When Josh Frydenberg made a significant foray into foreign affairs as Australia’s treasurer in late November 2020, his effort to calm trade friction with China got all the attention.

But with new China tensions blowing up within hours of the speech, it was his explanation of how the government is handling the quest to diversify Australia’s trade away from dependence on China that was more deserving of attention.

“The [pandemic] crisis has sharpened the focus of all countries on the need to build national resilience in a highly interconnected world. We are already seeing this manifest through a push for countries to become more self-sufficient and produce more critical goods in their home markets,” he told a conference.

Frydenberg didn’t acknowledge this was a debate that his boss, Prime Minister Scott Morrison, had unleashed six months before during April’s COVID-19 lockdown. (That had sparked speculation about government support to bring manufacturing back home to Aussie shores.)

But Frydenberg’s speech underlined how the government has taken a cautious approach to the “domestic economic sovereignty” promised by Morrison.

“It is important that calls for greater self-sufficiency do not go too far, resulting in a more fractured global economic system, or become a back door to increased protectionism… attempting to ‘decouple’ our highly integrated global supply chains, would be more than disruptive,” argued Frydenberg. “It would carry huge economic costs.”

On the domestic front

So far, the government has embarked on three quite different domestic interventions that can be seen as boosting domestic production capacity. But at the same time, it has stepped up efforts to boost the nation’s trading links with other countries – a response to China squeezing out Australian commodity exports including beef, barley and wine.

As Frydenberg argued: “The answer to building economic resilience is not to shut ourselves off from the benefits of economic openness. Instead, there are opportunities to build resilience by developing new international partnerships and establishing new markets.”

Picture: Treasurer Josh Frydenberg. Image credit: Nic Walker.

“The answer to building economic resilience is not to shut ourselves off from the benefits of economic openness.”

Early in the lockdown, the Australian government suddenly required all new foreign investment to be reviewed. That has now morphed into a permanent system whereby Australia’s federal treasurer can block any investment on national security grounds. Any investment in a designated sensitive national security business must now be flagged and previous investments can be unwound.

Two big bets for manufacturing

Manufacturing accounts for only 6% of Australia’s economic output and its share has been shrinking since the 1980s. But the COVID-19 shutdown prompted fresh anxiety about what products Australia should be able to make in a global emergency. Now, the government has made two separate big bets on a more resilient manufacturing sector.

Its Modern Manufacturing Strategy, announced in October, promises almost A$1.5 billion to help businesses scale up, turn ideas into commercial successes and integrate into local and international value chains, with specific money to fill certain supply-chain input gaps.

It also involves reducing energy costs, particularly by boosting gas production, and makes changes to the training system to improve worker skills.

But at its heart it directs the most resources to industries where Australia is judged to have a competitive advantage: food production, critical minerals, clean energy, medical products and the defence/space industries.

In the second bet, the government will spend A$1 billion over 10 years from 2026 buying medical products from CSL’s vaccine production subsidiary Seqirus, which otherwise would have been imported.

This will essentially underwrite Seqirus spending A$800 million building a new specialised production facility at Melbourne Airport Business Park that will be the largest influenza vaccine factory in the southern hemisphere.

The hunt for new markets

But despite battening down at home with these partial reshoring initiatives, Australia’s post-pandemic strategy is counting more on the nation’s location in the part of the world expected to recover from COVID-19 fastest.

The 2020 federal budget made a point of noting how Australia’s major trading partners in Asia will grow by 5.75% in 2021, compared to world growth of only 5%. However, with China taking more than one-third of Australia’s exports while also raising doubts about its long-term reliability, the single most difficult challenge to recovery may be finding new export markets.

India, Indonesia and Vietnam have been viewed as the best China-plus options for years but the focus on them has been noticeably stepped up since the pandemic. And, the newly agreed Regional Comprehensive Economic Partnership – which covers 15 Asian-Pacific countries including Australia – will help Australian companies cooperate across borders in this region, with unified rules for trade and some common standards for services.

Morrison kicked off a new Indian engagement strategy after an online meeting with Prime Minister Narendra Modi last June. It seeks to fill the gaps in targeted areas after the failure to conclude a broader bilateral trade agreement.

Meanwhile, the long-delayed start of the Indonesia-Australia Comprehensive Economic Partnership Agreement in July 2020 has prompted an unusually intense effort by bilateral business groups and the governments to produce some benchmark successes before momentum is lost.

India and Indonesia are, respectively, Australia’s sixth and 13th largest two-way trading partners, so there’s room for growth. But both have been badly hit by the pandemic, raising questions about their immediate prospects.

That is why Vietnam, which ranks 14th, is getting a lot of attention. A special economic engagement program is being developed by both countries to meet a target of doubling investment and becoming top 10 trading partners with each other.

Read more: