In a recent article I outlined how the chronic market failure of currency exchange rate valuation mechanisms devastates Australian non-cyclical industries such as manufacturing.
During the exchange rate peaks of only a few years ago (A$1.10 = US$1) many Australian export manufacturers even at the upper end of the value-add production scale were wiped out or driven to the brink and still have not fully recovered. Exports markets were lost and have not returned.
Revisiting all the information regarding exchange rate market failure is beyond the scope of this essay (see link to that article below) other than to reiterate exchange rates of smaller and middle economies have become the playthings of just a few heavyweight international financial players and market forces no longer prevail.
To what extent a floating exchange rate ever represented true or intrinsic market value that situation exists no longer and fresh thinking coupled with new remedies are required.
The Federal Government, the reserve bank and public service institutions of treasury and finance need to come together and take ownership of the solutions.
To explain the challenge in simple terms: If the Australian currency exchange rate is at Australian one dollar buys 80 cents American (A$1 = US$.80) and then the exchange rate moves to parity (A$1 = US$1) the price of Australian exports has increased by almost one quarter. That is, it takes more US dollars to buy the Australian product.
Exchange rates can move quite quickly and trends may not be immediately apparent. Accordingly, no manufacturing business can restructure in such a short time frame.
For the Australian business to remain competitive and try to keep existing customers, the only option is to reduce selling prices to offset the exchange rate cost increase.
By reducing prices they lose a big part of their profits which means delaying reinvestment in the next technical generation of products, jobs are lost, taxable profits are lower and less taxes are paid generally.
Any later attempts to regains those lost export customers once the exchange rates return to the mean is, in relative terms, quite costly.
Problems are relatively easy to identify, solutions on the other hand require a lot more effort and applying those solutions more nuanced than most imagine.
So, what to do?
Always keep in mind, the effects of wildly fluctuating exchange rates have nothing to do with the efficiency or otherwise of the manufacturing sector. Even the most efficient value add manufacturer will considerably suffer under such impositions.
For value-add manufactured goods exporters two possible options could be offered.
Both are to be underpinned by a 1200-day moving average of the exchange rate.
If or when the actual daily exchange rate exceeds the moving average for more than 90 days continuous or more than 180 days within a 12-month period the triggering conditions for one of the following are met.
The export manufactures can claim as an additional tax deduction on the value of all exports the difference between the actual exchange rate and the moving average exchange rate, with possible access to interest free short term bridging loans from Government in more extreme circumstances.
Depreciation of capital equipment
Another option is to access super accelerated depreciation of capital equipment, particularly where businesses may seek to modernise capital equipment or streamline manufacturing techniques to lower production costs and better meet adverse international trading conditions.
Value add manufacturing and product development investment is worked around a minimum timetable of 3-5 years. Mining for example, other than the initial intense investment is expected to move in cycles as the ore is still going to be in the ground for later extraction.
If Australian value add manufacturing is pushed into cycles by exchange rate fluctuation then it can be devastated taking 10 years or more to recover and then to “re-expertise” the key people.
The smoothing effect of a recast exchange rate tax rebate/deprecation system would keep the most competitive value add manufacturers in the game and that benefits all Australians.
Would such a program cost money? Of course it would, but it would also be self-funding. For every $2 spent on this program $3 would be made and another $1 saved for otherwise lost revenue.
David Gray is lead consultant at Digital Information Partners suppliers of media relations, press release campaigns and export documentation services to Australian manufactures and service providers. David can be contacted at www.diginfo.com.au