Economic diplomacy: Trade shifts challenge new government

Hit or miss

Trade issues have not had much of an impact in the Australian election campaign, unsurprisingly overshadowed by the Solomon Islands in the foreign affairs debate and now rising interest rates in the domestic debate.

The Labor opposition stepped up the rhetoric at its campaign launch on Sunday with the promise of a made-in-Australia future. Included was the vague commitment of “up to” $15 billion in loans, equity and guarantees across a range of industries for more domestic production and a predictable promise of more local government purchases. But there is more specific rhetoric about making more trains, trams and ferries in Australia.

The Morrison government has largely stuck to talking about its pre-existing $2.5 billion modern manufacturing strategy. This was reinforced in the March federal budget with new funding for rural industry development under the heading of regional accelerator programs, which was a compromise for the Coalition’s junior partner, the Nationals, for the policy on climate change last year ahead of the Glasgow summit.

On Wednesday, Labor trade spokeswoman Madeleine King introduced the first new detail of trade policy in the election, which builds in part on developments under the coalition, but also implies that a Labor government will place more emphasis on Asian opportunities (see below). However, whichever party forms government will have to consider the shifting sands of post-Covid industrial policy among trading partners and multilateral policymakers.

Shadow trade and resources minister Madeleine King with Labor leader Anthony Albanese (Paul Kane/Getty Images)

As already noted here, the International Monetary Fund argued for greater diversification and substitutability rather than a retreat into domestic manufacturing in its latest World Economic Outlook. He argues: “Trade has been fairly resilient to the pandemic – initially declining sharply, then recovering rapidly based on economic activity and demand, despite significant bottlenecks in trade logistics. .”

Thus, he argues that measures to reduce dependence on foreign suppliers who have set up shop in several major countries, including the United States since the pandemic, may be premature and even lead to less resilience given the the rear view of the pandemic period. He cites Toyota’s response to the Fukushima tsunami as a benchmark for reducing supply chain risk through component standardization, better understanding of supplier inventory and regionalizing supply chains rather than counting. on a single location. But some of these ideas were already in the reports of the Productivity Commission to the government last year. And the government has increasingly paid arguably more attention to diversification than to reshoring.

Friends in need

This is all fairly predictable IMF thinking. The most interesting intervention in this area in recent weeks has been U.S. Treasury Secretary Janet Yellen’s elevation of the Biden administration’s new buzzword “friendshoring.” . Yellen told the Atlantic Council:

I think we all recognized, in the aftermath of the pandemic, that our supply chains, while having become very efficient and excellent at reducing business costs, have not been resilient.

His proposed answer in more amishoring would involve having a “group of countries that have a strong adherence to a set of norms and values ​​about how to operate in the global economy and how to run the economic system. world, and we need to deepen our ties with these partners.

Australia has already taken this route, at least at the announcement level, with the supply chain cooperation talks with India and Japan, which could be helped by the conclusion of a trade agreement. interim with India. But Yellen’s specific reference to critical minerals being a specific area ripe for friendship is particularly relevant to Australia’s efforts to become the starting point for a rare earth supply chain that avoids China.

Trade Minister Dan Tehan with Prime Minister Scott Morrison (Sam Mooy/Getty Images)

Factory Asia rolls

Meanwhile, the latest regional assessments of how developing Asia and East Asia are recovering from the pandemic indicate that the region’s manufacturing-for-export strategy remains intact despite growing interest. growing for nearby production and relocation to protect critical supply chains.

Asian Development Bank (AfDB) economists say regional supply chains have not been as disrupted by the pandemic for several reasons. There has not been as great a shift from services to goods as, for example, in the United States; the more upstream position of some Asian producers/economies shielded from supply chain bottlenecks; and shipping costs have increased less in Asia. Indeed, as Australia begins to face inflation with this week’s interest rate hike, there is a striking chart in the AfDB’s work that shows Australia to be an exception for longer and more disruptive delivery times compared to a sample of regional and global economies.

