TRADE AND PUBLIC COMPENSATION IN AUSTRALIA

The Automotive and Textile, Clothing, and Footwear Industries

Kieran McCarron School of History and Politics, The University of Adelaide Adelaide, Australia, 5005 kieran.mccarron@adelaide.edu.au

It has been suggested that openness to international trade can lead to a compensatory expansion of the welfare state. In light of declining trade protection for Australian manufacturing this paper studies the Rudd governments industry support policies for the automotive, and textile, clothing and footwear industries. It finds that these policies have not targeted the true losers of trade, low skilled workers, but have targeted investors in these industries. This observation refutes the idea that compensation must target an industry or a class. Further, it is suggested that these programs have favoured investors over workers due to the international mobility of investment capital. These policies are therefore not a form of compensation, but a form of international competitive spending. Future studies of the relationship between trade openness and public spending need to consider the interrelationship between trade and capital mobility to fully understand state responses to economic integration.

Introduction The question of how and if economic globalisation relates to the budgets of modern welfare states is a big one. Existing literature offers several strands of thinking regarding this relationship. The efficiency view sees globalisation as exerting downward pressure on state spending (see Boyer 1996 and Mishra 2000). This view highlights international tax competition and capital mobility, the power of intentional financial markets and credit ratings agencies (as in the recent case of Greece), and the need to maintain market friendly policies, as sources of this pressure. Compensation arguments, on the other hand, suggest that democratic states will increase social spending as they become more integrated into international markets to offset its vagaries for local citizens, this is especially true when labour has access to decision making power (see Adsera and Boix 2002, Rodrik 1998, Katzenstein 1985). In a slightly different strain, Geoffrey Garret also argues that public spending is not incompatible with economic globalisation due to the need for public investments in infrastructure and human capital to foster growth and attract capital in an internationally competitive environment (1998, 5). This paper comments on two industry support policies initiated in Australia by the Rudd government, the New Car Plan for a Greener Future and the support package for the textiles, clothing, and footwear industries. It examines these policies in the context of the globalisation-welfare state debate and neoclassical trade theory. This paper does not address short term counter-cyclical spending, which is conceptually distinct from public spending related to the structural changes caused by trade.

Neoclassical Trade Theory Finding the Winners and Losers of Trade Neoclassical trade theory is important to understanding the political economy of compensation and indentifying the losers of trade. The Hecksher-Ohlin model implies that we need to look to the relative abundance of factors of production, namely land, labour, and capital, to understand the formation of political preferences around trade policy. This model argues that trade is driven by differences in relative endowments of these factors of production between countries (Hecksher 1950, Ohlin 1967). The oft-cited Stopler-Samuelson theorem follows this argument, stating that trade will benefit the abundant factor, while harming relatively scarce factors of production in any given country, implying that the scarce factor will be protectionist (Stopler and Samuelson 1941). In general, the developed economies of the OECD are relatively capital abundant, but scarce in unskilled labour, while, the developing economies are generally seen as capital poor, and labour rich (Rogowski 1989, 8-10). Capital abundant economies are expected to export goods that use capital intensively in their production, such as petroleum and chemicals, to capital poor economies, while labour abundant economies are expected to export labour intensive goods, such as clothing and textiles, to labour poor economies (Ohlin 1967, 33). This is the result of lower input prices in the form of wages and interest rates creating comparative advantage. Scarcity affects factor prices through the supply and demand mechanism - when capital is scarce, interest rates are high, and when labour is scarce wages are high. As a result, industries that use the scarce factor of production intensively will not be internationally competitive under free trade, at the same time those that use the abundant factor intensively will benefit from trade. This implies that political cleavages over trade policy will form along class lines. That is, the removal of trade barriers will cause a political conflict between capital owners, land owners, and labour. Stopler and Samuelson use capital and labour as the two factors of production in their original paper. This is useful because it provides a neat theoretical demonstration of the affects of trade on the scarce factor. However, contemporary analyses of the affects of trade on labour need to consider the fact that differences in the availability of capital between developed and developing countries have been heavily eroded by an environment of international capital mobility. As a result of this, Adrian Wood argues that the impetus for current trade in goods between developed and developing economies is not relative endowments of capital and labour, but relative endowments of skilled versus unskilled labour (Wood 1994, 5-6). This argument is especially convincing given the relatively low international mobility of labour. Thus, in an environment of capital mobility, skilled labour takes the place of capital in the example above, and unskilled labour the place of labour. It is possible to use these factors within the H-O model because, just as manufactured goods contain an inherent capital and labour content, they also contain an inherent portion of skilled and unskilled labour, the ratio varying between goods. It therefore follows that countries relatively well endowed with skilled versus unskilled labour will maintain comparative advantage in the production of skill intensive goods and services, and vice versa for countries relatively abundant in unskilled labour. Advanced industrial economies are relatively abundant in skilled labour, but relatively scarce in unskilled labour, therefore, participation in trade with economies highly abundant in unskilled labour will cause relative wages (demand) for unskilled labourers in the advanced economy to fall. Developing economies participating in trade with advanced economies will experience the opposite outcome, increased wages (demand) for
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unskilled labour, and decreased relative wages for skilled labour (or rents for capital if trade was caused by capital scarcity). Thus, neoclassical trade theory implies that low skilled workers in Australia will be hurt by increased trade.

