Labor’s Response to the Productivity Commission’s Interim Position Paper Review of TCF Assistance Craig Emerson - Shadow Minister for Innovation, Industry and Trade

Discussion Paper - Response Paper - 4 June 2003

Background

The textile, clothing and footwear (TCF) industries have been under heavy pressure from foreign competition for several decades. In response to that pressure, Federal governments initially increased tariffs and introduced quotas on the quantities of TCF that could be imported. Despite protection rates of up to 200 per cent on some TCF items, job losses continued. Between the early 1970s and the mid-1980s TCF employment in Australia declined from around 175,000 to around 117,000, a loss of 58,000 jobs (ABS Labour force survey).

In 1987, Labor introduced a TCF Industry Plan – the Button Plan. It was designed to ease the burden of adjustment on vulnerable workers and to help re-orient potentially viable parts of the industry towards high-value exports and import replacement. The Plan included structural adjustment assistance and set in train a gradual reduction in import restrictions from the late 1980s.

The Plan included a Labour Adjustment Program (LAP) that was scheduled to run until 2000, but was abolished in the first Howard Budget.

Under pressure from Labor, the Howard Government implemented a TCF tariff freeze in 2000. Tariffs were legislated to remain at 2000 levels until 2005. From 1 January 2005 tariffs were legislated to fall from 25 per cent to 17.5 per cent on clothing, from 15 per cent to 10 per cent on footwear, cotton sheeting and carpets and from 10 per cent to five per cent on sleeping bags and table linen.

The $700 million TCF Strategic Investment Program (SIP) formed part of the Howard Government's response to the previous 1997 Industry Commission inquiry into the TCF industries. SIP began in 2000 when the tariff freeze was introduced and is scheduled to continue through 2004-05.

Labor's Future for the TCF Industries

Labor sees a good future for high-value TCF industries that constantly innovate in product design, production, ordering and delivery. The TCF industries are full of examples of firms and employees making the transformation into innovative, high value operations that successfully compete against imports and export into high-value markets.

The future of the TCF industries is in encouraging innovation and skills development. The industry is working hard to achieve world-class efficiency and workers should be given every opportunity to raise their skills even further.

The future of the TCF industries in Australia must not become a race to the bottom by competing on wage costs. This will only depress TCF workers' wages. Competing on wage costs against Asian countries would be futile, taking Australia down the low road of low skills and low wages.

Labor is committed to regional development and recognises the TCF industries as important employers in many parts of regional Australia. In developing a future strategy for these industries, the jobs and lives of TCF workers and their families in regional Australia must be taken into account.

Labor considers the Government has failed to pursue greater market access for exports of Australian textiles, clothing and footwear.

Labor will vigorously pursue improved market access for Australian textile, clothing and footwear exports.

Restructuring in TCF employment

Employment in the TCF industries has continued to fall since the late 1980s. At that time, employment was around 120,000. By the end of 2002, employment had fallen to 71,000 (ABS Labour force survey).

Comparing average employment levels in 1985 and 2002, the biggest job losses in that period were in clothing manufacturing (22,000) and textile fibre, yarn and woven fabric manufacturing (13,500) (ABS Labour force survey). In contrast, employment in textile product manufacturing actually increased by 9,000. Employment in the carpet industry has increased by 14 per cent, around 400 jobs, since 1997 (Carpet Institute of Australia 2003, p. 4).

Current Assistance Arrangements

The main forms of assistance for the TCF industries are tariffs and the TCF Strategic Investment Program (SIP).

Tariffs

Tariffs for most TCF industries are currently at rates of five, 10, 15 or 25 per cent (Table 1). The Government froze tariffs at these rates from 1 July 2000 until 1 January 2005. The highest tariff rate of 25 per cent applies to clothing and finished textiles. From 1 January 2005, tariffs are legislated to fall. Following those legislated falls the highest tariffs of 17.5 per cent will be on clothing and finished textiles. All other products in the TCF sector will have tariffs of 10, 7.5 or five per cent.

Table 1: Current and future TCF tariff rates

Source: Prime Minister and Minister for Industry, Science and Tourism, Joint Press Release "The Textile, Clothing and Footwear Industries", 10 September 1997.

TCF Strategic Investment Program

The TCF Strategic Investment Program (SIP) provides financial grants to support innovation, investment and production in TCF industries. The program commenced on 1 July 2000 and will run until 30 June 2005. Funding for the SIP is capped at $700million and is designed as a transitional scheme to assist TCF firms to adjust to the lower tariff environment post-2005. Of the $700 million, $22 million has been used for TCF regional assistance programs, with the remaining $678 million available for the five types of grants available under SIP.

