The Productivity Commission (PC)’s annual trade and assistance review, covering 2021-22, contains some familiar themes: the level of overall trade assistance via budget handouts as tariffs continues to decline (tariffs now impose more costs to navigate than they raise in revenue); the continuing importance of trade (“globalisation is not dead”) and Australia’s obsessive and deeply unhealthy use of anti-dumping provisions, which we continue to employ at more than double the global rate.
The commission is also chary of assistance for renewables transition, which it sees as a potential vehicle for protectionism — though before climate denialists seize on that, it’s because the PC continues to maintain, as it did during Australia’s lost decade of climate policy under the Coalition, that an economy-wide carbon price is the best mechanism for enabling the transition. Which it is. Our current approach such as it is (a safeguard mechanism, a substantially fraudulent market of carbon credits, letting fossil fuel companies grow their exports) is a grossly inefficient alternative.
The commission also grapples with the dominant issue in trade policy worldwide today: the resurgence of industry policy and onshoring of strategic industries by the biggest economies. The United States is targeting advanced microprocessors and renewables via the CHIPS and Science Act and the Inflation Reduction Act (IRA), while the European Union has responded by targeting the same areas. Both are driven — beyond domestic political considerations — by pandemic-influenced concerns about supply chain vulnerability and a geopolitical desire to restrict China’s influence.
Under Labor, Australia now has multiple policies that mimic these — a national reconstruction fund to target renewables and high-tech manufacturing, a critical minerals strategy, a national battery strategy, and a “Hydrogen Headstart” program.
The economic case for these is dubious — they are not areas of natural advantage for Australia, and devoting resources to them comes with a significant opportunity cost. We’re competing against dramatically larger economies that are subsidising and encouraging their own companies, which have far more money than us to deploy.
As for the argument that these are “strategic”, “sovereign” or “critical” industries, the PC has this snarky response:
The number of sectors regarded as critical risks growing over time … Australia’s Security of Critical Infrastructure Act 2018 is a potential case in point, with the number of sectors with assets regarded as critical under the act increasing from four to 11 over the space of two years … The same can be potentially said of ‘critical minerals’ for which there is no fixed chemical definition, there being no ‘critical minerals’ category on the periodic table of elements.
Instead, a growing practice is for countries to identify which minerals or resources they judge to be ‘critical’, either to their economy or their security, on national ‘critical mineral’ lists. This list has been growing in the United States and the European Union over recent years, and the Australian government recently announced its desire to update Australia’s ‘critical minerals list’.
But what about supply chain risks and the threat of China in crucial economic areas? That’s where the very actions of the US and the EU used to justify Australia mimicking them provides the case for not doing so.
Two years ago the PC found that concerns about supply chain fragility were overstated in Australia: “To the extent that policymakers continue to hold concerns about supply chain resilience, nevertheless, it is likely that US and EU industry policy itself will be diversifying away some of these risks for Australia. That is, increased microprocessor and clean energy technology production capacity in the United States and in Europe will create additional supply alternatives for all countries, including Australia.”
Australia can be a free rider on other economies when it comes to supply chain resilience and reducing the risk of exposure to China. And in this case, there’s no moral problem with being a free rider, as there is when it comes to climate action, where Australia has been not merely a free rider but a saboteur and parasite.
If other economies are taking actions in their own perceived interests that help address the problems that we perceive, we’re under no obligation to make bad policies to mimic them. We can simply benefit from their policies. That’s particularly the case with the US IRA, which specifically privileges countries with existing free trade agreements — like Australia, in the provision of “critical minerals”.
In the meantime, we should get on with what we’re actually good at — exporting resources, professional services like education and finance, and lifestyle services like travel.