Factor Mobility and the choice between Industry and Class Compensation One of the Hecksher-Ohlin models key assumptions is that factors of production are perfectly mobile between industries this has to be the case if entire factors of production are to win or lose in the advent of increased trade. In the real economy, however, factors of production are often not costlessly mobile between industries (Harrod 1958). Industries like mining and automotive production require large capital investments in physical infrastructure which is highly specific to each industry these assets cannot be cost effectively redeployed to another productive use. Further, workers develop skills related to specific functions in specific industries, limiting their mobility. Mobility is of particular concern for low-skilled workers in sectors where employment is declining, such as manufacturing in Australia. This is because new jobs will not be created that match retrenched workers skills, which tend to relate to specific machines or processes in their industry (Swank 2001, 206). On the other hand, white collar professional workers tend to have softer skills and often provide services, such as legal or accounting expertise, that are highly transferable between industries. James Alt argues that workers and firms will engage in political action for protectionism in proportion with the immobility of their investments. If this is the case, firms with physical assets that may be costlessly deployed to another use will have less incentive to expend resources lobbying for protection than those whose assets are only valuable for a single economic activity (Alt et al 1996, 700). In the exact same way workers with skills that are particular to that industry will share the fate of their employers if protection is lost. When governments proceed with trade barrier reductions both capital owners and labourers in such industries will lobby the state for compensation at the industry rather than the class level (labour versus capital, or unskilled versus skilled labour). To summarise, if factors of production are freely mobile between industries, and Australia is skill abundant, then lobbying and compensation of low skilled labour as a whole should be expected when trade barriers are reduced (Rogowski 1989, 98). Alternatively, if factors of production are immobile between industries, lobbying and compensation will occur at the industry or firm level. Michael Hiscox expects Australia, at least up until the mid 1990s, to develop class based coalitions around trade policy, which implies we should observe class based compensation in Australia. He argues that factor mobility is high and class based associations and political parties strong (Hiscox 2001, 33). The concept of specificity is also important for understanding the effects of industrial decline on workers. Torben Iversen argues that manufacturing workers who lose their jobs in an environment of declining manufacturing will find it difficult to find commensurate employment due to the high specificity of their skills. These workers will lose market power, stuck amidst an oversupply of non-transferable skills leading to lower market wages, or higher unemployment if wages are fixed (Iversen 2001, 52, Wood 95, 58). Dani Rodrik (1998) argues that it is this increased labour market risk that unskilled workers will demand the state protect them from.

