01/06/2020
A debate has emerged around the role that manufacturing should play in Australia’s economy and how it should contribute to national security in a post COVID-19 world.
This echoes the 1901 Federation debate about national security. Although the points of view now on display are more sophisticated, the same general propositions are being aired. The debate divides into interventionists versus the free-traders; the supporters of government largess for manufacturers versus those who prefer ‘market’ based mechanisms.
When discussing the future for manufacturing, some commentators are addressing a national security issue and some suggest that manufacturing will be an important contributor to future employment growth post COVID-19. Some have also suggested providing public support for specific industry sectors such as electric vehicle manufacturing.
Although commentaries have centred on a few very specific parts of manufacturing, they give the impression that Australia does not have a viable manufacturing sector. They seem to assume that Australia’s existing policies are inadequate for supporting a viable and competitive manufacturing sector capable of addressing strategic supply chain weaknesses after COVID-19.
Government support has a patchy history of sustaining manufacturing sectors especially where significant economies of scale are involved. The clearest example of the failure of government protection is the Australian passenger motor vehicle industry. At its peak, the level of government support for the Australian car industry was so large and opaque that not even the Industry Commission, the predecessor to the Productivity Commission, could calculate the level of community assistance provided to this sector. It was protected by import taxes, import quotas, local content schemes and significant export incentives. Australia does not need to reintroduce past policy failures.
Before redesigning parts of Australian manufacturing, we need to give credit to what we already have and build on its successes. The AI Group estimates that pre COVID-19, manufacturing was Australia’s seventh largest industry sector and sixth largest by output. The industry accounted for around 11 per cent of Australia’s export earnings, had the highest business expenditure on R&D and employed around one million Australians. The Economist rated Australia as 25th in their league table of manufacturing output in 2020. Not too shabby for an industry sector that operates alongside the world’s most efficient resource producer, and one of the world’s most efficient producers of agricultural goods, both of which put upward pressure on Australia’s exchange rate. Let’s also recognise that today’s modern manufacturing sector has prospered with low levels of protection since the 1980s. Australian manufacturing has responded and significantly lifted its overall productivity.
The manufacturing sector, although important for Australia’s future, is unlikely to generate a significant increase in employment, even as its output increases, for two reasons. First, a manufacturing business will only succeed in the highly competitive international market if it continues to aggressively lift its overall productivity by, for example, introducing automation, AI and robots. Second, manufacturing jobs today are high-skilled jobs. A job in manufacturing often takes years of training, and they are not for everybody. A 1950s Australia, when manufacturing could provide a low-skilled worker their first job, has long gone.
This doesn’t mean we should ignore national security issues. COVID-19 has highlighted potential fragilities in specific global supply chains, such as specialist chemicals for water supply, personal protective equipment (PPE) and some pharmaceuticals. However, addressing this matter is complex. These fragilities should be reviewed by independent bodies, such as the Productivity Commission and other research units, strategically, one at a time, and promptly. Importantly and thankfully, from a national security perspective, Australia is not short on food supply.
In the past, it was often argued that we subsidised the auto supply chain for national defence so at times of war we had skills and production capability to make heavy vehicles. Even if this was true and appropriate, over time, we lost sight of why we were subsidising this industry. If there is a case for subsidising an industry for national security reasons, this should be made explicit and needs to change as circumstances change. It may even mean supporting specific software code and parcel home-delivery services, rather than manufacturing.
The success of our open economy introduced by the Hawke and Keating Governments must not be reversed. However, COVID-19 has shown that protecting our national interest by selectively addressing strategic supply chain weaknesses is critical.
Importantly, we can identify critical supply chain weaknesses without ceasing global trade and returning to 1950s ‘infant industry’ arguments for government support. Digital, and other supply chains from Australia provide us with considerable global opportunity and access to global markets. As the RSL reminded us on Anzac Day, we need to continue to participate in global trade for peace between global nations.