs and only briefly subject to quota.

The policy of coalition industry minister Phillip Lynch in the early 1980s was to allow some extra car imports but at much higher “out of quota” tariffs, but this was stiffened by the “Button Plan” which scheduled the end of the quota for 1992.

However a major decline in the value of the Australian dollar (AUD) began shortly after the new policy was announced. At that time most imported cars were from Japan and the red bars in the chart show that the cost of the Yen in AUD rose by 25 percent in 1985 and 48 percent in 1986 and this quickly overflowed into increased car prices, as the blue bars show.

The high prices stopped potential buyers in their tracks and the import quota became redundant - not enough buyers were prepared to pay the higher prices and the import quota was not filled from 1986.

In the mid term review of the Button plan in 1988 the quotas were therefore abolished - more importantly the tariff was cut from 57.5 percent to 45 percent overnight and then put on a slimming schedule of 2.5 percentage points a year through to 2000, as the green line graph shows. Under Howard government policies the tariff then stayed at 15 percent before falling to 10 percent in 2005.

The reductions in tariffs for LCVs and SUVs has been more complicated and less dramatic, but both have been at 5 percent since 1996.

Since 1988 the interaction between the exchange rate and the tariff have impacted on car prices, with the falling tariff softening price rises when the AUD was weakening - such as from 1991 to 1993 when the cost of buying Yen was consequently rising. In periods when the AUD strengthened (negative red bars) the falling tariff assisted price falls and/or improvements in vehicle specifications, such as the wide adoption of aircon as standard in imported cars in the second half of the 1990s.

During most of this decade the AUD has been improving and thus car prices have fallen - especially in 2005 when the tariff was reduced to 10 percent - spec has improved and increased costs for raw materials have been absorbed. The last red bar shows the cost of buying Yen is projected to have risen this year, but this is the result of the dive in the value of the AUD since September and will not have any impact on car prices this year.

Car companies are typically slow to raise prices, particularly above established price points such as AUD 20,000 for small segment cars. But if the AUD stays weak through the first half of 2009 - we expect some recovery in the currency but not back to pre September levels - then prices will rise.

And this is where the 2010 tariff reduction is important. Car companies will hold back on price increases to some extent in 2009, anticipating the benefit of the tariff reduction in January 2010. This will give buyers time to get used to higher prices.

Rising incomes and stable or falling vehicle prices have led to the record markets of the noughties. While income increases should not fall too far behind car prices over the next few years - unlike in the second half of the 1980s - some buyers will be discouraged.

Richard Johns

Australian Automotive Intelligence

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