The Australian Model of Social Protection and the Case for Compensation From federation until the 1980s Australia had a strong history of trade protection. This protectionism allowed Australia to mandate that relatively high wages be paid to low skilled workers, raising standards of living and reducing the need for a formal welfare state (Schwartz 2000, 73). This feature of the Australian political economy has led Francis Castles to characterise Australia as a wage earners welfare state, and an essential component of the Australian model of social protection (1985, 102-109). With a closed economy the judiciary was able to set wages in reference to social, rather than market concerns, as firms were guaranteed income streams, offsetting the need for a larger formal welfare state. In this sense, trade barriers are themselves a form of social protection, they moderate the market exchange of goods and services with the explicit goal guaranteeing local producers income streams. Commensurately, then, the removal of trade barriers has forced firms, and therefore wages and jobs, to be more responsive to the market and the need for profitability, creating an increased need for formal welfare institutions (Schwartz 2000, 125). Due to Australias long history of protectionism, some segments of Australian society are prone to risks and loss from engagement with the international economy, even during periods of strong economic growth - this is a product of the structural changes caused by trade. The focus of this paper is on the Rudd policy response to these types of losses. In some respects, the case for compensation among the losers of trade based structural adjustment is stronger than the case for compensation during periods of economic stagnation. Governments have pursued free trade under the assumption that it will have a net economic benefit. The standard of living will increase as consumer prices fall, while new areas of specialisation and export orientation will drive growth (OECD 1988, 39-50). The very reasons that trade has winners, are the reasons that trade has losers. Given that the winners of free trade win for the very reasons that the losers lose, it is reasonable for the losers to expect that some of the gains from trade be used to soften their landing. Adsera and Boix argue that such a public distribution of the gains from trade will be required to gain the support of the potential losers of trade, and guarantee the political viability of a shift to openness (2002, 253). The following sections will examine current forms of government spending in response to trade barrier reductions in Australia, specifically recent programmes targeting the automotive, and textile, clothing, and footwear industries, to determine how they fit into theoretical understandings of trade related compensation.

THE RUDD GOVERNMENT AND INDUSTRY COMPENSATION IN AUSTRALIA Protection and Liberalisation in Australia Australia has a strong history of trade protection versus other developed economies; running a comprehensive import replacement policy for manufactured goods until the mid 1980s (Anderson and Garnaut 1987, 6-7). High protection, averaging at least 50 percent during the 1930s and around 28 percent during the 1970s (Lloyd 2008, 123-124), was designed to maintain full employment, high wages, and national self sufficiency. In this sense trade barriers themselves formed an essential part of the Australian welfare model (Castles 1988, 96). In the last few decades a softening of public attitudes towards the free market and Labors ideological shift in the same direction have coincided with several instances of macroeconomic stagnation, inflation, and balance of payments problems, to prompt drastic cuts to Australias trade barriers (Capling 1992, 140-141). The growing orthodoxy of neoclassical ideas of limited state intervention, efficiency, and the need for a competitive environment to spur productivity improvements was especially important in motivating the shift towards an open economy. From an average overall effective protection rate of 31 percent in 1978/79 the average rate of protection fell to around 9.5 percent in 2004/05, and has been falling since (Lloyd, 2008, 125). The loss of this protection has coincided with a decline in Australian manufacturing employment, from over 1.3 million in 1969/70 to just over 1 million in 2008/09 (ABS 1971, 722 and ABS 2009, 578). Over the same period the total number of employed persons in the economy grew by around 6 million (ABS 1972, 693, ABS 2009) The most visible forms of public compensation for the economic loss caused by tariff reductions have targeted particular industries, reflecting the immobility of factors of production in these industries. Of particular interest are the automotive and textile, clothing and footwear (TCF) industries which were encouraged to invest in significant capacity by trade protection in the post war era, and subsequently exposed to competition in the past few decades. The policies examined below have been explicitly linked to reductions in protection.

The Australian Automotive Industry The Australian Auto industry has had a long history of protection. High protection allowed Australia to develop a large fully integrated car industry to serve the domestic market. Encouragement of an Australian industry was intended to provide employment, reduce imports, and help establish a broader base for heavy industry by supporting feed in industries like steel and engineering (Fagan and Webber 1994, 108-9). In 1965 domestic manufacturers held a market share of 81 percent for fully manufactured cars, and another 11 percent for cars assembled locally from imported parts. By 1975 local manufacturers market share had fallen to 58 percent, while imports had reached 23 percent and locally assembled cars made up 19 percent (Fagan and Webber 1994, 113). This fall in market share was despite rising tariff protection through the 60s and 70s, which peaked at 57.5 percent from 1978/79 1988/89 (Lloyd 2008, 105). The declining competitive position of Australian car manufacturers and their decreased protection is reflected in their decline in market share from 70 percent in 1988 to only 20 percent by 2006 (Conley 2009, 212).