Three standard types of grants, paid in arrears, are available to TCF firms:

• Type 1 grants paying up to 20 per cent of eligible expenditure on new plant, equipment or buildings;
• Type 2 grants of up to 45 per cent of eligible expenditure on both product and process for research & development; and
• Type 3 grants of up to five per cent of a company's TCF value added performed in Australia in any one year, limited to the total value of benefits earned under grant Types 1 and 2 in that year.

These types of grants are assessed by AusIndustry.

In addition, two other types of special grants are available which pay up to 20 per cent of eligible expenditure and require special approval by the Minister:

• Type 4 special grants for second hand plant and equipment for restructuring initiatives in TCF dependent communities; and
• Type 5 special miscellaneous grants for ancillary activities relating to restructuring initiatives in TCF dependent communities.

The SIP has a minimum expenditure threshold, with firms required to spend at least $200,000 of eligible expenditure to qualify for grants, although this expenditure can be accumulated over the five years the program is operating. SIP benefits for any firm are limited to five per cent of its annual eligible revenue. There is scope in the scheme for a modulation factor to be applied to grants to prevent the funding cap being exceeded.

In 2000-01, $130 million was paid to firms through the SIP and preliminary figures indicate that $61 million has so far been approved for 2001-02, although more may be approved (Productivity Commission 2003, p. 178).

Other TCF programs

The Government also has, or had, several other small programs for the TCF industries. The TCF Expanded Overseas Assembly Provisions (EOAP) Scheme gives duty concessions to companies that make garments and footwear overseas from predominantly Australian fabric or leather and then import them back into Australia for local consumption. Labor introduced the original Overseas Assembly Provisions (OAP) Scheme in1993.

The Howard Government introduced three other initiatives in its package for the TCF industry: the TCF Market Development Program, the TCF Technology Development Fund and the National Framework for Excellence in Education and Training in TCF. The programs were designed to encourage technology diffusion, a national approach to training and export development in the sector. They were originally intended to run for five years from 1 July 1999 to 30 June 2004, but the Government abolished these programs in the 2002 Budget, saving $21.5 million over five years.

Post-2005 Tariff Rates

In its interim report the Productivity Commission considers the future of tariffs for the TCF industries beyond those legislated to occur in 2005. It notes that due to the changes taking place in the industry worldwide, in Australia "employment will decline almost irrespective of the level of support provided to firms by Australian governments" (Productivity Commission 2003, p. 36).

The Commission presents four options for tariffs:

Option 1: Maintain all TCF tariffs at 2005 levels until 2010, then reduce to five per cent and maintain to 2015;

Option 2: Reduce all 2005 TCF tariffs in even annual steps to achieve five per cent in 2010, then maintain to 2015;

Option 3: ‘Tops down' to five per cent in 2010, then maintain to 2015; that is, higher tariffs are reduced before lower tariffs; and

Option 4: As for option 1, but reduce tariffs on apparel and certain finished textiles to 10 per cent in 2010 and then to five per cent in 2015.

The Commission's preferred option at this stage is for Option 4. The Commission doubts the capability of some clothing and finished textile producers to absorb the tariff reduction of 12.5 percentage points over the 2005-2010 period required under the other options.

The Commission utilised modelling from the Centre of Policy Studies at Monash University, Econtech Pty Ltd and the Centre for International Economics to estimate the impact on industry and the economy of further tariff reductions beyond those legislated in 2005.

The modelling showed negligible benefits from further reductions in assistance. "Overall, the model results suggest that the economy-wide effects of tariff and SIP reductions would be very small" (Productivity Commission 2003, p. 200). The reasons are: that the TCF industries are a small part of the overall economy; diminishing efficiency returns from reducing assistance; and because assistance levels are now much lower than previously. While there were minor differences between the different models used, they agreed that the overall economy-wide impacts of further reductions in assistance after the 2005 legislated reductions were very small.

At the same time, the social impacts of further reductions in tariffs need to be taken seriously. Labor is conscious of the vulnerability of many TCF workers and the impact that further closures of TCF operations could have, especially in regional Australia. Ending government assistance to the TCF industries would hit regional areas particularly hard. Regional areas would face an unfair burden if future assistance were abolished.

