Sean O'Grady: Scrappage scheme sells the UK motor industry short

Good news: according to some reports, at least, the Government is ready to help the motor industry. The bad news? We'll be helping the French, German, Korean, Polish, Czech, Slovakian and Korean motor industries rather than our own.

How come? Because the vast majority of the funds to be disbursed under the mooted scrappage scheme – something like a £2,000 state subsidy for you when you buy a new car and trade in your 10-year-old clunker – will be going abroad: 85 per cent of cars sold in this country are imports.

And when it comes to the sort of small, economical hatchbacks that will probably see a surge in sales as a result of a scrappage scheme, the British motor industry has just two offerings: the Nissan Micra and the Mini. Both are excellent cars, but between them only account for about 5 per cent, at most, of the new car market in their segment. The little Honda Jazz may join them, but not yet at any rate, given that Honda's Swindon factory isn't making any cars at all. So that would put the "leakage" rate for the new subsidy at 95 per cent-plus. Even the most committed free trader might blanch at such selflessness.

The main benefit of the scrappage scheme will, thus, be felt in the wider motor business – dealers, importers and the like – rather than in manufacturing. OK; but why is the car retail trade so much more vital than any other retailer? Why did the Government not offer a subsidy to us to buy pick'n'mix from Woolworths? Or kitchens from MFI? Official thinking a little muddled, perhaps?

There is a more serious, wider macro-economic point here too. The UK is the second biggest car market in Europe (behind Germany), and cars are expensive items. Bringing maybe half a million new cars in from abroad as a direct result of a taxpayer subsidy will not do our balance of trade, or sterling, much good. The sums are simple: say, conservatively, that the UK scheme is capped at a fifth of the cost of the German scheme – that is £1bn in a year, 95 per cent of which will be added to an already serious trade deficit. A mere £50m will help UK firms and suppliers directly. A £1bn new foreign car buying spree – all those cute Ford Kas, Kia Picantos and Citroë*C1s bought courtesy of HM Treasury – doesn't sound like the best use of public funds.

Ah, but aren't the Europeans implementing schemes that will benefit our car industry – now that 72 per cent of our cars are exported? Doesn't it mean the continentals will be keeping the Mini factory in Oxford busy? Well, yes and no. The French, Spanish and Germans certainly do have such schemes in place. Indeed, the German one is so popular that they have just trebled its budget, to €5bn (£4.5bn). Therefore, a British initiative would not be unilateral. Still, there are a couple of points to make here. First, the general observations about the structure of the UK industry remain – it is least likely to do well out of these schemes. Second, given the large potential for market distortions, it is odd that the European Union seems to have so little say about a consistent EU-wide scrappage scheme.

Then there is the green argument. A few years ago, Professor Julia King, vice-chancellor of Aston University, was recruited by Gordon Brown to review the market for low-carbon cars. It was an authoritative study, and she didn't mention scrappage once. She did endorse the view that 85 per cent of a car's CO2 emissions take place during its use, with only 10 per cent accounted for by the car's manufacture and 5 per cent in its disposal.

But that does not mean that scrapping every old car is a good idea. Even a 10-year-old Renault Clio or Volkswagen Polo will have plenty of life left in it, and its carbon dioxide emissions will not be so radically awful compared to its newer cousin. The marginal gain in CO2 and other noxious emissions might well not outweigh the additional rape of the earth's resources and the energy expended in the manufacture of a new vehicle. It might – if the old banger were a terrible gas guzzler, but then again there is nothing in principle to prevent scrappage money being used to get another few thousand off the price of a new gas guzzler, a Porsche SUV, say, while you scrap a more green older car. True, not many Porsche drivers knock about in decade-old crocks, but the point stands in the case of, say, an old Ford Ka against a new Mondeo.

Crucially, scrappage schemes usually place no premium on how fuel- efficient and clean the new car will be, against the old car to be scrapped – badly undermining the green credentials of the idea.

The King review sounded a strong warning on this point: "In practice, purchase decisions suggest that consumers take a short-term view when weighing up vehicle purchase costs. Future cost savings from fuel-efficiency are discounted heavily at the time of buying a new car, and consumers report that they would require large financial benefits before switching to a smaller car or a car with a smaller engine."

The £1bn we may spend on scrappage would, in the long term, probably be better directed at green research and development, where the UK lags behind.

That hypothetical Porsche buyer also raises another uncomfortable truth about scrappage – that it will have to carry the "dead weight" of people who were going to change their car anyway, many of whom are undeserving of such a big subsidy, and who will be given no special incentive to downsize or go green. To that must be added an additional dead weight of people who might now speculatively buy a decade-old £200 banger with a view to cashing in on the scheme, if the rules are lax. The used-car market is, after all, legendarily full of crafty entrepreneurs. And we don't want harmless old classics to be victims of the scheme. The Treasury had better make its scheme pretty tight if it is not to suffer the law of unintended consequences.

Then again, this Government's attitude towards the indigenous car industry has always been marked out by naivety. Exactly four years ago this week, our last indigenous volume manufacturer, MG Rover, collapsed, and most of Longbridge is now being turned into a retail park, as if we needed any more of them. It was a victim, in part, of official indifference to UK manufacturing, not least in public procurement.

There ought to be a word in economics for the antonym of protectionism, a word that transcends "free trade". Perhaps the phrase "foreign first" sums up ministers' attitudes to official purchases.

Inexplicably and indefensibly, we are still awaiting the official Department for Business report into MG Rover. While Lord Mandelson works hard to save Jaguar Land Rover, LDV vans, Vauxhall, perhaps even Honda and Nissan in the UK, there may be lessons to learn from that earlier debacle. Let's hope that a badly targeted scrappage scheme doesn't join the long line of political interventions over the British motor industry.