The establishment of a fully integrated automotive industry in Australia was dependent on this high level of protection (OECD 2005, 283). This is because car manufacturers in larger countries benefit from larger domestic markets, and thus larger production runs and economies of scale. Further, the fact that industries were already established in the United States and United Kingdom made it more difficult for new firms to enter the market (Fagan and Webber 1994, 112). More recently, firms in the advanced economies have also faced increased competitive pressures from competitors in low wage economies. This is commensurate with Hecksher-Ohlin arguments when the role of international capital mobility is taken into account. The automotive industry is characterised by a mixed factor content profile, while it uses low skilled labour more intensively than non-manufacturing industries, it also requires very high fixed capital investments (this is especially true for integrated car manufactures, as opposed to component manufacturers). Compared to TCF, the automotive industry is also relatively skill intensive, nevertheless the nominal volume of labour required makes the high wage costs for low skilled labourers in Australia a competitive disadvantage (Bracks 2008, 42). According to the HecksherOhlin model capital abundant economies should have a comparative advantage in capital intensive production, this, however, is irrelevant in an environment of international capital mobility. This is especially true of car manufacturing, as it is characterised by large multinational companies serving disparate international markets. This gives firms the capability and motivation to locate production in centralised and strategic locations where costs are the most competitive. Furthermore, the size of the industry gives governments incentives to compete for foreign direct investment in the industry. As a result of reduced trade protection and capital mobility the auto industry has been the beneficiary of large amounts of public spending. Earlier compensation programmes aimed to assist firms to restructure towards more efficient business models, and were based around some industry consolidation occurring - an acknowledgement by government that there were too many players in such a small market (Fagan and Webber 1994, 114-5). Other programmes, such as the Structural Adjustment Scheme in 1975 provided direct compensation to retrenched workers (Capling 1992, 202). The automotive industry is currently the beneficiary of a $6.4 billion industry program, the Rudd governments A New Car Plan for a Greener Future which is set to run from 2011 to 2020. This plan reallocates $3 billion of spending previously committed by the Howard government, and commits to an additional $3.4 billion. This level of public spending dwarfs spending on any other industry in Australia, and was devised in response to the findings of Steve Bracks review into the industry. The New Car Plan The New Car Plan (NCP) replaces the Automotive Competitiveness and Investment Scheme (ACIS). This scheme was intended to run from 2001 to 2015, and was coupled with two tariff cuts. Initially from 15 to 10 percent in 2005, then to 5 percent in 2010 (Conley 2009, 212). The cut to 5 percent was maintained under the Rudd program (Australian Government 2008). The direct link between these cuts in protection and the spending packages characterises them as compensation. The ACIS programme granted car and component manufacturers credits which could be used to offset duties on imported cars. These credits were granted for the sale of locally produced cars in Australia and New Zealand, and for appropriate research and development spending. Up until 2007, $3.55 billion in credits had been awarded under this scheme (Bracks 2008, 31-32). Most manufacturers supported the maintenance of ACIS, apart from General
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Motors, which highlighted the possibility for customs credits to lose effectiveness when tariffs are lowered (Bracks 2008, 32). The NCP will cease payments under ACIS in favour of several new schemes. The largest of these is the $3.4 billion Automotive Transformation Scheme (ATS). The ATS will run from 2011 to 2020. It provides grants for car producers and the component producers in their supply chain. These grants allow firms to claim assistance for up to 50 percent of the value of research and development investment, and up to 15 percent of their investment in approved plant equipment (Australian Government 2008, 9). Firms will no longer be eligible for assistance with the labour and management costs of plant and capacity investments. According to the governments policy statement, participants in the scheme will be required to demonstrate progress towards achieving better environmental outcomes and a commitment to developing capabilities and skilling the workforce (Australian Government 2008, 9). This scheme aims to