Australian Sovereign Industrial Capability: Shaping a Post COVID-19 World


Our colleagues at the Institute for Integrated Economic Research Australia Ltd having been working with Global Access Partners Pty Ltd and Gravity iLabs, DMTC Limited 2021 on a series of workshops framing key issues for a way ahead for Australia in the post-COVID 19 world.

A key element of shaping a transition is the question of the scope and nature of Australian industrial sovereignty.

Their latest report is on this topic and was published in May 2021.

The executive summary for the report highlighted their findings.

This report reflects the discussions of the Institute for Integrated Economic Research Australia (IIER-A) Working Group on Australia’s Sovereign Industry Capability. The group included a broad range of experts and stakeholders with diverse interests and opinions, and so not every participant would endorse every idea outlined in this document.

The group argued that the COVID-19 pandemic has exposed long-term deficiencies in Australia’s domestic productive capacity and that a reliance on overseas supply chains left the nation vulnerable to a range of future political, economic and environmental contingencies.

The report calls for a broad investigation of Australia’s manufacturing base to highlight areas of sovereign importance which could be strengthened and expanded through a range of government measures. This approach, which has already been embraced to some degree in the 2020-21 Federal Budget, could also generate a range of employment and environmental benefits, as well as support resilience efforts in human resources, social cohesion, disaster planning and other key sectors.

While Australia will continue to rely on mining, agriculture and services for most of its economic activity, lessons can be learned from Australia’s history, the domestic defence sector, and the approaches taken by international peers such as New Zealand and Scotland, to inform the creation of a coherent and effective industrial policy.

While the development of high-technology sectors, as outlined by the government in the 2020-21 Budget, is important, it must become part of a broader strategy to strengthen Australia’s manufacturing base, develop low-tech manufacturing industries, support small and medium-sized enterprises (SMEs) and create or protect strategically important manufacturing capacities.

A series of related steps to improve the resilience of Australia’s manufacturing sector, and therefore national resilience as a whole, should be undertaken as part of this broad approach, ranging from improved cyber-security and workforce training to city planning and the modernisation of energy supply.

The pursuit of an integrated resilience policy, in which economic policy plays a significant part, would help safeguard Australia from future threats. Viewing economic policy in isolation from international political issues, environmental threats and social consequences is no longer tenable, given a deteriorating international situation and the experience of COVID-19.

The creation of an independent National Resilience Institute would facilitate a thorough and ongoing examination of these issues, helping to inform the policy debate and ensure it remains on the political agenda beyond the current pandemic.

A revival of domestic manufacturing is a necessary, but not sufficient, part of improving national resilience, and so this report should be understood in concert with those produced by other IIER/GAP working parties.

The report is worthy of a close read and an e-book version of the report can be found at the end of this article.

But one issue which clearly is of interest not only to Australia is the question of shaping secure supply chains in the wake of dealing with the Chinese and their global approach.

This is how the authors of the report frame that issue:

Wuhan rose to international infamy as the epicentre of the global pandemic, but its role in international supply chains is equally instructive. The city produces a tenth of China’s fast-growing car industry and hosts over 100 parts suppliers to Honda alone. The lockdown belatedly imposed on Hubei province soon spread around the world, and the global supply chains which now dominate the world’s intertwined economy were significantly disrupted. Shortages of consumer goods, exacerbated by just-in-time ordering systems as well as panic buying, became commonplace, while a rush for scarce medical supplies revealed the world’s dependence on a handful of suppliers along chains of dubious provenance.

 No sensible commentator suggests that Australia could or should manufacture all the goods it needs. Many products are not vital to national functioning, while others could not be produced at reasonable cost. Even an expanded manufacturing sector would rely on a plethora of raw materials or components from abroad. Regional and global supply chains have undeniably helped fuel an unprecedented rise in the planet’s prosperity over the last 30 years, but the concentration of lowest-cost products from dubious sources have quietly increased the risks faced by consumers, businesses, workers and the nation, and taking action to rebalance the ledger is clearly both possible and desirable, given current and likely future circumstances.

Improved domestic capacity in essential manufactured goods and diversified supply chains would seem a prudent combination. A national policy to strengthen trading ties to longstanding allies, for example, will not only encourage mutual economic recovery while lessening the leverage of China but reinforce the cultural and security relationships required to contain China’s growth and ambitions.

Other nations are already adopting this approach. As early as May, the Japanese government devoted ¥243.5 billion (A$3.6 billion) of its COVID-19 support to shift supply chains from China to Japan or Southeast Asia. The USA’s admittedly chaotic response has included executive orders and cross-party bills to reduce its reliance on Chinese pharmaceuticals, while senior members of the Australian Government have at least acknowledged the need to look at domestic economic sovereignty.

Australia will stay in step with its allies, if it develops supply chains with trusted partners and steps up domestic industrial production, rather than divorce itself from them. The election of Donald Trump, Britain’s exit from the EU, widespread concerns over immigration and fear of China’s tightening grip were already pushing a more sceptical agenda in many Western democracies. COVID-19 has accelerated the trend away from unfettered globalisation and the divorce of private profit from any other considerations towards a new balance of national capability and mutually supportive political and trade alliances in the democratic world.

Every nation would still build on its strengths under this new scenario. Australia could develop its potentially lucrative rare earths industry to exploit its mining expertise, while British engineering, American productive capacity and Southeast Asian pharmaceuticals could reduce the need for Chinese goods. Scandinavia could retake the lead on mobile communications, while Germany could continue to develop its advanced manufacturing sector. Such specialisation would reap the benefits of comparative economic advantage while reducing the political and security risks of relying on China, although government support might be required to counter Chinese firms subsidised by the state.

Efforts to diversify Australia’s supply chains and build verifiable and trusted networks around the world would therefore complement, rather than contradict, an expansion of domestic manufacturing. European and other nations might be hard-pressed to identify the contribution Australia makes to global trade beyond coal, iron ore and wheat and a sunny destination for a foreign holiday, and so the development of manufacturing capacity and closer trading ties with nations which will actually buy from us may help increase the volume of foreign trade, rather than diminish it.