Yet Industry Minister Ian Macfarlane has pre-empted the Government's own inquiry, announcing that future assistance to TCF industries will be withdrawn by 2015 (Australian Financial Review, 30 April 2003). Such comments undermine the industry and display the Government's callous disregard for TCF workers.

Labor considers the Productivity Commission's review has failed to make the case for further tariff cuts in the TCF industries.

Labor remains committed to the resolution carried at the 2000 National Conference. Labor believes that a review must be undertaken, before the 2005 tariff cuts take effect, into the tariff and non-tariff barriers practised by our trading partners and the likely social impact of further tariff reductions on textiles, clothing and footwear workers and the broader community.

The future of the Strategic Investment Program

The Commission favours the retention of SIP for four years, a halving for the subsequent four years and then its termination.

The Commission sees government budgetary assistance provided in programs such as the SIP as having a twofold purpose: to ease the process of those firms and workers exiting the sector, and assisting those companies that will remain in the industry and are in the process of improving their competitiveness under lower tariffs.

The Commission argues that a key issue is striking the right balance between giving the industry time to adjust and to signal that special assistance must end no later than 2015.

The Commission suggests the following approach to future SIP funding:

• After the current program finishes in July 2005, budgetary support be provided for a further eight years;
• Funding for the first four year period from 2005-06 to 2008-09 be $560million, equal to existing annual average funding in nominal terms;
• Funding then be halved for the second four year period from 2009-10 to 2012‑13 for a total of $280 million; and
• Budgetary assistance to terminate on 1 July 2013.

Others, such as the Council of Textile and Fashion Industries of Australia (2003, p. 2) and the Carpet Institute of Australia (2003, p. 7), have argued that SIP should be extended until 2015.

The Commission presents three options for how any future post-2005 SIP assistance could be configured to best assist firms in the industry:

Option A: modify existing arrangements. This option would keep most of the current arrangements in place in any new program, continuing to focus on R&D, investment and some assistance for production. Possible modifications could include clarifying the definition of innovation, reducing administrative and compliance costs of the scheme and reducing the current $200,000 turnover eligibility threshold to allow smaller firms access to the scheme.

Option B: a bounty based on additional value. Firms would be entitled to assistance on the extent to which they increased their production, or value added, over a base period or periods. This form of support would be simpler and would reward additional activity. However, as with the current SIP, it would need to be restricted to five per cent of turnover in view of WTO sensitivities. The Commission also argued that without specific references to investment and R&D, "such a scheme might be more exposed to WTO actions" (Productivity Commission 2003, p. 93).

Option C: firms ‘compete' for assistance. Firms would apply for assistance with proposed expenditures. These would be assessed by a panel which would decide the successful projects on a merit basis. Eligible expenditure categories would need to be developed, but might include investment, R&D, innovation, IT, market development and training. This would introduce a ‘competitive' assistance program more like the current Pharmaceutical Industries Investment Program and the R&D Start Program.

The Commission has called for feedback from industry on the most appropriate option for future budgetary assistance.

Labor supports the continuation of the Strategic Investment Program until 2015.

Labor considers the current eligibility threshold should be lowered to allow smaller TCF firms to access the scheme.

Labor considers SIP should be reconfigured to give greater reward to innovation in product design, production and delivery and that it should be redesigned to give greater flexibility in the definition of innovation. Investment designed to boost the competitiveness of existing TCF operations should remain eligible for SIP.

Labour Adjustment Programs

A key issue in considering the future of the TCF industries is the impact of any additional restructuring on workers in the industry. Labor considers assistance for affected workers is an imperative for government. The Commission found that "situations may arise during the tariff transition period where additional targeted support is warranted" (2003, p. 96).

Labor believes that, given the special difficulties in finding new employment faced by retrenched TCF workers, an industry-specific program is warranted. Labor also considers that an effective way of boosting the competitiveness of existing operations is to provide opportunities for skills enhancement of their employed workforce.

It was a Labor Government that introduced the former TCF Labour Adjustment Program (LAP). The LAP consisted of wage subsidies, training and relocation assistance for up to one year (Table 2). This program was designed to help former TCF workers find new work, but the Howard Government abolished it in the 1996 Budget.

Table 2: Real cost of TCF Labour Adjustment Program, $m

Source: Industry Commission 1997 The Textiles, Clothing and Footwear Industries, Volume 1, Report; ABS cat. 5206.0. Figures are in 2001-02 prices deflated using non-farm product price deflator. ^a Program was abolished in August 1996.

