Over many decades, the global economic order has been defined by a lowering of barriers to trade and investment, helping usher developed and emerging economies alike into a wave of growth and prosperity unseen in the modern world. However, this 20th century world-view has seemingly given way to the contemporary order of the 21st century, where globalisation and free trade is no longer highly valued, and protection is the key to economic sovereignty and security.
Even Australia is not immune to these policy shifts, as the Albanese Government begins to make the case for a “Future Made In Australia”, an umbrella that underscores a more interventionist, green industrial policy. It thus begs the question of whether this represents the ‘new competition’ between economies, or is it a return to the protectionist instincts of old?
The History of Protectionism
Protectionism has appeared in many forms since the dawn of civilization, from ancient Mesopotamia, Egypt, and Greece to today’s world, playing a key role in shaping global economies. Its evolution from tariffs on commodity imports in the ancient world to a mainstream economic tool during the age of mercantilism is notable. A prominent misconception of that era was the zero-sum game mentality observed in economic trade with partners. As nations embraced policies designed to maximise exports and minimise imports to increase their reserve of precious metals, protectionism was not far behind. As the world’s understanding of economics evolved, an increasing trend toward free trade policies ensued.
Contemporary economic theory illustrates why this trend has occurred: protectionism causes deadweight loss (“shrinking the economic pie”) in economies. Economist David Ricardo discovered that free trade between countries allows nations to produce where they are comparatively advantageous, maximising the amount of material goods/services available to consumers. In practice, this means that countries with some advantage in producing a good or service, which may arise due to several reasons (geographical, cultural, technological), produce what they are relatively more efficient at, and trade the excess amount of the good/service they produce for other countries’ goods/services, where they have their own comparative advantages. In theory, this should lead to the most efficient production of goods and services and the greatest possible consumer surplus.
However, through protectionist policies such as tariffs or subsidies, there is typically a reduction in social surplus, in a bid to reallocate the gains of trade between producers and consumers. With Ricardo’s theories and advances in logistics infrastructure, the world saw a boom in free trade in the post-World War II era, marked by the inception of countless global and regional trade institutions and treaties, most notably the World Trade Organization (WTO), European Union (EU), and North American Free Trade Agreement (NAFTA). Globalisation’s success in the latter half of the 20th century relied on the trust between nations to act in accordance with their economic self-interest. However, with rising geopolitical tensions, energy insecurity, and the emergence of ever-more critical technologies of national security interests, the recent global shift toward protectionist policies should come as no surprise. Following suit, the “Future Built in Australia Act” is designed to “capitalise on our comparative advantages” and empower “new energy” initiatives. However, the question remains: Will the Future Built in Australia Act be any different from what civilization has implemented since its inception?
What’s Happening Around The World?
Last month, the government pledged to turn this around with a massive $1 billion towards local manufacturing of solar power to promote clean energy production. Further, this initiative will create jobs and broaden Australian manufacturing, aiming to make the country a key player in the global green energy supply chain. This may be a necessary intervention following tight regulatory constraints that local suppliers face when competing with imported goods from countries like China, with a decades long history of investment in R&D.
This isn’t solely an Australian phenomenon though, as seen with the Inflation Reduction Act (IRA) being the largest investment into climate and energy in American history. Countries are rallying to strengthen and protect their businesses, with the renewables industry at the forefront of their production. Trumping Australian efforts, the IRA boasts $5 billion committed towards the Energy Infrastructure Reinvestment (EIR) Program, and overall, the IRA contains $394 billion of value. This investment will be poured into businesses in green sectors through the likes of tax incentives, loans and grants.
These are just a select few examples out of multiple nations (especially those in Europe) that are shifting focus to their private sector to advance production towards the net zero agenda. Simultaneously giving themselves the upper hand on an international scale, and weakening export values. It can however be argued that these investments are not being allocated in the most efficient way for prosperity since exports (largely from China) are cheaper and specialised. And whether or not it is justified by the necessity of the energy transition, it seems to represent a return towards domestic protection.
The New Normal?
Once passed, the policy will see Australia joining major economic players, including USA, China and EU, in providing protectionist subsidies supporting domestic clean energy production. Paradoxically, a progressive shift towards investing in renewables will coincide with a regressive shift towards protectionist rhetoric characteristic of the 1980s.
One rationale behind this policy is the growing need for Australia and the world to transition to clean energy. With reduced demand forecasted for our current major exports of petrol, coal, and gas, Australia does need to find other areas of comparative advantage to remain internationally competitive. Alongside the ability to internalise externalities associated with pollution, this would allow Australia to move towards a more economically and environmentally sustainable future.
However, under the assumption of free trade, we can phase out fossil fuel, whilst not necessarily specialise in producing green capital. Some economists have pointed out that competing on medical, agricultural, education sectors, or mining of minerals, that are inputs for solar panels, which Australia has natural comparative advantage in, may better support market efficiency. Thus, the missing piece of the puzzle here is the rationale of self-sufficiency, the idea that mitigating the risks of global supply chain disruptions outweigh the costs of market distortion.
As such, the race for green capital looks to be the new normal. The transition towards green production has always been on the horizon, but recent supply chain disruptions and geoeconomic tensions has increased wariness towards supply chain vulnerabilities. As more countries support domestic industries, other countries will be forced to do the same to compete. And as the market for green capital grows relatively, a greater share of the world market will be protected. From globalisation, to slobalisation and now degloblisation, the Future Made in Australia policy may further cement this trend.
Looking ahead, whether this wave of protectionist policies will be lifted is so far unknown. The infant industry theory argues that once our green capital market matures, the subsidy should be lifted to improve market efficiency. But what we cannot predict is whether before then, the shift from win-win to zero-sum mentality on trade cements a return to old protectionist instincts and erodes modern ideals of globalisation. For a relatively small nation reliant on trade to achieve economies of scale, reduced free trade poses risks to Australia’s economy growth and aggregate welfare, and this is a risk we will need to consider and manage.
Conclusion
The “Future Made in Australia” policy seeks to simultaneously address economic and environmental objectives, aiding Australia’s transition to clean energy. Upon closer inspection, the policy is not without its risk as protectionist rhetoric potentially undermines the rewards of globalisation we have so far enjoyed. But against a wider trend of deglobalisation, and an inability to unilaterally reverse it, Australia may end up joining the game of protectionism sooner or later. In this lose-lose situation, perhaps the next best alternative is to promote our domestic clean energy sector and cut our losses sooner than later. The question thus remains: how do we balance the benefits of trade liberalisation and the recognition of self-sufficiency?
The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.