encourage investment in new capacity and technology and to encourage productivity improvements. The plan also includes a $1.3 billion Green Car Innovation Fund. This fund will provide competitive grants for the research and development of technologies with commercial potential to reduce fuel consumption and emissions of vehicles (Australian Government 2008, 10). The NCP also provides much smaller programmes for the development of a competitive supply chain, access to the international supply chain, an industry innovation council, and continuance of the LPG car programme. The relatively small, $116.3 million Automotive Industry Structural Adjustment Program (AISAP) program, is the only component of the NCP that addresses the costs of trade exposure for employees in the industry. The majority of this allocation, however, is for Part One of the program, which supports consolidation within the component industry by providing funds for merger costs such as legal and registration fees (DIISR 2010a). Part Two of the program addresses retrenched workers; it allows retrenched workers to access employment support from the Department of Education, Employment and Workplace Relations beyond the usual services available. This program provides no financial support to retrenched workers, and is based around rapid reemployment. Rather it provides intensive job search services and some funding for training, which is allocated at the discretion of each workers employment officer (DIISR 2010b). These services are essentially identical to those available to retrenched TCF workers, and those retrenched due to the 2008 Global Financial Crisis (see DEEWR 2010). The high level of funding awarded to producers versus employees in the NCP reflects the goal of this industry package to support exports and industry efficiency, rather than compensate the low skilled labour employed in it. The spending targeted at firms is primarily to keep investment in Australia, and is not to directly support the jobs that they supply. The Bracks Review is critical of the ACIS for its failure in this area, stating that assistance has effectively underwritten profits for the industry. The situation is not sustainable and has kept marginal firms, which would not survive without assistance, in the industry (Bracks 2008, 33). Rather, the Bracks Review argues the aim of assistance to the automotive industry should be to increase labour productivity (output per worker) though technological development and investment. It does this without reference to alternative employment opportunities for low skilled labour or any significant support for retraining. This is despite the poor employment opportunities for manufacturing workers in declining industries due to the high specificity of their skills.
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The Australian Textile, Clothing and Footwear Industries While car manufacturing uses capital and labour intensively, the production of textiles, clothing and footwear (TCF) are extremely labour intensive indutries versus their need for capital. As a result, investors withdrawing from the TCF industry will face lower nominal losses than those withdrawing from the automotive industry. The high intensity with which clothing and textile manufacturing uses low skilled labour makes it more vulnerable than the automotive industry to competition from low wage states. TCF workers are particularly vulnerable when retrenched due to their lack of transferable skills, and, in Australia, their high propensity to be from non-English speaking backgrounds (Productivity Commission 2003, 46). The Productivity Commission found that labour mobility in the TCF industry is lower than the manufacturing average, which is low in general, implying that workers will be severely affected by decline in the industry (2003, 42). High labour costs in Australia are reflected in the historically high rate of protection this industry has enjoyed. The Industry Commission stated that the TCF industries received an effective rate of assistance of around 60 percent in 1989/90 (1992, 287). Under the current industry program TCF tariffs are set between 5 and 10 percent, varying by product. Roy Greens review notes that international competition has posed a serious challenge to the Australian TCF industry, attributing this competition to the loss of domestic market share for Australian producers from 80.4 percent for clothing in 1975/6 to 46.6 percent in 2005/6, and from 70.6 percent to 15.5 percent for leather products over the same period (2008, 29). The TCF industries have been the focus of various public support programmes since Whitlams 25 percent across the board tariff reduction in 1973. The relatively generous Structural Adjustment scheme in this case allowed workers to claim wage replacement payments after retrenchment (Capling 1992, 232). TCF tariff reductions would always cause high levels of job losses; this was always the governments