Obama's high-stake auto race

Barack Obama's trade complaint against Chinese car subsidies is a strong pitch to the swing voters of Ohio. But it could have unwelcome repercussions for Australian manufacturing.

The strategy driven by US President Barack Obama to win a crucial swing state in the upcoming American election has reinforced the awkward position that Australia occupies as America’s ally and China’s supplier.

On Monday (US time), Obama filed an unfair trade complaint against China to the World Trade Organisation, calling for sanctions due to Beijing subsidies on vehicles and auto parts.

According to a statement from the WTO, the US wants consultation with China on policies "such as grants, loans, forgone government revenue, the provision of goods and services and other incentives contingent upon export performance to automobile and automobile-parts enterprises in China.”

The request is part of Obama’s pitch to the all-important voters of Ohio, many of which are directly or indirectly employed by America’s giant auto industry.

Ohio is arguably the most important swing state. So important in fact that it has picked the presidential winner in all but two polls since 1904 (the state went against FDR in 1944 and JFK in 1960).

It comes down to more than simple electoral math – Florida is worth more in that respect. The ‘roadmaps’ to the White House that bypass Ohio usually contain a handful of states that lean both left and right. Lean too far one way politically to get one half and you’ll lose the other.

Because the auto bailout is seen as Obama’s greatest success story – some argue, unfairly, his only success story – and this election is all about the economy, cars and Ohio are central to his campaign for re-election. China is now feeling the effects of that.

Just to lower the stakes on this discussion for a moment, Obama’s move alone probably isn’t going to do anything and certainly won’t do it soon. The WTO usually takes between 12 and 18 months to come to a ruling and China’s surging auto industry has more to do with its labour costs than its government subsidies.

Such points appear to be reflected in a report by Xinhua News Agency, the official mouthpiece of the People’s Republic.

"US presidential candidates often have the bad habit of playing a blame-China game in election years,” says the report.

"Chinese officials have repeatedly urged US politicians to view China's development in an objective and rational way, stop making groundless accusation against China and contribute more to China-US mutual trust and cooperation.”

Chuckle as we might Down Under at such editorialising, China has returned fire at the US by filing a counter-claim on anti-dumping measures. A trade feud of any magnitude between the US and China, particularly on cars, presents a few problems for Australia.

Firstly, America speaks for two of our three big automakers, General Motors’ Holden and Ford Australia – Japan’s Toyota is the third.

The industry benefits from enormous government handouts, ostensibly given to protect not just the line workers, but also the surrounding industry. The car making sector argues that every job on its books supports up to five others elsewhere in the local economy.

The federal government also offers up protections in the form of a 5 per cent tariff on new car imports. Second-hand cars in New Zealand are a lot cheaper because they don’t slap a $12,000 specific tariff in second-hand imported cars. And imported luxury cars (we don’t really make luxury cars here ourselves) above $57,466 cop a 33 per cent sales tax, raised from 25 per cent by the Rudd government.

Would the US prefer we didn’t support the industry in such a way? It’s a point our largest trading partner would be well within its grounds to bring up.

Regardless, the Australian carmaking sector looks to be set for a fairly inevitable departure. It’s just a matter of when.

The first domestic player to leave our shores will probably be Ford, given that the Falcon isn’t in good shape and doesn’t have the export markets in the US and the Middle East that the Holden Commodore has.

But as Frost & Sullivan's automotive and transportation research manager Vijay Rao tells Business Spectator, Australia has to deal with the fact that Ford could divert its resources to, of all markets, China.

"Ford already has its APAC headquarters in China,” says Rao. "In Australia, most of the products that are being imported are from China.”

Combine that with the labour costs and the unsuitability of other markets and China is best positioned to collect the first of our local operators to close shop.

Australia can take heart from the fact that our famous iron ore and coal, the very foundation of our relationship with the eastern superpower, will be in the steel of the factories that China’s growing number of cars are made in, as well as the vehicles themselves.

This will happen regardless of what the WTO concludes.

Alexander Liddington-Cox is Business Spectator's North America correspondent.