Labor notes the Commission's concerns about the design of a new labour adjustment program, but believes that a new program can be designed to be an effective tool to support workers and assist in industry restructuring, along the lines suggested by the Textiles, Clothing and Footwear Union of Australia (TCFUA). Moreover, former TCF workers have experienced difficulties accessing the Government's general labour assistance programs because many such workers fail to meet the eligibility criteria of these schemes.

The TCFUA in its submission to the Commission recommended that a new LAP be created that provides integrated training to workers who are made redundant (Textiles, Clothing and Footwear Union of Australia 2003, pp. 7-8). The training would be provided for up to two years and would not be means-tested. Unemployed TCF workers would also receive a wage during the training and a wage subsidy paid to employers who take on redundant workers. The program would also have funding for LAP liaison officers.

Labor supports the re-introduction of a new Labour Adjustment Program to assist TCF workers in improving their skills, in retraining and in finding new employment.

Outworkers

The TCF industries employ large numbers of ‘outworkers', working from home and often working long hours for very low rates of pay. Estimates of the number of outworkers in the industry vary from around 25,000 (Productivity Commission 2003, p. 129) to 329,000 (Textiles, Clothing and Footwear Union of Australia 2003, p. 86).

In 1996 the Homeworkers Code of Practice was introduced. The code is designed to protect outworkers' wages and conditions and end exploitation by monitoring the whole production chain. This voluntary agreement was made between retailers, manufacturers and the TCFUA. However, it was only at the end of last year that a significant number of retailers signed on to the agreement. Several state governments have introduced legislation to protect outworkers' entitlements.

The Productivity Commission recommends that additional regulations on outworkers should be avoided pending the Code of Practice being given sufficient time to prove its effectiveness. However, codes of conduct have not had a very happy history in Australia.

Labor supports the Homeworkers Code of Practice. At the same time, Labor is committed to introducing Federal legislation complementing State legislation (already adopted in NSW and Victoria) that aims to ensure outworkers are employed under secure, safe and fair systems of work.

Local Procurement Policies

Government procurement policies can play an important role in the future of Australia's textile, clothing and footwear industries. Purchasing policies that encourage and facilitate access by local TCF manufacturers to government contracts should be introduced.

Efforts by the Queensland and NSW Governments in this regard should be examined by a working party of stakeholders charged with developing a nationally consistent Commonwealth, State and local government procurement policy.

Workplace Relations

As with the automotive industry, the Government has sought to make industrial relations a central issue for the TCF industries. Industry Minister, Ian Macfarlane, described the TCFUA as "belligerent" (Australian Financial Review, 30 April 2003). Labor considers the TCFUA plays an important role in protecting the working conditions of TCF employees and that the industrial relations environment has generally been harmonious. Labor rejects the Government's ideological obsession with attacking the union movement – in this case the TCFUA.

Labor notes that the Productivity Commission found that the loss of employee entitlements is a major source of anxiety and tension in the industry. The Howard Government's ongoing failure to adequately address this issue is bad for industrial relations in the TCF industries.

Labor will establish a national employee entitlement scheme that is based on the principle that employees should receive 100 per cent of the entitlements, including superannuation entitlements, due to them.

A Final Labor Response

Labor will provide a final response on assistance arrangements for the TCF industries following the release of the Productivity Commission's final report.

References

Australian Bureau of Statistics cat. 5206.0, Australian National Accounts: National Income, Expenditure and Product, various years.

Australian Bureau of Statistics cat. 6203.0, Labour Force, Australia, various years.

Carpet Institute of Australia 2003 Submission to the Productivity Commission Inquiry into Post 2005 Assistance Arrangements for the Textile, Clothing and Footwear Industries, March: Melbourne.

Council of Textiles and Fashion Industries of Australia 2003 TFIA Submission to Productivity Commission, Post-2005 TCF Inquiry: Melbourne.

Industry Commission 1997, The Textiles, Clothing and Footwear Industries, Report No. 59, AGPS: Canberra.

Prime Minister and Minister for Industry, Science and Tourism, Joint Press Release "The Textile, Clothing and Footwear Industries", 10 September 1997.

Productivity Commission 2003, Review of TCF Assistance: Position Paper, April: Canberra.

Textiles, Clothing and Footwear Union of Australia 2003, Submission to the Productivity Commission post 2005 Textile, Clothing and Footwear Assistance Arrangements, March: Sydney.

"Code stitched up for outworkers", The Australian, 10 October 2002.

"Industries brace for tariff cuts", Australian Financial Review, 30 April 2003.