concern with this sector, rather than with rates of return for business owners and investment in an industrial base. Even when industry assistance was offered, it was for the sake of low skilled jobs. Capital owners in TCF knew this, and appealed to the public and governments sympathy over job losses. From the 1970s to mid 1980s subsides were maintained directly to the industry. Further tariff reductions in the late 1980s were also coupled with a generous labour assistance program, much more so than was available for the steel and auto industries at the time, acknowledging the labour intensity and skill specificity of the industry (Capling 1992, 244). It included income support for job retraining and employment assistance for workers to move to a different industry (Productivity Commission 2003, 151). Current Assistance to the TCF Industries The current TCF support program came out of the Rudd governments review of the TCF industries in 2008, the Green review. While the government announced this new policy as a triumph for the TCF industries, the 2009 package contained only $10 million of new commitments, plus an additional $5 million in the 2010/11 budget (DIISR 2010c). The Green Review argued that assistance to the industry must focus less on supporting firms and jobs, and more on fostering innovation in the industry and commercialising this innovation (2008). The program was designed in light of existing legislated tariff reductions, which have continued as scheduled under the program. These reductions saw tariffs on finished clothing and textiles fall from 25 percent in 2004 to 10 percent in 2010, with a further planned reduction to 5 percent in
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2015. Tariffs on all other TCF goods such as footwear and carpets have been reduced to 5 percent in 2010, where they will stay in 2015. (Green, 2008, p. 50) This package, $401 million over six years (from 2009/10 2015/16), consists of several distinct programs. The largest of these is the clothing and household textile Building Innovative Capability Program which replaces the previous Strategic Investment Program (SIP). This new program provides $112.5 million over six years in competitive grants to firms for developing innovative products or innovative production processes, grants may be awarded for up to 50 percent of the value of eligible expenditure (Ausindustry 2010). This contrasts with SIP, which provided grants of up to 40 percent of the value of new plant equipment or buildings and maximum 80 percent for innovative process improvements and products, notably firm eligibility under this scheme was broader (Ausindustry 2010). The new Strategic Capability Program provides a further $30 million for large innovative projects over the value of $1 million. The package also allowed for the continuation of the smaller, Small Business Program. Just as in the NCP, the Structural Adjustment Program is the only aspect of the package made in direct reference to affected workers. This program is being continued primarily as-is, the only change being a provision that allows community groups to apply for grants to help groups of retrenched workers find reemployment. Apart from this clause, the TCF SAP is essentially identical to the Automotive SAP. It consists of two parts, Part One provides access to the same intensive training services available to retrenched Auto workers, and those retrenched due to the 2008 Global Financial Crisis and subsequent economic slowdown. The Textile Clothing and Footwear Union of Australia (TCFUA) have identified Part One of the program as a failure; retrenched TCF workers who sign up for SAP assistance through the Job Networks experience a disappointingly low level of support. They largely access no training or reimbursement funds, very little case management and no active assistance in looking for a job. (TCFUA 2008, 43) They note that that from 2005 until February 2008 only $155,019 had been spent from the TCF Job Seeker account on training for retrenched workers, the equivalent of about $492 per person. This contrasts with the $2.4 million Job Networks was awarded for handling the retrenched workers cases. They are equally critical of Part Two of the program, which is for the facilitation of mergers and acquisitions. This program is somewhat more generous than the equivalent automotive industry policy, as it provides some grants for firms newly formed by mergers to buy plant equipment from discontinuing entities (DIISR 2010d). This policy acts to encourage consolidation for the purposes of continuity. Nevertheless, the TCFUA is critical of the TCFSAPs effectiveness in supporting jobs and reemployment. They highlight a case in which a firm (one of four beneficiaries of the program) received a $2.8 million grant under the program for restructuring, only to fail 15 months later with over $2.3 million owing to workers in unpaid wages and entitlements (TCFUA 2008, 41-2).

