So how does Australia benefit?

Well through having cars manufactured overseas, the same car can be made for say, 2000 dollars less. That means that every Australian would have to pay say 2000 dollars less on their purchase of a car compared to if it was made in Australia. That means that every Australian has 2000 dollars more to spend on other things; more disposable income. Like the Kevin Rudd bonus aims to do, if this 2000 dollars is spent on other stuff then the positive effect on our local economy will be multiplied severalfold.

And as I posted in the Proton thread a few topics back, if you want to see what happens when you have a automotive manufacturer which is protected by its countries government, Proton is a great example. The Malaysian government taxes foreign cars at something like 100%, this is the only way that Proton can compete against the Korean and Japanese brands. So the poor people of Malaysia have to pay more money for inferior products; everyone suffers for the benefit of a few (the automotive workers).

Regarding the increase in the standard of living, I will start with a simple example to outline the benefits of trade.

Say there are 2 countries in the world. Country A is great at making cars and 5 men from Country A can make 200 cars a year. Country A however has a terrible climate for agriculture and so 5 men from Country A can only grow 100 tonnes of wheat a year.

Country B has a great climate and as a result, 5 men from country B can grow 300 tonnes of wheat a year. However the wages in Country B are comparatively high, and the components are sourced from overseas and thus 5 men from country B can only make 70 cars a year.

If both countries don’t trade, and for the sake of simplicity have 10 people, then Country A ends up with 200 cars and 100 tonnes of wheat, and Country B ends up with 70 cars and 300 tonnes of wheat.

If however each country sticks to what it does best (ie. it has a comparative advantage in doing this), then Country A can make 400 cars with 10 people, and Country B can make 600 tonnes of wheat.

Those 2 countries then trade half of their local production for half of the other countries, meaning that both countries end up with 200 cars and 300 tonnes of wheat respectively. Compare this to what they would have ended up with if they had decided to go it alone.

If Australia didn’t have an manufacturing industry then we wouldn’t have to lower wages because we wouldn’t actually be competing with China and India!

If anything the standard of living would increase because like you said, identical cars can be produced in these countries for less because of their lower wages, meaning cheaper cars for us, and thus more disposable income for us to spend on other things.