High-level trade missions to key Asian markets are clearly needed after Australia’s long pandemic lockdown.

Even before the pandemic put reshoring on the global agenda, economists from the ASEAN+3 Macroeconomic Research Office (AMRO) warned that ASEAN countries could not continue to rely on conventional manufacturing to absorb their growing populations and should focus more on training for service delivery. And they now say the pandemic has given new impetus to the debate “by accelerating the adoption of automation and AI…Covid-19 has further narrowed the window for development of ASEAN economies to to move from labour-intensive, low-tech production to more capital-intensive, high-tech production.

But despite describing the pandemic as “an unprecedented crisis in the region” with long-term economic scars, they maintain there is still little chance of global value chains being shifted out of Asia. from the east. They argue:

The deep and well-established GVCs in the ASEAN+3 region, particularly in China, that have been built and fortified over decades would be very expensive, complex and time-consuming to completely reconfigure.

And echoing the same line of thinking as the IMF, they say “resilience is always likely to come from greater, rather than less, diversification involving more providers in more economies to smooth out disruptions when individual economies stop production for some reason”.

Go locally

Multilateral economists may still be flying the flag for relatively globalized diversification, but Australia’s sovereign wealth fund appears to have embarked on a more pessimistic retreat after its assets fell in the three months to March.

The Future Fund, which manages about $200 billion, plans to seek more local investments and reduce its exposure to listed companies as geopolitical tensions rise and markets fret over rate hikes. And chief executive Raphael Arndt seemed almost to channel Prime Minister Scott Morrison’s pessimistic wartime rhetoric of the 1930s in an interview this week where he reportedly spoke of a world that resembled that period with entrenched populism and countries taking more onshore supply chains.

“That probably means a greater focus on greater national exposure than we’ve had in the past. We no longer take the free flow of capital around the world for granted…The days when you could earn returns simply taking risks in the markets is coming to an end,” he told Bloomberg Television, continuing to say:

The world has totally changed and all of our financial models, everything we learned in business school around modern portfolio theory and capital asset valuation models – they’re all based on observations of the world since the World War II and they are wrong.

All of this is broadly consistent with the findings of the fund’s review of the ‘new investment order’ it released last year in a rather striking venture into broader geopolitics that has crossed over more than diplomatic discourse. usual. But given his long-term investment successes, his withdrawal from emerging markets and nervousness about globalization could have a wider influence on Australian policymakers.

Diversification 101

What is striking about Labour’s new trade diversification policy is that while it is prudent and sensible to find alternatives to China, the same old options keep resurfacing.

And so, while India is listed as one of the key points in the four-point diversification strategy, when asked, King singled out Indonesia as “the best starting point” for diversification. . India was “about number one too”, but there were more challenges to trade with.

Nonetheless, there are some interesting ideas here for the critical implementation work that follows the two relatively new trade agreements with Indonesia and India, although they largely build on ongoing themes. High-level trade missions to key Asian markets are clearly needed after Australia’s long pandemic lockdown, a detailed sector focus each year for the Australia-Indonesia economic ministers’ meeting would help drive home the openings of the bilateral trade agreement and the overhaul of export market development the subsidy system needs to be corrected.

The trial of a parallel pilot version of the Australian Consortium for Indonesian Studies in the country in India is an interesting idea although complex in India with more languages ​​to consider. And keeping Indonesia alive as a key language in Australia is a more important long-term strategic priority.

Pushing diversification upstream towards a 2040 task force on trade opportunities and making all ministers responsible for exports are fairly common ideas for new policies for a budding new government. But the main challenge remains to bring more Australian businesses up to speed to seize the opportunities.

And supporting Indonesia, Thailand and South Korea in the Comprehensive and Progressive Agreement (CPTPP) for the Trans-Pacific Partnership and India (returning) in the Regional Comprehensive Economic Partnership is also commendable. But he largely dodges the immediate conundrum of Chinese and Taiwanese candidacies to join the CPTPP.