Capital Mobility and the Targeting of Investors The TCF support package, much like the larger automotive package, provides a significantly greater level of assistance to investors in the industry than retrenched workers. This is evident in the way funds have been targeted within the two packages, which included a relatively
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insignificant sum for the direct compensation of workers. Although spending on research and development under these programs may have some positive employment effects, these policies are not explicitly linked to the maintenance of employment. Rather they are designed to subsidise investments in new capacity, research and development into new products and technologies, and especially investment in productivity improvements. While these types of investments are vital to the longevity of any industry, they are not mutually exclusive with the public compensation of low skilled workers, who are the clear losers of trade barrier reductions. Existing theoretical work on political preferences over trade policy presents a dichotomy between class based and industry based trade policy coalitions, and therefore the targeting of compensation (see Alt et al 1996). Recent patterns of industry compensation in Australia suggest that class compensation can occur within industry compensation. Further, the bias towards capital is especially striking in this case given that unskilled labourers in Australian manufacturing have highly industry specific skills and are internationally non-competitive (in terms of wages), suggesting they will be the biggest losers from trade. Although Hiscox (2001) may be correct in stating that factor mobility is generally high in Australia, there are practical limits to the mobility of workers in import competing manufacturing industries, especially when they are in decline. This has been reflected in the targeting of spending to the automotive and TCF industries rather than to labour as a whole as in the United States (under the Trade Adjustment Assistance Program). It is clear that workers in both industries will lose from trade and therefore prefer protectionism. However, the motivation for capital invested in these industries to share labours trade policy preferences are undermined in an environment of free trade coupled international capital mobility. Under capital autarky capital fleeing declining industries may withdraw without recouping previous investments, but will ultimately face limited domestic investment options, assuming existing opportunities for rent seeking capital have been exploited. However, under international capital mobility coupled with free trade investors are offered increased exit options, including the unique option of total relocation of production with the intention of serving the same domestic market from production in a low wage state (Elkholm 2004, 78, Rodrik 1997, 17). This is especially true for Australian automotive manufacturers, which are subsidiaries of foreign owned manufacturers with existing offshore capacity, and also for TCF manufacturers, who face very low start up costs versus labour costs, making it economical to relocate. It is this relative international mobility of capital versus labour, especially in the manufacturing industries, which has created a strong incentive for industry support policies to move resources away from compensating retrenched workers, towards subsidising and guaranteeing capital investments. Compensation for capital owners in the auto industry reflects a genuine threat of withdrawal. A threat legitimatised by Australian manufacturers relationship with international producers, this threat is especially salient given the Australian subsidiaries were created in direct response to the previous government policy of protection. According to Hiscox, local subsidiaries of international firms will be less resistant to tariff reductions because of their offshore capacity and ability to outsource production (2004, 261-2). As Fagen and Weber note, these manufacturers can also offset losses from tariff reductions by increasing sales of their imported models (1994, 114-5). TCF manufacturers also present governments with a very real threat of withdrawal due to the low start up costs in the industry compared to the costs of labour. This is evident in the withdrawal of Pacific Brands from 2009 to 2010. At least ten factories were closed resulting in
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3000 redundancies (SMH 2010). Pacific Brands ambiguously cite compelling rationale (Pacific Brands 2009, 3), and no future in Australia (The Age 2009) as reasons for outsourcing to Asia. These statements thinly mask the obvious motivation of lower wage costs for labour intensive production. Spending has not targeted the true losers of trade, as compensation should, but has instead taken the form of international-competition spending, designed to slow capital withdrawal. This argument is strengthened by the Bracks Reviews implication that public support for the automotive industry in other countries is a rationale for investment support in Australia (2008, 43-44). Inter-industry immobility, like in car manufacturing is likely to enhance the effectiveness of this type of spending by reducing the incentives needed to stop withdrawal. The government programs studied here are not intended to compensate the losers of trade as Rodrik and others have described; rather they are intended to promote exports, maintain capital investment, and speed up the structural adjustments induced by trade. While this spending is made in explicit response to trade barrier reductions, and represents significant budgetary commitment, these programmes cannot be classified as a form of social protection or compensation, but instead as a form of international-competition spending. There has been a trade related expansion of the state in Australia, but no expansion of the welfare state.

Conclusion Superficially, recent instances of trade related spending in Australia reflect compensation views of the globalisation-welfare state relationship - the size of the state has grown in response to the competitive pressures of exposure to the international economy. A closer look at the automotive and TCF industry policies, however, offers only subdued support for this thesis. While these policies have targeted the losing industries of free trade and therefore confirm the relationship between factor immobility and cleavage formation over trade policy, they have also targeted capital, as opposed to labour, within these industries. This is inconsistent with our understanding of compensation. Workers, especially in the TCF industries, are the biggest losers from import competition. The distribution of industry support in favour of investors over workers can be explained by the relatively new level of international mobility granted to capital owners and the related internationalisation of these industries, enhancing their capability for withdrawal. International capital mobility creates an imperative for states to attract and maintain capital investment. This is especially true when trade protection is falling for industries which are expected to be internationally uncompetitive. It is this combination of international capital mobility and trade openness that has encouraged potentially compensatory spending to become a form of international-competition spending.

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