Date posted: 09/06/2020 5 min read

6 ways Australia can step up its economic self-sufficiency

Broken supply chains and travel restrictions mean “buying local” and economic self-sufficiency is on the agenda in Australia.

In Brief

  • Domestic manufacturing can help fill the gaps in the supply chain created by COVID-19 restrictions.
  • The Australian government is in a position to create policies to help build the nation’s economic resilience.
  • A competitive manufacturing industry requires a stable energy supply and a bigger focus on science and technology in Australia’s education system.

It was just before the Easter long weekend, in one of his regular COVID-19 media conferences, that Australia’s prime minister, Scott Morrison, embarked on a new crusade for domestic economic resilience with a reassuring message that he wanted to make sure the country could produce essential goods.

“We need to look carefully at our domestic economic sovereignty,” he declared.

The prime minister’s shift to talking up longer term economic independence has prompted a wide-ranging debate about how, and how much, Australia will shift back to domestic manufacturing.

Andrew Liveris, the former Dow Chemical chief who now heads the federal government’s manufacturing task force, predicts the need for security of supply will accelerate “a new wave of economic nationalism” with more value-adding to Australian-produced commodities, food, defence materials and energy.

Perhaps the most striking contribution to a new way of economic thinking has been the normally open market-oriented Foreign Investment Review Board’s little noticed declaration that new tighter foreign investment approval rules – to defend local companies from opportunistic foreign takeovers during the epidemic – were critical to “ensuring public order”.

But what can a traditionally foreign investment and trade dependent country do to boost its domestic economic sovereignty?

1. Take equity

The decline of Virgin Airlines into administration has put the issue of strategic public investment in selective companies or industries on the agenda.

However, the government has firmly rejected this for Virgin, apparently confident there is sufficient private money from Australia or elsewhere to fund a second airline.

Nevertheless, before the pandemic hit, the government quietly directed the rebadged Export Finance Australia (formerly the Export Finance Insurance Corporation) to help fund rare earths mineral development projects to reduce reliance on Chinese production.

Export Finance Australia received an extra A$1 billion two years ago to play a key role in supporting the government’s Pacific Step-up policy, which offers Pacific nations alternative infrastructure funding to China’s Belt and Road Initiative. Now it may also become a vehicle for future pandemic-related investment or support for domestic companies.

2. Trade and investment limits

At least 40 countries have placed bans on pharmaceutical or medical exports since the pandemic started. Australia has opposed these actions on the basis the bans will drive up medical supply prices and hurt poorer countries.

Using higher tariffs to foster a domestic medical production capacity would be a remarkable change of course for a country that has celebrated its tariff reduction credentials since the textile tariff cuts in the 1980s.

Nevertheless, the Australian government’s decision to review all foreign investment amid the pandemic is one of the most wide-ranging increases in foreign investment regulation in the world. It underlines how greater scrutiny of foreign investment could play a big role in domestic economic resilience.

Some of Australia’s trade deals already give the government scope to take regulatory action in the health sector in the national interest, even if it damages the interests of foreign investors

3. Build stockpiles

This was already an established arm of health policy before COVID-19 and it’s not clear if it was a failure of planning that gave rise to the initial apparent shortfall of personal protection equipment in Australia, especially masks for medical personnel. Building stockpiles of designated strategic equipment would involve Budget costs, although this would be more transparent and less market distorting than directly funding companies or raising tariffs. It seems certain to be part of any economic security plan with the government already boosting the strategic oil reserve.

4. Direct action

This policy option has gained greater prominence and possibly respectability from the climate change debate and has been particularly favoured by some conservative politicians over more complex interventionist and multilateral long-term resilience frameworks.

The pandemic has seen two emblematic examples of swift and targeted direct action by the government. Military engineers were deployed to the personal protection equipment company Med-Con to help quickly increase production of surgical masks and other gear at its factory in Shepparton, Victoria.

Meanwhile, the government has paid for special cargo flights to get exports of perishable food products from Australia to mostly Asian markets. But these sort of interventions don’t offer a long-term solution to greater domestic economic sovereignty in Australia.

5. Company risk management

This basic business principle is now being dressed up in the lexicon of geopolitical language as “supply chain diversification”, particularly aimed at reducing dependence on China.

With about one-quarter of imports and one-third of exports coming from or going to China, Australia’s trade dependence on China is greater than with any country since Britain in the middle of last century. But there are two quite separate issues here. One relates to whether the China trade dependence is now more risky because the bilateral diplomatic relationship is more strained.

The government has played this down, arguing that China trade can continue amid the more diplomatically difficult debate about the need for an investigation into the origins of COVID-19 in Wuhan.

At the same time, the countries seen as alternative economic partners to China – such as India and Indonesia – look like being more damaged by the pandemic, which would make China a continuing good trading partner in the shorter term.

Separate to the China issues, there is the question of whether some companies have become too dependent on just-in-time supply chains for imported components with little understanding of the secondary supply chain risks of their principal import suppliers.

“Separate to the China issues, there is the question of whether some companies have become too dependent on just-in-time supply chains for imported components.”
Greg Earl

The government is likely to be emphasising the need for business to shift beyond just-in-time supply chains and suppliers with secondary risks, because this is the one area of improving domestic economic sovereignty that does not require government funding. (Japan, however, has introduced a government-funded scheme to encourage its companies to become less dependent on China.

6. The fundamentals

Rebuilding a competitive manufacturing industry in Australia won’t succeed without some basic foundational changes. These range from a greater focus on science and technology in the education system to a more stable energy system, possibly through domestic gas reservation.

Then there are even broader issues, including industrial relations to improve worker flexibility and new approaches to tax such as cash-flow taxation to encourage investment.

This is an old debate, but it seems set for a more targeted revival if domestic economic sovereignty really takes off as a new political priority.

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